Property with Negative Value

[TJQuate]

I have a client refusing to accept a report because it has a negative value.

House is in terrible condition, I estimated over $30,000 of repairs and would be worth about $20,000 repaired.

I found one vacant lot sale for $3,000 last year and researched the cost to demolish the subject - about $10,000 - $12,000

My math returns $-10,000 either way. What should I do?

 

[Mark K]

If you search you'll find several discussions on this, usually about 2-3 times per year.

Unless the property is affected by contamination, I don't subscribe to the negative value idea. Heck, pay me $1 and send me the deed; I'll take it. OK, so maybe its a -$1 dollar value plus postage.

I won't pay taxes or cleanup and will let it go back to the county or state but that's their problem. I recently submitted a report with a $0 value but by most accounting methods, it should have been about negative $5-10K counting demolition. My property was in the same value range, before and after, as yours with sites similar to the subject selling for $1-2K.

I'm hoping a million people send me $1 and deeds; I'll retire a couple years early.

 

[TJQuate]

If you search you'll find several discussions on this, usually about 2-3 times per year.

Unless the property is affected by contamination, I don't subscribe to the negative value idea. Heck, pay me $1 and send me the deed; I'll take it. OK, so maybe its a -$1 dollar value plus postage.

I won't pay taxes or cleanup and will let it go back to the county or state but that's their problem. I recently submitted a report with a $0 value but by most accounting methods, it should have been about negative $5-10K counting demolition. My property was in the same value range, before and after, as yours with sites similar to the subject selling for $1-2K.

I'm hoping a million people send me $1 and deeds; I'll retire a couple years early.

Does asbestos siding and peeling paint from 1945 (ya think it might be lead?) count as contamination??

Serious though, what was the client reaction. They are saying they won't accept the report.

 

[Jerry Bone Jr]

My math returns $-10,000 either way. What should I do?

Find a few sales where the price was negative $10k.

 

[CANative]

It would at least have some value to a speculator. Maybe it's only worth $20k now if in better condition but what might it be worth in two or three years? If a speculator thought it might be worth $40k in 3 years and he could buy it now at $5,000, pay taxes for three years, spend $10k to rehab it and then sell it for $40k he'd make a tidy profit.

In any case you can't state a negative value in a report that uses the GSE definition of MV.

 

[Scott R Marshall]

Perhaps an opinion of market value of $0 would be appropriate with an explanation within the report discussing what you have described. I have never appraised a $0 home and I understand the concept of repairs or demolition being in excess of what the market will support, which conceivably results in a negative value. Having said that, I am also not aware of any particular instances involving a transaction the way you have described it although there may very well be some.

A buyer comes to the table and tells the seller in order for me to buy this property you need to pay me $10000 and at that point the buyer is left with a property worth nothing. I guess it sounds like a good deal for the buyer. But what about the seller? Well if they are looking to avoid a foreclosure they probably do not have $10000 to spend. Even if they did, any type of mortgage on the property would probably mean that the buyer would have to assume the mortgage and make payments on a property worth nothing. How appealing is that? If it is bank owned I find it highly unlikely that a bank would pay someone $10000 to get it off their books and would probably send it to auction where it may very well sell for the $1 amount. I am not knowledgeable on what happens if a property is not bid on at auction.

I am sure there may be some options available which I have not thought of or could think of if I spent more time spinning the wheels in my head . Were you asked to provide MV or some other type of value?

 

[Michigan CG]

I have a client refusing to accept a report because it has a negative value.

House is in terrible condition, I estimated over $30,000 of repairs and would be worth about $20,000 repaired.

I found one vacant lot sale for $3,000 last year and researched the cost to demolish the subject - about $10,000 - $12,000

My math returns $-10,000 either way. What should I do?

Short answer is you did it right.

With your subject home being in poor condition you need repairs. If the cost to cure would be more than the home would be worth after those repairs then you have solved the issue of Financial Feasibility in terms of Highest and Best Use.

The Highest and Best Use is to not repair the property because of the severe damage but rather demo the property.

I had a similar property last year where I was -$5,000. Lady at the bank called and wanted to know if it was a mistake.

The only problem I see in your situation is that you only have one land sale. You need more than one.

 

[Michigan CG]

..........In any case you can't state a negative value in a report that uses the GSE definition of MV.

Sorry, but this is wrong.

 

[CANative]

The definition is "most probable price." Paying someone to take something off your hands is not a price.

In any event, say an investor could pick up the property for $5,000 and it cost $30,000 to make it livable. Say the market rent was $750. At 6% interest the payments would be $209 per month with a little extra for taxes and insurance. He would cash flow and have his investment back in about six years and then sell the property. What's the NPV of the cash flow and reversion?

 

[Michigan CG]

.....I'm hoping a million people send me $1 and deeds; I'll retire a couple years early.

The City of Detroit would send you 50,000 such deeds. Just make sure you pay the future property taxes. You will be broke in a year and the properties will still have no value.