Property with Negative Value

[PropertyEconomics]

One of the things I find interesting about these "cases" are, we as appraisers, typically calculate our repair costs based upon lets say placing the property in average condition. Theoretically that may be proper but practically it may not reflect the market.

I have two friends, I affectionately call them slum lords, make offers on these types of properties all the time and place minimal amount of improvements in them. I mean to the point they will remove carpeting from a better purchased property and place it in a lower end property and it is still an improvement. They primarily do the work themselves and I dont know if I have ever seen them spend over $5000 in rehab / repair.

Once complete, they lease the property to an appreciative tenant that cannot afford much and is thrilled having a place to call home and viola --- they make $200 - $250 a month on an investment of say $15,000.

Sometimes, and I am certainly not accusing the OP of this, I think we cant see the forest for the trees. Perhaps a search of everything sold under say $20,000 may reveal similar properties that were in similar shape and even though we are left wondering why someone would pay any amount for the property, there are in fact those investors out there.

My two friends are but one example.

 

[Terrel L. Shields]

For our next subject we will argue how many angels can dance on the head of a pin and perhaps decide if more angels can fit while doing a slow foxtrot than a Viennese waltz.

Give me all those deeds of properties with "negative" value...including one next to the nuke...I will sell them for souvenirs...

 

[Webbed Feet]

Duck, You confused me again!

I may be the null man out in this thread.. LOL

The theory versus the definitions would make for an interesting thread if more were interested. For the moment I have to stay with approach results arriving at indicators of negative value would be an indication that the results cannot meet the definition of value to be used for the assignment. A "buyer" departing with nothing of value belonging to the buyer to obtain real estate, instead being paid to take it, is not a buyer. Such a person could only be described as a receiver. Yes, there could be a grantor and grantee, but there is no buyer in a transaction where 100% of the exchange is all one way. Any such grantor would have to be distressed as well, hence no arms-length transaction by our definition of one would take place.

 

[prasercat]

Once complete, they lease the property to an appreciative tenant that cannot afford much and is thrilled having a place to call home and viola --- they make $200 - $250 a month on an investment of say $15,000.

My two friends are but one example.

Yes, but are your friends really "market" friends or are they "value in use" friends? In other words, are they unique individuals or do they represent the typical buyer of such property? However, what I believe you are relating is that these particular friends are members of a non-typical market or alternate market group and which could be considered a "market" in certain locations for a certain property under specific conditions. In such a case, the "overall market" could be seen as layered, like an onion. Properties in different conditions alone may cause the property to drop from one market layer to the next; such as, when properties become more valuable as "fix and flip" properties to the builder market as compared to the same property in a more repaired condition.

Perhaps then, one needs to determine whether the particular property has passed into another market layer due to subject condition or an intrisinc value existed all along, but was not discernable in normal market transactions; such as, historic value (which could set a minimum). Along this line of reasoning, I could imagine two viable markets and that according to market A (which is typically the buyer of the subject under normal circumstance), values it as a liability (negative value); whereas, in reality, the lower limit to "market value" is normally being set by the presence of market B (which is a more specialized but a significant market). Market B value for the subject would be analysed from sales being sold within Market B participation only. However, it could also be that a particular property has overlapping market participation between A & B. Whichever market then sets the maximum value, should then determine the "market value" of such a property.

What distinguishes Market A and Market B, is that Market B finds an economic or other benefit in the property that Market A does not, which may be due to specialized knowledge, specialized operations and/or equipment and/or interests. As an example, market A may pay $1 for a baby diaper, but once it is used, it has no value in Market A; however, a company that recycles diapers to make building materials would find a positive value in the diaper. The recycle company, in Market B, is equipped to handle and process used diapers, such that, there is a net profit, so it can extract value from it; however, no value can be extracted in Market A.

Naturally, the market value may still be "net" negative in an alternate market, but less negative. However, in line with the Webbed theory, still null.

Therefore, according to my cat logic, friends, onions and diapers are related mathematically.

 

[Terrel L. Shields]

I will up my ante... $2 each for deeds...up to the first 50 properties.

 

[The Warrior Monk]

Give me all those deeds of properties with "negative" value...including one next to the nuke...I will sell them for souvenirs...

If you're serious, give me your contact info...I know someone that is trying to get rid of a contaminated property. The liabilities that go along with it shouldn't be more than a few hundred grand.

 

[prasercat]

I will up my ante... $2 each for deeds...up to the first 50 properties.

If you acquire enough of these, you could become the lord of all slum lords, and perhaps run as a non-profit. You could increase the value of these properties over time without ever being positive in value, which should then make you exempt from capital gains.

 

[PropertyEconomics]

As an example, market A may pay $1 for a baby diaper, but once it is used, it has no value in Market A; however, a company that recycles diapers to make building materials would find a positive value in the diaper. The recycle company, in Market B, is equipped to handle and process used diapers, such that, there is a net profit, so it can extract value from it; however, no value can be extracted in Market A.

I believe what one man calls cow $*^t another man calls fertilizer. As you point out a liability to one (the producer) and an asset to the other (the fertilizer manufacture).

The logic is flawless ... and I believe it may apply ... but research is necessary to validate our theories regarding real estate.

OP ... you need to get to work and get back to us. :laugh:

 

[PropertyEconomics]

If you acquire enough of these, you could become the lord of all slum lords, and perhaps run as a non-profit. You could increase the value of these properties over time without ever being positive in value, which should then make you exempt from capital gains.

And, lest we forget, as a "developer" you can receive tax credits for free, which you can then sell at say $0.70 on the dollar, which would capitalize the renovation thus earning you a developer fee ...

And they said these properties have negative value ... ha!!!

 

[VegasWayne]

An acre on the moon can be purchased for $18.95. No air and direct exposure to solar radiation don't cause negative value.
http://www.lunarregistry.com/