Fee Simple v. Leased Fee

[hastalavista]

I agree, but I might say that you could not appraise the property AS-IS! Seems like a minor point. I learned that from the Santora school of appraising.

I like to think I learned a lot from the Santora School of Appraising as well... but maybe I flunked this course?
There is an as-is value of the fee simple interest even if the property is leased.
You don't need an EA or HC to value the fee simple interest in a leased property (IMO).
I'd naturally disclose that the property is leased, but I don't see an issue with the as-is part of the assignment condition.

 

[Carnivore]

I like to think I learned a lot from the Santora School of Appraising as well... but maybe I flunked this course?
There is an as-is value of the fee simple interest even if the property is leased.
You don't need an EA or HC to value the fee simple interest in a leased property (IMO).
I'd naturally disclose that the property is leased, but I don't see an issue with the as-is part of the assignment condition.

Denis, I digging deep from that school.. I think at the very minimum you have to not only disclose the lease but also the remainder(expiration) of the lease. I said earlier the Sheriff in Union County NC told the banks to take a hike. They obviously could foreclose, but they then became landlords and could not evict without cause and a court order. The district judge upheld his actions.

So disclosing a tenant to a lender is very important. I cannot see one good reason why an appraiser would not at least inform the lending client of the facts, let them decide what to do.

I might point out that there is a far more serious issue; I.E Life Estate now try and evict that person against there will.

 

[mark hurlock]

So disclosing a tenant to a lender is very important. I cannot see one good reason why an appraiser would not at least inform the lending client of the facts, let them decide what to do.

I might point out that there is a far more serious issue; I.E Life Estate now try and evict that person against there will.

According to the OP, the appraiser checked the tenant occupant box.

And they did not mention a life estate.

 

[Mr Rex]

Carnivore, do the local public foreclosure notices in the paper and at the courthouse in your area include notice to tenants? I started seeing that about 2010 around here. I'm sure there was a court case precedent set somewhere in NC, perhaps it was Union County.

 

[Carnivore]

Rex, good question and I don't know the answer to that. I never looked at one and I don't get a paper.

What is happening is that owner of record stops making payments but continues to collect rent from unsuspecting tenants. The tenants don't get the notice of pending foreclosure and the resulted eviction. The notice gives them 10 days and then the sheriff deputy shows up and theh tenants are blind sided.

Kudos to the sheriff and the judge. They did what was right. They kept the banks and property owner from trampling on the tenant rights.

Someone said above "no one said anything about life estates". I know that, I threw it in there to make a point that real property laws and rights of ownership and tenancy including Life estates are important.

If you notify the Lending Client they probably may tell you to stop work and pay you or tell you to proceed. Pretty much now you got to tell the AMC and then they pressure the appraiser to get the report in on time.

Terrell mentioned mineral rights, yep they are there. There in the bundle, apparently this fracking thing has brought that to startling reality for many land owners. They don't have any mineral rights and your crap out of luck.

 

[NLCApprMgr]

Again, thanks to everyone for posting their opinions.

The FHA guide is pretty clear that if there is a lease in place, then the property rights have to be addressed as leased fee. Check Appendix D of the FHA guide. If the property owner is receiving income from the property, then it is leased fee. They use an example of a 2-4 unit property that includes both owner-occupation and tenancy; they state the property rights are leased fee.

In my experience, if the property is vacant, this represents a fee simple estate, even if the anticipation of the most likely buyer were for renting the property to tenants. When determining property rights, the theory of anticipation is abandoned. Personally, I disagree with this momentary lapse of consistency, but you can only run head-first into a wall so many times.

As far as a leased fee analysis goes, if the appraiser determines through research that the difference between in-place and market rent is so negligible that a purchaser would not make a distinction between leased fee and fee simple, so be it. Just say that in the appraisal.

With regard to the approaches, the appraiser should follow the market. If a typical buyer would not research comparable rents in the market, then disclose that within the report to explain why the Income approach was not used. That being said, an appraiser should not use that as an excuse not to do the work. I found that Craigslist has been a pretty handy tool for finding asking rents in a market; however, those in rural areas might have a more difficult time.

 

[mark hurlock]

Again, thanks to everyone for posting their opinions.

