{"id":853,"date":"2018-01-25T12:20:32","date_gmt":"2018-01-25T19:20:32","guid":{"rendered":"http:\/\/privatemoneysource.com\/blog\/?p=853"},"modified":"2018-01-25T12:20:32","modified_gmt":"2018-01-25T19:20:32","slug":"two-hicks-from-oregon-go-to-malibu-a-cautionary-tale-2","status":"publish","type":"post","link":"https:\/\/privatemoneysource.com\/blog\/?p=853","title":{"rendered":"Two hicks from Oregon go to Malibu – a cautionary tale"},"content":{"rendered":"

Clay Sparkman<\/em><\/p>\n

I first posted this Blog piece on 11.11.09 at this site.<\/em><\/p>\n

The runway was drenched in sunlight as our plane touched down that morning at LAX.\u00a0 It was a golden balmy day.\u00a0 We grabbed our bags and headed for the rental car kiosks.\u00a0 I don\u2019t recall how it happened exactly, but the fellow at the counter said something like, \u201cI can make you a real good deal on a sporty little convertible.\u00a0 Do you want it?\u201d\u00a0 We looked at each other and shrugged, \u201cWhy not, let\u2019s have some fun.\u201d<\/p>\n

It was a business trip, me traveling as a private money loan broker and accompanied by Alan, a stalwart friend and investor of many years.\u00a0 Over the past two weeks we had been carefully picking our way through a loan file for a request to loan money on a bare land parcel in the Malibu hills.\u00a0 This was not a normal loan for us.\u00a0 At this point, we had not expanded our regional boundaries much beyond Oregon and Washington.\u00a0 California would have seemed strange to us, but Malibu was like another planet.\u00a0 Still, this was in the glory days of the California Empire, back when money ran free in the streets, and we were having a hard time finding good reasons not to like the loan, so we finally decided it was time to go have a look for ourselves.<\/p>\n

We hopped into the little red convertible\u2014top down, ready to go.\u00a0 I don\u2019t recall who navigated and who drove, but eventually we found ourselves cruising south along the coast and really enjoying the ride, the sunshine, and the beautiful sparking blue sea.\u00a0 \u201cI\u2019m sure we must be quite a sight,\u201d said Alan, \u201ctwo pasty white Oregonians on the California coast riding high in a bright red convertible.\u201d\u00a0 Some SP 40 and a couple of old baseball hats would have been useful, but we were in a hurry to get to our meeting and couldn\u2019t stop to shop.<\/p>\n

Our designated meeting spot was just off highway 101 near a small Realtors office at a cross-road leading into the Malibu hills.\u00a0 We pulled up a few minutes late and found two cars and three people waiting.\u00a0 The loan broker who had been the point man on the project was there.\u00a0 He was standing and talking to two other guys.\u00a0 We were introduced to our borrower.\u00a0 He was quite young (maybe mid-twenties), well dressed with a pony tail and friendly enough but a bit on the slick side (at least by Oregon hick standards, that is).\u00a0 His sports car\u2014an Audi TT\u2014was a\u00a0real<\/em> sports car, unlike our little domestic model.\u00a0 The other fellow (quite young himself) was introduced by the borrower.\u00a0 The introduction was a bit vague and came out sort of mumbled; somewhere in there, we thought we heard the word \u201cappraiser.\u201d\u00a0 We noticed quickly that he and the borrower appeared to be quite friendly with one other\u2014a couple of old pals maybe.<\/p>\n

After exchanging pleasantries, we all hopped into our respective vehicles and fell in line behind the TT. \u00a0The kid was working the peddle hard and seemed to be making a point as we wound our way around hairpin turns on this high windy gravel road; we struggled to keep up with the spray of gravel, until somehow we eventually managed to arrive alive and intact at the subject property, and everyone got out and stomped around in the dirt for awhile.<\/p>\n

The circumstances were pretty simple.\u00a0 The kid\u2019s father owned the property and was holding it as part of the kid\u2019s inheritance.\u00a0 The kid planned to use the free and clear property as collateral for a loan that he would utilize to pay for tuition (or some such thing).\u00a0 There were no immediate plans for development, but we were told that the property was fully accredited, meaning it was fully qualified as a buildable parcel for one residence.\u00a0 (Of course this is no small thing; in the hills of Malibu, CA the ecosystem of these hills has been seriously stressed due to over-building and becoming accredited for a new structure is no easy task.)<\/p>\n

