March 8, 2012
It’s no secret that property values throughout the nation have been depressed in recent years. Declining real estate values bring interesting problems to the valuation process because we haven’t experienced them in our recent past.
Property tax overvaluation problem
The Atlanta Journal-Constitution recently published a series of investigative articles reporting that properties in Georgia are over-valued by as much as 13 percent by county tax assessors because the assessors have not been equipped to handle rapidly declining markets. Other states likely have similar problems.
Because the assessed values often are presented in support of valuation claims, there exists a need for experts to value real property in ways that factor out tax assessor errors. Valuation experts should be prepared to defend their calculations in a declining market because, to some extent, they’re working in uncertain territory.
Real property scams
Adding to the assessor valuation problem is the recent increase in activity of so-called “sovereign citizens,” “adverse possession” holders, squatters, gypsies and other scam artists.
Sovereign citizens are the most egregious. They bedevil mortgage lenders by making absurd claims in state and federal courts to undermine legitimate mortgage foreclosure processes. They invade and occupy vacant foreclosed properties without paying compensation to the owners, depressing rental values and delaying sales.
Sovereigns believe they are not subject to law. They file bogus liens and Uniform Commercial Code (UCC) security statements claiming security interests in real estate. They quit-claim real estate to one another to cloud title, which affects the calculation of comparables. They attempt to frustrate mortgagees by submitting fraudulent “administrative judgments” against lenders to offset legitimate mortgages.
They even retaliate against judges and government officials by filing maritime liens against them, reasoning that human bodies are composed of 90 percent water and therefore are subject to admiralty law. These activities are commonly known as “paper terrorism.”
These fraud artists upset the valuation process by skewing the values of the properties they temporarily control, curving comparables upward or downward. It’s important to consider telltale signs of fraud, such as the existence of UCC security interest filings relating to real estate, “estates” of living persons or dramatic changes in value in recent conveyances.
Market comparables and omitted records
Realty valuations typically involve comparing recent sales or rentals of similar local properties. The service level can range from a basic review of tax assessor valuations to a sophisticated analysis performed by a qualified appraiser. The type of valuation might differ depending on whether it is done for tax reporting, litigation, business dissolution or simply resale.
Valuation deficiencies are also found when the expert wasn’t given complete or accurate information. For example, when a valuation is based on the client’s deed and mortgage records, but later quit claims, liens, trust deeds or other clouds to the title are not provided to the expert, valuation errors may surface at inopportune moments – such as during trial.
It’s important to look at the documents yourself because many closing attorneys or agents neglect to discuss form-of-title issues with their clients. Your client might tell you he owns his property with his wife as a joint tenant with right of survivorship, but a deed review might show that he owns it in fee simple absolute (or perhaps the wife is the sole owner).
Another problem occurs when the valuation expert does not have complete or true information regarding transfers to or from corporations, LLCs, trusts or other statutory entities.
Names are important. “John Doe 1, Inc.” is not the same entity as “John Doe 2, Inc.,” or “John Doe d/b/a John Doe 1, Inc.” Transfers to or from expired or administratively dissolved legal entities can be ignored or set aside, which can have devastating effects on real property valuation. In other words, the chain of title might be marred by questionable or void conveyances.
Rental vs. resale
Interestingly, the nationwide mortgage crisis hasn’t seemed to affect rental prices. This suggests that the real estate market simply has adjusted from an occupant-ownership market to a rental market.
One question, then, is whether to value a particular parcel on its anticipated sale price or its value as a going-concern rental. Which is the more accurate measure of value?
When valuing real estate, it’s always helpful to start with a title search to expose any clouds on title. Such matters should be told to the valuation expert. The expert then should be able to interpret the various possible clouds on title and analyze the sale vs. rent issue to accurately determine the property’s true market value.
This article was originally posted on March 8, 2012 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.