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  #1  
Old 02-25-2008, 08:41 PM
probasco's Avatar
probasco probasco is offline
 
Join Date: Feb 2008
State: Oregon
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Default heads up on highest and best use

I am sure this has been worn out here, but being a newby, i wanted to pass this on for those interested.

ok, heres the scenario.

I am doing a form 2000 review, the house on 7 acres is surrounded by new homes, some still under construction. this is the one market in the portland area that has shown declining values for the past 4 months. In doing my due diligence, I see the zoning is for 10,000 sf lots. I go by the city planner and he brings out a blueprint showing 48 new lots laid out on the subjects land, approved, ready to break ground.

I send in my review indicating the appraiser failed to identify the highest and best use (he stated as is) and the comps he used were not splittable like the subject is. I also stated i could not and would not provide replacement comps as it goes beyond the scope of the review.

Later that day, i get a call from a staff reviewer (APPRAISAL MGT) stating that unless the ground has been broken, I need to change the highest and best use back to as is like the appraiser stated.

Now i know the correct answer here, but the reviewer spends 20 minutes telling me I am wrong. I ended the conversation telling the person to check with their state appraiser board on the definition of highest and best use and get back to me. no response now for 5 days now.

anyone else run into this kind of ignorance with a "reviewer"?
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Old 02-25-2008, 09:15 PM
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Mztk1 Mztk1 is offline
 
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He might be right. You are reviewing a 1004 form I suppose. The report is not asking for highest and best use of the land as if vacant. Read it, it says "Is the highest and best use of the subject property as improved (or as proposed per plans and specifications) the present use.

Now turn to page 60 of the "Appraisal of Real Estate" 12th edition and read "Highest and best use of a property as improved:"

To save you the trouble, it says:

"The use that should be made of a property as it exists. An existing property should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one."

With your market in a decline and with all new construction sites around it, the current use as of the effective date may be contributing to the overall market value of the property and tearing them down may not be economically feasible...
  #3  
Old 02-25-2008, 09:27 PM
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probasco probasco is offline
 
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well , I was taught that the highest and best use is to be determined as if vacant and as improved.

or as the institute books say:
"the use of the land which will result in the highest value"

Even selling the bare lots at 75% discount (lots selling for over $100k) $25k per lot x 48 lots is $1mil, 200k. So, the $485k value of the appraisal was, shall we say, a little low?

whoops, i forgot to add, the existing dwelling was on the plans on its own lot. so there would be no tear down involved.


btw eappraisit4nothing is the firm

Last edited by probasco : 02-25-2008 at 09:29 PM.
  #4  
Old 02-25-2008, 09:58 PM
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Mztk1 Mztk1 is offline
 
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There are two types of highest and best use. Highest and best use as if vacant, and highest and best use as improved.

When we do the cost approach and determine a land value, that is highest and best use as if vacant.

When we check that box on the first page we are talking highest and best use as improved.

Does this house on the property actually add to the overall value of the property? Or would a vacant 7 acre tract with the same zoning in the market sell for more than the value of your 7 acres with the one house on it? If you 7 acre plus house is worth more than the 7 acres with no house than your highest and best use as improved answer is "yes".

Stopping by the tax office for a $125 field review...I'm impressed.
  #5  
Old 02-25-2008, 10:03 PM
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George Hatch George Hatch is offline
 
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I'll take a wild guess that the original appraisal report didn't report the correct specific site zoning or the approved map, and that it also doesn't include ANY summary of the highest and best use analysis. The reason being there wasn't any analysis performed. You had to find all this stuff out on your own and after the fact.

Just the error in fact on zoning and the omission of the approved map would call into question the credibility of everything else in the appraisal report, and I'd summarily reject the appraisal as being unsuitable just for that reason. If the appraiser did it out of ignorance they're just incompetent. If they did know about it but omitted it anyway they're a liar. Either way, this appraisal was DOA before it got to you.

As for the HBU, that staff reviewer better dig out their textbooks because the whole purpose of analyzing HBU in a Market Value appraisal assignment - and the reason it's required for those assignments - is to identify the basis upon which it will return that most probable price as established by the typical buyers and sellers.

