Church purchasing Duplex from a Trust in CA

[mikerorwick]

I have an interesting one:

Client is an individual(She is the trustee for her mother's estate)and wants fair market value appraisal of a duplex in Sierra Madre, CA so she can sell it to the church who owns the parcel next door to the subject. Transaction does not involve an agent and was not listed on MLS) Duplex is in fair condition and needs a lot of work, beyond my expertise in estimating cost of repairs. Not a tear down, in my opinion, but I'm guessing 20K-50K in repairs to bring into average condition. The appraisal is solely for the Trustee to determine what she feels a fair price to sell the property for.

The church is planning on demolishing the duplex and is only interested in the land, however, they realize there is some value in the structure. Seller just wants fair market value for the sale.

Here's how I plan on handling this: I've advised the client to obtain a contractor to estimate all repairs needed with a bid to make the repairs. Using the contractor's bid, I will use this to give an as is value, making a negative adjustment(using contractor's estimate of repairs) to all comparables. I will then provide an as is value and as repaired value. The buyer and seller agree that this methodology is the fairest way to proceed. I also thought of appraising the property as average condition, 'subject to' repairs', and let the buyer/seller figure out the cost to repair issues themselves. I'm just curious as to how any of you may have handled a similar situation.

Also, as the most important value to both parties is the 'as is' value and in the current condition, the property is not fit to be occupied, I'm leaning towards omitting the income approach. The buyer of the property is planning on razing and not renting to anyone. The client does not rent the property to anyone and does not plan to in the future. The income approach may be relevant in the market, however, as neither buyer nor seller is planning on using it as an income property, I'm leaning towards considering the income approach irrelevant.

Lastly, any recommendation on what form to use for this type of assignment?

Thanks in advance for any advice or any ideas. Any input is much appreciated!

 

[Rufus]

I think I would start with a land appraisal as if vacant. Then value the property as improved and if in average condition. Then deduct the cost to make it average condition. Compare the two values and make a decision.

Note: This is not my area of expertise, so use this advice at your own risk. (I just didn't want this thread to sit around with zero replies.)

 

[PropertyEconomics]

Complete your assignment as it was given to you. Simply appraise the property in its "as is" condition. There is nothing special about this request.

Take the parties out of your equation ... and do it like you would any other job of a duplex with repair issues.

 

[Annelle]

I agree with Prop Econ. Fairly straight forward assignment.

 

[Terrel L. Shields]

As if...repairs are stupid and unnecessarily.. It ain't gonna be repaired and this is NOT secondary market. PE is right do what they ask..appraise it.

I love those kinds of assignments. BTW, I would be looking to see if HBU is still duplex. If it is commercial then it might be a commercial land/tear down..Support your land value very well, check against cost to see if there is an external obsolescence which is the first hint that the property is transitioning into a non-residential HBU. I suspect you have some element of that as well.

 

[Frederick]

I completed a similar appraisal assignment some years ago and I did it as PE recommended.

( did it pro bono, I hoping the good Lord will cut me some slack when I am doing all my explaining at the Pearly Gates)

 

[Terrel L. Shields]

hoping the good Lord will cut me some slack

St. Peter probably runs an AMC and expected a 24 hr. turnaround.

 

[vargasteve]

Form & approach

Use the AI form. It is perfect for this assignment, and has land page if you'd like to include. The AI form does have a section for extra ordinary assumptions, and hypothetical conditions.


Depending on what type of comparables you can find, you no doubt will not find duplex's in comparable condition. I would estimate an amount lets say $50K for the repairs & calculate based on that #. Obviously, mention to the client to seek a professional estimator for a more expert opinion of the repairs. The client can then subtract and or add to your estimate based on those findings. This way you can just move through it & complete the assignment with the amount & adjustments falling on the seller/buyer to determine. At the same time, they will have your rough estimate to go off, they no doubt will just proceed on that.

If you explain it correctly the burdon will fall on the clients & you can just use the best available data based on your stated assumption.

 

[Annelle]

Frederick, I hope you got a letter of donation from the Place of Worship, to help reduce your tax liability.

 

[Joshua Fookes]

One thing to find out is if the report is going to be used for IRS purposes if the seller is planning to give the church a discount. IRS has specific reporting requirements.

Another thing to consider when dealing with a cost to cure. A typical buyer taking on a project with cost to cure will require compensation for the risk associated with that project. It can be called Entrepreneurial Profit.

Equation would look like this:

Value "As Is" = Value Subject To - Cost to Cure - Entrepreneurial Profit

I would look at any recent rehab purchases to see if you can ferret out a margin the buyer wanted to make on the effort of going through the rehab. Call the buyer directly and ask them, they will often have a figure in mind of what they wanted to make on the deal before they purchased.

Straight forward, but a couple extra steps. Enjoy the process.

Josh