Taking Care of Mom and Dad: Evaluate the Real Estate

You don't have to be Donald Trump to understand that the most valuable real estate is property that has the greatest equity -- in other words, the smallest amount of attached debt (mortgages, tax liens, etc.) in relation to its appraised value. A $3 million estate in Beverly Hills that's carrying $2.9 million in mortgages has $100,000 of equity; a modest $200,000 duplex on the outskirts of Fresno that you own free and clear has a value twice that of the Beverly Hills estate.

So, right away, you need to answer three questions:

1) Do your parents own any real estate?

2) What's the appraised value of each property?

3) How much do your parents owe on each?

The first question is usually the easiest to answer. If you've been in regular contact with your parents, you probably know the answer already. Even if you haven't been close, you can simply ask them -- or any lawyers, accountants or other family members who might know.

However, the answers to simple questions can be complicated. If your relations with your parents have been strained...or if they're already having memory problems and can't say or don't know what they own, you'll have to do some more detailed research.

In these cases, the best mechanism for finding out what -- if any-thing -- your parents own is to follow the property taxes. If you have access to their financial papers, you should find some notice of property taxes due...or accounts of taxes collected.

Compare the tax documents to the addresses and information that you know or think you know about where they live. In most cases, the information relating to their primary residence will match up -- if there were problems, they would usually have surfaced first. But, if they own investment property or vacation homes, make sure you know the proper addresses and title information; inconsistencies are more likely to occur with places where people don't live every day.

If the paperwork doesn't offer any solid information about ownership, your job becomes a little more difficult. But following the property taxes is still your best bet. You can go to the tax authority for the area in which your parents live (the authority is usually a County Tax Assessor, but in some areas it goes by a different name) and ask for a search of each parent's name and Social Security number. If they own property in that area, the answer will surface.

A caveat: Each tax authority sets its own terms for who can ask about ownership. In some areas, anyone can ask -- as long as you have the owner's name. In others, you'll need the name and Social Security number. In still others, you may need to have a document showing that you have a court order, power of attorney or similar authority to ask.

In the increasingly few areas where there is no property tax, the Hall of Records or County Court will usually serve the same function as the tax authority.

Aside from your uncertainty about what your parents own, the government may also be uncertain. This doesn't mean its records are fuzzy; it usually means that there's no clear title to a piece of property. This can happen for a number of reasons -- and none of them is good for you.

Some of the reasons that title to real estate becomes cloudy or uncertain include:

  • your parents bought the property in partnership with someone else;
  • your parents have executed a quitclaim deed or other legal transfer to someone else;
  • your parents did either of the above...and botched the paperwork in some way that's created a legal question;
  • creditors like mortgage companies or the very same tax authority have started foreclosure proceedings or put liens on the property for more than its appraised value; and
  • as a result of a lawsuit or other action, your parents owe someone money...and that person has filed a lien on the property.

If any of these scenarios apply, you are going to have to resolve them before you can take any other steps to get the most out of the property's value. In some cases, you may be able to negotiate a solution. If your parents executed a botched transfer to another family member, you may be able to explain to that person that no one's going to own the property while the title is unclear. You may be able work out a deal to nullify the botched transfer as part of a larger restructuring of your parents' finances.

Mortgage companies and tax authorities are usually less willing to negotiate. However, if your parents have some money and let payments slip by accident, you may be able to reach an agreement to catch up late payments or reinstate a mortgage out of foreclosure.

The point here is that, before you do any of the smart things that we'll discuss in the rest of this chapter, you need to make sure that your parents have clear title to their property. Once you've determined that your parents own real estate, the next question involves figuring out what it's worth.

The procedure for appraising real estate is fairly well-established. It's built around the business of making and refinancing real estate loans. Even if you're not planning to borrow against your parents' real estate, you can take advantage of the related appraisal tools.

Basically, what you're looking for in an appraisal are comps -- or the comparable values of similar real estate sold in the same area at about the same time. In most cases, the banks or mortgage companies that loan money on real estate in the area will keep the best comps for property in a given area. When these lenders need to make a decision about how much to lend on a house or piece of land, they use these numbers -- in additional to other factors -- to reach a number.

Like so much market-related data, comps are well-suited for delivery via the Internet. In fact, a quick search of any major search engine will turn up dozens of services that will give you detailed comps for just about any given property in any part of North America. Usually, all you need to get this information is the address in question and a credit card for paying the $30 to $100 fee.

In most cases, these services are consumer versions of information that the providers keep for big bank customers (i.e., they are less detailed). Obviously, these numbers will be somewhat approximate. For $50, you're not going to get information about matters like development potential, historic importance or custom design elements.

