Valuations and Appraisals – Hull on Estate and Succession Planning #100
Listen to Valuations and Appraisals
Ian celebrates the 100th episode of Hull on Estate and Succession Planning.
He discusses the question of valuations and appraisals and how these affect estate mediation.
Comments? Drop us a line at 206-457-1985 or send us an email at firstname.lastname@example.org.
Valuations and Appraisals – Hull on Estate and Succession Planning Podcast #100
Ian Hull: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #100 on Tuesday, February 19th, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by
Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.
Ian Hull: Hi and welcome to another episode of Hull on Estate and Succession Planning. I’m Ian Hull and today unfortunately I am doing this alone because Suzana Popovic-Montag is away. So I’m going to carry this solo and I want to remind you that if you want to be heard on our podcast, you can participate in our discussion by leaving a comment. Please feel free to call 206-457-1985. Now the number is also in the show notes and our webpage at: hullandhull.com. It’s an easy source to link to our blog and e-mail address for our podcast is email@example.com.
Today I wanted to talk about a couple of things. First and foremost with great pride, I can announce we’re at 100. Those of you who listen to the Canadian Podcast Buffet would know that this means that we’re in the Century Club which we intend to advise our good friends at the Canadian Podcast Buffet about our status at hitting 100. This has been quite a ride. Suzana and I began this challenge in March of 2005 and we’re here today having hit #100. As I say, I’m here alone but Suzana is here in spirit.
So today the issue I wanted to talk about is one that really, I think, underlies many, many of the problems that we face in an estate administration and that is, the question of valuations. Now this isn’t just going to be sort of a comment or discussion about valuations, about very big properties and very expensive properties. This is about valuations globally and how it affects an estate administration.
The first thing that somewhat comes to mind with valuations is real estate. And one of the things that an executor, once you’re appointed executor is put to task right away at, is to deal with real estate typically. And most estate administrations you’ve got the house or a cottage or something like that. And the valuation issue becomes a primary concern. Let me just pause at this moment on the real estate issue and let’s just save for the comment that I want to talk about right is… let’s say classic residential property. When you’re an executor, you really need to look around, check out the lay of the land and see who your beneficiaries are. Often you’ll have at the table people who may want to buy the property and there may be deals that you want to make directly with the beneficiaries to avoid commissions and so on. But in almost any event, there is the need to determine what the value of the residential property is. And there’s two central approaches. One is to get the valuation done by what I call a drive-by appraisal. And that’s getting a reputable agent or getting a few reputable agents, two or three, to give you a drive-by appraisal of the property. You need that at minimum for probate fee purposes in the sense that if you’re going to be paying the probate tax in Ontario. But just to get an understanding of the value of the assets you want to, I think, I tell my clients to consider first of all is the drive-by. Within the real estate agent gambit is also the possibility that they will go and just do a full inspection and give you a valuation on that basis. So it’s more than a drive-by. But it’s done by a real estate agent. And it’s essentially done on testing the market and so on, in that approach.
The other important delineation is if you want to really lock down the value of the property is to get a certified appraisal, I’ll call it. In Canada, there’s a certain association of certified appraisers. They have to be qualified and so forth. And you get what is essentially a more fulsome report on the appraisal value. That appraisal though, is typically obtained in situations where there is going to be some dispute as to the value. Maybe it’s the value from the taxing authority, they want to know what the value is for capital gains purposes. Or maybe it’s the value determination within the beneficiaries. More often than naught, the drive-by or walk-through appraisal through an agent is enough for an estate administration. But I always tell my clients to consider the possibility of doing a formal appraisal. And I think, I mean, two things come from this. One is, is of course the obvious is that when you get a drive-by or you get an agent to do the appraisal, it costs some money but it’s typically something in the modest range. I mean, my experience is that somewhere around… sometimes they’ll do it for free, sometimes they’ll do it anywhere up to fifteen hundred dollars. To do a proper, certified appraisal though, you’re looking at anywhere between two and five thousand dollars depending on the residential property. Now you get more of a seal of approval, so to speak, a more qualified opinion with the more expensive, but it’s a totally get-what-you-pay-for situation.