So after some walking and pointing and a series of questions and explanations, I lead into my most pressing concern.\u00a0 It had occurred to me on the flight down that there was a potentially serious error with the appraisal.\u00a0 This error (assuming it was an error in this case) is a surprisingly frequent error in appraisals; I have seen it many times over the years.\u00a0 Let\u2019s call it “The Fallacy of Infinite Scalability.”\u00a0 In order to demonstrate the Fallacy of Infinite Scalability, I\u2019ll use an example.\u00a0 Let\u2019s say that our subject property is a five acre parcel and that we are looking at a comp which is a one acre parcel.\u00a0 Assuming that the one acre parcel qualifies as a buildable parcel by virtue of size (say it was grandfathered in when the zoning was changed to 5 acre minimum size per site) and that the five acre parcel cannot be subdivided further (due to the change in zoning), then we cannot compare these properties acre for acre.\u00a0 If the one acre comp parcel sold for $800,000, then we would not be correct to say that the five acre parcel, all other things being equal, is worth $4,000,000.\u00a0 That would be the Fallacy of Infinite Scalability.\u00a0 Instead we must determine the base price of one home site–in this case the first acre–and then determine the incremental value of each additional (incremental) acre.\u00a0 So for example, we might determine that the one acre parcel is worth $800,000 and that each incremental acre (giving no more value as separately build-able land, but simply by virtue of the sheer joy, stretch, and buffer of additional land) is worth $50,000, giving us a total of $1,000,000.<\/p>\n

However, by my interpretation of the appraisal, and in the absence of further information, the appraiser had committed this error in determining the value of our subject property.\u00a0 So I asked of the third fellow, \u201cAre you the appraiser?\u201d\u00a0 \u201cUh \u2026 well no, I\u2019m not the appraiser,\u201d he muttered, \u201cI\u2019m his assistant.\u201d\u00a0 This seemed odd.\u00a0 I couldn\u2019t recall a time that an appraiser\u2019s assistant had ever been sent to a site review.\u00a0 At any rate, I went ahead and asked him about the appraisal and in particular whether or not the Fallacy of Infinite Scalability was at work here.\u00a0 He scratched his head a bit, looked kind of confused, rocked back and forth with his hands in his pockets, and indicated that he really didn\u2019t know the answer to my question. \u201cOkay, I\u2019m going to have to speak to the appraiser,\u201d I said.\u00a0 At which point the assistant most adamantly explained that the actual appraiser did not like to talk to clients and could not be talked to (or something to that effect).<\/p>\n

I countered that without a reasonable explanation for the apparent Fallacy of Infinite Scalability error I could not proceed and that I really needed to speak to the appraiser.\u00a0 There was much commotion and back and forth between the kid and the assistant, until finally the assistant said that he would phone the appraiser and see if he would speak to me.\u00a0 Eventually he managed to get a signal and contacted the appraiser who apparently agreed to have me put on the line.\u00a0 I took the phone and proceeded to ask about the appraisal and to what extent the Fallacy of Infinite Scalability applied.\u00a0 The appraiser sounded frail and confused and was barely audible.\u00a0 I walked him as carefully as I could back through the question a second time, much as I did for you the reader above, but he still didn\u2019t answer.\u00a0 After a while, it became clear that he simply could not respond to my question.<\/p>\n

At this point, I glanced at my watch and I looked over at Alan. He looked back and said, \u201cYou know what?\u00a0 We\u2019ve got a flight to make.\u00a0 We\u2019ve gotta get back to Oregon.\u201d\u00a0 \u201cThat\u2019s right,\u201d I said. \u00a0\u201cWe\u2019ll call you all once we\u2019ve had a chance to talk this over,\u201d and away we went. \u00a0And as we drove back up the coast the horror stories played out in our minds:\u00a0 an appraiser held captive in his own home, tied to a chair, perhaps drugged into submission, or just a very old man gone senile and his son taking over his work, his license, his letterhead \u2026 and maybe his signature.\u00a0 There were many possible interpretations, and we tended to favor the most hideous.<\/p>\n

I learned a long time ago that a loan *not done* for the right reasons is a successful loan and so I put this one in the win column (and so did Alan, I believe).\u00a0 On the flight back that evening we looked down at the sea and felt grateful for our pleasant journey, for the tragedy narrowly averted, and just to be on our way back to Portland in time for dinner, whole, intact, and more or less unscathed by the experience.\u00a0 Of course, there was the small matter of our bright red sunburned heads which were\u2014surprisingly–beginning to approximate the color of that cute little California sports car which we had just left behind.<\/p>\n

— Clay (clay@privatemoneysource.com)<\/p>\n

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964.\u00a0 Fairfield is currently targeting loans in OR, WA, AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.\u00a0 To submit a loan to Fairfield for consideration: <\/em>http:\/\/www.privatemoneysource.com\/loanproposal.php<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Clay Sparkman I first posted this Blog piece on 11.11.09 at this site. The runway was drenched in sunlight as our plane touched down that morning at LAX.\u00a0 It was a golden balmy day.\u00a0 We grabbed our bags and headed for the rental car kiosks.\u00a0 I don\u2019t recall how it happened exactly, but the fellow […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[5,20,25,29],"tags":[33,40,41,42,43,44,49,50,51,52,58,59,60],"_links":{"self":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/853"}],"collection":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=853"}],"version-history":[{"count":0,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/853\/revisions"}],"wp:attachment":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=853"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=853"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=853"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}