Valuating Real Estate

I'm selling my 1/3 house share to the other owners, and we need to establish a Fair Market Value. We hired his appraiser, but I found the results a little suspect, and I have a long, detailed post analyzing the subject on my Livejournal. If you're interested in the question, check it out.

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Patri, Knowing absolutely

Patri,

Knowing absolutely nothing about the buying, selling or owning of real estate, it struck me that the current market value of the house is only important if you going to sell it now. Selling it would convert it from a subjective use-valued good into an exchange-valued good.

Unless I am mistaken, you and your group do not actually own the house, but are effectively buying it over time from the bank.

Is it possible that an agreement could be more easily reached using the actual history and purpose of your payments as a base.

Presumably you have paid out a portion of a down payment and fees, and have made a share of both the principal and interest payments. You have benefitted from living space without paying rent, per se.

Putting all of these things in the mix, you may be owed significant compensation as you walk away. Whether it would be a lump sum compensation or one paid out over time with interest shouldn't be a real problem.

BWDIK

Regards, Don

Seems simple enough. Put the

Seems simple enough. Put the house on the market, collect the offers you get, negotiate with a few of them in a pretense of good faith, reach a selling price, and then laugh and change your mind and throw the buyers out.

Then divide whatever numbers you came up with by 3, and you're golden.

What, you wanted a non-sleazy and illegal way to do it? You should have specified that.

Robert - If you negotiate an

Robert -

If you negotiate an offer to convey real-estate, it is by all means an enforceable legal contract. The aggrieved "buyer" could in fact, sue you for performance of the agreement.

Could you just put your

Could you just put your share of the house on the market, and give the other owners a chance to bid on it? Or do you think that the limitations (being able to buy only a third of the house) would reduce the price you could get for it?

Robert's approach is the

Robert's approach is the right one. The prices you get, however, will probably be close to the appraisal that you doubt. How do you think the buyers are going to make their decision? They are using the same data you are to sell it. There are about 8 models out there that are used to value homes and they are typically all within 10% of each other, so I would not sweat it. Another thing to keep in mind is that, since you are not selling via a broker, you are avoiding commision. That knocks down the variance effect to about 5%.

Maybe your frustration is due to the fact that you are not going to make as much money as you thought you were. If you are buying another property, you may be able to 1031 exchange the two transactions to avoid the captial gains tax. That might help ease your pain.

I believe I completely

I believe I completely understand the source of Patri's frustration, and it doesn't stem from not making as much as he thought he was going to. It's from not knowing whether he's selling at a fair price or not. He doesn't want to be screwed, but he doesn't want to screw his friends, and he has no way of knowing whether or not either is happening. Hence the frustration and angst.

Sorry, Patri, you're meta-screwed. Linear regression analysis will not save you; it's merely a more complicated form of guesswork than the appraiser's methods.

You can figure the FMV for a ton of steel or an ounce of gold only because the commodity markets are very liquid and commodities are very substitutable. Housing ain't like that. You can't check to see what price a house just like yours in every meaningful way traded for five minutes ago so that you can predict with reasonable accuracy what your house would trade for if you offered to sell it five minutes from now. The notion of an FMV for a house is a logical fallacy.

The only way to know what the house is worth is to actually sell it, and even then the price will vary significantly due to factors such as how long you hold out waiting for better offers, how well you market it, how clean the carpet is and how trim the lawn is when you show it, and whether or not you get lucky enough to land a buyer that is lousy at negotiating. These factors will not be present in your regression models.

Without actually selling, you can only guess at what the sale price would have been. Your appraiser is guessing. Your regression models are guessing. What you are looking for is some validation that either your models or your appraiser are making valid predictions. I'm not certain you'll find that. Maybe some economist or academic financial analyst has written a paper evaluating various appraisal models - check Google Scholar.

You didn't explain why you wanted to divest of your ownership at this time, other than "it would be weird." Honestly, if you really want to avoid any feelings that any party is getting a raw deal, you should seriously consider keeping your ownership stake until all three parties are ready to sell to the open market or to each other at arm's length rather than as friends. If you were considering this independently of your relationship, then you'd already have your answer: they're offering a low price based on a pessimistic evaluation, you're asking a high price based on an optimistic evaluation, thus you don't sell yet.

If you really want to divest now, your best option is probably to follow the dispute resolution procedure that you have all already agreed to. It may not produce accurate results (i.e. the appraisals may all be ridiculous) but it will produce the agreed-upon results and should therefore maintain your friendly relationships.

Maybe you could make use of

Maybe you could make use of the fact that there are two other owners. Rather than assume they will each buy half of your share (or 1/6 of the total) each, they could bid for larger or smaller pieces. I haven't thought this out completely, but it seems that if the selected price is too high, each will wish to buy less than half of your share, while if the selected price is too low, each will wish to buy more than half of your share. So the fair price will be one that induces each party to wish to buy half your share.

But even as I wrote that, I saw the problem: it effectively assumes your co-owners have superior knowledge to your own. You wouldn't be solving the problem so much as offloading it to them. They'd have to go through the same calculations you've done in order to come up with their share-bids. Still, the approach I've outlined might be a good way of testing whether your co-owners believe the appraisal is right. (I should emphasize again that these are only half-baked thoughts on the matter.)