What is the collateral for your loans really worth?

This is an important issue as I constantly see  valuation numbers that are unrealistic regarding  various common forms of collateral.

First and foremost are your homes, vacation homes, investment properties included. There is no equity in most  homes in  America. Appraisals done a few years ago are meaningless today. I find that previously appraised homes are typically worth 30-50% less then the last fair market valuation appraisal done a few years ago and most are therefor under water, worth less then the mortgage it is carrying.

Consider also the fact that if in default and the bank is threatening foreclosure then the appraisal you may want is a thirty day quick sale appraisal and that most assuredly will yield a valuation which is about 40-50% below current fair market value.How low can it go?   Very low indeed.

Then why list it on your balance sheet for a fictitious valuation which is grossly inaccurate? What good will this do you or the bank? This will not improve your workout situation and will in fact cause significant issues to evolve, as your personal guaranty is based upon your net liquidated worth and if your real estate is all upside down your liquidated net worth is also, in most instances. This will result in a demand for more  in your offer in compromise.

The borrowers personal business assets, equipment, vehicles, even accounts receivable are all generally puffed up way to high. Remember it must be liquidated to produce capital, what is the liquidated value is the operative question. In today’s market with a quick sale most assets are worth far less then what is being carried on balance sheets and financial statements.

A receivable over 90 days is to be written off in considering collection value when provided in your business financial statement. Over 6o’s should be cut in half as half will reach 90 unpaid.

Minority interests in closely held businesses or real estate are other arrears for reconsideration. Your minority interest cannot be marketed, who would buy such a position? You have no power to force liquidation, you cannot demand  dividend distributions, it is for all practical purposes worthless, yet I see such entry’s with huge valuations.

Inventories  are grossly over valued, all the time. What is it worth if you had to liquidate it in thirty days is the benchmark.

The list goes on, I recently reviewed a financial statement that was provided for a loan made a few years back and on it  was included some antique vehicles valued by the owner for many hundreds of thousands of dollars, unrealistically. Now it’s value is extremely low,  as it is near impossible to liquidate the assets in thirty days unless the price is reduced enormously. forcing an inquiry as to whether or not this entry was originally fraudulent, it did not help  now to have such an issue to deal with.

Autos in general are typically over valued even though we can get a blue book value on line in an instant. Computers, office equipment, files, desks, for all practical purposes are worthless if required to be resold in thirty days…yet I see them listed for many thousands of dollars.

It just ain’t so.

The point is we must be realistic in your valuations and the objective in a workout scenario is not to puff your valuation high but to realistically declare them as currently valued for a thirty day quick sale, and these numbers are brutally low.

When you went into the bank for a loan you wanted everything to be as high as reasonably possible…ok. However when you return to the bank for a workout, you want everything to be based on a quick sale and thus much much less then previously valued. Circumstances change.

Be realistic, understand the current economy and value appropriately. Get help if you need.