{"id":377,"date":"2011-11-18T13:35:29","date_gmt":"2011-11-18T20:35:29","guid":{"rendered":"http:\/\/privatemoneysource.com\/broker-blog\/?p=377"},"modified":"2011-11-18T13:35:29","modified_gmt":"2011-11-18T20:35:29","slug":"private-money-and-the-question-of-value","status":"publish","type":"post","link":"https:\/\/privatemoneysource.com\/broker-blog\/?p=377","title":{"rendered":"Private money and the question of value"},"content":{"rendered":"

Clay Sparkman<\/em>
\nWhen it comes to private money, <\/em>the rules<\/em>–as you may know them–generally don\u2019t apply.\u00a0 Certainly, with regard to the matter of valuing a property, most of you would do well to throw away what you\u2019ve already learned and start over.\u00a0 To help you along these lines, I would like to share an article written by Aaron Heinrich, a Loan Coordinator here at Fairfield Financial. Keep in mind that this is primarily relevant when dealing with investment borrowers (builders, developers, REO and short sale purchasers, rehabbers, fix and flip artists, commercial property owners, and the like).<\/p>\n

The Quest for \u201ca Good Set of Comps\u201d<\/strong><\/p>\n

What We Need From You<\/p>\n

A professional appraisal can be a helpful tool, but appraisals are by no means foolproof, and a well-prepared set of comps is often superior and entirely sufficient for our purposes.\u00a0\u00a0 Since appraisals are expensive and time-consuming, it is often well worth an investor\u2019s time and effort to do their own value work.\u00a0 But although a good set of comps is often sufficient for our purposes, it is difficult for borrowers and brokers alike to understand exactly what we need from them in the process of determining the value of a subject property.\u00a0 This is unfortunate, since this evaluation is perhaps the most important part of the entire process of assembling a loan with Fairfield, and the borrower or broker often has an integral role to play in this evaluation.\u00a0 As an equity lender, our loans are only as secure as our determination of the value of the property against which we are lending, and consequently it is essential that we are confident of this determination.\u00a0 In point of fact, the confidence we require is nothing more than what any borrower should require and from himself or herself going into a project.
\nThe following rules and their explanations describe what we need from those investment professionals who choose to take advantage of this alternate approach to the valuation of their subject property.\u00a0 Let\u2019s consider what we mean by \u201ca good set of comps\u201d:
\nRule Number 1: Computer-generated listings are starting point, not an ending point.<\/strong>
\nVery often we tell a borrower or a broker that we need an \u201cobjective measure of value\u201d or a \u201cgood set of comps\u201d, and in response are sent, for example, five or six comparable sales generated by the online search program of a public database containing sales histories.\u00a0 We have access to these programs also, and will most probably have already looked at these, or similar, listings.\u00a0 These sorts of listings are the beginning of the process, not the end, and by themselves they will almost never be sufficient.\u00a0 Don\u2019t send these to us alone and expect that they will suffice.
\nRule Number 2) Be skeptical. <\/strong>
\nWhat we need from you is more involved than simply typing search criteria into a listing service, although this is indeed where the process usually starts.\u00a0 Once you have obtained a group of comparable sales listings with which to begin, take a hard look at them.\u00a0 From what you can see in the listings, are they really similar to your subject property in type, size, age, location and condition?\u00a0 If all of them aren\u2019t similar in all these aspects, do some of them illustrate value factors that the others don\u2019t?\u00a0 For example, all your comps are more than a mile away from your subject property, except for one, which although newer and larger than your subject property, is next door.\u00a0 The value of your location may be best indicated by this one property, although the building itself is not all that similar. It is important not to accept that a property is comparable just because a program or real estate agent tells you so.
\nRule Number 3) There are more things in heaven and earth than are dreamt of in the MLS\u2019s philosophy.<\/strong>
\nNow, once you have selected your five or six most representative comps, grab a notebook and a camera and go find them.\u00a0 As you drive, ride or walk past each one, stop, look at the neighborhood, notice the condition.\u00a0 Are there differences between the listing you were given and the reality you are seeing?\u00a0 Are there things not included in the listing which are important factors in the value of the property?\u00a0 Is there a grist mill next door or a condemned meth lab across the street?\u00a0 Write it down in your notebook.\u00a0 Take a picture or two.
\nRule 4) Think like an appraiser.<\/strong>
