Transcript J Judeh VALN IN DISTRESSED ECONOMIES

Valuation in Distressed
Economies - Detroit
Jumana Judeh, MAI, CCIM
Judeh & Associates
Dearborn, Michigan, USA
VALUATION IN DISTRESSED ECONOMIES
APPRAISERS IN US:
• Heavily regulated
• USPAP v IVS
• The Appraisal of Real Estate, 14th Ed
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VALUATION IN DISTRESSED ECONOMIES
Presentation Content:
• History of Detroit
• Detroit Bankruptcy
• Valuation Challenges
• Market Analysis
• Highest & Best Use
• Sales Approach
• Income Capitalization Approach
• Cost Approach
• Conclusion
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DETROIT – Put the world on wheels
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From Mo-Town to No-Town
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HISTORY OF DETROIT
• Auto industry
• Economy not diverse
• 1967 Riots
• Housing & commercial sector decline
• Caused racial tension
• Exodus of whites
• Population migration
• 1950: 1.85 million
• 2012: 685,000
• Race tensions
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DETROIT BANKRUPTCY
• Contributing Factors:
• Population loss
• Plant closings
• Lack of diverse economy
• Major gap
• Great recession
• Worst since Great Depression
• Unemployment
• 18.3% - Double national avg.
• Bankruptcies
• Up 200% 2005 to 2008
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DETROIT - POPULATION DECLINE
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DETROIT BANKRUPTCY
• Contributing Factors (cont.):
• Foreclosure rate
• Highest in history
• Decline in property tax base
• 78,000 abandoned buildings
• Valued at $1.2 billion
• Crime
• 5 times national average
• Children killed while sleeping
• Police response: 59 minutes
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DETROIT BANKRUPTCY
• Contributing Factors (cont.):
• State revenue sharing decline
• Mismanagement
• Debt and pension liability
• Lack of downsizing
• Public transportation
• Used by 9%
• America’s Miserable City
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DETROIT – REVENUE/DEBT
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DETROIT – HOUSING VALUES
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HISTORY OF DETROIT
• Detroit Public Schools
• Emergency Financial Manager
• School closings
• Bad management
• Capital improvements in 1994 & 2009
• Now closed schools
• No analysis of overall student population
• Still paying on bonds
• Trying to sell
• Giving tax incentives
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VALUATION CHALLENGES
Market Analysis
• Basis of adjustments and methodology
• Street smart v book smart
• City not homogenous
• Domino effect in vacancy
• Market behavior
• Stigma of “distressed/vacant” sales
• Past, present and future of market
• Market value v future value
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VALUATION CHALLENGES
Highest & Best Use
• Demand v supply
• Investor attitudes
• Who is likely buyer?
• Investor use v owner-occupied
• Demolish or rehab
• Hold for future development
• As if vacant v As if improved
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VALUATION CHALLENGES
Sales Comparison Approach
• No sales v listings
• “Distressed” sales
• Various interpretations
• Parallel markets
• Investor v owner-occupied
• Creative sales/financing Adjustments
• Short Sales
• Seller concessions v raising price
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VALUATION CHALLENGES
Income Capitalization Approach
• Rental data
• Investor v owner-occupied
• Market value or investment value
• Work backwards for typical value
• Typical household expense for housing debt
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VALUATION CHALLENGES
Cost Approach
• Measurement of accrued depreciation
• Functional obsolescence
• Consumer taste
• External obsolescence
• Core of distressed market
• Does cost = value?
• Land value in developed areas
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VALUATION CHALLENGES
An effective appraiser should:
• Have a clear understanding of the market
• Sale prices to listings
• Days on market
• Know market time line
• Be experienced with such assignments
• Competency in USPAP is critical
• Licensing requirement
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VALUATION CHALLENGES
Lending in distressed markets:
• Develop very strict appraisal guidelines
• Limit appraiser independence
• Fundamental
• Not lending on value
• Looking for reasons not to lend
• Hampers absorption rate
• Obstacle to home ownership
• Paralyzes market
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VALUATION CHALLENGES
Final thoughts:
• Competency
• Peer consultation
• Understand market movement
• Past, present and future
• Appraiser pressure
• Be extra careful
• Professional liability
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VALUATION IN DISTRESSED ECONOMIES
Thank you!
Jumana Judeh, MAI, CCIM
Judeh & Associates
22952 Outer Drive
Dearborn, MI 48123
Office: 313-277-1986
Mobile: 313-801-2603
Fascimile: 313-277-8634
[email protected]
www.judehonline.com
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