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Valuation in Distressed Economies - Detroit Jumana Judeh, MAI, CCIM Judeh & Associates Dearborn, Michigan, USA.

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Presentation on theme: "Valuation in Distressed Economies - Detroit Jumana Judeh, MAI, CCIM Judeh & Associates Dearborn, Michigan, USA."— Presentation transcript:

1 Valuation in Distressed Economies - Detroit Jumana Judeh, MAI, CCIM Judeh & Associates Dearborn, Michigan, USA

2 VALUATION IN DISTRESSED ECONOMIES APPRAISERS IN US: Heavily regulated USPAP v IVS The Appraisal of Real Estate, 14 th Ed Judeh & Associates ~ All Rights Reserved

3 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 Judeh & Associates ~ All Rights Reserved

4 DETROIT – Put the world on wheels Judeh & Associates ~ All Rights Reserved

5 From Mo-Town to No-Town Judeh & Associates ~ All Rights Reserved

6 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 Judeh & Associates ~ All Rights Reserved

7 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 Judeh & Associates ~ All Rights Reserved

8 DETROIT - POPULATION DECLINE Judeh & Associates ~ All Rights Reserved

9 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 Judeh & Associates ~ All Rights Reserved

10 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 Judeh & Associates ~ All Rights Reserved

11 DETROIT – REVENUE/DEBT Judeh & Associates ~ All Rights Reserved

12 DETROIT – HOUSING VALUES Judeh & Associates ~ All Rights Reserved

13 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 Judeh & Associates ~ All Rights Reserved

14 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 Judeh & Associates ~ All Rights Reserved

15 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 Judeh & Associates ~ All Rights Reserved

16 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 Judeh & Associates ~ All Rights Reserved

17 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 Judeh & Associates ~ All Rights Reserved

18 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 Judeh & Associates ~ All Rights Reserved

19 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 Judeh & Associates ~ All Rights Reserved

20 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 Judeh & Associates ~ All Rights Reserved

21 VALUATION CHALLENGES Final thoughts: Competency Peer consultation Understand market movement Past, present and future Appraiser pressure Be extra careful Professional liability Judeh & Associates ~ All Rights Reserved

22 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 jumanaj@judehonline.com www.judehonline.com Judeh & Associates ~ All Rights Reserved

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