0:00 Who [music] are you? And where are you going? What do you want?
0:16 >> Hello and welcome to Trust and Estates Weekly. I'm your host Kevin Bemel and I'm here every Monday at 10:00 a.m. Pacific time to talk about estate planning and trust and probate administration both from the standpoint of professionals like myself and my guest Scott who I'll introduce in just a moment, but also for those of you who you don't do this for a living. Maybe you were appointed executor of your parents will and now you're trying to figure out this incredibly opaque process. So hopefully this will give you some information that you can use to make it
0:52 a little bit easier, maybe talk more cogently with your advisors and get through the process without, you know, wanting to pull your hair out. So today I am really happy to introduce my guest Scott Volts. So Scott and I have known each other actually I think for I think a couple of years although we didn't have a chance to work together until recently. Scott did a fantastic job on a one of the trust that I administrate that's frankly kind of a mess. So it's good to
1:28 be able to have a a really high-quality reliable professionals to to turn to. And in the course of of working on that assignment I said, "Hey, Scott I don't think I've ever had you on my show." So you know, I ended up in enticing him into my lair so to speak and so Scott, thank you so much for being a guest here on Trust and Estates Weekly. Really appreciate you taking the time.
1:59 >> Kevin, thank you. It's my pleasure to be here. Very interesting man in your own right and always enjoy speaking with you and learning from you as well.
2:08 >> you. So so Scott, let's start out let's start out if you would by telling us a little bit about your back at least a little bit about your background. So you know, viewers, listeners can you know, understand who you are and and then we can we can take the conversation from there.
2:27 >> Well, sure. So today I I am a real estate appraiser that and just commercial real estate, industrial real estate, land, portfolio those that sort of thing and much of the work that I do is estate tax related, gift tax related, trusts and so forth. And we have offices in LA and in Las Vegas. I am presently headquartered in Las Vegas in Summerlin,
3:02 Nevada and often travel into California. I'm also licensed in Hawaii and Montana. And and just very much enjoy what I've been doing for the last 40 years. This is my 40th year in the appraisal field. Before that I was a real estate analyst for a couple of different syndication firms in the early 1980s. And and gravitated into real estate appraisal and got very lucky and and I
3:37 am here where I am today.
3:39 >> Wonderful. So take a moment if you would. You have some designations there that I think people are would be curious about. I think most people know what an MBA is, Uh, but but the the uh, real estate appraisal designations, um, unless someone, you know, has an appraisal background like me, they may not know what those are about. I think it's important for people to understand the kind of qualifications that you've earned.
4:06 >> Sure. So, uh, the first set of letters you see there, MAI, stands for Member of the Appraisal Institute. Appraisal Institute is the premier organization, private organization, in the United States for education and, um, maintaining standards. Before there was even state regulation of appraisers, uh, many appraisers signed up with the Appraisal Institute or back in the that day they were called the American Institute of Real Estate Appraisers as a way to self-govern and
4:44 self-police and and have a a standards of ethics, um, and standards of professional practice. Um, so that's that's that organization. In addition to the MAI designation, the Appraisal Institute also, uh, offers, uh, an appraiser a chance to earn the, uh, AI-GRS designation, which is the second designation I have. And that is for review appraisal. And about half of the work that we do at my firm is the review of the work that other appraisers do.
5:21 We have, uh, a number of banks around the country that, uh, hire, uh, us and me, uh, specifically to review those appraisals to make sure that they are, uh, one, accurate, and two, that they're compliant not only with what the banks' requirements are, but with what the, uh, Uniform Standards of Professional Appraisal Practice, uh, require. The, uh, uh we call that USPAP. And USPAP is a document that uh highlights our our uh standards of
5:58 professional practice, our code of ethics, what we can and can't do. There's some uh what we call advisory opinions there, which are are are not mandatory, but you're uh they're they're guidelines for us as appraisers. And so uh those are the designations that I have. I I kind of liken the MAI designation to what a CPA is in the tax profession. You know, you can go down the street to the tax preparer on the corner, or you can get a CPA to do your taxes. And it's very much the same kind of thing. I think there's a a lot of appraisers that might disagree
6:34 with me. Um but uh I you know, when it comes to doing work, going to court, doing work for the IRS, and doing work for the major lenders, they want to know that the appraiser that they've hired has met a certain level of distinction, level of experience, and uh those designations are not easy to get. They don't give them out easily.
