Help for Property Owners in a Flux Market

When a market is in flux, like the uncertainty we’re experiencing during the global Covid-19 pandemic, property owners may find themselves feeling that their options are limited. Not so! Although a property owner may be unable to cover monthly debt service, loan servicers will typically enter a period of negotiation (workout). If no agreement is reached after a period of time the property or loan will enter foreclosure and the lender will take ownership. An unpleasant outcome for banks, lenders, REITS, portfolio managers, and property owners/borrowers. Despite distress, most real estate (land, structures, and improvements) has value. The metrics by which such properties are valued, however, may be different.

Recently a client reached out to better understand disposition and liquidation valuation methodologies. For the expert team at Argianas, it was an opportunity to discuss value nuances and help our client identify and seek out stronger appraisal support/rationale for disposition and liquidation value. In the end, it’s all about managing tolerance for risk!

wait, there’s something other than market value?!

Market Value, Fair Market Value or Insurance Values, they all serve a specific purpose and intended use. Sometimes things aren’t so cut and dry and for that an appraiser has tools in their toolbelt. Sometimes properties are offered on the open market subject to undue stress on the buyers and sellers and/or sellers are sometimes under compulsion to sell their property without extended marketed times. The common thread is that the property needs to be sold fast!

 Appraisal Institute Guide Note 11, revised for 2020, discusses the nuances to disposition value and liquidation value. In a perfect world without an external pressure to sell, a common marketing time (the time it takes a property to sell) is 365 days (12 months). Under a liquidation or disposition scenario that time can be shortened to 90-180 days.

A disposition value is the most probable price that a specified interest in the property should bring under some key conditions:

1. 1. The sale of the property is within a given time period but shorter than the typical marketing/exposure time.
2. 2. The property is subjected to current market conditions as of the date of valuation.
3. 3. Both the buyer and seller are acting prudently and knowledgeably.
4. 4. The seller is under compulsion to sell.
5. 5. The buyer is typically motivated.
6. 6. Both parties are acting in what they consider to be their best interests.
7. 7. An adequate marketing effort will be made during the exposure time.
8. 8. Payment will be made in cash in U.S. dollars (or the local currency) or in terms of financial arrangements comparable thereto.
9. 9. The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

A liquidation value is the most probable price that a specified interest in property should bring under the following conditions:

1. 1. Consummation of a sale within a short time period.
2. 2. The property is subjected to current market conditions as of the date of valuation.
3. 3. Both the buyer and seller are acting prudently and knowledgeably.
4. 4. The seller is under extreme compulsion to sell.
5. 5. The buyer is typically motivated.
6. 6. Both parties are acting in what they consider to be their best interests.
7. 7. A normal marketing effort is not possible due to the brief exposure time.
8. 8. Payment will be made in cash in U.S. dollars (or the local currency) or in terms of financial arrangements comparable thereto.
9. 9. The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

show me the data (and support!)

If distressed properties deviate from recent trends and forecast models and often there are fewer transactions during market uncertainty; values may fall. The due diligence required for distressed properties generally involves greater care with adjustments to comparable sales appropriately supported, opinions on estimation of external obsolescence in the cost approach carefully rationalized, and rent rolls reviewed more cautiously to identify any changes to terms/loss of revenue.

The team at Argianas has employed the same tested and true methods they’ve used throughout the last 30 years (and more than one recession). “When asked to provide support for distressed or liquidation valuation efforts our approach is simple, an enhanced search of like-kind properties that sold for liquidation value prices (oftentimes confirmed by the listing as an REO sale), coupled with comprehensive research/title searches for Grantors listed as a bank/OREO/financial institutions are warranted,” according to Vice President Alexander Argianas. “Selected sales will most likely reflect low market value as such property transfers may not represent market-level norms (because prices realized from REO sales may represent below-market prices.  For this reason, and coupled with our research efforts, a trusted broker can often confirm property-sale specific terms/conditions of sale. All combined, this extra analysis, research, and confirmation from market participants provides a multi-faceted rationale and supported analysis that can easily be disclosed or qualified to the reader”. The point is that distress-level sales may or may not be used for comparison purposes, but either way, adjustments have to be considered.

riding out the storm with a friend

The worst time to make a decision about real estate is during market uncertainty. Not all markets exhibit change during economic uncertainty in the same way; equally, not all property types are affected the same. Through economic uncertainty, buyer and seller motivations can and usually do vary depending upon their respective motivations. Either way, careful analysis of sale comparables is always warranted. Calmness is the cradle of power and an objective, trusted commercial real estate advisor should be retained before hasty buy or sell decisions are made. “It really is as simple as spending the 10-15 minutes talking with clients and walking them through their current real estate problem; it’s the security blanket that they’re not riding out a financial storm alone,” shares Alexander. And as the great Maya Angelou once said, “Every storm runs out of rain”.

Argianas & Associates is at the ready to help you navigate these disruptive times with your next real estate valuation. Call us at 630.390.0113, email us at [email protected] or complete this form. Be sure to join our mailing list to receive our newsletter.