Undivided interest discount

[Wayne Tomlinson]

I am working on an appraisal of a 600 acre farm which has eight family owner/heirs.

One of the heirs has died, and I am to appraise the farm and determine the appropriate discount for the undivided interest.

I have done it before with no problem. I know that there is no formulae or any such but you do have to justify your conclusions.

In this case, the heir is of the next generation, and all the present owners are uncles or aunts of the heir. I know from observation that the heir will likely be the last one to be asked her opinion on the operation of the property.

I just was wondering if anyone has any good suggesions in this regard.

Wayne Tomlinson

 

[PropertyEconomics]

Mr Tomlinson,
I take from your posting that you have no sales with which to measure the discount attributable to fractional interest. Historically I have used an adjustment which would show the necessary costs of partitoning the property in a court of law. Typically it has been my experience that there will be two factions that will divide among the heirs and partitioning by court order at that point is often the most logical answer. In those instances I have valued the property considering the fee, expressing the fractional interests clearly, and then deducting the amount of costs (attorney fees, surveys if needed, court fees, etc) in order to provide an estimate of the fractional interest value.
As you know undivided interests have little to no power without the complete agreement of the other interests thus partitioning may be necessary at some time and is how I have valued these in the past.

 

[Charles Knutson]

Until the title is consolidated into a single deed (or all of the owners agree to sell) it is not merchantable. The undivided interest could be held in trust, but as long as a single undivided owner can hold out, the property cannot be sold.

When I bought my house, it had been vacant for 8 years and it had 16 owners. It had been in the family for generations, with an elderly brother and sister each owning an undivided 1/2 interest. The sister decided to change her will, so that her grandchildren would become her heirs. Her attorney changed the will just before she had a stroke -- it was then discovered that the attorney had passed title to each of the 15 grandkids, rather than her son as a trustee.

I made an offer, the family accepted, but it took me 9 months and $6k in legal fees to consolidate the title. My attorney had each of the grandkids execute a bargain and sale deed, conveying title to the uncle that owned the 1/2 interest. The last heir to sign did so at my attorney's office -- it cost me $400 for the notary fee, but it was well worth it. It was a god awful experience, and I would never do it again.

If title is not merchantable in the seller, it cannot be sold. I would suggest the owners set up a trust to consolidate the title into a single deed. Each of the undivided interests would have the same share of ownership, but the decision to sell could be made by majority vote.

If you explain the difference in value to them, they might see the wisdom of consolidating the title.

 

[Eminent Domain]

Until the title is consolidated into a single deed (or all of the owners agree to sell) it is not merchantable. The undivided interest could be held in trust, but as long as a single undivided owner can hold out, the property cannot be sold.............If title is not merchantable in the seller, it cannot be sold.

I would disagree with this as a blanket statement. I recently had the opportunity to appraise a partial interest and I was able to locate several sales of partial interests. I found sales that were anywhere from 2/3 to a 1/128 interest in a tract. Some were between family members and just as many I found were to other parties with no blood relation. While most transactions were at a discount I also found that some pay a pro-rata share of market value and some actually paid more than the pro-rata share of market value. It depends on the property and the particular circumstances surrounding it. I would agree that a house on a 0.25 acre lot may have a difficult time selling a 1/4 interest, but with other types of properties its not as difficult. I find speculators who purchase undivided interests of land in hopes of buying out the other parties of ownership and that failing force a partition of the property to gain clear title to their portion. These guys don't make a lot of friends but they do tend to make money on their projects.

Just a few thoughts and my $ 0.02 from an old ****.


Bryan


Wow, I can't believe I can't call myself an old f-art.

 

[PropertyEconomics]

I agree Mr Farley ... the parties can sell their undivided interests in the property to others, unless, there is some document saying it cannot be done. They are not selling the whole but only their fractional interest.
Fully acceptable in most situations. Happens among Doctor partnerships all the time.