Do You Want Liquidation Value in Your Appraisal?

July–August 2011 The RMA Journal

He m e r a /TH i n k s T o c k

Th e s i g n i f i c a n T i n c r e a s e in loan workouts has created an

abundance of orders for real estate appraisals. For some

markets, appraisals have been needed every six months to

keep up with falling property values.

As loans’ risk ratings deteriorate, ﬁnancial institutions are

considering their options. Should they take the property

back, or should they work out the situation with the bor-

rower? A helpful piece of information could be liquidation

value of the underlying collateral. Federal regulations do

not require ﬁnancial institutions to obtain liquidation value,

so it is solely at their discretion to request this information

from an appraiser.

So what is liquidation value and how does it differ from

market value? Market value assumes neither the seller nor

the buyer is under duress, and the property is actively

marketed for a reasonable time. According to The Diction-

ary of Real Estate Appraisal, liquidation value differs in the

following assumptions:

•Consummationofasalewilloccurwithinaseverelylim-

ited future marketing period speciﬁed by the client.

•Thesellerisunderextremecompulsiontosell.

•Alimitedmarketingeffortandtimewillbeallowedfor

the completion of the sale.

As noted above, the ﬁnancial institution speciﬁes the

“severely limited future marketing period.” I have seen 60

or 90 days used most often. If you request liquidation value

from the appraiser, remember to set the marketing period

so that both parties know what will be provided.

How does the appraiser arrive at liquidation value? I am

familiar with three techniques, albeit there may be others I

haven’t seen. Surveying real estate brokers is one technique

I would recommend as a requirement whenever you ask

for liquidation value.

Theappraisersurveyslocalbrokersandwillusually

get useful information on how the subject property type

isbeingperceivedbythemarket.Theyalsowillaskhow

much of a discount from market value is needed to sell

the property in the speciﬁed 60 or 90 days. I like this

technique because this information can be very useful to

the workout department in determining a strategy for the

loan and the underlying collateral.

Thesecondtechniqueistondpropertiesthathavesold

atauction.Then,throughverication,theappraisercan

ﬁnd out how the auction price differed from market value.

Thisinformationwouldbestreectmarketaction,butit’s

very difﬁcult to obtain. Workout departments could help

their fee appraisers by providing more information about

the properties they sell at auction.

Recently, I heard about a technique that involves dis-

counting the market value over the period between 60 or 90

days and the marketing time estimated in the appraisal. For

example, if marketing time is estimated at 15 months and

liquidation value is set at three months, the market value

conclusion would be discounted at a speciﬁed rate for 12

Do You Want Liquidation Value

in Your Appraisal?

Appraisal Red Flags

The RMA Journal July–August 2011

months. My only concern with this method is that I have

not seen any market evidence concerning which discount

rate to use. Also, how would this method account for the

obvious difference in how raw land is treated currently

versus a well-located vacant retail building?

All of that aside, one important question remains: Do

I want liquidation value in my appraisal? Although the

information this value provides may be useful in making a

workout decision, there are some downsides to obtaining

it. Some of my clients have said it has worked against them

in court proceedings. Also, some have had their examiners

make them mark their loans down to liquidation value

instead of market value. Without passing judgment or

examining case law, I believe these concerns are real and

should be considered before ordering liquidation value in

an appraisal report.

Thereareafewsolutionstotheproblemsdiscussedhere.

One is to have the appraiser provide the liquidation value

analysis in a report separate from the market value report.

Another is to have the reports ordered by and addressed

tooutsidecounsel.Thissupposedlyavoidstheappraisal

report being available for discovery by the opposing parties

in a lawsuit. I am not an attorney and do not know if these

solutionswillbeviableforyournancialinstitution.Check

with your internal counsel before using either one.

In summary, my advice is to obtain liquidation value if

foreclosure is an option to be considered. If foreclosure is not

currently on the table and the preference is to work the loan

out with the borrower, then just get market value. Before

asking for liquidation value, consider the issues raised in

this article and select a plan that will beneﬁt your company

the most. v

b y Ge o r G e r. Ma n n

George R. Mann, MAI, SRA, MRICS, is managing director and chief appraiser of

Collateral Evaluation Services, LLC. He can be reached at [email protected].

RMA’s course Understanding and Interpreting Real Estate Appraisals

offers more information on this topic. Visit www.rmahq.org.

Without passing judgment or

examining case law, I believe

these concerns are real and

should be considered before

ordering liquidation value

in an appraisal report.