Selling and Financing Real Estate

November 13, 2008

On November 8, the Washington Post wrote this about the real estate market:

In soft and declining housing markets, lenders are making a big deal of “comps,” the comparable sales of properties used as benchmarks in home real estate appraisals. Some sellers are forced to renegotiate lower prices with buyers, even after they have a signed contract. Rather than accepting sales of similar properties that closed as much as six to 12 months ago, lenders and mortgage investors are demanding that appraisers include only the freshest comps, ideally those closed within the previous 90 days, to support their valuations. In Richmond, appraiser Perry Turner of P.E. Turner & Co. said his firm has seen numerous cases where using newly mandated 90-day or more recent comps, as opposed to those six months or older, has contributed to valuations lower than the price on the sales contract. Turner said that in 95% of those cases, the listing and selling agents have gotten together and renegotiated the contract rather than lose the deal

Both buyers and sellers should be wary of prices based on comparable sales more than 90 days prior to the appraisal or “market survey.” Sellers need to be wary because a listing based on even six month old sales might be artificially high so that even if a buyer is found, financing may not be available.

In this eroding market, it behooves buyers to be sure that there is a good contingency for financing and to put little down as a deposit. Sellers on the other hand are motivated to get a large deposit. Financing contingencies are sometimes rather unclearly written, so both sides should be quite clear about the meaning of this part of the agreement.


Appraisals and the Courts

February 21, 2008

Appraisals are viewed with a good deal of suspicion and rightly so. There is inherently a degree of latitude in a determination of market value and appraisers have been used as tools in banking and savings and loan scandals over the years. All that aside, it is impossible to determine market value with the same sort of precision and verifiability as a scientific conclusion.

A recent Division III Court of Appeals case, Washington Beef, Inc. v. County of Yakima (Feb. 14, 2008) reveals the vagaries of the discipline almost to the point of parody.

There we have the county assessor determining determining the value of building and equipment at about $35 million and the owner’s expert valuing the same assets at about $7 million. The owner’s valuation involved the “income approach” which capitalizes cash flow, basing the vlaue on the amount of money the asset is expected to generate. The county used the cost approach which estimates what it would cost a purchaser to acquire the assessed asset. There was credible expert opinion supporting each approach to the valuation of the assets under consideration.

The trial court, when asked to determine the outcome, concluded that neither side was right and came up with a valuation the was supported by none of the experts, but far closer to the county’s position than the taxpayer’s.

The court of appeals began its analysis with the proposition that appraisals are more of an art than a science. It had to remind itself of this at one point in its decision when it attempted to apply the “law of appraisals” to the baffling calculations before it. Finally, the court not seeing any obvious errors made by the trial judge in his independent calculations, affirmed his decision. You can almost hear the collective sigh.

The reader is left with the impression that appraisals are certainly not a science and with no appreciation of them as an art form. They appear to be more of a crap shoot.