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We wrote about “real estate having no value at all?” a short time ago. Our point was that no real estate has any value at all, but rather real property has value. In this post, we’ll discuss when real property has no value.
Among the 1,000’s of real property auctions occurring every day in the United States, there are some properties that are garnering no bids — no bids at all. Some of these properties are selling absolute (without any minimum bid nor reserve of any kind) and still not receiving any bid, not even 1 penny.
I’m standing in front of a court-ordered auction of real property in Columbus, Ohio. Ohio has been hard hit by foreclosures, job losses, tight credit — like much of the United States. There is an abundance of property for sale in Columbus, Ohio and not sufficient demand for it, thus prices are down.
This property is selling absolute to the high bidder; in other words, whatever it brings, that’s the sale price.
This property had an auditor’s market value of $35,000. This $35,000 number was current with the auditor as of 2006. In today’s market, this property’s market value would be more like $10,000. However, it stood vacant, with considerable repairs needed to bring it up to habitable standards.
For example, the stairs to ascend to the second floor was gone. The first floor had places where if one was not careful, one could fall into the basement through the floor. The house had no windows — just holes in the perimeter walls, and most of the aluminum siding had been stolen off the side of the house.
As bidders gathered, more items of concern surfaced including that the furnace and air conditioner had also been stolen, all bath tubs and sinks were damaged beyond repair, and there was considerable fire damage to the kitchen.
As the auction time approached, although there were registered bidders, nobody bid. The auctioneer packed up to move on to his next property and I took a minute to talk with those registered about their thoughts. The overwhelming consensus was that this real property had no value at all.
No value? What makes a real property worthless? Buyers told me that the property could probably be rented for $200 – $225 per month which would indicate a market value of about $15,000 (based on a cursory capitalization rate of 10%).
However, the home needed in excess of $15,000 in repairs — more like $30,000 — which would then suggest that even if our seller gave the property to a new owner, they would have $30,000 in it, plus some vacancy loss and other expenses, producing a capitaliation rate of only 4%-5% for the new owner.
Is 4% or 5% return on investment not enough? For those buyers, they had properties available to them all over Columbus, Ohio which could provide a rate of return in excess of 10% — why would they buy (or even take as a gift) this property that would only produce 4% – 5% return. The answer? They wouldn’t.
And, that’s just one example.
Virtually, anytime a property requires more in repairs that it would be worth once the repairs were made, is worthless. Any property being sold subject to liens or other encumbrances which inhibit the property to be resold or used in certain fashions may as well be worthless. Some properties are worthless due to the cost of demolition, and the limited remaining value of the land or other attachments left following such.
Can real property have no value at all? While not terribly common, it certainly can.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He is Executive Director of The Ohio Auction School.