Determining real estate equity
By Michael Hall
At some point in many contentious legal matters, an individual’s wealth or value is likely to become a central point of concern. That may be your client’s wealth and you will be doing what you can to protect it. Or, it may be the wealth of opposing counsel’s client and you will be doing what you can to obtain it – or at least determine it.
For many individuals, the most valuable asset they own is real property. As a mortgage broker, I cannot advise you on the legal maneuvering required to protect or obtain that property. However, I can share with you my experience on how to determine an individual’s equity position. This information should better equip you to protect your client’s interests or make a successful claim to the assets of an adversary. My belief is the better you serve your clients with this information, the more your practice will grow.
Location, location, location
The first step in determining real property value is to find the property. There are a number of methods and each one should be employed to ensure that nothing is missed.
One of the best resources is the customer service department of a local title company. These folks will routinely do free searches to discover property held in certain names. There’s a caveat, though; while a customer service representative might succeed at locating some property, that person may not operate with full diligence. Property can easily go undiscovered when an exhaustive search is required (see hints below). A free search can turn out to be expensive if it fails to locate an adversary’s asset.
Large title companies have websites you can use to do the search yourself. The data is usually organized by state and county, so you should probably start with some knowledge that you could find property in a certain county. Of course, you’ll be limited to counties that have their property records computerized.
With a name and a vague idea that the person owns property somewhere in Oregon or in some region of the state, it might be best to hire a legal investigator to visit each courthouse in the region and comb through the countys’ property records.
Accuracy v. speed
Once you have a piece of property in your sights, the next trick is to learn what it’s really worth. Some of the tools that provide this information are fast and cheap, but the results can be unreliable. Other tools provide more reliable results, but greater costs will be incurred.
The classic and most convenient tool is tax-assessed value. It is easily obtained but contains a margin of error of perhaps 30-50 percent. It’s a mixed bag. Tax assessed value, second mortgage appraisals and stale dated appraisals should only be used as very rough reference points and not relied on for a conclusive answer.
A traditional appraisal (form 1004) costing $300 to $500 is a good way to get a reliable opinion of value. Check with a reputable mortgage broker for referrals to one or two good appraisers.
For property in cookie-cutter neighborhoods, or when the value is expected to be near the median price for the area, a streamlined appraisal will usually do a good job. Ask your appraiser about using the streamlined Fannie Mae form 2055 interior/exterior. It may save $100 to $150 of your client’s hard earned money and provide similar results.
A realtor will gladly provide assistance in the form of a comparative market analysis when you need an opinion of value. While not a formal appraisal, a good realtor’s CMA can be as accurate as a full appraisal. If you haven’t already cultivated a working relationship with a professional realtor, you should. Realtors can be the source of a great deal of information at no cost.
Properties above $1 million, 2-4 plexes, 5-plus unit multifamily and commercial real estate each have their own appraisal forms, prices and methodologies. Expect to pay more for these, wait longer and perhaps even use different specialty appraisers.
Make sure you read the appraisal. Get past the bottom line and get an interpretation of 'finance-ability' from a mortgage broker or other professional knowledgeable in the financial aspect of real estate. A key consideration is whether a buyer could easily borrow against the property. If there is any aspect of the appraisal that makes the property hard to finance, the true value of the property is impacted, and it may not be apparent until you ask a lender.
With the valuation in hand, it would be easy to get carried away and think, 'Hey, this is one valuable piece of property. We’re set now.' Before you and your client take a drive to the bank, we need to think about the flip-side of the real estate game: encumbrances. Determining encumbrances on the real estate helps determine a party’s net equity.
You should employ a title company to prepare a report for starters. This will provide some data on the obvious mortgages. However, it may be outdated, especially after recent years of refinancing activity.
Second mortgages and lines of credit may exist and may (more often) have unrecorded interests.
Business owners and more sophisticated property owners may have 'blanket' or 'cross-collateral' mortgages, or SBA loans that encumber multiple properties. This could be good for discovery, but bad for net equity.
Many first-time homeowners utilize shared equity agreements and silent seconds. These may be unrecorded but recordable interests that affect equity. Those interests and other state-or federally-subsidized programs may also have recapture provisions, meaning, if the property is prematurely sold, an added liability becomes due in the form of the loan payoff or springing tax bill. Here in Oregon, watch for this surprise whenever the Portland Development Commission or the Oregon Home Loan is involved. Nationally, watch for this with select HUD or MCC (mortgage credit certificate) programs.
When disposing of property, don’t overlook the liability presented by accrued interest and prepayment penalties.
Net equity and liquidation costs
When a property must be liquidated, it’s clear that you need to count the costs of disposal in your calculation of net equity. When dissolving a marriage or business entity, and property is not sold but is retained by a party, it may be advisable for that party to negotiate for a downward adjustment in the equity calculation on the basis of the future cost of disposal.
In calculating costs of liquidating real estate in today’s market, you may want to research and include realtor listing fees, typical seller’s closing costs, buyer’s closing costs, carrying costs during sale, market preparation costs, escrow account deficits, relocation costs, concessions to tenants and replacement transaction costs.
The bottom line
Donald Trump said, 'Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper.' Who would know better about real property value than Mr. Trump? The dollars and cents you’re seeing on paper almost always are an incomplete picture. Equity is a simple math exercise once you know all the facts. There’s no substitute for doing the research.
We all help our businesses and add to our clients’ satisfaction by providing additional value. These insights into determining real property equity should enable you to be of greater service to your clients. Their increased satisfaction will spread by word of mouth – and that’s good for your bottom line.
Whether you or the title company executes the property search, here are some helpful hints:
Names are easily misspelled. Consider they may be misspelled by the searcher or by the party who originally entered the documents.
Name variations abound. The first name for 'Michael George Smith' could show up as 'Michael,' 'Mike,' 'Mick,' 'M. George,' 'M.G.' and so on.
Property may be held in a maiden name or in an obscurely named trust or corporation.
ABOUT THE AUTHOR
Michael Hall is a licensed mortgage broker and owner of Sterling Mortgage in Portland.
© 2003 Michael Hall