Values Are Down But There is A Silver Lining: Part 1

A few days ago, I went to a real estate investors meeting to better understand what small investors are looking to buy and the information they were receiving. One of the primary topics of discussion was about foreclosures, values and how to buying bank owned real estate or REO. Bank owned real estate value is currently one of the primary indicators of property values, thus an important topic.

Before countinuing, let me pass this little tip. I met a property auctioneer and for few minutes we talked about the process and what was happening at auctions. One of the most interesting pieces of information was that most properties auctioned are never bought. Banks, put properties though auctions but in 99% of the cases they repossess them.

Private money lenders are concern about property values 100% of the times. Not only they have to look at the value of properties today but they need to think about values few years later when their loans expire. This is in part a reason why when we approve loans the property valuation will be more conservative than a government sponsored lending institution. Keeping a close tab on what the real estate market is doing, where it is headed, is one important task of private lenders. To value a property we all have slightly different approach methodology. We use a combination of different tools, such as appraisals, automated valuation systems etc.. in addition our experience and understanding of local markets will be complimentary tools.

Numerous reports in January came up with the following pieces of information, property values dropped on an average 18% year over year. California has 4 of the top five markets that lost the most values. Number of sales of properties that have been previously owned has increased. The question is why are we seeing an increase in sell but a decrease in value. The answer is investors and in some cases first time home buyers leveraging low interest rate. Current home buyer are not upgrading or downgrading as it is a really bad time to sell a property.

More about valuation and market in our next post.

Land Financing - Not That Simple!

It has always been a little more complicated to evaluate land financing than any other real estate transactions. In part because there are much less land transactions so less comparables. In addition, different pieces of lands, even geographically closely related, may have significant different usage. This being said, there is still a need to provide financing for land and land development.

When thiniking of land value here are couple of pointers for you and your clients to consider. If the land is supposed to be developped for residential purpose make sure the final value of the lot make sense. The estimated value of the lot has to be in line with the future value of the completed property. If the land is only used for agricultural purpose, then the valuation is done based on agricultural value. There is a significant difference in value between land entitled and land that is not. However, at this time the difference in value is not at significant as it once was. Finaly, we at this time land for commercial use is in higher demand than residential development.

In term of financing, land values have dropped significantly not only accross California, but in the US in general. The drops that was seen and that we are seeing are related to how fast and high values of improved property had increased in the last 5 years. Land values have drops between 30% and 80% in the past 8 months. When providing financing a lender will look at these issues and then be conservative. On land not entitled LTV will be 25% to 35% on lot LTV will be up to 55%.

Make sure to send me your feedback on this and other post at gui@euroeq.com.