7:01 >> Right. Right. Yeah. Uh and you know, and and as I recall, um the Appraisal Institute also is um probably the top publisher of books on uh on appraising, specifically real estate appraising. I know if if you went into my library, um you would you would n- well, one would see, you know, several books um on on real estate appraising from, you know, like the Dictionary of Real Estate Appraisal to, you know, other to s- more specialty titles, but a lot of them are published by
7:37 um the the Appraisal Institute. So, it it seems to me there's a kind of a repository of knowledge there for for the appraisal profession.
7:48 >> Well, as you can see over my shoulder here, yes.
7:51 >> [laughter]
7:52 >> Yes, I'm a I'm a regular purchaser of their books.
7:55 >> Yeah. Yeah.
7:56 >> So, yeah, probably purchased more books from them than Barnes & Noble or Amazon.
8:01 >> Yeah, that's what made me think of it. I'm I think I've got some of those titles, by the way.
8:05 >> [laughter]
8:07 >> You probably do. You probably do. Yes. And you know what's great about that is it's peer-reviewed, you know, because you did appraisal on that property or that type of property. It's peer-reviewed and and uh um it's it's very well received uh by by experts, other experts, by courts, and so forth. And you know, it's pretty amazing how new uh topics come into a profession that's
8:42 been around for almost 100 years now, and now, you know, the big thing is data centers. And And so, you're going to I think start seeing books and articles. I know you've seen articles, or there are articles published about appraising data centers and what what to look out for. And we do do a lot of those uh appraisal reviews uh in in our business, in our you know, my company here. So.
9:07 >> Yeah. So, you know, you mentioned USPAP. And I I think well, you know, we don't want to get in necessarily to all of the, you know, fine details of it. I I think it's worth talking a in a little more depth about what USPAP is and what it's about, why it's important uh because for users of appraisals, I I think they they don't quite understand uh that they're that these standards do exist and while uh, you know, an appraisal for an estate
9:42 or probate is not a federally related transaction and so there's no law per se that requires USPAP compliance, yet an appraiser most appraisers are licensed and so by their licenses they're they're required to to adhere. And any good appraiser, even if he's not licensed, is going to comply because it's what the profession is is requiring. So, expand if you would on on what USPAP is about and how it it it impacts the work that you do and and, you know, conversations
10:18 with with clients.
10:21 >> Sure. Well, as an MAI we we are actually required to follow USPAP. They USPAP was adopted by the Appraisal Institute, which is kind of funny because a lot of what is in USPAP was predates in the Appraisal Institute. They were using it long before USPAP was even a a thought. And so they they USPAP the the the body looked at it and said, "Let's pretty much adopt as much as possible uh, USPAP." So, USPAP again
10:56 stands for the Uniform Standards of Professional Appraisal Practice. And it's not only just uh, about real estate appraisal. It covers business appraisal, property personal property appraisals. It covers appraisal review. And it is updated on an on an as-needed basis by its Board of Governors. Uh, and they it covers the first part, Standard 1 and 2, covers real estate appraisal specifically. Standard 1
11:32 uh, covers appraisal development. It doesn't tell an appraiser how to appraise a property. It tells them what they must include and what they must consider in developing the appraisal. Standard two tells the appraiser report. Well, what must be included the different types of reports that are available. Many people don't know that an appraiser can do just a verbal report, an oral report. And for that
12:08 there's there's one set of rules for that and another set of rules for an abbreviated report and another set of rules for a full report. So, that's how we have to educate our clients. When I get a call from an attorney we discuss the case and one of the things I ask for is, you know, what is the deliverable? What do you want to see from me? Do you want to see a full report? Do you want to see just an oral report or hear just an oral report from me? And lately most of them have just wanted an oral report from me.
12:44 So, that requires that we, you know, put together a very detailed work file. It's it's the same report as if we had done a written report. We have to be able to look at our file and be able to recreate that entire report. But it's the the research and the investigation is just as thorough in an oral report as it is in the most largest written report that we do. So, the appraiser has to be very very knowledgeable about USPAP and so much so
13:19 that we often have to educate our clients about what is required for us to do. So, uh that's why when we when we do our research and investigation while we're in the appraisal process itself, I'm I'm a stickler for questions and and I'll ask the same question from three different vantage points and I'm probably annoying the heck out of whoever I'm talking to, but I want to poke and prod and make sure I'm getting all of the facts because people unless
13:54 you ask questions in a certain way or a certain number of times, they're going to give you the answer they want to give you and not the answer that you asked about.