This property is either worth more as an SFR with some extra land area, or it's worth more to a developer for building out that subdivision. Whichever is the more profitable use right now is the HBU of the property the way it sits right now (as improved). The dividing line for HBU is not whether construction has commenced.


This is EXACTLY the type of property that conventional residential lenders want to avoid overencumbering. There's a reason land loans are written at LTVs that cap out at 50% and have 5-year balloons.

If you want to duck out of this assignment without calling the AMCs reviewer out, you can simply decline it based on limitations on your own license. You can tell them you don't have the technical competency in appraising subdivision projects to develop an informed opinion about the HBU on this site. If the reviewer is smart they'll find a nice dark hole to hide in, too, 'cause they obviously know just enough to be dangerous.

One more thing - the "as is" value of a subdivision site IS NOT the sum of the retail value of the mapped lots after the subdivision is recorded. For that matter, neither is the "subject to" value the sum of the individual lots @ retail pricing.

In other words, unless you know how to value a subdivision properly you would have no way of knowing whether that property really is worth more with the house than without. Don't forget - one of the options is to retain the house and subdivide around it.

Last edited by George Hatch : 02-25-2008 at 10:08 PM.
  #6  
Old 02-25-2008, 10:35 PM
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David Wimpelberg David Wimpelberg is offline
 
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Quote:
Originally Posted by Jim Klos View Post
He might be right. You are reviewing a 1004 form I suppose. The report is not asking for highest and best use of the land as if vacant. Read it, it says "Is the highest and best use of the subject property as improved (or as proposed per plans and specifications) the present use.
It's asking whether or not the HBU is "as improved." If the appraiser checked yes, and HBU is not as improved, the analysis on that fact alone is not credible. The appraiser may have in fact determined something other than market value, such as use value.
  #7  
Old 02-25-2008, 10:42 PM
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probasco probasco is offline
 
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Quote:
Originally Posted by David Wimpelberg View Post
It's asking whether or not the HBU is "as improved." If the appraiser checked yes, and HBU is not as improved, the analysis on that fact alone is not credible. The appraiser may have in fact determined something other than market value, such as use value.
from what i have learned, simply checking the box never meets uspap. you need a statement (usually canned) that explains that you did in fact consider and determine hbu
  #8  
Old 02-26-2008, 02:03 AM
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PropertyEconomics PropertyEconomics is offline
 
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In fact, the 1004 is a Summary Report and the appraiser at a minimum must summarize the highest and best use of the site and the reasoning and factors which led them to that conclusion. Its all in USPAP .. the FNMA form does not meet the minimum reporting requirements for a Summary Report and meeting those requirements is mandatory to any appraiser under the jurisdiction of USPAP in accordance with SR 2.

It is entirely possible that neither the original appraiser (I dont know his license status) or the reviewer (licensed) are qualified to provide a value estimate on this property because its highest and best use may in fact be for something other than a stand alone single family residential site. At the very least its a site with entitlements for development ... and it appears that has not been addressed.
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  #9  
Old 02-26-2008, 08:33 AM
Greg davenport Greg davenport is offline
 
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Default

Quote:
Originally Posted by probasco View Post

I am doing a form 2000 review, the house on 7 acres is surrounded by new homes, some still under construction. this is the one market in the portland area that has shown declining values for the past 4 months. In doing my due diligence, I see the zoning is for 10,000 sf lots. I go by the city planner and he brings out a blueprint showing 48 new lots laid out on the subjects land, approved, ready to break ground.
Ok so you are doing a review, so you are working from data and conditions that are from the PAST. You need to tell us two very important details.
1. Date of the report under review
2. Date the new Plat map was recorded.

Did you even bother to check those two minor details?
  #10  
Old 02-26-2008, 08:44 AM
stefan olafson stefan olafson is offline
 
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I tend to agree with George Hatch on this one. Subdivision analysis, unless done properly may injure your brain! This is specialty appraising only to be completed by someone with experience in this type of work. I sat through a subdivision analysis class a few years ago and decided at the end of the class I was not competent, even after the class, to attempt this type of work.

You always have to consider HBU as if vacant and with the existing improvements. You always have to analyze and comment on HBU in a 1004 summary appraisal report, you just can't or shouldn't check the box.
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