Bad advice from Fannie--"Multiple Parcels" from Dec. 2019 'Appraiser Update'

[George Hatch]

The reason I don't like their solution is because if Fannie is willing to do a 95% loan on a vacant parcel then they should just exercise their discretion and do that; not ask the appraiser to mischaracterize the market value of that parcel to the typical buyer for that parcel. If they want to take the additional parcel (without any appraisal at all) as an abundance off caution then they should do that. Underwriting and lending decisions are their call. Appraisers are just supposed to observe/report.

There is zero overlap between the buyers of an existing SFR and a vacant parcel. They're completely different market segments, they (usually) have completely different supply/demand situations and they're normally subject to very different financing terms.

Appraiser submits a single value for both, borrower sells the vacant parcel for the value that's attributed to it and finds out later that wasn't actually the MV of that parcel. That is not a good plan.

 

[Overimprovement]

Oh, my. Flat-out...NO.

You would lump-together these 2 properties and appraise as a single-whole for mortgage lending?:

Two parcels, side-by-side, one owner. The market value of the LAND for EACH parcel is $350K.

One parcel is SFR improved and is conforming in all important respects. The vacant site is ready for development. The market does NOT combine the two as though one. QUESTION: For a mortgage refinance, you would combine the two as though one and offer a single opinion of market value? If YES, you would have to "X" the NO box to the question on page 1 of the Fannie report form that asks (paraphrasing here) "Is the H&BU as improved the current use?"

Does the client (Fannie) or purpose (mortgage lending) really define this issue at hand? Would it matter if the borrower simply wanted a non-mortgage related appraisal? Doesn't Fannie get to dictate what they want to lend on?

I understand the angle from which you are coming on this, I really do, but let me try to show my perspective.

If a private owner asked you to do a narrative appraisal on two adjacent vacant lots, both ready to build on, zoned the same, bought separately, but just happen to be owned by the same person today, but they just wanted them both valued together on one report---would you be able to do this? Not asking if you would want to do it, just if you were able?

Now if the answer is no, please explain why.

If the answer is yes, then we at least are in the same hemisphere.

Now, if you answer yes, my contention is that it is certainly possible, and not in violation of any USPAP or general appraisal guidelines. It then simply becomes a problem of fitting a square peg appraisal problem into a round hole 1004 form. Since Fannie created the 1004 form, I think they have a little latitude in telling us how they want it filled out.

 

[J Grant]

We're talking about appraisal principles, H&BU analysis, and proper methodology...and you're going off on a tangent .

Lol, it was your tangent ( the market does not combine the two as one -)

A number of my posts addressed appraisal principles, H & BU analysis....you disagree with my viewpoint on it which is okay. A number of people see it as you do, a number see it as I do. These assignments do not come along that often and appraisers can decline them easily .

 

[Overimprovement]

The reason I don't like their solution is because if Fannie is willing to do a 95% loan on a vacant parcel then they should just exercise their discretion and do that; not ask the appraiser to mischaracterize the market value of that parcel to the typical buyer for that parcel. If they want to take the additional parcel (without any appraisal at all) as an abundance off caution then they should do that. Underwriting and lending decisions are their call. Appraisers are just supposed to observe/report.

There is zero overlap between the buyers of an existing SFR and a vacant parcel. They're completely different market segments, they (usually) have completely different supply/demand situations and they're normally subject to very different financing terms.

Appraiser submits a single value for both, borrower sells the vacant parcel for the value that's attributed to it and finds out later that wasn't actually the MV of that parcel. That is not a good plan.

OK--scenario. Lot 1 with home is valued at $100,000 (eastern KY here, not SoCal ) Lot 2, adjacent, IF sold by itself, perhaps valued at $15,000.

The way I read it, Fannie is NOT asking the appraiser to value them both at $115,000, and report that. They are asking the appraiser to value the home, and what the typical market participant would value the vacant lot next door IF it came with lot 1--a package deal. Maybe most would value it simply as surplus land. Doubtful most would, in their minds, ascribe to it its full nominal market value of $15,000.

So lets say the value in place (to use their verbiage) for the vacant lot as determined by the appraiser is $7,000, and the total market value is then $107,000, with a clear description of how this was obtained. Where is the real issue in doing this?

 

[George Hatch]

Does the client (Fannie) or purpose (mortgage lending) really define this issue at hand? Would it matter if the borrower simply wanted a non-mortgage related appraisal? Doesn't Fannie get to dictate what they want to lend on?

I understand the angle from which you are coming on this, I really do, but let me try to show my perspective.

If a private owner asked you to do a narrative appraisal on two adjacent vacant lots, both ready to build on, zoned the same, bought separately, but just happen to be owned by the same person today, but they just wanted them both valued together on one report---would you be able to do this? Not asking if you would want to do it, just if you were able?

Now if the answer is no, please explain why.

If the answer is yes, then we at least are in the same hemisphere.

