• Welcome to AppraisersForum.com, the premier online  community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

A bit of a Problem. Different values.

Status
Not open for further replies.

Ray Miller

Thread Starter
Elite Member
Joined
Feb 20, 2002
Professional Status
Licensed Appraiser
State
Wisconsin
A bit of a problem. On different value of appraisals.

I have a project that I have put together on some Real Estate that has been in distress for the past 36 months. It is now set for Sheriff Sale on the 16th of Sept. Pending any filing of Chapter 11 on another business venture that is was also pledge as collateral. One of these many great deals where the CEO borrowed company money to buy the farm and remold it with stock option and shares that have now lost value. Loans are being called.

The property is 590 acres, a remolded 4200 square foot home, first class all the way, real imported marble, wine cellar, hand rub oak wood work, inlaid tile floors kitchen and baths, hard wood oak floors, hot tub, swimming pool extra large, hot sauna, wet sauna. Then the old Dairy barn has been remolded into nine guest apartments (lower level), the hay loft wood was striped and refinished, with one end of the hay loft replace with glass and beams that look out across the valley. The apartments are on the lower level and the hay loft with dining with commercial kitchen is all open for entertainment full heating and air. The dog house and chicken coops are better then my home. The horse barn is first class. The barn was rerock with native stone and the outside of the barn refinished in cedar. With upper and lower fire places. The silo was rerock with native stone and made into a kind of summer sitting and view building with several levels until you get to the top of the wrap around viewing glass enclosed area.

The bank that holds the note on the property had it appraised by licensed appraiser who can only sign off on appraisal of up to $600,000 by state law. So that appraiser set the value at $600,000 for the bank.

The owner paid another appraiser to do an independent appraisal, who came in at $4.2 million but said he could find no comps in the area for farms that have sold with these types of improvements. So he would not sign off on the appraisal. He is correct there are no other like comps in the area, because of what was done to the house, barn and related buildings. All landscaped and new fencing. After talking with the owner I don’t think the appraiser had a clue as to a working recreational farm/ranch operation.

Farm is a producing hay and grain farm 350 acres. The balance is woolands and hills. View of the valley and the lower Wisconsin River.

I run the appraisal as a projected recreational year round working ranch/farm. For it highest and best use. As this is where my knowledge base has been for the past thirty years in these types of property, as owning, managing, consulting on operation of such properties I come in with a workable appraisal at $2.75 million. Producing a “Net Income” of $275,000.00 per year.

How would you handle the other two appraisals that were done in the past 90 days.

I have a telephone conference with two of my investment groups tomorrow, a meeting friday with the current owners and his investment group to see which way we are going to jump or if we jump at all.

I might add that I made the owner an offer to lease or partner up with then when there was a fist hint of trouble. That we could cash flow the farm. Wanted to wait until the last minute, tell the Devil is knocking on the door.


Ray Miller
[email protected]
 

jtrotta

Senior Member
Joined
Jan 16, 2002
My first question is more towards the last part of your statement;

"I might add that I made the owner an offer to lease or partner up with then ( I assume you meant "them" & mean your two investment groups) "

and prior to that you said; "I have a telephone conference with two of my investment groups tommorrow, a meeting Friday with the current owners and his investment group to see which way we are going to jump or if we jump at all"

Perhaps you need to explain your position here a little more carefully, are you appraising this parcel & it's improvements :?: OR are you getting involved in the potential possible purchase :?:

8)
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
Ray:

Assuming that your purpose is to make a consulting appraisal for your potential investment clients (and that appears that is the purpose from your post), then your job appears to be to look at the most profitable use of the site (highest and best) and what the return would be.

You state that a mixed use as a recreational farm (i.e. dude ranch) plus operating farm would be the best use. It seems that what you are describing is neither fish nor fowl, but something in between. As this is your local market, I bow to your expertise. However, having seen quarterhorse operations in Texas with extensive barns, etc., it appears that there is a need to FOCUS the operation. IF there is enough business for recreational use, it appears that the property is severly underdeveloped with apartments, etc. Otherwise, the apartments become a superadequacy as they would not show a significant return. Just a though.

As to the other two appraisals: The first one is self-explanatory. He could only legally sign off on $600,000 so he could not perform the analysis required and should not have performed the appraisal in the first place. As to the second report. If there are no comparables, how did he come up with the value? Did he use the Cost Approach or run an investment analysis for the Income Approach? Either can be valid but you need to see the report to make an analysis.

If you think you are right, then go ahead and support your position. Don't worry a lot about the other appraisals. If you're right and your investors move based on your decisions, you'll find out in a couple of years. If you're wrong, well, you'll also find out in a couple of years when they sue you.

Good luck.
 

Ray Miller

Thread Starter
Elite Member
Joined
Feb 20, 2002
Professional Status
Licensed Appraiser
State
Wisconsin
My first question is more towards the last part of your statement;

"I might add that I made the owner an offer to lease or partner up with then ( I assume you meant "them" & mean your two investment groups) "

I had made the current owner an offer to partner up over the past three years, with myself and the investment groups. At those times he put us on the back burner. Now after checking my reference and history and before the sheriff sale. He would like us to do a partnership.



and prior to that you said; "I have a telephone conference with two of my investment groups tomorrow, a meeting Friday with the current owners and his investment group to see which way we are going to jump or if we jump at all"

Perhaps you need to explain your position here a little more carefully, are you appraising this parcel & it's improvements

I have to investment/funding groups, that are interested in the project. So I am meeting with each group this afternoon by phone in my lawyers office. To see what the best offer would be. Or to do a joint venture with the current owner or go it alone. Both have advantages and disadvantages.

OR are you getting involved in the potential possible purchase


I would be a principle in purchase or partnership.

