Proficient Note Buyers
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October 04, 2010
Methinks the Lady Doth Protest Too Much
Property valuations are the source of much discontent these days. This applies to anyone involved in trying to determine how much a property is worth; property owners, note holders, note buyers, appraisers, Realtors, etc. When it comes to note holders, not so oddly enough, they are eager to prove why the property that secures their note is worth far more than what a licensed professional (whose sole job is to determine market value) says it is. I have heard some quite humorous explanations (“the landscaping is exquisite!”, “it has granite countertops!”, “it’s the nicest house in the neighborhood!”), but the explanation I got yesterday was laugh-out-loud funny.

The property in question is a single-family residence that is used as a commercial assisted living facility. The borrowers on the note are the operators of the facility, and have been making payments on the note since 1994. Unfortunately, the property has not been well maintained, and a soft real estate market helped push the estimated value to $40,000 less than what the property sold for 16 years ago. Adding to complications is over $7,000 in delinquent property taxes, which is usually a pretty good indication all is not well with the borrowers and/or business. When presented with the current property valuation, the note holder responded thusly:

“The appraiser is mistaken about the value. His value is based on residential use. However, our property is a mixed use residential/commercial with the commercial being the primary use. Therefore, his comps and value are inaccurate. The value of commercial properties is directly based on the amount of income produced by the business on the property. Also, several factors of his comparison are not applicable for commercial use properties. For example, lot size and number of bedrooms are irrelevant for commercial properties like this. I can put you in touch with a local Realtor who sells properties like this and they will tell you that the value for assisted living facilities is approximately $50,000 to $60,000 per client. Because this property houses twelve clients, its true value is closer to $600,000. The fact that it has a three bedroom caretakers quarters makes it more desirable.

The appraiser should re-evaluate his comps to reflect the true nature of the property. If he needs comps, he can look to a boarding house located less than one mile from our property and another facility located about ten miles away. These are both properties similar to ours.

Please let know if I can be of further assistance to get to the true value of the property. We went through a condemnation lawsuit last year (our property was bought by the City so it could be knocked down for new condos) and we have a pretty good understanding of how easily property valuation can be done incorrectly.”

Well, at first glance this seems like a reasonable argument, right? After all, if an investor was purchasing an apartment complex, rent rolls would be a valid determiner of value (to a certain extent). However, go back and read the first paragraph again. This is a single-family house used as an assisted living facility. If we have to foreclose and evict, what do we have? A non-revenue producing house, right? I know for a fact I have no business trying to run an assisted living facility – how about you?

Since the borrowers operate the facility, we have to assume its success as an assisted living facility is dependent upon them being its operators. Just because they derive income based on its current usage does not guarantee that same kind of income if we have to take the property back. Besides, if the income potential is so great on this property, why aren’t the borrowers paying their property taxes???

We have tendered a counter-offer taking into account the lower-than-expected property value. We have also encouraged the note holder should they decide not to take the lower price that at minimum they should move to insure the property doesn’t go to tax sale. That scenario could effectively leave them with nothing.

I’ve written prior blogs about the NIMBY Syndrome (Not In My BackYard). As it continues to prevail in this marketplace, I can’t help but wonder if the note holders and property owners suffer more from a bad case of wishful thinking or outright delusion. For fear of getting into an “us versus them” confrontation, let me say this to anyone selling a note or a property: We want the value to be just as high as you do – our business doesn’t benefit one iota from a pallet of deals that never get funded. But we must also protect our investment dollars, so the marketplace must dictate absolutely what we can pay.

The market is the market is the market. Just remember that!

Make it a great week.

Clint


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