\nBorrowers are often a bit daunted at the prospect of putting on the appraiser\u2019s hat and analyzing the information they have gathered.\u00a0 \u201cI\u2019m not an appraiser,\u201d they say, \u201cI\u2019m not trained for this.\u201d\u00a0 We\u2019re not asking you to be an appraiser; all we\u2019re asking from you is to think through the information you\u2019ve gathered, apply a little common sense, and to make your best case for value.\u00a0 When we look at your analysis, we may find corrections that need to be made, we may disagree with your logic in places, but if you\u2019ve done your work, chances are your value is close.
\nLet\u2019s take an example to illustrate what\u2019s involved in this analysis:\u00a0 Our subject property is a 3000 sq. ft. SFR built in 2001.\u00a0 Let\u2019s say it\u2019s across the street from a nice park, with a school nearby.\u00a0 One of the comps we\u2019ve looked at is a 2800 sq. ft. house built in 2000, about 1\/4 mile from the subject property.\u00a0 It sold two months ago for $179,000.\u00a0 Our notes from when we looked at the house say that it is essentially in the same neighborhood as our subject, and is also a newer house with generally the same quality of construction.\u00a0 The two properties are quite comparable, even without any adjustments; but we can probably refine the value a bit more by taking the small differences into account.\u00a0 First, our subject property has a superior location, being across the street from the park.\u00a0 Depending on the neighborhood, we might determine that this location increases the value of the property by $5000.\u00a0 We add this figure to the sales price of the comparable property, to arrive at an adjusted value of $184,000.\u00a0\u00a0 Next, we need to make a small adjustment for the size: dividing our adjusted value by the comparable property\u2019s 2800 square feet, we arrive at a per square foot value of $65.71.\u00a0 Multiplying this value by our subject property\u2019s 3000 square feet, we get a final adjusted value of $197,130.
\nNow, in your own case, your subject property might be a bowling alley, a piece of raw land, or an office building, and so your considerations might be very different.\u00a0 But in all these cases, the general process will still apply.\u00a0 There may be more research involved in finding out what individual differences are worth, but the overall approach described above can always be applied.
\nRule Number 5) Presentation isn\u2019t everything, but it helps. <\/strong>
\nNow that you have gathered all the information you\u2019ll need, and done all the necessary analysis, you are ready to assemble your \u201cgood set of comps.\u201d\u00a0 This set should include:
\n1)\u00a0\u00a0\u00a0\u00a0\u00a0 Your comparable sales analysis,
\n2)\u00a0\u00a0\u00a0\u00a0\u00a0 A map of the area indicating the location of the subject property and the comparable sales, and
\n3)\u00a0\u00a0\u00a0\u00a0\u00a0 a photo and essential information for each comparable property, including the address, specs, sale date, sale price, and distance from the subject property.
\nYour comparable sales analysis should be a concise summary of all your reasoning in adjusting the values of the subject properties, with one paragraph or section for each property, stating what was different, how you adjusted for these differences, and why.\u00a0 At the end of each paragraph you will indicate an adjusted value; and at the end of the analysis you will summarize your conclusions, and give your final estimated value for your subject property.\u00a0 The documentation for each comparable sale (Number 3) gives us a frame of reference in which to read the analysis for that property.
\nWhen you haven\u2019t done it before, this may seem like a lot of work. But again, anyone making an investment in a piece of real property should be at least this confident of the value of their investment, whether or not he or she is looking for a loan.\u00a0 And it is often well worth the work. \u201c
\n(Article by Aaron Heinrich, Fairfield Financial Services, Inc, July 2004)<\/p>\n

\u2013 Clay (clay@privatemoneysource.com, 503-476-2909)<\/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 When it comes to private money, the rules–as you may know them–generally don\u2019t apply.\u00a0 Certainly, with regard to the matter of valuing a property, most of you would do well to throw away what you\u2019ve already learned and start over.\u00a0 To help you along these lines, I would like to share an article […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[29],"tags":[37,38,42,43,46,54,55,58,59,61,62,63,64,65,66],"_links":{"self":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/377"}],"collection":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=377"}],"version-history":[{"count":0,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/377\/revisions"}],"wp:attachment":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=377"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=377"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=377"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}