COMPLEX question: Extraordinary assumption???

[Farm Gal]

Oh, help! condo unit from H.E.L.L...

Subject is a very, very, well built, very nice, 2 year old condominium unit in a very rural county surrounded by other rural counties. There are NO condominium complexes in any of the surrounding counties except the state capitol city (40+ miles away, different market, and all of which condo units are in excess of 30 years old... thus non-comparable for many reasons). The market nearly always decides that at some point it makes sense to purchase near new housing units, sometimes at a price significantly lower than the inital offering. Realistically the only sales even close can/could be a half duplex, and a few other non-condo sales from the same small town. That is not our biggest problem...

Three units are occupied, subject unit is under contract to tenant, second unit was purchased under contract for deed (details unknown, and unknowable... interviewee declined to comment, details not recorded - nondisclosure state, she WAS paying $650 per month rent...), third unit's sale may not be arm's length.

Problem sketch:

There are only three units completed, of a proposed 18 unit complex.
The construction is super energy efficient (styroblock) and low maintainance clad, no exterior maintainance required at this time. Complex road(s) are gravel (which is not uncommon for the larger area).

Developer is now out of state. Despite verbal assurance that the complex will be completed... there may be some doubt that they ever will be. He initially overpriced the units, lost about a year due to this fact... He is purportedly changing the proposed future units style and such to complete the complex (initally had 1 car garages wich are not well received in the area), but again no assurance that this will occurr. It is far beyond the assignment parameters to analyze the developers personal financial future: he could get hit by a truck tomorrow, or be filing bancruptcy even as you read... :roll:

Complex reserves are unknown, reserves adequacy unknowable: given the potential for non-completion of the complex! Owners will own the interior of their units only and the structure etc will remain titled in the condo association currently controlled by the developer...

SO here's the BIG QUESTION:
Perform appraisal with what crummy non-comparables available under an Extraordinary assumption along with a caveat that it might NOT be???

I can't even think what else to do in this case? :?

Obviously, at some point (apparently NOW) there will be a market for the individual units: as well built existing houseing they have some value. Can figure something there being an appriaser!~ Due dilligence to the condo aspect has me at least slightly buffaloed!! 8O along with how to reasonably explain all of this this to someone sitting in Orange County in less than novel length :lol:

Thanks in advance for any suggestions!?!

 

[Dee Dee]

LeeAnn,
Since you have no crystal ball to predict the future of the complex, I believe that you are on the right track in disclosing what is unknown, along with disclaimers that your appraisal is based on the assumption that the project will be completed.
As for comps...this sounds like a situation where you'll just have to do the best you can with what's available.
This is going to be an ugly one!

 

[airphoto]

Run, LeeAnn!

You couldn't get paid enough for this one ..

 

[Pamela Crowley (Florida)]

Lee Ann,

I would graciously decline this assignment. Every once in a while one comes along that just is not worth it.

 

[George Hatch]

Lee Ann,

Well, you can forget the concept that you'll be able to get this across to an O.C. underwriter with less than a novella. You may have to draw a picture in crayon for them to understand it. Probably the first thing you should do is to call the lender, ask for their chief appraiser, and ask him/her how they want the deal done. If you're lucky, they will tell you to stop work immediately and bill them for the time you have in it. The second best outcome on this would be for them to give you some advice, which you should follow to the letter. Do not plan on making any money off of this deal. It's a loser, money-wise. On the plus side, completing this type of assignment to the best of your abilities will enhance your stature (at least among us :wink: ). Think of it this way: this is the type of valuation an AVM could never do properly. Kinda like job security.


As for the appraisal, all you can do is to paint the picture and give it your best shot. I can guarantee you that no one will complain about your opinion of value or your method of determining it, lest they be faced with the prospect of re-doing it themselves. I recommend you make NO unsupported assumptions without disclosing the steps that you went through to get any information that was not available. This project is obviously an orphan, the developer obviously is not making any money after allowing the project to drag on so long, and has little incentive to even finish the project other than to protect their credit rating. Realistically, the HOA could fold at any time, the units will likely end up being heavily tenant occupied, and your unit would be competing with any of the new units coming online if it is re-sold any time in the near future. In most markets, condos are the first to drop in value and the last to recover. These types of possible scenarios are going to be part of your decision making process; therefore they should be reported so that your readers at least understand how you came to your conclusions. I would plan on writing a paragraph or more in your addenda under the heading of "subject market segment".

This is a high-risk lending scenario and this property certainly should not be mortgaged under a typical loan program with a high LTV. So call it like it is and pull no punches. White-wash nothing; give no benefits of the doubt.

