Archive for the ‘Uncategorized’ Category
Happy Holidays
Not many people are aware of it, but Santa wasn’t the original owner of the famous house and workshop at the North Pole. The original owner was his older brother, Gunther Claus, an alligator wrestler by trade who, for reasons unknown, decided he wanted to get into the toy-making business.
Gunther’s problems were immediate and myriad. He didn’t know the first thing about toy construction. He couldn’t speak elvish, so he and his helpers had no way to communicate. Being a Florida native, he hated the cold. And he didn’t like children.
So he offered to sell the whole operation to his younger brother. But what would his asking price be? There was the house to consider, the workshop, the toy-making equipment, the workbenches, the tools, the toys themselves – how could he estimate a value for all of it?
He called on the services of the good girls and boys at Present Value. They were able to do an appraisal on the house (not easy when the nearest comparable property is hundreds of miles away), appraise the equipment, and provide a business valuation so that both Clauses were satisfied with the final sale price.
Gunther returned to the Florida panhandle, where he happily lives out his days. Santa stayed at the North Pole and became the legend he is today. And Present Value wishes you and your family the happiest of holidays!
By: Present Value
The Sales Comparison Approach
In real estate appraisal, there are three methods used to determine the value of a property: sales comparison approach, cost approach, and income approach. This blog will cover the sales comparison approach.
The sales comparison approach is based on the principle of substitution, meaning a prospective buyer would not pay more for a property than he or she would pay to purchase a comparable property. The approach stems from the acknowledgement that a buyer will compare the prices of various suitable properties and purchase the one with the lowest cost. Within the sales comparison approach, a state-licensed real estate appraiser will gauge and study the actions of buyers, sellers, and investors in the marketplace.
The appraiser will collect information on recent sales of properties similar to the property being valued. These compilations of data are called “comparables.” Sources of comparable data include real estate publications, public records, buyers, sellers, real estate agents, real estate appraisers, and others. Details of each comparable sale are in the appraisal report. Since comparable sales are not identical to the subject property, adjustments are sometimes made for date of sale, location, style, number of bathrooms, square feet, etc. The idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If the adjustment to the comparable is higher or lower than the subject property’s value, an adjustment is made higher or lower, as appropriate, to the subject property’s value. From the analysis of the adjusted prices of the comparables, the real estate appraiser determines the subject property’s value.
By: Present Value
Bankruptcy & Restructuring Valuations
Bankruptcy is the process of handling the debt of a business that is not able to pay its liabilities. When a business enters bankruptcy proceedings, it is critical to assess the value of the business and its assets to begin the restructuring process. There are three general types of bankruptcy in which businesses will end up:
Chapter 7 — Also known as “liquidation bankruptcy,” in Chapter 7 filing, a court-approved trustee takes over the assets of the business in bankruptcy, liquidates those assets, and pays off the business’s creditors.
Chapter 11 — Also known as “reorganization bankruptcy,” a Chapter 11 filing allows for a business that wishes to continue operations to do so while repaying creditors through a court-approved reorganization plan. Chapter 11 filings allow struggling companies to survive, but is costly and time consuming. To qualify for Chapter 11 and avoid Chapter 7, the business must demonstrate (through proper bankruptcy appraisals) that the value of the reorganized business is much greater than the liquidation value of the business.
Out-of-Court Restructuring — This option is cheaper than a Chapter filing and provides the business with more flexibility; the business maintains greater control over its operations. In a typical out-of-court restructuring, a creditors’ committee is formed to negotiate with the business, which must disclose financial and other information to the committee to come to a settlement.
In any bankruptcy or restructuring proceeding, expert asset appraisals and business valuations are crucial to maintaining the confidence of the creditors’ committee or trustee. Whether filing under Chapter 7 to liquidate assets or under Chapter 11 to reorganize, be sure to use a full-service appraisal firm with expertise in bankruptcy appraisals and valuations.
By: Present Value
From a Lender’s Perspective
In any real estate transaction, there are three key players: the purchaser, the appraiser, and the lender. The lender’s role is very clearly defined — he’s the money man. Because most average purchasers can’t afford to buy a house outright, they turn to the lender. But the lender can’t do anything until he knows the amount the loan will need to be for, and for that, he needs the certified appraiser. The appraiser’s determination of the property’s value dictates how much the lender is willing to loan — if anything at all.