Now, if you answer yes, my contention is that it is certainly possible, and not in violation of any USPAP or general appraisal guidelines. It then simply becomes a problem of fitting a square peg appraisal problem into a round hole 1004 form. Since Fannie created the 1004 form, I think they have a little latitude in telling us how they want it filled out.

I do multiple values for multiple parcels in the same report all the time.

 

[George Hatch]

OK--scenario. Lot 1 with home is valued at $100,000 (eastern KY here, not SoCal ) Lot 2, adjacent, IF sold by itself, perhaps valued at $15,000.

The way I read it, Fannie is NOT asking the appraiser to value them both at $115,000, and report that. They are asking the appraiser to value the home, and what the typical market participant would value the vacant lot next door IF it came with lot 1--a package deal. Maybe most would value it simply as surplus land. Doubtful most would, in their minds, ascribe to it its full nominal market value of $15,000.

So lets say the value in place (to use their verbiage) for the vacant lot as determined by the appraiser is $7,000, and the total market value is then $107,000, with a clear description of how this was obtained. Where is the real issue in doing this?

Because a knowledgeable buyer would understand that is not the MV of those two parcels (aka the subject).

And because 95% of $115k is $109,750, whereas 95% of the house by itself is $95k and because that same lender probably wouldn't even do a land loan on the $15k parcel at any LTV, much less a 95% LTV.

By contrast, if the appraiser expresses 2 separate values and the lender decides to do 95% on both then that's a lending decision, not an appraisal decision being used to provide cover for that lending decision.

Further, if the lender wants to use some form of Use Value then the value conclusion should be called that, not mischaracterized as the MV for the subject.

 

[J Grant]

The reason I don't like their solution is because if Fannie is willing to do a 95% loan on a vacant parcel then they should just exercise their discretion and do that; not ask the appraiser to mischaracterize the market value of that parcel to the typical buyer for that parcel. If they want to take the additional parcel (without any appraisal at all) as an abundance off caution then they should do that. Underwriting and lending decisions are their call. Appraisers are just supposed to observe/report.

There is zero overlap between the buyers of an existing SFR and a vacant parcel. They're completely different market segments, they (usually) have completely different supply/demand situations and they're normally subject to very different financing terms.

Appraiser submits a single value for both, borrower sells the vacant parcel for the value that's attributed to it and finds out later that wasn't actually the MV of that parcel. That is not a good plan.

Fannie is not asking appraiser to mischaracterize the market value of the vacant parcel...if appraiser does that it is their own lack of competence, not an instruction from fannie.

There is some overlap of buyers for these properties, I have seen it in my area transactions. Buyers will purchase a house along with an adjacent vacant build able site. Why are the two interests mutually exclusive? The borrower gets to live in the house and hold the lot for future appreciation. Or, they can build a house on the vacant lot and move in to it, and sell the older house. Or they can build a spec house on the vacant lot and sell it. (mortgage would be paid off or restructured at that time.

It is a good opportunity for a particular set of buyers. True, it is a limited niche of buyers but then again there are a limited number of properties like this in most markets. .

 

[Overimprovement]

Because a knowledgeable buyer would understand that is not the MV of those two parcels.

Perhaps not if purchased separately, but if purchased together...

This is really not different than a developer purchasing 5 $30,000 lots together for, say $125,000, and thus getting a discount for purchasing them together. An appraisal which showed the lots valued individually at $30,000 but together at $125,000 would be a reasonable report, IMO.

 

[George Hatch]

You're referring to the market value of the assemblage under bulk sale conditions. And not using conventional financing terms and rates. Of course, at that point your best comps would consist of other assemblages being purchased by whichever types of buyers would engage in such transactions and pursuant to their motivations.

The irony here is that it's actually easier to do it the right way, and to express separate values for each. That is, it would be for those appraisers (like you, I'm sure) who actually use land sales data in support of your site values in your CA. Because IRL the MV of an SFR on a single parcel of 30,000sf is (often) different than the MV of an SFR on a 15,000sf lot + the value of another developable 15,000sf lot.

 

[J Grant]

OK--scenario. Lot 1 with home is valued at $100,000 (eastern KY here, not SoCal ) Lot 2, adjacent, IF sold by itself, perhaps valued at $15,000.

The way I read it, Fannie is NOT asking the appraiser to value them both at $115,000, and report that. They are asking the appraiser to value the home, and what the typical market participant would value the vacant lot next door IF it came with lot 1--a package deal. Maybe most would value it simply as surplus land. Doubtful most would, in their minds, ascribe to it its full nominal market value of $15,000.

So lets say the value in place (to use their verbiage) for the vacant lot as determined by the appraiser is $7,000, and the total market value is then $107,000, with a clear description of how this was obtained. Where is the real issue in doing this?

Why would the value of the vacant lot be 7k and not 15k? The vacant lot is still build-able and can be made avail for sale separately - if and when that happens, why would it be worth less than other similar vacant buildable lots?

It does not become surplus land simply because it is conveying with a house and lot in a transaction.

There are cases in RE when assemblages make the parts worth less but imo this is not one of them .