Opinion
NOT FOR PUBLICATION
MEMORANDUM DECISION ON VALUE OF REAL PROPERTY UNDER 11 U.S.C. § 506(a)(1)
STEPHEN L. JOHNSON, Bankruptcy Judge
The following discussion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052(a).
This court held a trial in this case on February 7, 2011, to determine the value of the debtors' residence in connection with their motion to value their property and strip off the lien of a junior secured creditor.
Having considered the testimony of the witnesses, the argument of counsel, and the papers submitted, the court finds the value of the Property on the petition date was $690,000.
II. BACKGROUND
On April 30, 2010, debtors Iftikhar and Rubina Ahmed ("Debtors") filed a voluntary petition under Chapter 13 of the Bankruptcy Code. On August 17, 2010, Debtors filed the Motion to Value Collateral and Avoid Second Lien (the "Motion to Value"), by which they sought a determination that their real property located at 171 La Canada Court, Los Gatos, California (the "Property") had a value of $630,000. The Property is encumbered by a deed of trust in favor of Kandaur Capital Corporation of $674,000. Wells Fargo Bank, N.A. ("Wells Fargo") has a second position lien of approximately $125,000. The effect of an order valuing the Property at $630,000 would be to strip off the Wells Fargo lien.
All section references are the Bankruptcy Code, found at title 11 of the United States Code, unless indicated otherwise.
Wells Fargo objected to Debtors' Motion, arguing in its papers the Property's value was $690,000 on the petition date, meaning its lien could not be stripped off. At trial, Wells Fargo contended the Property's value was $770,000. On February 8, 2011, the court held a trial to value the Property.
Debtors based their $630,000 estimate of value on two things: their personal opinion of the Property's value, and a Broker Price Opinion (the "BPO") prepared by Naeem Malik ("Malik"). Malik is a real estate broker but is not an appraiser. He is generally familiar with the location of the Property but does not specialize in the area. He visited the Property and took photographs to form his opinion of value. He also ran a report of sales in the same geographic area as the Property. He testified that the Property was not in saleable condition because it had substantial deferred maintenance, including roof problems, possible termite issues, footpath deterioration, tree trimming, outdated carpeting and windows, and other upkeep conditions. He estimated the cost of those repairs to be $150,000. He also testified the Property was neither improved nor remodeled. Based on his observations and review of comparable properties, he concluded the Property's "as-is" value is $630,000, its repaired value was $750,000, and "quick sale" value was $620,000.
Wells Fargo increased its estimate of value by the time of the trial. In its original objection, Wells Fargo relied on a comparative market analysis done by LSI, with a value of $690,000. At trial, Wells Fargo's expert Erick Bryan Mould ("Mould") testified, based on an appraisal (the "Appraisal") of the Property, that the value on the petition date was $770,000. The Appraisal is premised on comparative sales in the near vicinity of the Property, and is complete and thorough. Mould made adjustments to the comparable sales amounts based on location, square footage, and condition.
The parties have several disputes regarding the value of the Property. Debtors maintain that the Appraisal Mould prepared is deficient because it does not adequately take into account the actual condition of the Property. Debtors maintain Mould inappropriately compared the Property to other properties that had been improved, remodeled, and did not suffer from the same condition problems.
Wells Fargo contends Debtor's BPO underestimates the Property's value. It contends Malik relied on sales that are not comparable to the Property and overestimates the cost of necessary repairs. Wells Fargo offered the testimony of Scott R. Hull, a licensed general contractor, who opined that the cost of repairing the faults identified in Malik's BPO would be approximately $40,000.
III. DISCUSSION
A. Burden of Proof
A debtor bears the burden of proof on the issue of valuation under § 506(a). In re Finnegan, 358 B.R. 644, 649 (Bankr. M.D. Penn. 2006). A debtor may offer an opinion on the value of his home pursuant to Federal Rule of Evidence 701. In re Meeks, 349 B.R. 19, 22 (Bankr. E.D. Cal. 2006); In re Kinsey, 2006 Bankr. LEXIS 2095, at *12 (Bankr. E.D. Cal. 2006). A debtor is not qualified as an expert, however, and the court must determine how much weight to give competing opinions of value. Id.
