H&BU - As Is Surplus Vs Hypothetical Excess Land

[Jaketnt]

Any thoughts on this one from veterans and/or peers who have had to deal with the H&BU of a property where the subdivision of Excess land was a possibility?

I am working on a 4,000 sf+ historic home built in 1921 located on a larger-than-typical lot of 19,700 sf (it is actually six 25' x 125' lots + 1/4 of a 25' X 125' lot.) The current improvements are located on the four northern lots (+ 1/4 lot), and the two southern lots (total of 6,250 sf) are vacant.

Originally, I was not aware of the possibility of Excess land, because I assumed (and assumed incorrectly!) that the improvements were built in the middle of the lot or that each individual lot was supporting the current improvements.

Sales of homes in similar condition but with lots of only 8,000-12,000 sf have sold anywhere in the $1.5MM to $1.9MM ballpark approx. I need to determine how much does the extra surplus land contribute to the value of the subject.

Hypothetically, a potential 6,250 sf subdivided lot could command $800K-$1MM (based on other neighborhoods) mainly due to the high-end central historic location where land is not available. However, it would be necessary to go through the zoning department AND landmark preservation board to be able to get approval for the subdivision. The remainder of the land (13,450 sf) and the existing home could be appraised with its own H&BU by using some of the comps that I mentioned above.

Is the best approach to this problem to figure out the value of the property "As Is" with the surplus land and compare that value with the hypothetical value of the existing home with the remainder of the land PLUS the value of the new subdivided lot (Aggregate value)? The way I see it, whichever yields the highest value that is the H&BU of the property right? Also what if the current buyers in the market area prefer and are more interested in purchasing the home with the larger lot so that they can add a pool or have other uses of their own land instead of buying the property with the intent of subdividing and selling off or developing the extra 6,250sf lot?

And finally, can you pull off all of the above on a 1004 URAR?!

Thank you for reading and for your input on this one. Let me know if I'm forgetting to mention something or if I need to clarify something further.

 

[Michigan CG]

Are the two southern lots legally buildable? Does the zoning for the property allow a 50-foot wide parcel and a total area of 6,250 SF?


Does the additional land contribute $800k-$1M value to the subject property or is it less? If the possible excess land is worth more by itself than it does as-is, and it is legal to build on it then you may have excess land which could have its own separate highest and best use.


Is there demand in the area for vacant land?


I think the best approach to the problem would be to tell the client the report will be delayed a week until you get answers from the powers that be. Will the zoning department and the landmark preservation board approve the subdivision? If not then the land is not (excellent) exces but rather (sucky) surplus.


Until the above questions are answered I don’t think you can complete the report without using EAs or HCs.


Can all of the above be put on a 1004? Yes.


If it is determined you have surplus land then it is easy. If you have excess land then the following e-mail discussion I had with a lender last year might be of help to you. This e-mail was about two separate parcels but it is still the same topic.

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Mr. XXXXXX,

The appraisal process requires a Highest and Best Use analysis. By including both parcels as the subject property (hypothetically as one) there is a problem in that the second parcel (unimproved) has a separate Highest and Best Use as it is a buildable parcel. The fourth test of Highest and Best Use is what is the Maximally Productive use of the land and the answer for the second parcel would be for single-family development separate from the first parcel. Naming both parcels as the subject would force the appraiser (if they are doing it correctly) to mark the NO box on the 1004 form.

Marking the YES box for Highest and Best Use would be ignoring the second parcel's Highest and Best Use and appraisers have been sanctioned by states for doing that.

I understand that many appraisers just add the two together, however that is not correct, acceptable appraisal practice.

USPAP has a FAQ on this subject.

FAQ 211: APPRAISING TWO LOTS AS ONE

QUESTION: I have a lender client that wants a market value appraisal completed. The property consists of tow separate legal lots. The highest and best use for each of these lots is as a separate one-unit residential site. However, the client want them appraised as though they were one legal lot. The intended use is for mortgage lending purposes.

May this assignment be completed treating these two lots as if they were one legal lot with the highest and best use as one legal lot?

RESPONSE: Yes. However, complying with the lender's request will require the use of a hypothetical condition. If the client is a federally regulated financial institution, the client may also need an "as-is" appraisal.

If the appraisal were based on a hypothetical condition (i.e. market value of the subject as if it were a single lot), and if necessary for credible results, the appraiser would have to develop an opinion of highest and best use of the hypothetical parcel. If this leads to the conclusion that the highest and best use would be subdivision into tow or more lots the appraiser must perform the appraisal recognizing that potential use and may need to perform a subdivision analysis to reach a credible opinion of the highest and best use of the hypothetical parcel.

========================

There are two opinions on how to handle the situation at hand. The first group think is that there has to be two separate appraisals while the second group think is that the value of the second parcel can be included in an addenda of the home appraisal although the value of the second cannot be added to create a final number; this is essentially two reports in one.

