A Critical Skill: Valuing Real Estate

By Melissa Bank Stepno, Senior Consultant, Target Analytics, a Division of Blackbaud, Inc.

When I started my career in fundraising, I was trained with a simple formula: a $1 million home equated to a major gift prospect rating. Even as a budding prospect researcher, this simple formula didn’t quite ‘sit right,’ but it took me a few years to pull all the pieces together.

Due to the real estate market’s explosion and later bubble burst, national economic conditions, changes in mortgage company policies, new government regulations, and other factors, what someone’s home is worth today may or may not help a fundraiser understand its relative ‘value’ to the owner. Simply stated: not every major gift prospect lives in a million dollar home and not every million dollar home is owned by a major gift prospect.

Consider this: according to wealth studies, as a person’s wealth increases, the percentage of their portfolio connected to real estate tends to shrink. What this means is that for the average person, their home can typically make up more than 1/3 of their net worth (provided, of course, that they are not underwater, like 1 in 4 or 5 homeowners today with mortgages) whereas for the ultra-wealthy, with net worth over $20 million, their home is typically only about 3% of net worth.

When focused on real estate, there are many factors to consider to help you better determine whether a property is truly an asset, or actually a liability, and how that may (or may not) impact someone’s potential capacity. While not designed to give you the single answer (there isn’t one), the rest of this article explores some of the areas you should consider to help you make a case-by-case determination on your own.

Most importantly, rather than simply noting that Mr. Smith purchased a property for X, or owns a home worth Y, consider the following questions a starting point for a deeper analysis of what that property means relative to his potential capacity:

• What type of property value are you looking at?
• Where is the property?
• Is it a primary residence or a secondary property?
• If the latter, is it a vacation home, an investment property, a commercial unit or something else?
• When was the property purchased?
• Can you ascertain a sales amount and/or mortgage amount?
• If mortgaged, what kind of mortgage is it?
• What are other similar properties currently selling for in the same neighborhood?
• Is there anything else that seems interesting, out of the ordinary or just plain weird?
• What else isn’t included in this list but could be important?

Differing Values

Experienced real estate professionals (and researchers) understand that there are multiple values to consider as you evaluate a particular property. I can think of at least 5 “values” that could exist, all of which could be different:

• Sales Price- The actual amount a property sold for. This is the value I am most interested in, especially if the property was purchased recently, as it is the only value to provide an actual figure of how much your prospect bought or sold it for.
• Mortgage Amount- The amount that is borrowed against the property via a loan. Combined with sales price, mortgage amount can begin to build a picture of the prospect’s actual financial circumstances. (But, mortgage amount is only helpful if you know when the property was purchased. A property with no mortgage purchased 35 years ago is an entirely different scenario than a property purchased two years ago with no mortgage!)
• Assessed Value- A value applied by a town or municipality used for levying taxes. Be careful not to simply use an assessed value as it may or may not relate to any other values on this list. Many towns and municipalities provide assessed value at only a small percentage of market value. If you use assessed value, you will also need to know if there is a ratio or multiplier needed to determine full market value of the property.
• Market Value- Typically provided, or calculated, by the Assessor’s Office as an estimate of what a property is worth on the open market; how much might it be able to sell for today? If I can’t determine a recent sales price, this is a good alternative as it is the best estimate of what the property is likely to be worth today, if bought or sold.
• “Market Comp” Value – A method that realtors use to analyze the actual amount other similar properties in the same community have sold for recently, as a way of estimating what a property is worth. Similar to Market Value above, this is a good alternative to sales value as it provides an estimate of what the property is likely to be worth today, if bought or sold.

Location, Location…

Property values across the country vary greatly. As of November 2012 (the most recent data available as of this writing, on http://hlr.coldwellbanker.com/), the average price of a 4-bedroom, 2-bathroom home in the United States was about $292K.

While a national average is interesting, regional differences can be vast. Where does your town fall? How about the town your prospect lives in? Whether you work for an organization with a national or local scope, understanding this is important.

In reality, the range of average prices across the country varies from $60K (in Redford, MI, just outside of Detroit) to $1.7M (in Los Altos, CA). And, while Redford is about 2,400 miles from Los Altos, more localized differences are also important. Birmingham, MI, another Detroit suburb, just 16 miles down the road from Redford, has an average home price of $430K.

As such, I would be more excited to see a prospect with a $500K home in Redford, MI than in Birmingham, MI or even than a $1M home in Los Altos, CA.

Multiple Property Ownerships – Good News?

While experience shows that owning two or three properties may indicate a higher level of wealth and assets, homes also cost money and they could be multiplying the liabilities that a prospect is carrying.

Further, as you move from two or three properties owned to four or more, you will frequently find yourself looking at a prospect who may use real estate as an investment vehicle or who operates a small rental business. In this instance, frequently your prospect may be very low on liquidity and not able to make a major gift until he or she reallocates their asset portfolio. Planned giving may also a good option for these prospects.

Property in Trust

Take a look at the title for the property. Does it include the words “trust,” “trustee,” “conservator,” or something similar? Individuals placing their property in trust generally do so to protect their wealth. Reasons could include planning for an intergenerational transfer of ownership, making bequest intentions known or being employed in an industry with a higher likelihood of being sued (for instance, medical or construction fields). Regardless of the reason, those with property in trust generally have assets they are trying to protect and have a higher level of sophistication regarding wealth, assets, and potentially even planned giving.

Unique Scenarios
If something looks weird, think it through. There may be more than meets the eye. I was recently working with a client who noticed a property listing that was only a couple hundred square feet in size, yet it sold for nearly six-figures.

Pulling up the address on Google Maps, it appeared to be a parking lot! In addition, parking spots in large cities such as Boston and New York, boat slips in water communities and airplane hangars at private airports can command tens of thousands of dollars. All three scenarios inform you that (1) the person must live somewhere else (this is not their primary residence), (2) they must have something of value to park (or dock) in the spot (or slip or hangar), and that (3) they had the discretionary assets available to invest in such luxury items.

When in doubt, pick up the phone!

The lost art of making a telephone call is sometimes all it takes to crack open a window of opportunity. Most tax assessor offices will provide some information for you by phone – typically ownership information, description of the property and assessed value. However, sometimes you will get extra lucky!

I was once researching a prospect who lived in a small town and I was having trouble finding the assessed value of his home. So, I called the tax assessor and provided the property address. The chatty employee on the phone offered that she had known the family who owns the property for years and inquired whether I also wanted information on their other properties in town, one of which they use as a plane strip.

Granted, the tax assessor probably provided more information than she should have, but not only did I get the information I was looking for, I now also had some strong evidence that the family owned a plane…and my research continued: was the plane an old clunker cash-sink? Or was it this year’s top-of-the-line private jet? I continued down an entirely different path than I would have thought without my brief telephone call.

The morale of the story is: there is more than meets the eye when it comes to real estate valuation. A simple formula might be tempting but critical thought is more likely needed to help you understand real estate as one factor in determining an estimate of someone’s capacity. Pulling many disparate pieces together, not just the easiest value to access, will better help you understand your prospect as a unique case with his or her own specific circumstances.

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