14:04 >> Right.
14:05 >> So, so uh so that that's where we are. And of course when we go to court, we have to also follow the rules about testimony and and what we can and can't do and confidentiality is a big part of that as well.
14:20 >> Mhm.
14:20 >> You know, what what we what we get privately from our clients, if the client particularly is is asked to keep it confidential, we have to keep it confidential. We can't go sending around If you, Kevin, asked me to do a report, I can't take that report and send it to anybody who wanted to know what that particular property is worth. We can't do that. So, so it really is a a very strong um you know, people I I hate using this term, but they they want to call it the Bible. And for for reasons that that you
14:55 and I probably know, we I I refuse to do that. So, um but we we do uh we do adhere to it very very strongly. And so if I'm rambling, go ahead and stop me, but this is what I
15:11 >> not at all. So, but but I do want to ask a So, you raised an issue and and I actually had this issue come up um just I think just a two or three months ago, um, on a another, um, another case on which I was working where it was an appraiser had appraised a home for me, um, probably about a year, year and a half ago. And, um, uh, the there was someone involved in the administration of the estate who wasn't part of the estate and there and they
15:48 wanted a copy of the appraisal. And and I said, "Well, I need to check with the appraiser first to make sure that he's okay with me giving you a copy." And he said, "But you didn't you pay for the appraisal?" And I said, "Yes, I did." And he said, "Well, it's your report." I said, "Well, technically no. I mean, technically yes, but but the the appraiser has a certain obligation and part of that is to state who's going to be using that report.
16:24 And I don't have the unilateral authority or I don't believe that I have the unilateral authority to change that, right? Um, and and you know, the the fellow was a little bit put off, but I contacted the appraiser and and and the response was "Nobody ever asked me about this even though they should, right?" [laughter]
16:50 >> Yes.
16:50 >> So so talk if you would a little bit more about that obligation cuz I think it's really important for people to understand why it why is it the case that when you do a report and you identify the user of the report in it that that that is an actual restriction?
17:11 >> Right. Well, so it's interesting you got right to to a very important question early on. Yeah, I think it's one of the appraiser's worst nightmares that an appraisal that they have done ends up in somebody's hand who is not an intended user, a named intended user of the report. Purely from the appraiser's point of view, that's a point of liability to the appraiser because you know, anybody can sue anybody for anything at any time. And regard and it's been done. And regardless of of
17:47 uh whether they are entitled to that report or not, it's it's a very uh big point of liability for the appraiser, one that the appraiser has to be really super careful
17:58 >> Mhm.
17:58 >> uh about who is written in in fact in our sections of our report we were about that big on we don't just say who it's intended for. We go and say that this appraisal report is specifically written for this person and no broker, buyer, seller, attorney, agent is authorized to rely on this appraisal report. A real disclaimer. And and part of that is because the the general public the average person, the average user of appraisals doesn't always know or understand
18:35 um the premise of the appraisal. For example, we do a lot of retrospective appraisals of a you know, when a property is appraised for as of a year ago, what was it worth a year ago?
18:49 >> Mhm.
18:50 >> And well, that that's going to be different than what it is today. Um and the user may say, "Well, big deal. We'll just add, you know, 5% or subtract 5% from it because the market's gone up or down." That's not exactly it and and the truth of the matter is is the reason that I have uh a pretty good litigation side of my practice is because appraisers, you can have three appraisers look at the same property but make three different assumptions and have three different premises on what that value of the property is going in.
19:26 And so [clears throat] uh that all ends up getting litigated. And this happens often and the intended user really doesn't have any idea of what happened to lead up to the you know, necessitating an appraisal. So your situation, I don't know who that third party was, but it may not have been relevant at all. And some And And frankly, some people are just curious. You know, that's why there's a there is a Zillow is because people are curious what what their neighbor's house is worth. Well,
20:01 it's not their business, you know. They want to know, then they should hire an appraiser and get it done. So you don't you know, you can get in a you can order an appraisal on anybody's property. It doesn't have to be your own property or even one that you're lending on. So yeah.
