Opinion
ORDER ON MOTION TO VALUE REAL PROPERTY
PETER W. BOWIE, Judge United States Bankruptcy Court.
This matter came on for evidentiary hearing on the debtor's motion to value real property and avoid the junior liens of Michael Hughes, Damon McGorey and Lucy Abernathy (Creditors). The matter came to hearing from the court's special lien strip calendar, where almost all such motions are considered regardless of what judge is assigned to the case upon filing.
Debtor's motion asserted that the subject property was valued at $524,000 as of August 2, 2012, based on an appraisal and declaration of an appraiser. Debtor claimed that Bank of America held the first position, and was owed $612,585.30 as of August 13, 2 012, based on a proof of claim filed by the bank. The second position debt and lien is held by Creditors, with a proof of claim on file in the amount of $281,842.85. Debtor has indicated he disputes the amount the Creditors claim is due, but there is no need to address that issue at this point in time. If the Creditors' claim is secured by any amount of equity in the property, no part of that debt, whatever its amount, is avoidable in this process, because the subject property is debtor's principal residence. 11 U.S.C. § 1322(b)(2).
At the hearing, debtor testified he bought the property in October, 2005 and paid $620,000 for it. He told the Court that he put about $60,000 into remodeling it. In August, 2007 debtor, who was an active real estate agent at the time, listed the property for sale at $975,000. Debtor listed the property again in 2008 at a price range of $865,000 - $895,000.
According to the Bank's amended proof of claim 6-2, in June, 2012 debtor and the Bank agreed to modify the loan terms, pursuant to which the new principal balance was agreed to be $613,324.09, $350,000 of which was identified as "The Deferred Principal Balance" accrued no interest obligation but is all due and payable as a balloon payment at the end of the 280 month loan term. The "Interest Bearing Principal Balance" was agreed to be $263,324.09, on which the monthly principal and interest, plus escrow payments was calculated. The new monthly payment under the loan modification commenced August 2, 2012. On August 13, 2012 debtor filed this Chapter 13 case.
Debtor filed the present motion to value the property on or about January 17, 2013. As already noted, debtor asserted the property's value was $524,000, based on an appraisal and the appraiser's declaration. Creditors filed their Opposition, which included a declaration of an appraiser they employed, who valued the property at $645,000 as of August 2, 2012. In their Opposition Creditors also raised an issue of whether the $350,000 "Deferred Principal Balance" should be included in calculation of the senior debt, and also whether debtor's Chapter 13 plan is proposed in good faith. The latter issue is a confirmation issue, to be decided by the originally assigned judge.
Concerning whether the "Deferred Principal Balance" should be included in the senior debt, Creditors have not suggested any reason why it is not. The matter has not been briefed by either side. The Court notes, in passing, that the loan modification agreement attached to the Bank's amended proof of claim 6-2 makes clear in paragraph 3, as follows:
A. ...The new principal balance of my Note will be $613,324.09 (the "New Principal Balance")...
B. $350,000 of the New Principal Balance shall be deferred (the "Deferred Principal Balance") and I will not pay interest or make monthly payments on this amount. The New Principal Balance, minus the Deferred Principal Balance shall be referred to as the "Interest Bearing Principal Balance" and this amount is $263,324.09...
The total remaining principal balance that will be due in a balloon payment at the maturing of my loan will be the Deferred Principal Balance described in paragraph B above. This means that, even if I make all of the scheduled payments on time and comply with all the other terms of the modified loan agreement, a principal balance of $350,000 will remain unpaid at the time of the scheduled maturity date. This balance will not accrue interest at the Note rate and is sometimes called a balloon payment. I will need to make arrangements to pay this remaining balance when I payoff my loan, when I transfer an interest in, refinance or sell the Property, or at maturity.
THE AMOUNT OF THE FINAL PAYMENT ON THIS LOAN, ASSUMING ALL SCHEDULED PRINCIPAL PAYMENTS ARE MADE IN ACCORDANCE WITH THIS MODIFICATION AGREEMENT, IS $350,000.
As already mentioned, the Creditors have raised the question of how the $350,000 "Deferred Principal Balance" is to be treated for purposes of calculating the amount of senior debt as of the petition date, August 13, 2012. Neither side had squarely addressed it in pleadings, and this Court will withhold any comment or conclusion until the parties have had the opportunity to do so.
When debtor filed the instant motion, it was supported by a declaration of an appraiser, and his appraisal opining that the value of the subject property was $524,000 as of August 2, 2012. That appraiser did not testify at the evidentiary hearing, nor was his appraisal offered into evidence. Instead, debtor hired a different appraiser, whose report was timely provided to the Creditors. That appraisal was physically conducted April 8, 2013, and adjusted to a date of value of August 12, 2012. His opinion of value is $565,000, and he so testified. Aside from the street address of the subject property, there is little agreement between the testifying appraisers of the characteristics or qualities of the subject property, or the comparable sales they used to derive their opinions of value.
Debtor's testifying appraiser, Mr. Olsberg, described the property as a 2 bedroom 1 bath detached Craftsman style home. Mr. Olsberg noted:
** There is a [second] bathroom which is not included in the Realist.com public records indicating the likelihood of not being permitted. ... The bathroom adds some functional utility to the improvements, however, the seller would have to disclose the unpermitted bathroom. The resale market would most likely not pay additional money for the unpermitted bathroom. Based on this rationale, the appraiser is NOT assigning a value to the additional unpermitted bathroom.
