AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training
Yesterday an Attorney from Fresno that we had worked for recently, contacted me about appraising some land they own in the Palmdale area, just 2.5 acres, he just wanted to know the FMV for personal reasons, thinking of selling.
It is Zoned A-1. It is located in the County, SE of Palmdale, about 1-hour from my office, in Los Angeles County. I responded and asked if there were any Approvals or Maps on the property. He said there was a map in process at a high density of 12/lots per acre.
What should the Unit of Measure be, Acres or Lots?
What should our Scope of Work be?
Do we need to look at the Absorption of Home Sales and Pricing?
Click below to read on . . .
Example, in Riverside County, in the Winchester area, I just got off the phone with Greg Martin, SRPA. He is working on a Winchester tract that the builder and his JV client Weyerhauser bought the lots last year with a Map for $107,000/Lot. The value today in the same As Is condition is $60,000/lot.
The seller, Rancon has not finished the roads to the property. Rancon sold to all the public builders, Lennar, Richman American, etc. finished their lots, but have no paved road access or infrastructure to them.
They have given back 67 Deposits on the homes they were going to build. Rancon will be sued by all who bought land, because they have not performed. How many land projects is Rancon involved in, guess, maybe dozens, each with the same scenario.
How many other companies are their like Rancon who sold lots to builders?
Using this as an example, what you you think now about appraising 2.5 acres that is not entitled?
Sounds like an Absorption Study and Market Analysis will be required in order to do a good Highest & Best Use. Sounds like at least a $4,000 fee. The point about the fee is not the exact amount, it is that it is thousands of dollars, not hundreds. It is a complex assignment, not just 2.5 acres.
If land went down 44% Per Lot in a given market area, what does that do to the prices of Homes, new and used, in that area? We are seeing large price reductions on new homes in the Inland Empire where I work, as much as 28% in the Coachella Valley on one Lennar tract in La Quinta. Do resale prices mirror new home prices? Or do they move at a different rate of change?
At some point in the downward cycle, land becomes worth less. In time it becomes almost worthless. Especially if it is un-entitled. If encumbered by Bonds for a CFD, I have seen it sell only after the Bonds were collapsed.
During the depth of the market last time we saw entire Specific Plans with backbone infrastructure in the ground, resell for $12,500,000 after foreclosure, and they had $75,000,000 in construction loans on them.
This example is from the Warmington holdings in Moreno Valley Ranch, which we appraised after the default. $12.5 as a % of $75 is 16.7%. $12.5m was less than the Fees, let-alone the Costs expended.In the end, at the low point, there were Sunk Costs that were never recovered.
Sunk Costs is a term used by CPA's that relates to plant and equipment. We can use it in real estate too. Sunk Costs in real estate is all the costs and fees, board and nail costs that it took to complete the project. When markets turn down, costs are not recovered. They were real enough, but are sunk into the project and not repaid during a down market.
In this example, the property lost 83.3% of its value. That is what can happen to land in a declining market. Land prices in that market went from $60,000 per Mapped Lot, with densities of 4 to 5 per acre, to an Acreage price of $12,000 or $2,400-$3,000/Lot.
Then, a new breed of land buyers came into the market and bought to hold 5-7 years. At the end of their holding period they re-did the Maps and resold for Lot Values, not Acreage Values.
Watch as builders default on land deals, stop construction projects and leave their JV partners holding the bag. Last time the S&L's were partnered with builders and it took them down. Oh, yes, then there were the issues of inflated appraisals, which the S&L executives pointed out to Congress, and asked for help to make the appraisers be more honest. Congress obliged and FIRREA included appraiser licensing in 1989, the Appraisal Foundation and USPAP were formed and promulgated.
It fixed the problems, since now every licensed appraiser certified to ethics and standards and to not taking assignments with a predetermined condition or value. Sure.
That was in 1985. What is happening now in your markets. The more aware we are, the better our eyes and ears, the more we see. Market Analysis needs to be a larger part of what we do as this market went from hot, to cool, to declining.
Developing good eyes, means we need to be aware and alert to signs from the market, signs of change. Being aware of and correctly employing good valuation procedures, requires KNOWING what the Supply, Demand, Inventory and Value Trends are in every market we are appraising. KNOWING cannot be achieved by running on auto-pilot or using Templates for appraisals.
"This report does not comply with USPAP. I did no primary research or analysis and am not really aware of Supply, Demand, Inventory or Value Trends in this market area. All we did was look up public records on the subject and property transfers values from Tax Stamps, we used six transfers that had Full Values indicated, made rule-of thumb adjustments and concluded to a value. We do not know anything about the subject in terms of approvals or fees paid, nor do we have any information about the sales relied upon."
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