In terms of your valuation, it's time to think beyond the box. This condo unit will be competing with other types of residences in the area, one way or another. What is happening 40 miles away in a completely different type of market is not as relevant to this valuation as the proximate data or data from a comparable market area. Take your prior sales data and any current or pending listings in your project, throw in some entry-level SFRs on the smallest lots you can find in your market area, and the half-duplex or even a 2-unit duplex. If duplexes are selling based on their income, you might even go so far as to develop a supported GRM and use the rental rate from any rented units from your project to apply it against, thereby developing an income approach. You can figure your unit will probably be worth less than the other types of residences after accounting for your differences in age, quality and condition. I would just go to the lower end of the range; I wouldn't try to penalize it any further by extrapolating beyond the range. Where this deal will end up going down is not the value, but your estimate of exposure time. If there is evidence of investor activity in your market, you might even hazard the suggestion that the typical buyer might include off-site investors for tenant occupancy. Most lenders will not be getting excited about a 90% LTV on any value dependent on a 9-month or 1-year exposure time, which you may very well have there. If they do lend on it after all these red flags have been raised, well then that's their problem, not yours. Your main goal in this is to offer your opinion based on all the available data and disclose what wasn't available and why. All you can do is all you can do.

I would even suggest that you recommend they seek a second opinion on this.

Anyhow, cheer up. This type of work is what separates the legions of sweat shop operators from the artisans.

George Hatch

 

[Farm Gal]

George:

Thank you for your comprehensive reply!!!

Points such as (paraphrased) "It's a money loser" and "No one is likely to throw rocks at an honest attempt to value this turkey lest they have to do so themselves", I had already figured out...

However calling the chief appraiser (tho I have done this before) had largely escaped me on this one... control freak that I am In this case however it may be easier to just write it up and then wait for the screams.... at least we can be looking at the same page of comments as we discuss it :lol: :lol: :lol: at which point it can be tuned to what ever they suggest that is possible (no better comps, not much sales etc etc etc)

Pop 2263, 779 households, 811 houseing units ... I think they counted the doghouses...

Did you catch the part that there ARE only 3 of these units completed, no others started and of those three there are NO verifiable valid sales after a 2 year marketing period :lol: :lol: .

This one is going to wind up as 'it is my professional opinion cause I SAID so', after any/all analysis is done and explained and crayoned out!
Should I use the 8 color box or 124??? :?:

 

[Ray Ohler]

I tend to agree with the ones who said RUN. It appears to be an accepted statement that ANYTHING can be appraised. I think this is one good example of something that CAN NOT be appraised. Sure, its worth something, but what? You mentioned three "sales" out of a proposed 18 unit "complex". First sale under contract to the tenant (maybe a no money down deal maybe perfectly above board you'll probably never know), second sale is moot by your own description, third sale "may not be" arms-length, toss that. Sure you could write a book justifying how you arrived at a number but it would, in my opinion, just be a exercise in mathematics. You didn't mention what the purpose of the appraisal was but I assume it is for mortgage financing. If it isn't for a lender who portfolios their own loans FOR A LONG PERIOD OF TIME, NOT 3 DAYS, run as fast as you can. On the other hand, maybe the project will take off all of a sudden and you get to do 15 more "pieces of cake". Doubtful BUT possible. I still say run, it isn't worth the gamble.

 

[Farm Gal]

Ray and all others who favor the Bambi approach:

Thanks but with all due respect, in some cases it DOES boil down to our professional OPINION.

Beyond the numbercrunching and form filling when the lender looks at that bottom line they are requesting MY estimate of market value as defined by the parameters attached: WHAT DO I THINK and to whatever limted extent can either prove or guess at based on the data contained...

which I am inclined to give them!

It is not a cookie cutter, less and less of our reports are! We DO need to start charging for such services accordingly, however I'd rather do one where it stretches my mind than sit behind the desk eating Oreos cause I am bored. We have other work, we are going to 'lose money' but I suspect we are going to learn a little more about oddball properties in small rural towns and such in the process. A future as expert witness may come of this :roll:

Anyway, I anticipate spirited conversation and arguement to ensue

 

[Ray Ohler]

BUT if you are "inclined" to give them what they want, go right ahead and do it. The way YOU descibed the "project" and its completion, or lack of completion, I would make damn sure my E&O policy was for
multi-millions. An appraisal IS an OPINION, however that OPINION has to be supported and defendable (in court if necessary). With what you described, I don't see that being "reasonable". That's why they make chocolate ice cream, vanilla ice cream and strawberry ice cream. And for those who CAN'T PULL THE TRIGGER, they make "neopolitan" :lol: .

 

[Farm Gal]

Ray:
I DO intend to suport and be able to defend my opinion... I always have a basis for my opinion (except occasionally when flapping on this forum, and usually even here). I intend to fully research and report, what I was looking for (OK inaddition to a little sypmpathy) was direction on how to cover my *** with regard to the descriptive part of the hypothetical condition or lack there of on which to base that estimate of value...

Point is most properties exist such that SOME one should have enough basis/reasearch/attitude on top of limited available data to determine a 'value opinion'. Which as mentioned in another section of this forum may differ greatly from 'price'.

Horsesense is not entirely out of favor when it comes to appraising the hard ones!