The FHA guide is pretty clear that if there is a lease in place, then the property rights have to be addressed as leased fee. Check Appendix D of the FHA guide. If the property owner is receiving income from the property, then it is leased fee. They use an example of a 2-4 unit property that includes both owner-occupation and tenancy; they state the property rights are leased fee.

In my experience, if the property is vacant, this represents a fee simple estate, even if the anticipation of the most likely buyer were for renting the property to tenants. When determining property rights, the theory of anticipation is abandoned. Personally, I disagree with this momentary lapse of consistency, but you can only run head-first into a wall so many times.

As far as a leased fee analysis goes, if the appraiser determines through research that the difference between in-place and market rent is so negligible that a purchaser would not make a distinction between leased fee and fee simple, so be it. Just say that in the appraisal.

With regard to the approaches, the appraiser should follow the market. If a typical buyer would not research comparable rents in the market, then disclose that within the report to explain why the Income approach was not used. That being said, an appraiser should not use that as an excuse not to do the work. I found that Craigslist has been a pretty handy tool for finding asking rents in a market; however, those in rural areas might have a more difficult time.

I would not consider guidelines for a small income property to be relevant to a single family dwelling as you indicated in your OP.

Also, I do not consider it a matter of the appraiser conducting and reporting an analysis that conclusively determines a market difference between fee simple and leased fee as I would not consider an analysis of a short term lease to be relevant. The fact that it is not considered relevant is the reason the analysis is not being performed.

 

[Peter LeQuire]

I don't profess to know Appendix D as well as anybody, but the only place I read about "addressing" a leasehold interest in its "Value Adjustments" sections which say, in part -"State whether the property was sold as Fee Simple or as a Leasehold Estate. An adjustment is required if the estate differs from the rights appraised for the subject property." This applies to each of the four property types HUD for which the Appendix provides instructions.

But, assuming the appraisal is being done in connection with a GSE or HUD-related loan on a 1-4 family property, the property interest appraised is the fee simple estate. There are exceptions (locales where leasehold interests are common and marketable, for example, or an individual condo unit in a project that is on leased land). Notification of tenant occupancy puts the lender on notice that there may be a prior claim on the property, as well as providing information about whether the applied for transaction fits the lending program requirements.



From the 4150.1 REV-1 Handbook:

___________________________________________________________________________

CHAPTER 6. APPROACHES TO VALUE

6-1. GENERAL. The estimate of the market value represents an all-cash price to the seller. This assumes that typical buyers will take advantage of the most favorable mortgage financing available in order to pay the seller all cash. The estimate does not assume that the seller will finance the buyer in part or in whole by accepting a first or second mortgage on the property in lieu of cash. The estimate assumes the property in fee simple unencumbered by special assessments or ground lease. The cost of acquiring a substitute property by outright purchase, like the cost of assembling a duplicate, is an upper limit of value.

 

[David Dyal]

Leashold Estate

Here in the Panhandle of Florida, the outer barrier island is owned by the government. They lease the property on 99 year leases. It is subdivided again and again and re-leased over and over. Now that is the true leasehold estate.

 

[Ken B]

If the question is "Did the property sell in Fee Simple or Leasehold?", the question obviously regards a comparable property. I don't know about anyone else, but I have never seen a deed where the interest transferred was the Leased Fee interest. The difference between a property which sold in Fee Simple or Leasehold is that, although the property which sold in Fee Simple may be encumbered by a lease, the full bundle of rights will transfer to the purchaser upon expiration of the lease. Conversely, if the Leasehold interest was transferred to the purchaser, the interest in the property transferred eventually reverts to someone else at the end of the leasehold period.

Most appraisers never encounter a leasehold property, or, if they do, they do not recognize it. An increasingly common form of leasehold ownership is a property owned and developed by a Community Land Trust (CLT). CLTs generally develop affordable housing and sell the leasehold interest in the improvements to a qualified purchaser. As part of the transaction, the interest in the land is leased to purchaser. Generally, the lease has a starting term of 99 years. The lease payment is negliglble ($1/year). The purchaser can sell their leasehold interest in the building and transfer the lease for the land to a different qualified owner. When the improvements reach the end of their economic life, they revert to the CLT. CLTs, being a relatively unsusual creature, are becoming increasingly common in the development of affordable housing. As this housing becomes aged, appraisers will need to be very careful in their valuation, for what I would think to be obvious reasons.