What is quick sale value?
What is QSV, quick sale value. There is no generally accepted definition, but here is my attempt at defining it based on experience:
QSV, quick sale value, is the price a property put on the market will trade at less seller administrative, legal and accounting charges, realtor fees and closing costs in a liquidation process that lasts 90 days or less.
This concept is important in situations where the owner is being foreclosed upon or a power of sale proceeding has been commenced against a property.
It is also important in terms of mortgage proceeds.
Here’s how it works:
June is buying her first home--a small inner-city 3-bedroom place with a tiny 1-bedroom sideyard apartment for $435,000. She’s been approved by her lender for a 90% LTV mortgage.
“Hooray,” says June.
She consequently expects her mortgage proceeds to be:
$435,000 x 90% = $391,500
As a result, she has calculated she will need to come up with cash (her equity) on completion of $435,000 - $391,500 = $43,500 plus closing costs (her legal fees plus applicable taxes).
What she doesn’t know is that even though she will pay the appraiser who comes to inspect and value the home, the appraiser takes instructions from the lender. Those instructions often result in FMV (fair market values) that are 5% below market. This gives the lender more debt coverage than the “90% LTV” ratio would suggest. It’s more like an 85% LTV.
But wait. It gets worse.
If it is a hard money lender, they may instruct the appraiser to use QSV, so the “appraised” value of the property might look more like this:
FMV x 95% x 65% = $435,000 x 95% x 65% = $268,612.50
Now, June’s mortgage proceeds are just:
90% of $268,612.50 = $241,751.25
#Gulp
So, June has to pony up a whopping $193,248.75 plus closing costs in cash on completion, an incredible $149,748.75 more than she was expecting.
Obviously, I have sketched out a worst-case scenario here, but the primary message is you have to know what instructions “your” appraiser has received as to how they are going to value your property. What you really want to hear is that they will use an unfettered fair market value, defined this way by Investopedia:
Fair market value (FMV) is the price that property would sell for on the open market... fair market value has come to represent the price of an asset under the following usual set of conditions: Prospective buyers and sellers are reasonably knowledgeable about the asset, behaving in their own best interests, free of undue pressure to trade and given a reasonable time period for completing the transaction. Given these conditions, an asset's fair market value should represent an accurate valuation or assessment of its worth.
Prof Bruce
Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD Real Estate Investment and Business coach Century 21 Explorer Realty Inc broker Ottawa Senators founder 1-613-762-8884 [email protected] twitter.com/ProfBruce profbruce.tumblr.com/archive brucemfirestone.com
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postscript: It can get even worse. QSV may also deduct penalties (such as three months interest for mortgage agreement abrogation/early termination) and realtors often charge higher fees in these situations because the property owner may delay sale by petitioning the courts to set aside a foreclose notice or, in the case of power of sale, they can redeem (ie, cure the default) right up to about 30-minutes before a forced sale is completed.
