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Double Dealing?

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gregs

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Dec 7, 2008
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Georgia
I'm a builder in Georgia. Three years ago I acquired 39 sf developed lots. The bank loaned me 100% of Market Value. Turned out to be a terrible market. This year the lender foreclosed. The lender this time had the lots appraised using the DCF method which, of course, gutted the value by 40%. I wonder if the bank has the flexibility to use 2 different appraisal methods on the same collateral to manipulate the values to create a difficiency.

I would have had no problem with the lender using the DCF at the time of foreclosure had they also used the DCF at the time of acquisition.

Any Ideas?
 

Thomas Fiehler

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Ohio
I don't know any lender with at least a partial brain that would NOT use a DCF. That is, unless you have contracts in hand for all the lots. It was possibly an error on the original appraisal not to discoutn the sales unless the market was really that hot at that time.
 

Boonders

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Iowa
If they actually sell them for more, it's my understanding you get the proceeds and/or partial release.

This is more of a banking question than an appraisal question.

But, it still comes down to the "you borrowed it", no matter what the valuation, you still borrowed the same amount.

And, lending 100% of retail market value of individual lots is pretty crazy. Sounds like somebody(s) getting fired.
 

The Warrior Monk

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New York
I'm a builder in Georgia. Three years ago I acquired 39 sf developed lots. The bank loaned me 100% of Market Value. Turned out to be a terrible market. This year the lender foreclosed. The lender this time had the lots appraised using the DCF method which, of course, gutted the value by 40%. I wonder if the bank has the flexibility to use 2 different appraisal methods on the same collateral to manipulate the values to create a difficiency.

I would have had no problem with the lender using the DCF at the time of foreclosure had they also used the DCF at the time of acquisition.

Any Ideas?

It's difficult to answer because we don't know what the lender required in each case. We also don't have copies of the appraisals, so we don't really know what was done.

It appears that the second appraisal, given that the property was foreclosed on, determined the value of the subdivision. That value would be what the subdivision as a whole would sell for. No investor is going to pay the gross sellout for the subdivision, so obviously there will be a discount.

Do you happen to know whether or not the appraisal was performed by a residential or general certified appraiser?
 

Y-TOWN

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Mar 10, 2007
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Certified General Appraiser
State
Ohio
I have been doing some reading where this seems to be a hot button for lender liability suits of late. I've not read of any results of the actions. I just know some developers are filing them.

You list yourself as a real estate broker or salesman on this forum. If that is the case you have to remember you knew or should have known the first appraisal was not real life.

With those licenses or any combination of (if you have them) you would be easily qualified as an expert in real estate. That being said, you knew or should have known the deal was unrealistic from the beginning. The courts typically will rule you had an obligation to do your own due diligence.

You, me and every other developer in the USA is simply a victim of timing caused by the general economic downturn. All we can do is lick our wounds and go on.
 

Mountain Man

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Georgia
Greg, we've done a lot of subdivision appraisals in the past few years, and have re-done a few for our clients to help develop a liquidation plan. One thing I've seen consistent in may of the loans...
Lenders usually ask for 3 values, As Is (dirt only), Market Value (using the cost approach and income discounted cash flow), and Retail Value (bascially the sales price of all the lots without a DCF). While we stress in the appraisal that providing the MARKET VALUE is the intended use of the appraisal, many, many lenders used the Retail Value to base their loans. Therefore, I've seen many lenders who ended up in the hole without any equity because they lent 80% of the retail price when they should have lent 80% of the Market Value. Many new what they were doing, and some didn't... using clerks to "under write" the loan package. At that point, all I am able to do is point out their mistake, give them the newly revised discounted cash flow with no sales for the next couple/few years, and say hold on, it's going to be a tough ride.
 

gmherrin

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Dec 23, 2008
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Certified General Appraiser
State
Louisiana
The DCF analysis was appropriate in both instances; however, a liquidation value may have been needed in addition to the DCF in the second appraisal. As stated before, it is difficult to say not knowing all of the details and without knowing exactly what the appraisers did.
 

Carnivore

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Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
And, lending 100% of retail market value of individual lots is pretty crazy. Sounds like somebody(s) getting fired.

From what I read in the papers no one is getting fired except low level people are being laid off and all the others above are getting bonuses! Go figure

I agree with you, but it aint gonna happen.
 

Boonders

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Joined
Oct 31, 2006
Professional Status
Certified General Appraiser
State
Iowa
From what I read in the papers no one is getting fired except low level people are being laid off and all the others above are getting bonuses! Go figure

I agree with you, but it aint gonna happen.

I know of several bankers in my market that got pink slips over stupid lending practices.
 

AJL118

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Jul 29, 2005
Professional Status
General Public
State
Florida
I know of several bankers in my market that got pink slips over stupid lending practices.

That statement is a broad brush. The grunts usually get the broom, and the upper echelon gets the bonies and the stock options. What is your description of "banker"?
 
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