So that’s something, I think, that you’ll want to really consider is, is that whether or not, if you have real estate, you want to proceed to get the informal appraisal or proceed to get the more formal appraisal through the certified process, through a certified appraiser. I can think of a thousand reasons to do one and a thousand reasons to do the other and so to guess at it right now doesn’t make sense. I just think that what I will say though is, is that typically people stay within the ambit of working with agents to get it and don’t go to the full level of the appraisal.
I just want to talk a minute about commercial properties. Now in my example I think of, a nice woman dies, she dies with a cottage that needs to be appraised for CRA purposes because they want to know what the capital gain is, they want to appraise the house because the house is to be sold, the proceeds are to be split between the two children. And thirdly, they own a little retail property around the corner that they bought 50 years ago and it’s for a convenience store at this point, with a little tenant on the top of it. I mean that kind of scenario. And really, I mean, starting with that, when you get into a commercial property, then I tell my clients we’ve got to really seriously consider getting the certified appraisal.
Now like anything though, I make sure that we’re getting the appraisal from experts. People who know the area, the property, it’s the same as residential. You don’t want to get someone to give you an appraisal that works out of Whitby, when their specialty is Whitby and the property is in Saskatoon. But the same thing goes with commercial properties. There are specialties within their different framework of commercial properties that you want to look to, to get the right person to get involved with the appraisal process.
Now from a government taxing standpoint, CRA, the appraisal on a commercial property is very important and it also can be very important from the standpoint of a disposition ultimately to the beneficiaries. So we’ve got this appraisal process and I want to take it to another level in a sense, another tier of appraisal problems and that is, is that whether or not it’s just a Mac’s Milk and a tenant on top property or it is a series of buildings or it is something more substantial, different buildings and some vacant land and a whole mixture of residential and commercial properties. Obviously you need to have them carefully appraised just for the taxing authorities’ standpoint alone. But it seems to me anyway, you want to take a look at the properties and determine what you will ultimately want to do with these properties. If, for example, some are going to be split up amongst the families, each property given to one child or something like that, what we call a direct gift of the properties through the Will, then that may affect how you’re going to approach the appraisal. If they’re going to be sold, that may affect your approach to the appraisal.
I notice now in my practice many more times what’s happening is, is that you’ve got situations where you’ve got say, six or seven buildings, some bigger than others, a portfolio of a few million dollars in real estate and you may want to unload them all collectively to a group. And there are obviously people who are interested in investing in collections of properties. I know Suzana and I have dealt with over the years situations where there’s such a large collection of properties that you can even find that some of the pension funds and other very big investors are interested in getting the real estate properties into their portfolio. So what’s important, I think, is to look at the end game, determine what kind of property we’re dealing with. Are we dealing with residential only? Are we dealing with a mix? Are we dealing with small commercial property? Or are we dealing with larger or middle-sized commercial properties? Seek out the appropriate advisors and where I say that is, is that I typically say to my clients, “Look, go to…for a commercial property situation where you’ve got multiple commercial properties…go to two or three of the big brokers, get some analysis done by them (a) on the valuation side but (b) on what they think they’re going to do to market these properties to get them sold. And they’ll often put a bit of a pitch together, so to speak, and go to the executors with some sort of framework as to how they think they can put the properties out on the market and ultimately sell them.
So it comes down to a real question of due diligence and, I think, anyway from my perspective, you can never spend too much time getting the valuations organized because they can be a tremendous source of litigation at the end of the day if you’re not careful.
Alright, well that’s just some thoughts on valuations. There’s many more issues that we can talk about in Episode #101 when Suzana gets back, so I will save that for her. As I say, it has been a great thrill and an honor and a pleasure to be able to work with Suzana on these 100 podcasts. I’m looking forward to another 100 podcasts and I know that if we combine these plus all the Hull on Estates podcasts that we’ve done over the years, we’re well over 100, but today does mark an important and a bit of a monumental day in my podcasting career, only sad to be doing this alone.
Alright, so thanks again for joining us and this brings us to the end of this week’s discussion. Thanks for listening to me today. We look forward to hearing from you and again, our email is at firstname.lastname@example.org or our comment line 206-457-1985. I’m Ian Hull and until next week, so long.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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