20:16 >> Yeah, in this case, he was we were we were um uh dissolving an LLC that owned several properties and the estate got a couple of properties and they kept some other ones and there was an issue of um property taxes as of the date of death of the decedent and and that's what the appraisal, you know, was valuing. And so, you know, their their outlook was, "Well, you've already established that that value, um you know, we don't want we don't want to be fighting a different value from you,
20:52 right? As if we have to if this gets challenged, so can we just, you know, use your valuation?" So I think, you know, their request was legitimate and and and in the end, once the appraiser understood what was going on, he didn't have a problem with um you know, letting the appraisal be used cuz he saw it was going to avoid it was like more as as likely to avoid a problem as to create one. But um they they couldn't understand that in essence I I I you know, needed the appraiser's permission. Now, the funny thing is there were two properties. One was a
21:27 a piece of vacant land and the other was I said a residence. The guy who did the vacant land when I asked him the same question, he says, "Well, it's your property. You do with it whatever you want." I'm thinking to myself, "Wow, I never would have said that to a client back when I was doing appraising accurately." Yeah. For the for the reasons that you mentioned.
21:46 >> Well,
21:47 >> too much liability.
21:48 >> Yeah, and I think it's a it's actually a a good opportunity to have it done correctly and just connecting the appraiser with whoever wants that information and and, you know, adapting that appraisal or or rewriting it or or or doing whatever needs to be done to make it an appraisal that they can actually rely on and use and depend on, you know. So.
22:15 >> Yep. Yeah, it's again one of I think the most misunderstood aspects of about the appraisal business. So, um you mentioned you also mentioned often times you're working with lawyers um and and and in some cases they're they're asking you only for a verbal report. Um talk if you would um about the kind of work product aspect of that, which I suspect is is why the attorney is engaging you and and why he may even want, you know, just a verbal report or maybe he wants one initially before he
22:52 decides to, you know, have a written report. Talk about that aspect cuz again, I think for unless somebody is a lawyer, I don't think they understand that aspect of the the privilege that is accorded to to work product, you know, you know, when it's a lawyer who's doing the engagement.
23:12 >> Right. So, I have found that lawyers well, they want to keep their cost down for their clients first and foremost, obviously, especially because, you know, they may lose the case or or they may settle and they don't want they they don't want to have to spend a lot of money. So, it's useful to have an oral report at the beginning to see where they stand, if there's enough uh value in the property or if there's enough damages in the property. That that's one important point. The
23:49 second important point is, you know, when you have a written document out there, the appraisal report floating around and you're in an adversarial situation in a litigation, it's a target. It's a target for the other appraiser, it's a target for the other attorney. Um I've been involved in in many litigations where we we both done appraisals and the appraisers end up, you know, firing bullets at each other's appraisal and
24:19 >> [laughter]
24:19 >> that's never fun unless uh unless the other side uh comes with a a pistol and you hire a howitzer, uh which [laughter] is how I I describe myself because more often than not that's exactly what happens. You know, that the lawyers will spend the extra money to hire a guy like me with the extra designations
24:42 >> Mhm.
24:42 >> and with 40 years of experience in the business to go up against somebody who does not have that. And and so um or isn't even close to it. And and it's happened, fortunately for me, more often times than I can count. And so so that's another reason. They don't want to have a target out there.
25:03 >> So I'll I'll tell you a funny story cuz I used to do litigation support when I was an appraiser and I was kind of a young buck at this time and I was in a in an arbitration with an appraiser who'd been around a long long time. The subject was an apartment building in Los Angeles City of Los Angeles and so you know we traded appraisals of course, standard practice. I read the guy's appraisal, went through it and and I I marked off several things that I thought were, you know, inaccurate or unsupported or whatever and then and then I at the on the front page of the report I wrote he never mentions rent
25:40 control once in this entire report, right?
25:44 >> Uh-huh.
25:45 >> And
25:45 >> [laughter]
25:46 >> and that's what my the lawyer, you know, who had hired me, that's what he led off with. And and the the appraiser was he was just he was just appalled. Not at not at me of course, but like he he he realized what what just a like a you know, it was it was a it was a 10-ft error, right? Um but of course the arbitrators looking at him like how did you leave, you know what I'm saying? So it it you know, it made him look foolish, right? So after the hearing we're both we I walked to the elevator and he comes walking up behind me and I thought, oh no, this guy is going to clobber me, right? And he turns
26:22 to me and he goes he goes I have to I have to give you your due. Well done. Well done.
