Zoning and FHA

[Abester]

It does if lenders will not loan money on it as a residential property because it cannot be re-built!

My lender has no such requirement built into its contract with me. I cannot be the only one.

 

[The Warrior Monk]

Sheesh. Appraise the property, use residential sale comps with similar zoning, report the rationale for your HBU opinion and move on.

I'd be careful with that one. If the HBU of the property is not residential, then appraising it as a residential property does not result in a market value conclusion (without invoking a hypothetical condition).

In my limited experience this type of zoning is usually "good zoning" because it allows for a multitude of uses including residential.

FWIW, I've found it to be the other way around. One of the biggest reasons it that we don't have public sewage systems in this area, so sanitary flow issues are important. Many preexisting, nonconforming commercial properties have a preexisting high sanitary flow. Therefore, when the use is converted to residential, the preexisting flow may allow for higher-density development.

I can only think of a very few circumstances where a municipality would not allow rebuilding a residence because they are simply not in the business of putting people out of their homes.

In my experience, the rebuild issue typically rises when living units are not permitted in the particular zone. For example, a hamlet business district in a village may allow commercial and residential uses, but an industrial zone often does not. As a result of being in an industrial zone, the rebuild may not be permitted.

No, sir. I'm saying the inability to rebuild tomorrow does not affect the value today.

It certainly may, and I have had to deal with such issues. Many municipalites have restrictions on preexisting, nonconforming properties. For example, take the following:

• A 650 sq.ft. cottage on a residential-zoned lot.
• A 650 sq.ft. cottage on an industrial-zoned lot.

Because the first property is zoned residential, the cottage can be razed, and a 7,500 sq.ft. home can be built on the property. In the second case, because the improvements are preexisting, the dwelling can only be expanded, per zone code, by 50%. So, at best, the home can be expanded to 975 sq.ft.

Think that has an effect on value???

An that is without consideration of what happens if the dwelling is destroyed. The utility of the properties is clearly not the same.

What is the typical discount for cash rather than credit for real estate? I have not met a seller that cared from whence the buyer got the money. Are you saying that you make upward adjustments for your cash sales versus your financed sales? I have not been to that market. Please let me know where it is because I have investors in waiting.

I work in an office that has two divisions; sales and appraising. Cash makes a difference. Buyers will take a discount for an all-cash, no-contingency closing, ESPECIALLY in this market. How these things are handled depends on the particular market.

 

[The Warrior Monk]

My lender has no such requirement built into its contract with me. I cannot be the only one.

I do strictly FRTs. The lenders I work with would also lend on the property. However, it won't be at FHA rates.

 

[CANative]

Leverage makes things easier to buy. It doesn't mean someone is going to pay more (unless they're an idiot).

 

[Abester]

How these things are handled depends on the particular market.

True enough. I can't argue with you folks in foreign countries. I guess I'll start forcing those sellers to take my lower cash offers. I guess the fact that a particular use may go on for another 100 years just like it has for the past 100 years is of no consequence because, if it can't be rebuilt tomorrow, it is worth less. Or maybe the improvements are worthless. I guess I'll switch sides and go along with you folks.

I'm working on an office bulding that is grandfathered such that it does not meet the current setback requirements and was built to the lot lines. Since this building cannot be rebuilt if damaged more than 50%, I'll have to let them know that their 15 year NNN leases are worth less than those of the neighbor's property since the neighbor is in compliance with the setback requirement. I hope they are OK with that.

 

[CANative]

If the HBU of the property is not residential, then appraising it as a residential property does not result in a market value conclusion (without invoking a hypothetical condition).

An HC would be inappropriate. The problem is that the method would involve a problem with the consistent use theory (wouldn't it?)

In any case I included your caveat in my post (report the rationale for the HBU opinion. The assumption was continuation with the present use. Otherwise a residential mortgage appraisal stops at that point.)

One of the biggest reasons it that we don't have public sewage systems in this area, so sanitary flow issues are important. Many preexisting, nonconforming commercial properties have a preexisting high sanitary flow. Therefore, when the use is converted to residential, the preexisting flow may allow for higher-density development.

If the property is out in a cluster community in the boonies it's not likely that higher-density development is a likely consideration for an individual residential assignment. The Hopland Casino doesn't have access to a public sewer so it uses a 250,000 gallon "septic" system.

In my experience, the rebuild issue typically rises when living units are not permitted in the particular zone.

Extreme general plan enforcement. Pretty rare I would think.

 

[The Warrior Monk]

True enough. I can't argue with you folks in foreign countries. I guess I'll start forcing those sellers to take my lower cash offers.

We have an all cash offer going on in the office right now. Investors with cash are managing to scoop up properties before everyone else, at discounted prices. That's because sellers don't want to be dragged along for months on end with the hope the the buyer might obtain financing. I know people with high-700/low-800 credit scores being dragged through mud of ridiculous issues.

I guess the fact that a particular use may go on for another 100 years just like it has for the past 100 years is of no consequence because, if it can't be rebuilt tomorrow, it is worth less. Or maybe the improvements are worthless. I guess I'll switch sides and go along with you folks.

What happened to the present value of future benefits? Is that no longer part of the valuation process?

If you're appraising a property that whose contract rent is $100 per square foot, and market rates are $10 per square foot, are we supposed to not consider what may happen to the income stream in the future?

What may happen in the future is relevant. In the case at hand, it may very well not have the same utility as properties with different zoning (which affects current and future utility) and thus value.

 

[Abester]

I said I was switching sides. I told you I'll let them know those 15 year leases were junk because the building cannot be rebuilt. I consider myself to be quite agreeable. Also, since you're in the Hamptons, you live planets away from me. I watched the Real Housewives of New York. They may as well have been on Mars because they have nothing in common with anyone around here. Local Germans say they'll let the property "rust to a teaspoon of dust" before they'll discount their prices.

 

[Abester]

present value of future benefits

The future benefit is the ongoing use of the property, and, in the case of the imminent destruction by fire, a hefty insurance check.

 

[Abester]

If you're appraising a property that whose contract rent is $100 per square foot, and market rates are $10 per square foot, are we supposed to not consider what may happen to the income stream in the future?

I dunno. Ask Walgreens, CVS, McDonalds if they want their rents discounted to $10/sf.