What is the most effective way to value real estate in a liquidation scenario?

Valuing real estate in a liquidation scenario can be challenging, especially when the market conditions are uncertain or volatile. You need to estimate the fair market value of the property, as well as the costs and time involved in selling it. In this article, you will learn about some of the most effective methods and factors to consider when valuing real estate in a liquidation scenario.

1 Liquidation value vs. fair market value

Liquidation value is the amount that a property can be sold for in a short period of time, usually under distress or urgency. Fair market value is the amount that a property can be sold for in a normal market, with reasonable exposure and negotiation. Liquidation value is typically lower than fair market value, as it reflects the lower demand, higher risk, and lower bargaining power of the seller. To estimate the liquidation value of a property, you need to adjust the fair market value by applying a discount rate that reflects the liquidity and marketability of the property.

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Debra Henderson Morgan

Managing Director @ CohnReznick LLP | Real Estate Restructuring
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Transacting at liquidation value creates opportunity with a basis reset, and opportunity for redevelopment, repositioning and refinancing (opportunistic refinancing). Selling at liquidation value is often strategic - the seller may have a reason to seek a quick disposition and it is important to understand what is driving that decision. The seller will also expect certainty of performance by the buyer (primarily funding), no re-trading under the contract, and other quick-close considerations. The buyer must be ready, willing and able to transact, and ideally will appreciate the liquidation value opportunity. Complete due diligence beforehand and be able to overcome minor hurdles without going back to the seller. CohnReznick can help!

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Stephen Hassenflu

Debt, Equity, and Structured Finance Intermediary Specializing in Shopping Centers
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An important difference between liquidation value and fair market value can be time needed to transact. A cash buyer willing to rapidly close without contingencies will not pay fair market value for a property. Fair market value can only be established by running an investment sales process with a reputable brokerage shop covering the entire buyer market.

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John Czerw

The REO Consultancy was founded by John Czerw as a biz development firm. Ask about our REO=mc2 plan to grow your REO.
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Frequently and be anticipatory. Stay abreast of and ahead of the market. Be aware of macro economic factors. Throw wishful thinking out the window.

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José Mauro Floriano da Silva

Corretor e Perito Avaliador Imobiliário; Mentor e Investidor em Startups. Registrado no CRECI-MG 51459 e CNAI 44643
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O valor de imóvel depende do valor de oportunidade tanto pelo vendedor quanto do comprador. Por isto é importante ter um portfólio de ofertas e demandas para ajustar as expectativas. O proprietário pode estar em uma situação onde o seu endividamento pode ser tornar maior que o preço de desconto na venda e o comprador esteja no momento de investir nesta oportunidade. O melhor caminho é entender o momento de cada parte e obter os melhores acordos e bases de negociação.

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Scott Silberman

got cut from APMC NMLS # 681059 -
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"The crux of the biscuit is the apostrophe." So said the great American poet Frank Zappa. I couldn't agree more unless I decide to move to Montana and raise me up a crop of dental floss.

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2 Comparable sales method

One of the most common and simple methods to estimate the fair market value of a property is to use the comparable sales method. This method involves finding similar properties that have been sold recently in the same area and market, and adjusting their prices for any differences in size, quality, condition, features, and location. The comparable sales method can provide a reliable estimate of the fair market value of a property, as long as there are enough recent and relevant transactions to compare with. However, this method may not capture the specific circumstances and expectations of a liquidation scenario, such as the urgency, competition, and uncertainty of the sale.

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3 Income approach method

Another method to estimate the fair market value of a property is to use the income approach method. This method involves estimating the present value of the future cash flows that the property can generate, such as rents, fees, or dividends. The income approach method can provide a realistic estimate of the fair market value of a property, as it reflects the income potential and risk profile of the property. However, this method may not account for the variability and unpredictability of the future cash flows, especially in a liquidation scenario, where the income stream may be disrupted or terminated.

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4 Cost approach method

A third method to estimate the fair market value of a property is to use the cost approach method. This method involves estimating the cost of reproducing or replacing the property, taking into account the depreciation, obsolescence, and deterioration of the property. The cost approach method can provide a conservative estimate of the fair market value of a property, as it reflects the physical condition and functionality of the property. However, this method may not reflect the market demand and supply, or the intangible value and uniqueness of the property, which may affect the price in a liquidation scenario.

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5 Other factors to consider

When valuing a property in a liquidation scenario, you should consider other factors in addition to the chosen valuation method. These may include the reason and timing of the liquidation, market conditions and trends, and the costs and time of selling. For example, a forced liquidation due to bankruptcy or foreclosure may result in a lower value than a voluntary liquidation, while a recession or pandemic may reduce the demand and increase the supply of the property. Moreover, commissions, fees, taxes, repairs, and maintenance may increase the costs of selling, while legal, regulatory, and contractual issues may delay the sale.

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Douglas Mazzucato

Advogado Imobiliário Pleno
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Uma outra possível vantagem é colocar um imóvel à venda sem acabamentos como pisos, revestimentos e pintura é que isso pode ser usado como um fator de negociação com o comprador, permitindo que ele escolha os materiais e as cores de sua preferência, de acordo com o seu gosto e orçamento. Assim, o imóvel pode ser personalizado pelo comprador, que se sentirá mais satisfeito e valorizado com a compra. Além disso, a venda do imóvel sem acabamentos pode reduzir os custos do vendedor, que não precisará investir em reformas ou materiais que podem não agradar ao comprador. Dessa forma, o vendedor pode oferecer um preço mais competitivo e atrativo para o imóvel, aumentando as chances de fechar o negócio.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What is the most effective way to value real estate in a liquidation scenario?

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1 Liquidation value vs. fair market value

2 Comparable sales method

3 Income approach method

4 Cost approach method

5 Other factors to consider

6 Here’s what else to consider

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