26:28 >> Yeah.
26:29 >> You know, cuz that's and that is part of the fun by the way of doing that kind of work. I'm sorry, we're going I'm I'm late for taking a sponsor break. Let's take a quick break and we'll talk some more.
26:39 >> Okay.
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27:27 >> [clears throat]
27:28 >> So So, Scott, you were talking about other issues that are uh you know if not unique, but they're they're kind of you know, different about doing appraisal work in the legal context, working with attorneys. So I I and I I kind of cut you off at one point. So, you know, follow up on on other issues like that because I Again, I think this is a a a crucial aspect of your profession that that's important for people in in trusts and estates to understand. Well, um I think it's important that
28:05 the appraiser that is ultimately hired uh in in even if it it's a a matter that's not going to get litigated, but there's some dispute or some some question that you've got somebody who's credentialed, who's got the highest credentials possible and the most experience possible because you know, I tell I I tell the people that it's clear to me when they call me up that they're they're shopping for the appraisal and they're not just shopping for the outcome that they want, but
28:41 they're shopping by by price sensitivity. You know, I'll get I'll get um an IRS request uh not from the IRS but from a portfolio a large property owner that wants or needs their their portfolio appraised and and I tell them right off the bat look we're not the low cost provider there's plenty of people out there that will will accommodate you. We take time to to do the job right. Not everybody is going to be satisfied
29:17 with the result that we give them but you'll be satisfied with the professionalism. And and that's the kind of thing you want to look for. I've taught at the college level I've testified in in Arizona and California. I've had household names as clients of mine over the years.
29:39 >> Mhm.
29:39 >> And you know to to to save a couple thousand dollars on an appraisal because you want to give it to someone you know maybe less credentials that could cost you money in the long run if they don't do a good job for you. And so that's the very definition of you know penny wise and pound foolish or whatever that that phrase is you know you got to you got to make a good decision and I tell people all the time you know there's there's two things that you don't want to be cheap about.
30:15 One is sushi and the other thing is appraisals you know [laughter] and they said that they get that they get that you know so
30:25 >> So you you you mentioned working with the IRS which is of course another aspect of you know trust in the state administration and you know these days you know with with a you know 15 million dollar exemption so I imagine that there's not as much you know, appraisal business at least as it relates to estate taxes and such. On the other hand, when it does, we're talking very, very serious uh you know, dollars at stake potentially.
31:01 So, talk if you would we we we were we were conversing a little bit before the show about uh probate referees. So, talk if you would a little bit about, you know, valuations by probate referees versus appraisals and and and how your perception on how the Internal Revenue Service looks at that cuz I I I've I've talked to accountants about that, but I I I I I'd really love to hear your your perspective on that issue.
31:31 >> Right. Well, I haven't had too much experience dealing with probate referees, only two or three times maybe in my career if I've been asked to help and participate and and assist in something like that, but it really comes down to education and experience. You know, the the probate referees are not are not experienced and educated and not only that, but the the thing about being a licensed appraiser, don't forget about it being
32:06 an MAI, but even being a licensed appraiser, you're still bound by a code of professional ethics and standards of professional practice that I don't think probate referees necessarily are. And if they are, it's not so they're not jeopardizing their entire appraisal career if they blow it on that.
32:28 >> Right.
32:29 >> So, again, it comes back to, you know, are you really doing the best you can to get to do the best by your client. Um and and I think because these things are important. Value opinions are important. We're a necessary evil in society. That's the truth of the matter. We're a necessary evil, but it's but it's necessary and if you if you're going to have something that's necessary, then be good at it. Do it well. Do it any job you do well. And so that's that's what I think
33:04 appraisers bring. And and I'll even expand that to um brokers price opinions, for example. I have a a bank just yesterday asked me about evaluations and broker price opinions and again, that comes from a place of you know, wanting to monitor their loans and monitoring their assets. And and for a little bit more money, they can get an actual appraisal by somebody who is required to be educated in appraisal uh methods and and also required
33:42 to observe a code of ethics when it comes to uh valuation. I've seen many brokers opinions and and and you know, for court and for my bank clients that uh are are not worth the piece of paper they're written on. I've used more colorful language than that in the past. But [laughter] but no, it's you know, one of my favorite saying is you know, we're on the West Coast, right? If you're going to New York, don't get off at Chicago. Go to New York. Right? Do it or don't do it at all. Don't do it half-assed. So that that's that's my opinion, you know.
