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Conflicts of Interest Are Natural With Home Sales

Richard Montgomery on

Dear Monty: I need professional advice. I am interested in purchasing a one-bedroom, one bath house with property and some structures in the Midwest. The seller is someone my wife and I have known for several years, and we are well acquainted. The seller also has a business at his residence. The business is a small flower farming operation he has managed for around 30 years. My wife has been an employee at the seller's farm for around 15 years and helps manage it. The seller's farm has historically done well, financially speaking.

Getting to the point: The seller has had two appraisals done so far. One was for around $450,000, and the other was around $200,000. There are 10 acres of land, the abovementioned house, two 40-by-30 plastic greenhouses and a small heated barn with a large walk-in cooler. The seller isn't selling the property as a business, just the house, land and structures. The property is maintained well, and the house, even though small, is essentially a custom house, so it's nice on the inside. What are your thoughts regarding the two appraisals being so far apart? My lender has not performed an appraisal yet, but I am unsure what to make of the potential transaction. Additionally, do you think this situation presents as a conflict of interest?

Monty's Answer: It sounds like the property is unique, and the seller's approach is exceptional. It is unusual for a seller to have an operating business that has done well financially and want to sell as if there were no business. Usually, this would add value to the sale price. It is unclear how much your wife knows. It is very common for an employee to believe the owner is raking it in, even though the owner is struggling. On the other hand, after 30 years, he may have a fortune and want the same for a dedicated employee. If your wife helps manage it and knows the balance sheet, she likely already knows the value added by operating the business.

THE APPRAISALS

All opinions will be different because the nature of the appraisal is based on subjective thinking with many variables. If you know both valuations, you may have viewed the appraisal documents. Reading each appraisal will reveal what the appraiser is thinking. I suspect comparable sales may be difficult to find for the business you describe, which could also account for the surprising difference. Also, some improvements are necessary for the operation of the business, specifically the two hoop houses and the walk-in cooler. Your lender's appraiser will also have a different opinion. The difference between the seller obtaining two appraisals and your lender's appraiser is that this appraiser is not working for you. Even though you are paying, your lender's appraiser protects the lender's interest.

 

THE CONFLICT OF INTEREST

It is unclear who you think has the conflict of interest. You both have a conflict of interest inherent in protecting your interests. The seller knows your wife knows the financials, and that knowledge may explain why he would sell in this fashion. Consider asking him. It is expected to have the concerns you are sharing. Let it play out and react as necessary.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur, and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @dearmonty or visit DearMonty.com.

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