Opinion
BK. No. 12-04261-LT13
10-11-2012
In re: Ralph Jesus Jimenez and Rosalind Dion Jimenez, Debtors.
MEMORANDUM DECISION
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
On October 1, 2012, the Court conducted an evidentiary hearing regarding Debtor's Motion to Value Real Property, Treat Claim as Unsecured and Avoid Junior Lien of North Island Federal Credit Union (the "Lien Strip Motion"). Appearances were made as set forth on the record.
The Court carefully considered the declaratory and oral testimony of the appraisers, the testimony of debtor Ralph Jimenez, and the written appraisal reports. The Court also considered the arguments made by counsel at the hearing. After considering this evidence and argument, the Court concludes that the Debtors' appraiser more accurately appraised the Debtors' real property (the "Residence") and that, in any event, adjustments to this appraisal, even if made by the Court, would not be sufficient to establish a value for the Residence in excess of the amount owed to the senior lienholder. The Court's reasoning is as follows:
1. Location of Comparables.
a. The Debtors' appraiser, Brenner C. Ault, utilized three comparable properties ("Debtors' Comparables") in his appraisal report. Mr. Ault's properties were more comparable to the Residence in terms of location. Indeed, one comparable was located immediately adjacent to the Residence and, in fact, shares a fence with the Residence. The other two properties were located within a block and a half block of the Residence, respectively.
b. The North Island Federal Credit Union ("Lender") appraiser, David S. Cuchiara, utilized five comparables ("Lender's Comparables") located between .42 and .93 of a mile from the Residence. These comparables, while not geographically remote, were less geographically similar.
2. Other Issues As To Comparables.
a. Mr. Cuchiari testified that while his comparables were more remote, they were otherwise more similar. Mr. Ault disputed this assertion. The Court found Mr. Ault more credible on this point.
i. Mr. Cuchiari never established with precision what factors, other than swimming pools, made the Debtors' Comparables significantly dissimilar. He discredits the Ault appraisal because it does not comply in minor respects with general lending and Fannie Mae guidelines, but these guidelines are not applicable here. The house next door (Mr. Cuchiara mistakenly places it across the street) is 453 sq. feet larger, but Mr. Cuchiara never adequately explains why the square footage adjustment is not an appropriate way to determine relative value. Mr. Ault's other comparables had square footage closer to that of the Residence.
ii. More importantly, however, Mr. Cuchiara never adequately established why his comparables were more comparable. He flatly states that one of Debtors' Comparables was not comparable because of a recent remodel. This is curious as Mr. Cuchiara also utilized substantially remodeled properties as comparables. Mr. Cuchiara also stated in his rebuttal declaration that one comparable was on a dissimilar busy street, but Mr. Ault effectively refuted this point.
b. Mr. Cuchiara makes the point that the Ault appraisal did not provide an upward adjustment for the existence of a fence. If the Court allows a $5,000 upward adjustment to each of the Debtors' Comparables, however, this does not result in a value in excess of the amount owed to the senior lender.
The parties stipulated that this amount was $238,323.46. Dkt. # 3911.
c. In the case of Debtors' comparable two, Mr. Cuchiara testified that the pool adjustment is excessive as the pool contained "green water" and was not "functional." He testified that he might add a slight value, but that it would be minimal, and certainly not the full adjustment for the pool utilized by Mr. Ault. Mr. Ault utilized a $15,000 downward adjustment in connection with a "superior" patio and a pool. But an adjustment in the full amount of $15,000, even on top of a fence adjustment, would not yield a value in excess of the amount owed to the senior lender.
d. Mr. Cuchiara also testified that the condition adjustment in connection with Debtors' comparable three is excessive. But once again even a reduction for the fence and a $10,000 reduction in the condition adjustment, one that appears to be similar to condition adjustments made by Mr. Cuchiara, does not yield a value in excess of the amount owed to the senior lender.
e. The Court notes that the size adjustments Mr. Ault used were not criticized by Mr. Cuchiara and, indeed, appear to be consistent across the board with upward and lower adjustments made at approximately the same rate.
f. Thus, even if adjustments are made to Debtors' Comparables in areas criticized by Mr. Cuchiara, the adjustments do not result in a value for the Residence in excess of the amount owed to the senior lender.
C. Lender's Comparables Follow Recent Prior Sales At Substantially Lower Amounts And, Thus, Evidence Substantial Remodeling.
A review of Mr. Cuchiara's appraisal also raises questions. First, the comparable properties are slightly farther away. The Court does not find this fact either dispositive or especially probative, given his evidence that these properties are otherwise "competitive" and "similar."
But most of these properties also evidence recent remodels. Lender's Comparables two, three, and four all sold for an amount substantially less than the Debtors' proposed value for the Residence earlier this year. Each resold thereafter for significantly more. Mr. Cuchiara indicated that each property involved some remodeling.
Comparable 5 was in escrow at the time of the appraisal, but sold for $205,000 earlier this year.
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In contrast, there is no evidence of any recent remodeling of the Residence. Mr. Jimenez's testimony makes clear that the Residence has not received any recent remodeling and that much of the Residence remains in its condition as of Debtors' purchase.
The Debtors argue that the correct adjustment should reflect the entirety of the difference between the previous sale and the resale. This requires, however, that the Court assume that the condition of the Lender's Comparables prior to any renovations was exactly the same as the Residence. There is no evidence in this regard, and the Court cannot make this assumption. But given the testimony by both appraisers that the market is stable, one must assume that any increase in value over the short time period between sales is the result of physical improvement to the property (and not to a significant upward adjustment in market prices). This makes highly questionable, for example, the properties where Mr. Cuchiara makes absolutely no condition adjustment. It also raises exactly the dissimilarity problem that Mr. Cuchiara attempted to use to discredit Mr. Ault's appraisal. Indeed, it appears to the Court, that these properties, given the recent improvements, are less similar to the Residence then the Debtors' Comparables.
As a result of all the above, the Court, once again, finds the Ault appraisal to be more accurate.
D. Even After Appropriate Adjustments, The Ault Appraisal Indicates A Value For The Residence That Is Less Than $238,323.46.
The Court made an appropriate adjustment in its analysis to increase the Ault calculations to account for the fence and to otherwise increase a comparable value to eliminate a downward adjustment on account of a nonfunctional pool. The Court also made other possibly appropriate adjustments to examine the possibility that such adjustments would make a meaningful difference. After all such adjustments, however, the value of the Residence continued to be less than the amount owed to the senior secured lender. The Court, thus, concludes that the value of the Residence is less than that owed to the senior secured lender and that, as a result, a lien strip is appropriate.
The Court does not think it necessary to put a precise value on the Residence different from that of the Ault appraisal and is hesitant to do so as the Court is not, itself, an appraisal professional. However, if a modified value must be used, the value is $227,500. This represents a $5,000 increase for each of the comparables based on the fence, a $12,000 increase as to Debtors' Comparable 2 based on the fact that the pool is nonfunctional, and a $10,000 increase for Debtors' Comparable 3 where there was a $40,000 downward adjustment for condition (this brings this factor more into line with Mr. Cuchiara's value adjustments.) Having made these adjustments, the Court, as noted above, concludes that under no scenario is the value of the Residence over and above that owed to the senior lender. Thus, Lender is completely unsecured and a lien strip is appropriate.
The Debtors, as the prevailing parties, should submit an appropriate order within 14 days.
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LAURA S. TAYLOR, JUDGE
United States Bankruptcy Court