Most mortgage lenders require that the appraiser employ the market-data approach in determining value, meaning the appraiser will find similar properties in the area that sold recently and use that information to determine an approximate value. This method can be time-consuming, so some lenders use a less formal method that speeds appraisals, waiving the need to find comparable homes in the area and relying instead on the experience of their appraisers.
Lenders generally combine the market-data approach with the cost approach, where the property’s value is determined by what it would cost to acquire the land and build the house. Older homes are usually appraised using the market-data approach, and newer homes are usually appraised with the cost approach.
Of course, once an appraiser has made a determination of a property’s value, the lender still has a number of criteria to consider with regard to the potential purchaser – factors like credit history, available down payment, references, and LTV (loan to value, the amount of the loan as a percentage of the value of the property). But as long as the property has a solid appraisal from a certified appraiser and a good candidate to buy, the lender’s job is made that much easier.
By: Present Value
Cost Segregation
If you are planning on buying or improving a building for your business, your CPA may recommend a cost segregation, which is an asset depreciation technique. This technique separates real estate into personal property, land improvements, buildings, and land, and then depreciates personal property and land improvements at an accelerated rate. This would reduce the building owner’s tax obligations.
Personal property would include things like furniture, window treatments, and some fixtures. Land improvements would include a sidewalk or a fence. Because these items are useful for a relatively short period of time, they can be depreciated more quickly than buildings or land. The buildings category includes each of the building’s separate components, like the roof or the walls, each of which can be depreciated at a different rate. The value of the building that is not accounted for in personal property, land improvements, or buildings is allocated to the land category.
An important component of conducting a cost segregation study is hiring an appraiser who can conduct a site inspection and substantiate the value of any equipment or machinery on the property that would fall under the personal property or buildings categories of the cost segregation.
By: Present Value
Business Valuations and Estate Planning
Estate planning is possibly the most neglected, but arguably the most important aspect of family-owned businesses.
Estate planning sets up the transfer of an individual’s property to designated beneficiaries to minimize or possibly eliminate the taxes levied by the U.S. Unified Gift and Estate Tax Program. Without estate planning, the tax liability of the business can be so oppressive that the only choice the inheritor has is to sell off all of the company’s assets and either soldier on without them, or shutter the business and walk away.
A periodic valuation of the business can help the owner and family members better understand the nature of the estate tax concerns. The valuation can also provide a guide the business owner can use to set up ownership transfers, and can provide a basis for the valuation of gifts. More importantly, it can guard against future conflicts with the IRS.
Business succession planning is just as important as estate planning to the future of a business. Making business succession plans (determining which family member or combination of family members will carry on the business) requires careful thought that will often cause the business owner to reconsider his original position on who will carry on the operations once he is gone or no longer able to maintain the leadership role.
By: Present Value
Things That Appraise in the Night
This story is completely true. It was related to me by the man who lived it, and was first hinted at in the blog “What Exactly Are You Doing, Appraiser?”
Back in March of 2009, a real estate appraiser named Jason received a normal appraisal request. A two-family house, owner unoccupied, get to it when you have a chance. Simple. Jason arranged to pay a visit on a Thursday.
A certified appraiser for a number of years, Jason saw nothing out of the ordinary when he pulled up to the saltbox-style house. It was located on a side street in Danvers, Massachusetts, which history buffs will recall was once a part of the original Salem Village. But nothing unusual about the house. Just a house.
There was a lockbox on the front door. No one had lived there for a while, so this was standard practice. He keyed the code for the lockbox, got the key, and let himself in.
The first thing that struck him was that every single light in the house was on. Sometimes owner unoccupied houses are kept on timers so that it looks like someone is home at night, but Jason was there in the middle of the day. It didn’t make sense.
He stepped in and took out his digital camera to take some photos of the property. The first floor was laid out like a very wide hallway, one room leading straight into the next. At the end, opposite from where he entered, was a doorway that led to an enclosed porch. The stairs to the second floor were just outside the doorway.
There were a few pieces of furniture left behind by the most recent owners, and one of them was a recliner to the far left of the doorway. Jason paid it little notice.
After he finished with the first floor, he passed through the doorway and out onto the porch. He climbed the stairs to the second floor. The layout was identical to the first floor. Jason made his way through, snapping photos and making notes in his notebook.
As he passed the archway between the dining room and the living room, something suddenly pushed him hard from behind, right between his shoulder blades. He whipped around fast and caught movement out of the corner of his eye. His immediate thought was that a cat had been perched somewhere, pounced on him, and then took off. But there was nowhere for a cat to perch, nowhere for a cat to hide. He couldn’t find anything that could have pushed him. He was all alone in the house.
