“I always try to buy real estate at liquidation value and never at market”, states your barbequing neighbor. Amidst the sizzling of flipping steaks, you ask “what is liquidation value in real estate and what's the difference between the two?” “You know”, pointing your way with grill tongs in hand, “you’ve got to go to Event Driven Daily, they’ve got everything you need to know!”
What is Liquidation Value in Real Estate?
The liquidation value in real estate is the estimated selling price of a property under distress or urgent circumstances. This situation is known as a quick sale. The seller is motivated to quickly liquidate or sell the property due to financial distress, bankruptcy, foreclosure, or an urgent condition in which the seller needs to convert the property into immediate cash.
What is Liquidation Value in Real Estate: The real estate term is best illustrated by examining a few key characteristics:
Urgent Sale – The property must be sold in a short time frame.
Distress – Necessitating the sale is the seller’s current or impending condition of financial distress.
Discounted Price – The property is sold at a discount to fair market value to precipitate a quick sale.
Market Conditions – The liquidation value and speed of the sale consummation are influenced by property conditions, interest rates, supply and demand, environmental seasons, and overarching macroeconomic conditions.
What is Liquidation Value in Real Estate: The liquidation value is the amount a property is sold for under rapid sale conditions due to the seller’s willingness to accept a discounted sales price.
How do you calculate the liquidation value of real estate? Let’s look at an example:
Determine the Fair Market Value (FMV) – The property’s fair market value, what the property sells for on the open market, can be determined in multiple ways:
- Comparable Sales Method – This method compares the subject property to comparable properties within the area to arrive at a sales price.
- Cost Approach – Calculate the cost to reproduce or replace the property then subtract depreciation.
- Income Approach – This method is usually a rental property value approach, in which the property value is based on the income the property generates.
In our example, the property’s fair market value is based on comparable sales and is priced at $600,000.
Estimate Discount Rate – We have assessed the market trends and overall economic climate and have made a discount rate determination. The discount rate reflects the discount in sales price due to our need for a quick sale. The discount rate is 20% and the discount amount is:
$600,000 (property sales price) x 20% (discount rate) = $120,000 (price discount)
Calculate the Liquidation Value – The market’s comparable sales have dictated our property’s fair market value of $600,000 and local supply and demand has determined our $120,000 pricing discount. We can now calculate the liquidation value:
$600,000 (FMV) - $120,000 (price discount) = $480,000 Liquidation Value
Our $480,000 liquidation value is now the reduced market sales price we are willing to sell the property for to realize a quick sale.
What is Liquidation Value in Real Estate: The liquidation value in real estate is the reduced fair market value of a property priced for quick liquidation due to a seller’s immediate need for cash.