34:18 You want to hire somebody, hire the best that you can afford.
34:22 >> Right. And what what has been your experience dealing with with the IRS, um you know, with with with respect to valuations and and and I don't know that you ever have but have you ever been in a situation where basically you were the guy called in to clean up the mess that a previous appraiser or a previous valuator had created and now you know the IRS is you know they're they're assessing taxes in a way that is not appropriate because the original valuations were done not
34:58 done appropriately.
35:00 >> I've not had occasion to clean up anybody's mess luckily. The only the only occasion I had to deal with I the IRS was many many years ago probably when I first started out probably 30 years ago. One of my clients was going through an audit and he's apartment building that we appraised they didn't like something to do with the expenses they thought I was too low or something and so he asked me to have a conversation with that auditor which I did and we discussed it and I think we
35:35 came to some kind of mutual understanding and and agreement. And and she was fine with it. I thought that's reasonable. I can live with that. And my client said well what happened and they said well we we discussed it and I you know I think I used the word negotiated a different number with that number and and he got mad at me. He said well nobody authorized you to negotiate that number you know negotiate anything for me. That's the only time I ever and it couldn't have cost this guy more than a few hundred dollars long and short of it but um
36:10 that's the only time I had chance to deal with the IRS but I have had very good feedback. Um one of my CPA clients I did a a large portfolio and we were doing fractional interest discounting and maybe that's something we should talk about too, but
36:31 >> Yes, uh-huh.
36:31 >> Uh what that is is when um uh uh a property owner wants to say gift a percentage to their kids or they have uh minority interests in a property uh the IRS allows that property owner to take a discount for controlling interests and and other interests. And we have a little bit of an unusual way that we've been going about valuing fractional interests. And we've never had an issue with it and I had one CPA said that that this one
37:08 IRS auditor loved it so much she shared it with her people back in uh Washington D.C. so I I still I still have kept that email like 20 years later. I was uh pleased about that. In fact, I think it might even be on my website, but uh anyway, so that's the only you know, thankfully because nobody wants to deal with the IRS ever.
37:28 >> Yeah.
37:29 >> Ever.
37:31 >> Yeah, you know what
37:31 >> reason to spend more money to get something done right is with the IRS.
37:36 >> Ex- Well, so so exactly. So, um on on one of the large estates that I'm handling right now, you know, talking with the accountant cuz we have we have in this case it is going to be subject or it is subject to estate taxes and and I said, "So, how do you want to handle the valuation?" And he said, "Well, we have to get all of the properties appraised um you know, by a qualified appraiser." And I said, "Okay." I said, "I'm going to apply to the court to not have the probate referee do the valuations
38:11 because it's going to be meaningless, right? And it's going to cost us whatever, $50,000 in fees to the probate referee because of the size of the estate that that adds no value um because this is what we need to pass muster with the IRS and inexplicably the judge said her ruling was well the estate can afford the probate referee's fees so we're going to do it anyway.
38:39 >> Wow. Wow. Okay.
38:42 >> Okay. I mean a true statement I suppose it could but why are we spending you know $50,000 on valuations that will not have any validity? No one's going to use those.
38:54 >> Right.
38:55 >> The the tax assessor is not going to use them. Nobody's going to use them but you know this this is kind of the frustrations of of of my side of it.
39:03 >> Yeah. There's a lot of things that don't make sense with what happens with our appraisals in in our business and I know you've seen it. I've seen it. You know just all you can do is shake your head and walk away.
39:17 >> I will you'll get a kick out of this just brief story. Um this I did have to clean up a a mess in front of the IRS once for a client. I didn't do the original appraisal. Um and it was but another appraiser did it. It was submitted to the IRS. This was quite a long time ago and the IRS came back and said the property is valued way too little because based on the assessed value it's you know X and I and I'm I thought to myself we have prop 13 here in California. Assessed value has no relation
39:51 >> Right.
39:52 >> to to um market value except for basically I mean I guess as of the day the property was sold right?
40:00 >> Right.
40:00 >> In theory that's you know
40:02 >> Right.
40:02 >> So the my my client said well will will you handle this? I said well let me write a letter for you to the IRS explaining how this works and why the two have nothing to do with each other. And uh so I did that. It was on my three-four page letter, whatever. Sent it off to the IRS. The IRS [laughter] said, "Okay, we're wrong."
