Liquidation Value

[Calvin the Airedale]

For the benefit of a friend, and in the context of commercial assignments, I am posing the following questions for open discussion.

1. What particular sources do you find most helpful in researching liquation, forced, or distressed sales?

2. What techniques or regimens do you apply in determining liquidation value or liquidation discount that are unique to this problem?

The following definition applies:

liquidation value
The most probable price that a specified interest in real property is likely to bring under all of the following conditions:
1. Consummation of a sale will occur within a severely limited future marketing period specified by the client.
2. The actual market conditions currently prevailing are those to which the appraised property interest is subject.
3. The buyer is acting prudently and knowledgeably.
4. The seller is under extreme compulsion to sell.
5. The buyer is typically motivated.
6. The buyer is acting in what he or she considers his or her best interest.
7. A limited marketing effort and time will be allowed for the completion of a sale.
8. Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.
9. The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

I have my own answers and opinions regarding these questions but it would be useful to hear from other CG members.

These assignments are becoming more common and will likely continue so for the near future, until Mr. Walk on Water can get the economy straightened away.

 

[Scott Lanz]

1. Same as any other comp search with properties meeting the criteria

2. Solid Brokers, Investors, Developers, etc. - Most of these individuals have buyers in their pockets, or their own ideas of what would move them on property

The very first lesson I had in college in the real estate department was this...

"I can sell any property in 24 hours as long as I get to the set the price"

Literally, those were the first words out of his mouth as he entered the room.

 

[PL1957]

IMO, virtually any information provided by a broker today pertains more to a liquidation value than a market value. There are so few transactions occuring that the broker's only thoughts are SELL NOW. The term "reasonable marketing period" is not in the typical broker's vocabulary today. It's tough living without commission income.

 

[Ken B]

Numerous property owners I have spoken with recently report that they have been approached by buyers who, in the owner's opinion, are offering unacceptably low offers. The attitude reported by the property owner is that they are not going to "give away" their property and they will just hold it until the market improves. The inference is that the only people selling today are doing so because they are in a distressed position and must sell. A reasonable conclusion is that most sales in this market climate indicate liquidation value.

 

[miktay]

...and this whole time I thought that "liquidation value" meant doing an appraisal while drinking beer.......
:new_all_coholic:

 

[JT1974]

Most of my appraisal assignments over the last 6 months have included my opinion of the liquidation value. Some clients want a 6 month "liquidation" value and others base it on 60 to 90 days marketing time. My last one had a definition similiar to the OP. The point I'm making is that "liquidation" value means different things to different clients so make sure you and the client both agree on the definition and include that definition in your report.

That being said, I have found no clear rules of thumb for this issue. Some property types such as apartments still have adequate demand and don't require much if any discounting to attract a buyer in a relatively short time frame........as long as the price is reasonable. Industrial properties on the other hand seem to require substantial discounting in order to attract a buyer.

On a recent industrial building appraisal I did, I made a deduction equal to two years of rent loss and holding costs from my market value conclusion in order to arrive at a liquidation value. This worked out to something in the neighborhood of 30% off. The brokers I spoke to generally spoke in terms of a percentage discount while the investors I spoke with said they factor in holding costs and estimate them relatively high in order to arrive at an offering price when they acquire distressed property. Given the state of the economy, it is tough to predict when things will turn around and tenants will be back in the market for vacant space. However, I don't think two years of rent loss is out of line for a vacant building..........even a relatively new and desirable building.........of course this will vary from one market to another and depend on the supply/demand for the specific property type.

Another example of no clear rule of thumb comes from a subdivision I recently appraised. I found a recent comparable sale of a completed subdivision similar to the one I was appraising. The comparable had 28 finished lots with all infrastructure in place right down to the streetlights and boulevard landscaping. Lots were selling for around $70K with modest demand (people are still building in some areas). The buyer was able to buy the remaining lots for around 25% of their retail value. I figured he got a very significant discount so I asked him how he came up with his offering price. I figured he may have applied a high discount rate. However, the buyer said he knew that the seller had to come up with XXXX dollars within 7 days or he would lose this and another development. The buyer happened to have the cash and wrote the check. My point is, in times like this there are no clear methods for defining liquidation value. It all comes down to how badly the seller needs to sell and how shrewd of a negotiator the buyer is.

 

[Calvin the Airedale]

Do any of you use foreclosure or other forced sales as LV indicators? I'm not talking about the situation where a lienholder takes back the property but those instances where the lienholder has been outbid.

 

[Financially Feasible]

Do any of you use foreclosure or other forced sales as LV indicators? I'm not talking about the situation where a lienholder takes back the property but those instances where the lienholder has been outbid.

As the old saying goes: "If that's all that you have - use it!". However, there are pros/cons to using forced sales/auction sales as an indicator of value (and this has been debated on the Forum before).

Pro: On one side - what are you doing with a foreclosure or auction sale? You're liquidating the asset. Does the lienholder truly think that they're going to get a true fair market value for the property? Probably not. Therefore, there will be some discounting of the price to reflect their urgency to sell. That's pretty explicit in the definition of liquidation value.

Con: If you're doing an auction sale, it generally has limited exposure to the general public. Also, these sales typically require a 100% cash payment in 30 days - this disqualifies those who would require financing for such a property.

Again - use what information that you have which is available to you and disclose, disclose, disclose.

I just did an apartment foreclosure for a client who wanted a liquidation value with a "restricted marketing time" of 1 year. Since it is typical for properties like this within my subject's marketing area to sell in less than a year, then I advised them that liquidation value is the same as the "as-is" market value given that criteria. I was very surprised to see a request for liquidation value be given a 1 year marketing time. How many lienholders want their money to sit for that long?

 

[Calvin the Airedale]

I don't disagree with anything you've written here.

As the old saying goes: "If that's all that you have - use it!". However, there are pros/cons to using forced sales/auction sales as an indicator of value (and this has been debated on the Forum before). The debates have usually been couched in terms of appraising to a market value definition.

Pro: On one side - what are you doing with a foreclosure or auction sale? You're liquidating the asset. Does the lienholder truly think that they're going to get a true fair market value for the property? Probably not. Therefore, there will be some discounting of the price to reflect their urgency to sell. That's pretty explicit in the definition of liquidation value.

Con: If you're doing an auction sale, it generally has limited exposure to the general public. Also, these sales typically require a 100% cash payment in 30 days - this disqualifies those who would require financing for such a property. This raises an interesting point. With the current credit crisis, are we not approaching a "cash" market for a whole range of non-investment grade commercial and industrial properties? Ken B. noted that anyone selling in this environment maybe selling to a liquidation value but I think that position a bit extreme. In terms of definitions, there is one gradient between liquidation and market value, that is "disposition value." Still, when economic circumstances force such extreme convergence (lack of leverage, urgency to sell, few buyers, typical investors hoarding cash) can the lack of maneuver room to leverage really be a con?

Again - use what information that you have which is available to you and disclose, disclose, disclose.

I just did an apartment foreclosure for a client who wanted a liquidation value with a "restricted marketing time" of 1 year. Since it is typical for properties like this within my subject's marketing area to sell in less than a year, then I advised them that liquidation value is the same as the "as-is" market value given that criteria. I was very surprised to see a request for liquidation value be given a 1 year marketing time. How many lienholders want their money to sit for that long?

Thank you for the input!