One-half Undivided Interest

[Elliott]

Steven,

Here's what I tell people who want a value with
a fractional interest......

I only have sufficent access to evidence of
market value for whole fee simple interest.
So, I can provide you with an appraisal of the
market value of fee simple, 100% interest.

I understand that the IRS, accountants and U.S. Congress, is
their infinite wisdom, have developed tables which
specify what a 50% interest is actually worth for
an estate (I think its like 38% or some other partial
amount). Your accountant can advise you. I cannot
provide you with a value of a 50% interest, since
they are not routinely bought and sold in the market.

elliott

 

[Dennis J. Black ASA IFAS]

Mr. Reed,

You are right in stating sales of such property are rare, but they are not impossible to value, and no such "table" is used. In fact the Berg case addresses such mentality, and the court relies upon an appraiser in the end. It also addressed using case law to support a discount (The court said it is improper). I reiterate the discount must consider "all relevant facts and circumstances" and considering they change with each assignment such one size fits all thinking is troublesome. I watch appraisers complain on the forum all the time about lending work and its accompaning pressure, yet they resist moving into areas where professional and skills are recoginized. I encourage all readers of this forum to read some of the suggested reading and consider those facts the next time someone asks for a valuation of such property. You may find a nitch in your market no one else is covering.

 

[George W Dodd]

Mr. Black,


I am unfamiliar with the designation listed behind your name. What organization does the IFAS belong to?

I do not agree with your position. There are not enough, if any, sales of a part interest in a single family home available for anyone to conduct a reliable analysis of "market value."

As a point of law, a party with " one-half undivided interest in a single family residence" .. "as tenant in common..." can force the sale of the property and receive their percentage of its value at sale. Since an appraisal would establish the market value of the full interest in the property, as of a specified date, the most prudent method for the estate to consider is a percentage of that value. To suggest that there is a "better" way is to ignore market basics.

 

[Dennis J. Black ASA IFAS]

The IFAS designation is conferred upon appraisers by the National Association of Independent Fee Appraisers, a forty year old professional association based in St, Louis which is one of the founding members of both NACAO and the Appraisal Foundation. I not only hold that designation but I sit on the Board of Directors, as well as chair their National Education Committee. Concerning the method of value for undivided fractional interests, these are not just my thoughts, but those which have been published by several of the appraisal organizations including the Appraisal Institute, American Society of Appraisers and the NAIFA. You seem fixed on the premise that without comparable sales a valuation is not possible. Then how is that appraisers have performed valuations of millions of leasehold interests, undivided fractional interests, easements, partial takings, etc.... over the years. We value proeprty rights, not the physical real estate, and this is just another form of the bundle of rights.

 

[Stephen J. Vertin MAI]

Group:

I have heard Mr. Black state nothing incorrect and the information he pointed to was excellent. Although I have not written articles as he has, I have done many such assignments and sat through several AI courses on the subject. Mr. Dobbs it use to be the lack-of-control discount was taken from transactions involving minority interests in public real estate limited partnerships. The marketability discount, sometimes referred to as the partnership re-sale discount were taken from Equity Partnerships Re-Sale Discount Studies. However, it my understanding there are very few transactions now days. You are correct in stating data is scare.

My advice is, if you do not have the time to study the process, turn the assignment down. However, Mr. Black is quite right in stating there is a real market for such services. Especially if you keep up to date data and are a good listener. You have to thoroughly understand the partial interest agreement.

Steve Vertin

 

[Fred]

Dennis,
I remember your seminar in St Louis (2000). Afterward, I told you that creating undivided fractional interests was the "lowest and worst use" of a property. :lol:

Steven Santora, IFAS

 

[George W Dodd]

Mr. Vertin,

Again, go back to the question asked. This is a single family residence with an undivided one-half interest as tenants in common. The type of extraction Mr. Black refers to is not applicable to this assingment.

The assertion that it takes a specialist to do partial interests in for commerical type properties or other unique properties is not the question.

 

[Stephen J. Vertin MAI]

George (if I may call you by your first name):

The methodolgy is the same. While, at first I would agree it sounds perfectly logical to put the house on the market, sell it and divide the proceeds. And in some cases, you are right, it is that simple. However, sometimes this is not practical or in the best interest of one or more of the partners.

Let me give you an example. Lets say in this undivided one-half interest as tenants in common there is a partnership agreement. One owner is general partner who lives in the house while the other is a minor partner who has no say in the operations, acquisition or disposition of any part of the asset. Believe this or not there are parents who set-up ownership situations such as this for various reason. Possibly one of the siblings is mentally retarded, on drugs, can not be trusted with money, etc..... In my example, if the parent(s) die both siblings are required to pay estate taxes on the assets. It is not fair to just evenly divide the taxes amongst the owners due to the owners actual control of the asset. Because in reality, the minor partner has no say. If the minor partner wanted to sell his/her share, there would probably be few buyers.

Now come the question. What is the value of this type minor partners undivided one-half interest as tenants in common? I am not saying this is the situation in the case of the original post. However, what I am saying is this is the type stuff you have to watch out for in partial interest valuation. Sometimes it is not as simple as just dividing market value. Sometimes it is. It depends. That's why appraisers have to be careful and understand all aspect of the deal.

Steve Vertin

 

[George W Dodd]

Steven,

I don't disagree with what you are saying, but in the example situation are you not valuing the partnership interest and not the real property?

 

[David C. Johnson]

Mr. Black,

I hope to be reading more of your posts in the future!

dcj