Partial Interest valuation

[vargasteve]

I recently completed an estate (trust related) date of death appraisal for a customer. Subsequently to the assignment I recieved a request from the attorney for a modified assignment to revise the appraisal to include 50% discount for partial ownership. (my customer as it turns out is one or two owners). Any way I've not actually completed a partial interest assignment valuation as of yet.

In my mind there is two or three issues

1) 6% realtors fee

2) sweat equity - repairs and such, details / staging

3) good will

I realize it's more complicated the more owners involved but with just two my estimate is total - 10% (subtotal) divided by two = 1/2 partial interest. Any comments?

 

[Abester]

Partial interest valuation is an appraisal specialty. If the attorney knows the discount, let the attorney apply it as the expert.

 

[Elliott]

I'm with Greg. Unless "partial interest" valuation is
your speciality and your up on it, I'd tell Mr. Attorney
that you can only do Market Value, and that partial interest
valuation requires either an accountant or a specilalist.

Being the smart *** I am, I'd probably ask, why 50%,
why not 30% or 70%?

elliott

 

[Howard Klahr]

Without attempting to pile on this issue ... Remember to keep in mind that when evaluating partial interests, the sum of the parts may not equal the whole. As the many new owners of Tenant In Common interests in commercial properties are beginning to find out

 

[Restrain]

I've been involved in this in East Texas, where large numbers of heirs would have undivided interests in large acreages. The issue involves the cost to cure the title (estate costs), the costs involved in division of the asset, if possible, and general administration costs for an ongoing entity, not to mention other costs. For example, on an acreage tract, you are looking at survey costs, title company costs, etc. Further, you must consider that any division of the property may involve court costs if one of the parties decides not to accept the division.

The effect on value is directly dependent on the number of parties involved. A simple partnership would have limited effect. A large number would significantly affect the value.

Talk with the attorney to examine the legal issues and why the attorney believes the effect is 50%. He may well be right, but you need to find out for yourself.

 

[Stephen J. Vertin MAI]

Vergasteve:

Partial interest appraisals are certainly not something thrown together based on what an attorney believes the divided allocations should equal. Further this is not an assignment to be turned over to an accountant. It is a speciality appraisal and you would be well to comply with the competency provision of USPAP. Further it is not something that can be explained on a forum in a couple paragraphs. There are entire classes allocated to the subject.

On the positive side this maybe an opportunity to learn something new and expand your practice. I would recommend you find someone who has done a number of these type assignments. Explain the issues and ask how much they would charge to review the report and explain the basics.

The very first and most important issue is establishing the type of partnership involved and its ownership and what is the ownership interest being appraised. If your prospective mentor does not ask this information find someone else. Once the prospective mentor establishes his price for helping you go back to the client and tack on your cut. Do not be greedy. In fact you may want to consider taking a loss for future benefits (there is good money in partial interest appraisals) once you understand it complexities. I usually charge $1,500 to $2,500 for the most basic assignment and these do not include complex property type.

There are appraisers who do nothing but partial interest and make a very good living. Further there is not that much competition. Most people who can do them have many other avenues of business and many due not focus solely on these type assignments. Good luck and God bless.

Steve Vertin

 

[JSmith43]

It might have been about a year ago, but there was a thread in the commercial forum that touched on the topic. There were some control issues in that valuation assignment as I recall. Does the search engine work yet?

 

[aussie ken]

Steve before you dive in. Consider that all though the solicitor maybe saying 50% he/she could be wrong on the %.

I believe you foreigners use the Torrens Title system or similar Govt Guaranteed Title system.

Within Torrens a sub catagory exists called "Joint Tenancy" where two parties own a property 50/50.

There is also a sub catagory called "Tenants in Common" where ownership is apportioned as agreed by parties. It may be 95/5 or 80/20 etc. or even 49/51.

I would imagine the title system where you would have similar although perhaps differently named types of title.

So before starting get a copy of the title just to make sure the % are correct if possible. Solicitors DO sometimes make mistake.

Consider the old Australian saying " Im an honest solicitior, Im from the Govt here to help you, your cheques in the mail and I will still love in the morning"

 

[Richard Carlsen]

In my mind there is two or three issues

1) 6% Realtors fee

2) sweat equity - repairs and such, details / staging

3) good will

These are not issues for the valuation of real property. Not one of them shows up in the definition of Market Value to which you are appraising.

If the client is a co-owner of the property where two people own the property, assuming this is not a complex appraisal or commercial property with leases etc. then the math goes like this:


Opinion of Value
_______________ = Value of Ownership Interest

2 owners


It's a tough one but after four days in class, I finally got a handle on it.

Seriously, I've had the same request from an attorney for a fishing cabin on the AuSable River. I simply asked him if he wanted me to do the math as part of the report or if he wanted to do it so he could bill the client. He decided that he could handle the math while the clock ticked.

However, if the assignment is anything more than a simple real estate valuation assignment where division by 2 would equal ownership interest, I'd back away form it based on competency. These could get difficult.

 

[xm39hnu]

Got one similar that I'm working on right now. Dad passed away, two siblings inherited an undivided interest. They don't want to divide the land, sell it, or do anything else to it. The attorney for one of them needs market value of a 50% undivided interest for estate tax calculations. This is 770± acres of land in five different parcels, three tracts of which are non-contiguous. One pair of parcels has a HBU different from the rest (about 70± acres).

Now, I've found the sale of a 1/2 undivided interest in 440 acres, one contractor to another, of land having similar terrain and utility, similarly remote. This will support how much of a discount to apply to the fee simple estate. The market values of the two types of tracts is well supported in the market.

Richard, would you pay 50% of market value for a 50% undivided interest in land owned by a total stranger? Division by two indicates ownership interest, to be sure. But your assignment is to define market value, not ownership interest. What could one of the owners sell his interest for at arm's length?