An email I received:
Dear Russell;
How many years have you been in Real Estate here in the valley? (I know it has been a long time)
We were going to build a custom home for resale in Circle G Ranches Silvercreek, which is in Gilbert. We had a lot partner that owned the lot and would subordinate it to us to get the construction loan. When the project was completed and sold, all debts would be paid and the profits would be split 50/50.
The deal did not work out. The real estate market (as you are very aware) has softened. The lot she bought in March 2006 for $485,000.00 has now appraised for $430,000.00. The lot owner feels she has suffered a loss on the lot and wants us to split the $55,000.00 loss, yet she will keep the lot and in the future either sell the lot or build a home on it.
What do you think? We think she hasn’t suffered a loss until the lot is sold and she officially suffers a loss.
Thank you for your time.
This is my 30th year in the real estate business. I started with John Hall & Associates early in the year in 1978. Now for the far more important question, has your lot investor suffered a real loss. It depends on how you look at it. Is the “loss” real to her? I think that answer is yes. Is it real to me? Not so much.
Have prices dropped since March of 2006? Yes, absolutely. Is that lot now worth less? Maybe. But if we look at who appraisals are for we may get better insight on this issue. Appraisals are for the lender or necessary to show some other party the “true value”. They are not required by the buyer or seller. Oddly, issues like the buyer’s FICO score can be a factor in determining the appraisal amount – so – no disrespect to appraisers – but I’m not very interested in what an appraiser thinks the value is, unless that appraiser is going to buy it. There are various rules that appraisers must follow (I’m not suggesting here that I have a better set of rules in mind) and sometimes those rules can cause an appraisal to come in at a higher amount than the market would seem to bear and sometimes at a lower amount. Two years ago I could sell almost any house for more than I could get it appraised for and six months ago I could get almost any house appraised for more than I could sell it for. None of this is to suggest that those appraisers weren’t doing their jobs (per the rules they have to work with) or that I have a better set of ideas for establishing how to quantify some of the data they have to quantify for the actual lenders (the person or company who is really loaning the money and will never physically see the property). Lenders want the appraiser’s opinion to prevent fraud.
Are appraisals always supposed to reflect the current market value? Yes. Do they always do that? No.
What would be the correct agreement if your lot investor kept the lot for twenty years and then sold it for 1.5 million? Not to start a stupid argument about real estate prices – but if history continues to repeat itself (relative rate of inflation, etc.) that lot will probably sell for about that amount in twenty years. Will she owe you then half of the profit (about a half a million dollars)? What if she builds a house on the lot and then later sells it? Will you have a right to a share of that money?
Part of what is “wrong” here is that the possibility of loss was not considered when making this agreement. That wasn’t part of the agreement and now she sees that she has lost money, if she were to sell it now. She seems to like the lot location, etc. and perhaps believes that if she were buying that lot today she would only be paying $430,000, so you “owe her the difference”. I don’t agree. She bought the lot, and now still owns the lot. It is her lot. She was going to put it into the deal but didn’t. If the reasons for not doing the deal were different and you or her – for whatever reason – were not going to do the deal but the appraised value of the lot had gone UP by $55,000, would she (keeping the lot) be writing you a check for “your half”?
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