40:25 >> Oh, good. Good.
40:26 >> So, it was interesting. This was, you know, not too long after Prop 13 had passed. So, I think maybe it just wasn't on their radar yet or something. But, I think these are the kinds of things that um a prof- a pro- you know, a professional appraiser like you, you'll know these just as a matter of course, but somebody else, you know, well, especially if they're not familiar with California, they they Oh, well, yeah, you know, appraised value, that's going to be pretty close.
40:55 >> Right. Right. Yeah, that happens a lot. It happens a lot. So, I see it.
41:03 >> So, um Oh, you know what? Let's take another quick break cuz I want to follow up on your your topic of of partial uh fractional interests.
41:10 >> Okay.
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41:55 >> So, I'll give you just kind of a a a small example. Let's say a property a property is worth a million dollars, right? And an estate has a 20% interest. So, it would appear then that the interest is worth $200,000, 20% of a million dollars. And and what what you were saying a few minutes ago was, "No, that's probably not the case." So, expand on that for for us so so, you know, we can all understand why would a 20% interest in a million-dollar property not be worth $200,000?
42:34 >> Right. Okay, so the in in practical terms, if Kevin, you had a 20% interest in a million-dollar property, and on a prorated basis, that would be worth 200,000. But you wouldn't be able to sell that for $200,000 because whoever buys it is going to understand that they're going to have a minority interest in that property. They're not going to be able to be the decision-maker on that property. Um in addition, that 20% interest is not as liquid as
43:12 would a 100% undivided interest be. So, the IRS have has allowed property owners to take discounts for those situations. Um this has been litigated in tax courts for decades. And uh there's there's evidence that this is happened on on a secondary market basis when property owners do sell like a 20% interest. Problem is is to look at
43:47 comparable sales of 20% interest. It is is rather um it's not as thorough enough because in truth of the matter is is each piece of real estate is as unique as a fingerprint. And each 20% interest is also somewhat unique. I had a situation where there was a brother and a sister
44:13 >> Mhm.
44:13 >> who owned fractional interest. I forget exactly who had what and and who had the majority and the minority, but the long and the short of it is the brother had had some unfortunately some um psychological problems and was been in and out of mental hospitals and rehab and care. And as a result, her interest was worth less because she would have to sell that interest to somebody who would be willing to have as a partner someone with those problems.
44:49 >> Wow, yeah, uh-huh.
44:50 >> So so that was a rather large dis- that was the largest discount I ever attached to that. So how much is that discount? So on top of the the $200,000, pretty much the IRS has more or less said, you know, you there's a 15 to 17% discount window that we're pretty much going to agree to. And then if you think that there's more reason, for example, the case that I mentioned you can add on to that and
45:26 they'll of course have the right to the IRS will have the right to dispute that and and argue with you. But so so we say there's a discount not only for the lack of control but also for lack of liquidity. And and then there's some other issues that we consider. How long will it take you to sell that 20%? It's not going to take you the same amount of time as it does to sell the 100% interest, right? It might take you 2 years to find a buyer for that. Well a 2-year note right now is a four is 4%, so that's another 4% on top of that that we add to the discount. So that's why I
46:02 say each each situation is different. And so, we we we build up that discount rate based on the individual situation uh in that case. So,
46:15 >> I mean, that that's real the the example you gave is very interesting. I I used to do uh fractional interest appraisals when I had my real estate company back in, you know, what I jokingly referred to as Kevin 1.0, my first, you know, professional career. Um and it it didn't occur to me at the time that the situation of the co-owner could also be a relevant factor um you know, in in what kind of discount might be demanded. I.e., you know, you gave an example of someone who maybe maybe
46:50 lacked capacity or or might be found to lack capacity at some point or or was just a difficult individual uh you know, with whom to deal. Um you know, as opposed to I don't know, you know, maybe just some kind of you know, trust this professionally, you know, there's a professional trustee where it's it's maybe more straightforward about how things are going to be handled. So,
47:13 >> Right.
47:13 >> Um you know, I mean, that's that's that's a a great point to to highlight um as as people look at at these things and they can be very important. I know I'm one of my clients, you know, we're working on their estate plan and the ability to justify fractional interest discounts is well is having a material impact on just how much flexibility we have and how we set everything up. So,
47:43 >> Right. And the reason that that's important is because after your discounting, let's say you take that 200,000 and you discount it by uh 20% and so, you take 40,000 off the top, you're you're going to only be taxed on that 160,000 instead of the 200,000.
