Life Estate and Actuary Tables

[Bella Crocheron]

A friend of mine is appraising a life estate property and asked for some help from the forum. His question is broad:
What are the steps you go through when appraising a life estate property?

He has completed one life estate in the past....about ten years ago. He believes he will get a fair market value of property based on comps; then deduct the "loss of income" and use the actuary table in determining how long the property will remain a life estate. .....

Any help I could pass along to him would be much appreciated.
Thanks.

 

[Joanne Rauenzahn]

He should make sure the lender will even accept the property with the life estate - many won't! (we won't) Not willing to guess how lomg someone's going to live if I need to foreclose.

 

[Robert Dunkle]

Hope your friend is Certified Residential or above!!! This IS a complex assignment that should not be taken on with someone whose only "competence" is information is from a forum.

 

[Fred]

It sounds like your friend is appraising the remainderman interest. Is that true?

It sounds like commercial real estate when you say loss of income. Is it?

Also, I don’t believe the remainderman is losing income. He is just not entitled to it - any more than I am.

 

[Bella Crocheron]

Yes, He is a Certified Residential Appraiser....and yes, this is a "complex" appraisal. He is perfectly competant and would not rely only on the advice from others on this forum...The forum provides a lot of different opinions from appraisers with a lot of different levels of expertise....Good thing he is competant enough to know good advice from bad!

 

[Bella Crocheron]

loss of income

OK. Lets say a man owns a Life Estate property. I believe this is a partial interest in the property. His mother sold the property to him, but she remains the "owner" until she dies. She certainly would not sell the property to him for market value. She would sell the property for market value minus the "loss of value" (because son will not take over property until mother dies) or minus the "loss of value" (son cannot rent out the property because mother is still alive".

This is what I mean when I say "loss of income"

 

[The Warrior Monk]

Yes, He is a Certified Residential Appraiser....and yes, this is a "complex" appraisal.

Not only is it complex, but it may fall outside the scope of practice of a residentially certified appraisers license, depending on the laws of your state.

Asking how to appraise a life estate is like asking how to appraise a fee simple estate; the answer is too broad. I recommend working with someone that is compentent in the appraisal of such estates.

 

[moh malekpour]

OK. Lets say a man owns a Life Estate property. I believe this is a partial interest in the property. His mother sold the property to him, but she remains the "owner" until she dies. She certainly would not sell the property to him for market value. She would sell the property for market value minus the "loss of value" (because son will not take over property until mother dies) or minus the "loss of value" (son cannot rent out the property because mother is still alive".

This is what I mean when I say "loss of income"

It looks like it is a family living trust life estate. The mother transfers the deed to her son and reserve to live in the house until she dies. The son is the remainder and the mother is life tenant and has the life estate. This is done to avoid estate probate and is very common. The son who is the remainder or the beneficiary doesn’t lose any income because the property doesn’t have any income as his mother occupies it. The son, however, loses the benefit of possession and use of the property for the life of his mother and that benefit can be calculated by the life estate and remainder interest table. ‘http://www.iowa-estates.com/table.htm
To calculate that interest, you should appraise the property like any other home and get its market value, then multiply that market value by factors on the table to find out the remainder value and life estate value as each one has different interests.
For example if the market value of the house is $200,000 and the age of life estate holder (the mother) is 60 years, the value of remainder (the son) is $200, 000 x .25509 = $51,018 and the value of life estate holder (the mother) is $200,000 = $148,982.
As the age of life estate holder increase, the value of remainder increase because it takes a shorter times to get the possession and the use of the property.
I guess, there are other IRS tables available to calculate the remainder and life estate interest for tax liabilities.
I am not sure if this table and calculation is acceptable to lenders for loan purpose but if they asked to do it, there is a way to do it.

 

[Mike Kennedy]

It Depends......

What are the steps you go through when appraising a life estate property?

Broad question - broad answer ..........it depends on the SOW and Intended Use of the Appraisal.

 

[Fred]

Robin,
These are difficult to appraise for market value with comps and virtually impossible without.

In general the main problems with dealing with this issue that you have partial interests based on time, but unlike a lease no one know how long the time period is. Assuming average life expectancy is no different than assuming property condition in a desktop appraisal. The alternative would be to get medical opinions about life expectancy.

First, there are generally no sales, so the chances of developing a credible opinion of market value are virtually zero. Value for intra-family sales is another story.
Second, the necessary methods would include forms of Discounted Cash Flow and the key variable is the yield rate or discount rate.
Third, you would not be able to subtract the value of one partial interest from the whole value to find the other partial interest – unless “the market” uses the same yield rate for both interests. I think USPAP says something about not assuming that the whole equals the sum of the parts.
Fourth, annuity tables or tables like the one Moh posted are not good. You might as well just guess something like – 20% of the full fee value – because that would be as credible. I don’t see any way to find an economic apportioning without a yield rate, nor do I see any reference to such in Moh’s tables. The only place for such tables is taxable value, because I believe that’s what the IRS says they are owed.