Creditors' appraiser, Mr. Gillgren, testified that a permit was not required for such a bathroom until the 1950's, while the house was built in the 1920's. In his view, the second bathroom, including the shower, was functional and added value to the property.
A separate area of disagreement concerns the number of bedrooms. Both appraisers acknowledge that inside the home there are two bedrooms. Outside the home, however, there is a separate office of over 200 sq. ft. in space. When debtor listed the property in 2008, (Exhibit D), he listed it as an optional third bedroom, larger than either of the other two bedrooms. Mr. Olsberg recognized the existence of the office, but did not consider it a third bedroom.
The relevance of the number of bedrooms and bathrooms is reflected in the comparable sales each appraiser chose to use to determine their respective opinion of value. Mr. Olsberg considered the subject property to be a 2 bedroom, 1 bath property, while Mr. Gillgren saw it as a 2 bedroom, 2 bath with a separate office. Mr. Olsberg chose 3 comps with two bedrooms and 1 bath, and one with 2 bedrooms, 2 baths. Mr. Gillgren's comps included 4 that had 2 bedrooms and 2 baths, and 1 with 3 bedrooms and 1 bath. Interesting, both appraisers made adjustments of $10,000 for a difference of 1 bathroom.
Mr. Olsberg used 2 comps that had a site size that is 1000 sq. ft. smaller - 2 0% smaller than the subject - but made no adjustment at all. He said the office was well done and adjusted the subject upward by $10,000, although it was a feature that none of the comps had. At the same time, Mr. Gillgren made the same adjustment, in the same amount on 3 of his comps. So the analysis distills down to the quality of the comps selected by each appraiser. Of the 5 listed by Mr. Olsberg, he eliminated no. 5 because it was erroneously included by computer error. His third comp involved a short sale rather than a market sale, and does not fit either appraisers' printed definition of market value. His fourth comp, although only .74 miles away, was located in a recognizably different neighborhood with a different, and lesser, community market appeal.
There was only one comparable sale selected by both appraisers, 4035 Randolph Street. It sold for $655,000 on a contract written April 24, 2012 and closed May 31, 5 weeks later. It was only on the market for 10 days. The property site size was 3999 sq. ft., while the subject is 5000 sq. ft., and it has 2 bedrooms and 2 baths, while the subject also has the office or optional third bedroom. Both appraisers recognized that the comp had undergone a major remodel, which prompted Mr. Gillgren to make a $30,000 adjustment, and Mr. Olsberg to make one of $50,000. On top of that adjustment, Mr. Olsberg also made a -$25,000 adjustment to the subject property for deferred maintenance. The Court finds the latter is redundant, and that $40,000 is a reasonable adjustment for the superior renovation. Mr. Olsberg made no adjustment for the subject having a 2 0% larger, useable lot, while Mr. Gillgren made a $15,000 adjustment. The Court finds a $10,000 adjustment to be reasonable. Both appraisers added $10,000 to the value of the subject property for the office. Mr. Olsberg also added $3,000 to the subject because it has central air, while the Randolph Street comp does not. The remaining item of disagreement concerns the garage. Mr. Olsberg testifed he saw the garage, but it was full of stuff. He said the flooring of the garage did not seem to support a car. Mr. Gillgren's report indicated there was a detached one car garage "that is not accessible for vehicles due to the placement of fencing and personal items." Mr. Gillgren made an adjustment of - $5,000 to reflect a one car garage rather than the two car capacity of Randolph Street. Mr. Olsberg treated the subject as having no garage, so his adjustment was - $10,000. For his other comps that had a one car garage, his adjustment was - $5,000, like Mr. Gillgren's.
As a separate matter, Mr. Olsberg included a list of purported defects provided by the debtor, Mr. McWhorter, but Mr. Olsberg did not investigate or reach his own opinion concerning the items on the list. Mr. Gillgren was not provided a similar list, but did discuss with the debtor that the fireplace has an issue, and that there was a problem of a board in the living room. There was a dearth of evidence on the cost to make the repairs claimed to be needed, except for $2,965 to relocate the water heater from the attic to outside. The Court also was made aware that in his 2008 listing for the subject property (Ex. D), the debtor stated in Supplemental Remarks: "1925 Lovingly Restored Dutch Craftsman. Completely restored in 2005. 2 bedrooms, with 2 baths. Large Living Room w/fireplace. Dining Room with windows to garden, front porch...." The Court also recognized some amount of puffery is anticipated in a seller's listing for sale.
Based on the testimony, documentary evidence, and argument, and after careful review of the competing comparable sales, the Court finds the comparables selected by Mr. Gillgren to more closely approximate the subject property. The Court has reviewed the competing adjustments, and stated its own conclusions of what is reasonable. From all that information, the Court finds and concludes that the approximate value of the subject property, 4144 Eagle Street, as of August 13, 2012 was $630,000.
Accordingly, debtor's motion to avoid the second position lien and trust deed is denied. Whether the third position lien and trust deed is avoidable depends on whether the judge assigned this case concludes that the "Deferred Principal Balance" is a component of the senior debt as of August 13, 2 012, or not, an issue on which this Court expresses no opinion because no party-has put it into a posture for decision.
IT IS SO ORDERED.