We recently had an appraiser value an undivided interest in West Texas ranch land. The appraiser discounted the interest by 50%. So that means that if the whole value of the land would have been worth 100,000, a 25% interest would be worth $12,500 rather than 25,000. Why would that be? Well, the truth is a jointly held interest is rarely worth the full value of the whole underlying property.
For example, let’s say you own the 25% interest in the ranch land above. Maybe for $10,000 of court and survey fees you can partition off your part of the land to sale. Assuming you are now able to sell property you own 100% of for $25,000, you are still out the 10,000 of expenses which brings your net down to $15,000. And that wouldn’t take into account all the time and effort involved in a partition proceeding, hiring an attorney, hiring a surveyor etc. On top of that you run the risk that the piece of the property you end up with will not sell for as much per acre as the whole ranch. Perhaps the ranch land has fences and once you partitioned your property you would have to build more fences to demand the same price per acreage you might be able to demand for the whole property.
SRR, well known professional appraisers, published a great, detailed article on discounts for undivided interests:
Overall, the lack of control associated with an undivided interest leaves the unsatisfied investor with one of three options with respect to achieving liquidity: 1) sell the ownership interest to the other co-tenants; 2) attempt to locate another willing investor; or 3) if possible, conduct a potentially protracted and expensive partition lawsuit.
An undivided interest also suffers from a lack of marketability when compared to a fee-simple interest. This lack of marketability is primarily attributable to the following:
- No established market for undivided interests
- Obtaining financing for an undivided interest is more difficult than for a fee-simple interest
- Co-tenants may be jointly and severally liable for the debt obligations of the asset
- Negative consequences associated with suing for partition of the asset
- Creditors of individual co-tenants may be able to force the sale of the asset