If you think a property is worth more than what an "off the shelf" comp service is likely to indicate, you can hire a real estate appraiser to evaluate the property in person.

In these cases, you may prefer to use an appraiser who belongs to the American Society of Appraisers in Washington D.C. or the Appraisers Association of America in New York. Both groups can provide you with a directory of members:

If you log on to either of these two sites, you can plug in information about where your parents reside and be directed to comp services that cater to that location.

Like brokers or agents, real estate appraisers must adhere to a series of professional guidelines designed to make their evaluations as objective and reliable as possible.

Generally, an appraiser charges between $100 and $300 for the most basic evaluation (sometimes called a drive-by) of a residential property. This fee will go up if the house is unusually large or otherwise distinct. It will also be higher if the property includes a commercial building.

If you hire an appraiser to evaluate a piece of property, the resulting estimate will usually not be something that a bank will accept for a loan, reverse mortgage or other financing mechanisms. Banks typically require their own appraisals at the time of a deal (even if that appraisal ends up being performed by the same appraiser). But the private appraisal will be good for telling you what the property is worth...and can be useful for tax or estate planning purposes.

One thing to keep in mind when you're evaluating your parents' real estate: Older people often underestimate the value of the assets that they own.

We've mentioned this in passing before -- it's probably worth discussing in more detail here. It also leads to the final question that you need to ask in evaluating your parents' real estate: How much do they owe on their real estate?

Although there are many exceptions, it is a frequent reality that older people tend to think very conservatively about the value of the things they own. In terms of real estate, this usually means living in a house that doesn't have a mortgage attached...or has a relatively small mortgage. It may also mean that the property is underinsured.

But, generally, the conservative bent that older people share can be a good thing. The slow and steady effects of inflation, appreciation and compounding can build considerable -- and useful -- equity.

To calculate how much equity your parents have in their real estate, you need to know how much they owe on it. Again, the tax authorities will have a lot of this information if no one else does.

All parties -- people or companies, including mortgage companies -- that hold liens on real estate have to file those liens with the state or county government. These liens are public records, just as the ownership of real estate is. However, these public records can sometimes be tough to find.

This is another field in which numerous for-profit enterprises have stepped in to offer the speed at relative ease of on-line searches. If going down to the county hall of records where your parents live is either inconvenient or impossible, you can contact a title search company (it's usually best to find one in that area) to do the digging for a fee.

You might want to contact the American Land Title Association, a Washington, D.C.-based trade group for the industry that can direct you to a company that conducts title searches in your or your parents' area: 1828 L Street, NW Suite 705 Washington, D.C.; 20036; 1.202.296.3671; 1.800.787.ALTA; www.alta.org.

Of course, mortgage companies aren't the only parties that may have liens on your parents' property. After first and second mortgage holders, the most common type of lien is related to unpaid taxes. The Internal Revenue Service and any of various state or local tax agencies may have attached claims to the property related to income, capital gains or property taxes that your parents haven't paid or are disputing.

If the liens for unpaid taxes are large enough, the tax agencies may either take possession of the real estate or force a sale. This can be a devastating loss for the owner of the real estate...in some cases, the tax liens represent only a fraction of the property's market value.

Unpaid taxes are often a problem for older people who have started to forget the details of daily living. This is one of the most important reasons to stay informed about your parents' financial wellbeing...long before they start forgetting to pay their taxes.

Other liens that may be on your parents' property include:

  • mechanics' liens, related to unpaid bills to contractors, maintenance or repair companies;
  • court-ordered liens, usually linked to a judgment or fine related to some form of lawsuit;
  • bank liens for credit card debt and consumer loans; and
  • bail bonds.

If your parents' property is encumbered with these other liens -- and, especially, if one person or company has placed several of them -- you may want to investigate the filings in detail. In some areas that have lots of older residents and property owners, unscrupulous contractors will file liens related to bogus or exaggerated work. They hope that the property owner doesn't have a will or family who cares -- and will pass away, leaving valuable real estate ripe for the taking.

How does a lien work? It's a legal attachment to the value of an asset (it can be any asset but is usually real estate) related to an unpaid debt. Liens are expensive and time-consuming to file; so, they usually make economic sense for larger debts -- like mortgages, back taxes or legal judgments. In most cases, a lien holder can't force the sale of the asset -- especially if the asset is the owner's primary residence. So, the lien holder has to wait until the asset is sold, at which point he or she can force payment of the underlying debt (plus interest).

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