---------------



Ray:

Assuming that your purpose is to make a consulting appraisal for your potential investment clients (and that appears that is the purpose from your post), then your job appears to be to look at the most profitable use of the site (highest and best) and what the return would be.


Correct.
The consulting appraisal is for myself and the group that I chose or the group that chose to work with me on the project.



You state that a mixed use as a recreational farm (i.e. dude ranch) plus operating farm would be the best use. It seems that what you are describing is neither fish nor fowl, but something in between.
Correct.


As this is your local market, I bow to your expertise. However, having seen quarterhorse operations in Texas with extensive barns, etc., it appears that there is a need to FOCUS the operation.

Working ranches/farms with general public recreational subsystems are really quite common and a lot of the times support the working ranch/farm operations.


As for the QH and other show horse operation I have yet to see then cash flow to the positive. They usually have a sugar daddy behind then somewhere or are used for a tax write off for a few years. The other side is that the owners are talk into building them because they can get rich off the horse industry. In a couple of years they find the truth and the barns set empty or are turned into storage shed or something else. We have a number of them in our area. Had one the Doc put 2 million into and another 3 million in the operation for five years. Never ever recovered even the investment in the barn. It now sits with his three personal horse in it. Also has a nice three bedroom 1800 sq. foot home built on one end for the manager (the man that talked him into it), that sits empty. Burnt Doc right out of the horse business.


IF there is enough business for recreational use, it appears that the property is severly underdeveloped with apartments, etc. Otherwise, the apartments become a superadequacy as they would not show a significant return. Just a though.

Correct. Sleeping with the clients as I put it raises the cost of investment and the cost of doing business. In some cases this can be good, if the operation is not close to a population center and a center that has large number of housing, rental units for vacation guest. But if the operation is close to a large population center or there is ample out side housing, then the need to sleep with the day guest is not required. This operation is centered both for a day trip and one that has a large motel, hotel base to draw from. Milwaukee, Chicago, Madison, Debuke, St.Paul/Minneapolis for day trips. Plus all of the related motels and hotels in Wisconsin Dells and the resorts at Dodgeville and Spring Green. Easy location to get.



The positive cash flow would come from the daily saddle horse rides, the wagon/sleigh dinner rides and entertainment, canoeing/canoe trips, fishing/float trips, bicycle trecking, upland bird hunting, fall big game hunting, hiking and etc.

Day Clinics for Outfitting/packing, Dutch Oven cooking, outdoor skills for those heading out on a much larger vacation, that want a little experience, before heading out.


As to the other two appraisals: The first one is self-explanatory. He could only legally sign off on $600,000 so he could not perform the analysis required and should not have performed the appraisal in the first place.

But he did and the bank accepted it for fact.


As to the second report. If there are no comparables, how did he come up with the value? Did he use the Cost Approach or run an investment analysis for the Income Approach? Either can be valid but you need to see the report to make an analysis.

He use a combination of cost for land and buildings and income from the farm land. Income he only did for the ag. But the figures are way off. The publication the “Country Today” just did a major article on rural land value in Wisconsin and broke it down by county. They came in at the same figure I did for ag land use at $1690 per acre. He sit the land value at $3500.00


If you think you are right, then go ahead and support your position. Don't worry a lot about the other appraisals. If you're right and your investors move based on your decisions, you'll find out in a couple of years. If you're wrong, well, you'll also find out in a couple of years when they sue you.

Agreed.


Thank you.


Ray Miller
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Clearly the property does have potential as income property and it appears you are basing an offer on that? i.e. - 10% cap rate.

Somewhere in the region should be other similar operations, and or this operation has been doing this already so the income estimate is reliable.

Assuming your cap rate is reasonable, in my market, I would doubt many investors would be much interested in the property as investment only considering the probable conditions of sale.

That is, they would further discount, perhaps up to 50%, the offer as a risk factor. They would consider that their own estimates might be accurate but would want some "wiggle" room.

I know a situation where a business owner combined two businesses, a Pizza parlor and a Hamburger joint and thought he would actually increase the sum of the gross incomes. He didn't, in fact, lost 10-20% of his gross, but his overall expenses were a little lower. He should have factored in a risk margin.
 

jtrotta

Senior Member
Joined
Jan 16, 2002
Ray

thanks for the response, am not familiar with your area, sounds as though it offers "potential" and as others have pointed out RISK is involved, but I believe that happens with any business. You have stated that your in it for the investment and not the appraisal; you also said the Bank accepted the $600,000 value established by one appraiser and on the high end you have $4.2 million a large difference and your estimating it at approximately $2.75 Million based in part on a "Net Income" of $275,000 per year. (Only you know if that figure needs adjusting)

First off I wouldn't take on the current owner as a partner; he already blew it; see ya :!: Secondly, if your investment group is solid and ya'll have a solid plan - (5-10+ yr.) I would lean more in that direction, carve out the incidentals with your attorney and then arrive at what you feel is a comfortable offer, based on the many avenues it could go.

Good Luck

Lifes an adventure, which train stop do you want to get off at :?:

8)
 

Verne Hebert

Senior Member
Joined
Feb 25, 2002
Professional Status
Certified General Appraiser
State
Montana
One thing I have learned from doing many appraisals of this type. The cost approach is always high due to obsolescence; and often considerably high.

Plain and simple it is always cheaper to buy a recreational property than to build one--all day.

The problem is How High? And without good market data this is not possible to accurately determine. A crap shoot for you--------------------------------17% to 50 % high.

Verne Hebert
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at
AppraiserSites.com
Top

AdBlock Detected

We get it, advertisements are annoying!

Sure, ad-blocking software does a great job at blocking ads, but it also blocks useful features of our website. For the best site experience please disable your AdBlocker.

I've Disabled AdBlock
No Thanks