Jason sped through the rest of the second floor. He was supposed to check the attic, but he thought the attic could wait. He was ready to go.
He went back down the stairs in the enclosed porch, headed for the doorway that led back to the first floor. At the foot of the stairs he froze. The recliner he’d seen earlier was now blocking the doorway.
After taking a minute or so to process this, he shoved the recliner aside, sprinted through the house, ran through the front door, and slammed it behind him.
Real estate appraisers can see some strange things, but sometimes they see some really strange things. Buyer beware.
The Appraiser’s Role
The Boston Globe published an article this week on the way the housing slump is affecting the job of an appraiser. When conducting a real estate appraisal, one of the tools an appraiser uses to determine a home’s value is sale prices of comparable homes in the area. But the large number of foreclosed properties is skewing that number, making it difficult for appraisers to make a proper judgment on a home’s value. Another issue is the current dearth of home sales, which gives appraisers little information with which to make comparisons. When there are no comparable home sales in the area, appraisers have to look at the sales of bank-owned properties, which can also drag down a home’s value. Another way appraisers determine the value of a home is to predict its value next year and balance that with its current value, but the current volatile market makes predictions difficult.
The trend seems to be that a buyer and seller will agree upon a price, but the appraisal value comes back lower than the agreed-upon price, threatening a successful sale. Real estate appraising is less of an exact science in the current economic climate than it used to be and much is left to interpretation. This is why it is more important than ever to work with an experienced appraisal company that you trust.
Click here to read the full article.
By: Present Value
AVMs
In real estate appraisal parlance, the acronym AVM stands for Automated Valuation Model. An AVM is a computer-generated report that uses complex mathematical equations to determine the most logical value of a home based on public records and other relevant data. There is no involvement of an appraiser or person during the compilation of the AVM. The report takes into consideration past market trends, factual neighborhood analysis, tax assessments, and other factors; each appraisal company uses its own set of calculations to achieve the final report.
AVMs have three principal limitations:
1. They are dependent upon the timeliness, accuracy, and comprehensiveness of the data they use.
2. AVMs cannot be used to determine the physical condition of a property.
3. AVMs can never fully replace the knowledge and judgment of a skilled appraiser.
Consequently, AVMs tend to work best in circumstances when there is a relative abundance of current data, when properties in a given area are similar overall, and when the condition and marketability of the property are typical for the area. AVMs are not as useful when data is lacking, in areas with diverse properties, and for properties that differ from the average property condition or marketability.
Though AVMs have many strengths, they cannot nor should they ever replace an experienced real estate appraisal company. An AVM is a useful tool, but only an appraiser can take into account the subtle nuances of any given property. Sorry, HAL.
By: Present Value
HVCC: The Comp Check Killer
In a recent blog post, “Comp Check: The Code Red of Real Estate Appraisal,” we discussed the dubious practice of comp checks, and promised a future blog with an overview of new laws that were enacted to prevent comp checks. The future is now.
Just a short recap: A comp check is something a lender requests of a real estate appraiser. It’s essentially an undocumented, unofficial examination of properties similar to one that’s on the market. If the comp check matches the price range the lender was hoping for, the appraisal goes through official channels. If not, the matter is dropped and the appraiser gets nothing. Except the promise of future work from the lender.
So what’s been done to put a halt to this unethical practice? The passage of the Home Valuation Code of Conduct (HVCC). Almost a year ago, New York Attorney General Andrew Cuomo announced an agreement with Fannie Mae and Freddie Mac to establish the HVCC. Right out of the gate, the HVCC reads, in part:
“No employee, director, officer, or agent of the lender … shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner … “
This would appear to be nothing but good news for appraisers. Well, yes and no. HVCC seems to have caught lenders off guard; many are unsure how to be HVCC-compliant. This is driving lenders to stop using independent appraisers and start using appraisal management companies (AMCs). Some lenders even believe that HVCC requires them to. But this means that most independent appraisers are being punished for the actions of a select few. And anyway, using an AMC doesn’t guarantee HVCC compliance – a great number of AMC appraisers either were or will be independent appraisers.
So does the passing of HVCC mean that comp checks are a thing of the past? Of course not. Speeding is against the law. Will everyone drive the speed limit? The one thing HVCC will do is make this gray area a little less so. Lenders who attempt to have comp checks done will now be in violation of HVCC, so they’ll likely think twice about asking for them.
By: Present Value
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