Can you close real estate’s most difficult sale?
properties can seem like a myth in the real estate world. These properties are
not only rare, but also notoriously difficult to sell. If you ever happen
across a partial-interest property, here’s how to work with the seller and find
Partial Interest Defined
properties divide ownership into smaller fractional percentages held by
multiple owners. These properties may have two owners with 50-50 stakes, five
20-percent owners, or any other combination.
interests typically stem from estate planning. Owners might parse a property
among multiple inheritors, usually family members. Splitting the property this
way often prevents the partial interests from ever entering the market, since
the transfer of shares usually occurs within the owning group.
of the most popular partial-interest structures is the tenant-in-common
ownership, or TIC. Prior to the 2008 financial crisis, financing for the
acquisition of partial interest in real estate was more readily available than
it currently is in many regions of the country.
many partial-interest transactions are completed as cash purchases out of
necessity. However, in regions of the country where partial-interest ownerships
are more common, and the lending community is therefore more familiar and
comfortable with partial-
interest transactions, it is still possible to obtain a loan on the acquisition
of partial interest in real estate.
A Hard Sell
struggle to find buyers for partial-interest properties because most real
estate buyers understandably desire 100 percent ownership. If the buyer holds
only a partial interest, any modifications require the input and approval of
the other owners.
if a broker beats the odds and finds a willing buyer, the list of potential
buyers narrows further because in many markets it’s nearly impossible to obtain
a loan to purchase a partial interest. Most banks view such financing as too
risky because it’s impossible to foreclose on a piece of a property if the
borrower fails to maintain payments. As a result, many banks turn down such
loan requests, and the limited financing shrinks the potential purchasing field
to cash buyers.
partial-interest properties is a complicated dance between appeasing the client
and making the sale. The first step for selling brokers is determining a
discount percentage to apply to the asking price and communicating its need to
the seller. The discount rate is to the overall cost of the asset given the
limited number of potential buyers and the property’s limited desirability on
the open market.
appraisal of a partial-interest property includes these four steps:
the entire property.
the percentage ownership of the partial interest by the value of the entire property,
which will equal the value of the partial-interest in the property before
applying the discount.
the appropriate partial-interest discount to apply.
the appropriate discount percentage by the value of the partial share to arrive
at the discounted value of the partial interest in the property.
sellers might balk at the applied discount rate, that discount is necessary for
the property to sell, and brokers must convey this to sellers.
next step is targeting the right buyer. The most obvious buyer is an owner of
another piece of the property. The other property owners tend to be good
targets since they already have a stake in the property and would benefit from
owning the entire asset. In addition, if another owner would gain 100 percent
ownership with the new purchase, he or she will have an easier time acquiring a
loan because the bank would issue the loan on the entire property, making
foreclosure possible if the borrower defaults.
Buying Partial Interests
buyer broker, partial-interest properties can be one of the trickiest assets to
close on, since few buyers seek out a partial interest. But for unique buyers
who want to eventually own a full property — and have the patience to buy in
pieces — significant discounts are possible.
partial interests can be so heavily discounted due to their undesirability,
they can be opportunities for patient investors to gradually gain full
ownership of a property at a substantial savings to what they would pay to buy
the whole property at once.
a broker, it’s important to keep in mind the regional attitudes toward
partial-interest properties. For example, partial-interest sales are rare in
Los Angeles, but less unusual in San Francisco, where banks are more willing to
grant financing. The opportunity to obtain loans opens the pool from strictly
cash buyers to a more diverse market.
faced with selling a partial interest, brokers should seek out professional
advice and guidance on how to discount these properties. Discount rates are
best defined by past market sales, and despite the infrequency of
partial-interest sales, professional appraisers will likely have the most
recent market data.
Aftergut is a senior analyst in Integra Realty
Resources’ Los Angeles office. Contact him at email@example.com.