It is my opinion that both values can be put in the same report (option #2).

There was a discussion about this topic on the Appraiser's Forum and Denis Desaix MAI, SRA wrote the following:


Reporting two values (two appraisals) in a single report doesn't seem to be an issue as I see it.
The problem is adding the two values together to represent market value of the whole; it assumes there is no bulk discount.

If I am purchasing a house to live in and included in that sale is a separate lot, I'm likely not going to pay retail price for that 2nd lot. I'm going to discount it (especially if my intent is to sell it as soon as the deal closes; I'm going to consider my selling costs of the 2nd lot as well as any holding costs during the period).

For GSE purposes, here is what I think would be a compliant process:
1. Use the majority of the form to identify the improved lot. Report that in the form-box as the value.
2. Include an addendum which values the vacant lot; this will include everything that is necessary to appropriately support and report that value.
3. If they want retail value, they have it in the two separate values.
4. If they want a bulk value, that could be reported as well (in the addendum... not on the form's value indication which, according to my process, would only reflect the improved site). The bulk value would consider what I mentioned as well as other items.

 

[Jaketnt]

Hello ,
Thank you for the reply and for providing a portion of the email discussion with lender, the FAQ 211, and Denis Desaix's comments.
In response to your questions.

1) Are the two southern lots legally buildable? Does the zoning for the property allow a 50-foot wide parcel and a total area of 6,250 SF?
Everything so far seems to indicate that they are legally buildable as long as the width is at least 50 ft. As a matter of fact, most homes on the subject street and other adjacent streets have 50' x 125' or 75' x 125' lots.

2) Does the additional land contribute $800k-$1M value to the subject property or is it less? If the possible excess land is worth more by itself than it does as-is, and it is legal to build on it then you may have excess land which could have its own separate highest and best use.
I still need to determine this, but I have a feeling that the additional "surplus" land might contribute less than the value of the separate 6,250 sf with its own H&BU.

3) Is there demand in the area for vacant land?
There appears to be a strong demand for lots in the 6,000 to 7,000sf in other adjacent neighborhoods within a 3-mile radius from the subject, with DOM ranging from a few days up to 90 days approx.
This subdivided lot would be worth at the very least $500,000 worse case scenario.

4) I think the best approach to the problem would be to tell the client the report will be delayed a week until you get answers from the powers that be.
Will the zoning department and the landmark preservation board approve the subdivision? If not then the land is not (excellent) exces but rather (sucky) surplus.
This is a private deal, client inherited the home (3rd generation owner). According to preliminary communication between zoning & landmark historic preservation and an interested party (broker/developer), as long as lot frontage is at least 50ft along the subject street, the new building does not overwhelm the existing home in scale/design and conforms with guidelines for new buildings in the historic district.

Until the above questions are answered I don’t think you can complete the report without using EAs or HCs.

Can all of the above be put on a 1004? Yes.

If it is determined you have surplus land then it is easy. If you have excess land then the following e-mail discussion I had with a lender last year might be of help to you. This e-mail was about two separate parcels but it is still the same topic.


There are two opinions on how to handle the situation at hand. The first group think is that there has to be two separate appraisals while the second group think is that the value of the second parcel can be included in an addenda of the home appraisal although the value of the second cannot be added to create a final number; this is essentially two reports in one.
It is my opinion that both values can be put in the same report (option #2).
I also thought that option #2 was the most feasible in this situation, where the majority and bulk of the 1004 is used to arrive at the value estimate of the improved lot and a separate addendum within the body of the report can address the value estimate of the new 6,250sf subdivided lot and everything needed to support its value.

However, shouldn't I have to report three values:
i) An as-is value with the surplus land
ii) Value estimate of the house with the remainder of the land after subdivision
iii) and the value of the new subdivided lot

if i) is greater than both, ii) and iii), with consideration given to the discount required by the bulk value, then the H&BU is as-is with surplus, but if the value of as is is less than the value of ii) and iii) less the bulk discount, then the H&BU is the
subdivision of the current property into two separate properties. Does that make sense or am I missing something? I guess what I'm trying to say is do I prepare a report that illustrates why the most maximally productive use is i) and not ii) + iii) or viceversa.

Thank you for your help Sir!

 

[gregb]

What are the purpose(s) and intended use(s) of the appraisal? Understanding these would guide one to answering the questions posed as i) ii) and iii).

 

[Meandering]

Because you refer to the subject as having different "lots", are these lots existing, as in an old subdivision, or are these lots proposed for a new subdivision?

If they are from an older subdivision, there may be some grandfathering that should be considered. If not yet subdivided, the costs of getting the approvals + any projected requirement for sidewalks, curbs, sidewalk/driveway let down requirements, blah, blah should be weighted against projected resale price. Sometimes it looks good, at the start, but that feasibility analysis will change your mind.