48:00 >> Right.
48:01 >> That's that's why savvy estate planning professionals and owners
48:07 >> Mhm.
48:07 >> implement those those really great tools that are available to them. So
48:12 >> So I'm I'm curious to hear your thoughts on this cuz I've had this discussion with various people. Um if if if um an estate owns a 50% interest, right? So now you've got a situation where you know, neither party really has control. How do you look at the evaluation in under that circumstance? Cuz it's not really a minority, but it's not controlling.
48:37 >> a majority either, right? Right. Yeah, it's tricky. I start asking questions about well, what is the relationship between the the the two parties? You know, is it amicable? Are they fellow professionals? You know, it it's one thing when it's a it's a house, right? But it's another thing when it's a an apartment building or a shopping center, right? So the person who buys a 50% interest in a shopping center, they're going to chances are they're going to have some investment savvy
49:12 investment knowledge and and and the same motivations, by the way, appreciation, tax benefits, uh and so forth. Whereas the 50% participant in a home is going to have a completely different They they may or may not have an interest. They just might be trying to help out their their cousin or something like that, which I've seen happen a lot, too. So yeah, that's that's we drill down. You got to ask the questions.
49:41 >> Mhm.
49:42 >> Right.
49:42 >> Interesting. Yeah, yeah, very much so. Um well, you know what, Scott? Un- unfortunately, we're we're we're we're run- we're out of time here uh because I I I there's so many more issues I think we could dig into. So, you know, I'll have to have you back maybe hopefully later this year and we'll we'll crawl into some of these other topics that I that I think people need to know about because so much of of probate administration really comes down to what are what are the assets worth? And so then to understand that process is crucial to properly administer an estate. But any
50:18 any sort of last thoughts before before we wrap up the show?
50:23 >> Uh just make sure that you hire a professional not be not not trip over pennies or to save dollars. Don't don't don't trip over dollars save pennies. There we go. I'll get it out. And um thank you very much for having me. This has been a lot of fun.
50:42 >> Great.
50:43 >> to doing it again hopefully soon.
50:45 >> Absolutely. Well, thanks so much. I'll have you hang tight here while I do a little wrap up. So, all right. folks, um you you you can see the kind of knowledge that that that Scott brings to the table here. And and if you're a frequent watcher of the show, you know that uh for you know, some of my guests um I I give it the what I call a shameless plug. So, you know, you you having worked with Scott myself, I can tell you that um that that if if you need appraisal services, uh you know, call Scott. If you look right down below, you you'll see in the
51:20 show notes it has Scott's contact information. And if you've got a a need, I'm sure he'll be happy to speak with you about it and and you can see he's he's he's not going to um he's not going to just try and grab you for a client. He's going to make sure that he's the right professional uh for the situation that you have. And and to my mind, that that is that is the kind of professional with whom we want to deal um because they're putting you know the needs of the client first. So so you know on on that basis I I I give
51:57 Scott my absolute unqualified recommendation.
52:01 >> Thank you.
52:01 >> You're welcome. So real quickly my slate of shows Mondays like today at 10:00 a.m. Pacific time Trust and Estates weekly Tuesdays at 10:00 a.m. Pacific time Business lessons from the military Wednesdays at 10:00 p.m. at 10:00 a.m. sorry Pacific time People making money and then every other Thursday at 5:00 p.m. Pacific time is my show Jiggers is place where we kick back have a cocktail and a schmooze talk about all the things not related to finances. So a lot of opportunities for us to be together every week. So I
52:37 really appreciate you tuning in and watching the show today. If you have questions comments criticisms again just look down below you you'll see links to social media feel free to post things if you want to tag Scott or me. You know happy to respond to those and and you know give you some direction if we can if it's within our area of expertise and if you're not a subscriber to the show. Consider subscribing we're on YouTube. Spotify and Apple podcast and
53:14 would love for to to be able to earn you as a subscriber and that way you won't miss any upcoming shows. So Scott again thank you so much for joining me today really great talking to you I I rarely get to talk a praising which you know resonates with me cuz it was my former profession so really a delight. Thank you so so much. And that just leaves me to sign off as I always do by reminding you Marie darling you are my Val. Courage at all times my friends.