B. Valuation Standard under § 506(a)(1)
When the debtor intends to stay in his house, the proper valuation of the house under § 506(a) is the fair market value. In re Serda, 395 B.R. 450, 453 (Bankr. E.D. Cal. 2008) (citing Taffi v. United States ( In re Taffi ), 96 F.3d 1190, 1192 (9th Cir. 1996)). "Fair market value" means "the price which a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy would agree upon after the property has been exposed to the market for a reasonable time." Id. at 453-54.
C. Court Is Not Bound by Appraisals Submitted
Complex factual inquires such as valuation require the trial judge to evaluate a number of facts: whether an expert appraiser's experience and testimony entitle his opinion to more or less weight; whether an alleged comparable sale fairly approximates the subject property's market value; and the overall cogency of each expert's analysis. Sammons v. Comm's of IRS, 838 F.2d. 330, 333 (9th Cir. 1988); Ebben v. Comm's, 783 F.2d.906, 909 (9th Cir. 1986). The court does not necessarily abuse its discretion if it decides to reject an appraisal. Id.
D. Determination of Value
The question presented is how to measure the value of the Property given the divergent opinions offered by Debtors' BPO and Wells Fargo's Appraisal.
The BPO provided a list of twenty comparable properties, ranging in sale price from $635,000 to $1,485,000. Based on these twenty comparable properties, Malik produced two possible values for the Property: the "as is" market value of $630,000.00, and the "repaired" market value of $750,000.00. Malik offered no specific methodology for his conclusion on value other than a basic comparison of properties and prices. The court does not credit this testimony significantly.
Wells Fargo's valuation is more credible. Mould valued the Property at $770,000. His approach was expert. He used an industry-accepted method of valuing the Property based on three comparable sales. For this reason, the court finds Mould's valuation more reliable than the BPO. Moreover, Mould's value is very close to the sales price of a neighboring property. Both parties referred in their analyses to a property located at 159 La Canada Court in Los Gatos, California, which is across the court from Debtors' Property. 159 La Canada Court sold for $774,500 on June 6, 2009, a little more than a year before the petition date. Mould did not rely on 159 La Canada Court in his estimate of value because the sale occurred more than one year before his appraisal. He indicated that he used it only as reference point' for his $770,000 valuation. Mould testified this was reasonable because the real property market was fairly stable in Los Gatos during the year between the sale of 159 La Canada Court and the petition date.
The court concludes, however, that certain adjustments should be made to the $770,000 value. The Appraisal indicates the effective age of the Property is 30-35 years old, and that it has "deferred maintenance." Malik identified a number problems, including roofing, dry rot, possible termite damage, and other concerns. Malik testified that buyers typically desire properties that do not have such problems, and have been upgraded. Buyers are not interested in purchasing properties that require new roofs, dry rot, and termite repair. The photographs attached to the BPO bear out Malik's concerns on this point, as they show an aging property with substantial cosmetic issues. Mould acknowledged some of these problems in the Appraisal, making adjustments to his comparable properties for upgrades and remodels, but did not make any specific adjustment for patent cosmetic and structural issues.
Malik testified that the total repair cost to bring the Property to a marketable state would be $150,000, but he did not itemize the work required. He relied on his experience as an owner and property manager to support that figure. Wells Fargo offered the testimony of Hull, a licensed contractor. He estimated the cost of a new roof at $12,500, new fascia board at $1,500, new paint for the interior at $4,000, new carpet at $3,500 to $4,000, new paint for the exterior at $5,000, a new footpath at $4,500, and a new heating system at $5,500 to $7,500, for a total of approximately $40,000.
The court concludes the estimate of necessary repairs to be near the mid-point of Malik and Hull's estimates. Malik's numbers are not supported by an opinion of a general contractor and appear to be too high for the work required. Based on the court's experience, Hull's estimate appears low and does not include the costs of garage repair, tree trimming, termite inspection and repair, and new windows. Given the condition of the Property and the work necessary to make it saleable, the court determines the price should be adjusted downward $80,000.
Using Mould's $770,000 as the starting point, the court determines the fair market value of the Property for purposes of § 506(a) is $690,000 ($770,000 minus $80,000).
IV. CONCLUSION
The Property's value on the petition date was $690,000. Debtors contend in their Motion to Value that the first deed of trust on the Property is $674,000. The second position Wells Fargo lien cannot be reduced under § 506(a) and controlling precedent in the Ninth Circuit. Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002).
Counsel for Wells Fargo shall upload an order in the ECF system consistent with this decision.