.

 

[Jaketnt]

What are the purpose(s) and intended use(s) of the appraisal? Understanding these would guide one to answering the questions posed as i) ii) and iii).

Hi Greg,
The individual who inherited the property lives out of state, and neither him nor the siblings/close relatives are interested in keeping or buying the property.
The purpose for the appraisal would be to determine the current market value and use that as a benchmark for listing price and/or negotiating with buyers interested in buying the property.

 

[Jaketnt]

Because you refer to the subject as having different "lots", are these lots existing, as in an old subdivision, or are these lots proposed for a new subdivision?

If they are from an older subdivision, there may be some grandfathering that should be considered. If not yet subdivided, the costs of getting the approvals + any projected requirement for sidewalks, curbs, sidewalk/driveway let down requirements, blah, blah should be weighted against projected resale price. Sometimes it looks good, at the start, but that feasibility analysis will change your mind.

.

Hi Marion,

The subject site was originally formed as the combination of 6 and 1/4 lots, so they are from the old subdivision dating back to 1921 probably.
You do have a good point regarding the requirements compared against the projected resale, that something that I should consider.

 

[KHS445]

Because you refer to the subject as having different "lots", are these lots existing, as in an old subdivision, or are these lots proposed for a new subdivision?

If they are from an older subdivision, there may be some grandfathering that should be considered. If not yet subdivided, the costs of getting the approvals + any projected requirement for sidewalks, curbs, sidewalk/driveway let down requirements, blah, blah should be weighted against projected resale price. Sometimes it looks good, at the start, but that feasibility analysis will change your mind.

.

What Marion said. Plus time to accomplish everything and all of the costs involved in selling a second parcel of land. It may be one of those deals where you tell the client the house and 4+ lots are worth $1,000,000 and the vacant 2 lots are worth $500,000 when completely freed up and available for immediate sale/development. However, to free up those two lots is going to cost $100,000 in legal, permits and various fees and will take a minimum of one year to accomplish, then you will have XX number of DOM and another $50,000 in seller related closing costs. So maybe the 2 vacant lots are only worth $300,000 if stand alone and maybe only add $200,000 incremental value to the existing dwelling and 4+ lots. Give your client the benefit of your knowledge and a well thought out breakdown of your analysis valuing the house & 6+ lots, the house & 4+ lots and two lots "as is" contributory value, then the house & 4+ lots and the "as projected" value of the 2 lots once they are ready for immediate sale and development. Let the client decide if they want to sell potential or shovel ready.

Personally I would use a narrative format, just because of all the moving parts. You could probably use the a 1004 form (non-lending), but I might consider breaking it down into three reports, each of which would refer to and include the others by reference. First would be "as is" for the house and 6+ lots. Then would be for the house and 4+ lots and lastly would be a vacant land form for the 2 vacant lots valuing them both "as is" and ready for immediate sale/development. You will have to do the same amount of analysis anyway so why not show your work.

 

[Carnivore]

Hi Marion,

The subject site was originally formed as the combination of 6 and 1/4 lots, so they are from the old subdivision dating back to 1921 probably.
You do have a good point regarding the requirements compared against the projected resale, that something that I should consider.

In the early 1900 hundreds it was not uncommon to have residential areas subdivided in small lots as low as even 15-25 ft lots street frontage. This was done in the small towns all round the nation. The purpose was pretty smart when you think of who was going to live in these small town. Think of a small pond with a few large fish and many small fish. So if a person wanted to build a housei n town he could buy the number of lots he needed but not more than needed to build. Outside of these towns and villages was farmland or just vacant land. There was no such thing as a suburb.

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OK, i have one issue with your valuation problem as you have described. "I am working on a 4,000 sf+ historic home built in 1921 located on a larger-than-typical lot of 19,700 sf (it is actually six 25' x 125' lots + 1/4 of a 25' X 125' lot.) The current improvements are located on the four northern lots (+ 1/4 lot), and the two southern lots (total of 6,250 sf) are vacant."

I suggest before you go though all these Gyrations with the owners is you first must determine what "Historic Home" actually means to your Valuation Problem. If this property is registered with a Historic Society of some sort: https://www.nps.gov/subjects/nationalregister/index.htm

The reason I am bring this up may help you solve just what you can or can not do. Its very possible that you don't have excess or surplus property. In other words the owners may not be able to severe any portion of the total property because of some Historical Society Agreement that may limit the Use of this Subject site.

Just a thought to consider.

My second thought/recommendation is this/ Abandon the FNMA Series Format. Go with a some other format. Either complete Narrative or a mix and match of GP or AI Forms for grids pages and photo addendum.

Again get rid of any reference to lending if that is NOT the purpose and intended use of the Appraisal report.

 

[nstanbru]

Do these lots have separate parcel numbers? If all the lots are under one parcel number, you also need to consider a parcel split for your hypothetical.