Hagar's Take on HBU and Highest Value in Working RE

[Terrel L. Shields]

Trying to decipher Richard Hagar’s article in Working Real Estate (Fall 2025) – I have a paper copy but I think you can read on line. The title is “Highest and Best- and the Highest Value”. He discusses a few of the basics of HBU but his main theme (based on a simple example of a SFR on a site zoned for Multi-family) is that a property with a different zoning may, in fact, not meet the HBU test of “most profitable” even when the existing dwelling contributes value to the value “as if vacant”.

I am not disputing his example, but I have questions. His example is a $300,000 lot with a house worth $50,000. The savvy buyer buys anyway, tears down the perfectly serviceable house and builds a fourplex whose rents will far exceed the rents of that old SFR. That's the 'most profitable' use. Yes, that happens but how does the appraiser anticipate that will honestly happen? The buyer might still live there anyway, or remodel for a more modern look or even an addition. Who among us hasn’t encountered homes with a beaucoup of functional obsolescences, but happily lived in by the owners?

The rub, as Shakespeare might say, is how can we as appraisers anticipate the minds of a future buyer? What if the house is an interim utility until the buyer thinks it has 'ripened' into its HBU? What if merely holding waiting to flip in a better market? I mean anyone here savvy enough to buy almost anything in 2010-11 could have doubled, tripled or more their investment by doing nothing but waiting 10 years.

Comps tell us what similar property might bring but can we really be expected to anticipate what will be done post-closing unless the buyer says so? Next, is it not true that even if zoning is SFR, one could argue that tearing down a house of any age and replacing with a new structure would be a higher and better use of a site? In other words, the moment a property depreciates by one dollar, i.e- it is worth less than if the “ideal” (new) improvement would replace it. You might have to think on that one.

Next, zoning itself. I work some small towns with no zoning. I work some with only vague zoning – R is residential, C is commercial, I – industrial and not much else. But most will have R1 for SFR, R2 might be 2-4 units, or they might call it RM2 and apartments as RM3. In fact, sometimes the zoning classifications can be numerous. RE – executive estates over 2 acres; R1a- SFR on lots less than 5,000 SF; R1b- SFR with lots between 5,000 – 15,000 SF; R1c- lots between 15,000 SF and 2 acres. And, of course, lots of towns are now mandated to allow so many manufactured homes in the city and allowing (or requiring) cities to accommodate ADUs. And some towns have such a myriad of “zones” it finally became so overwhelming that they are revamping the zoning classifications. How does the appraiser anticipate that?
The map below is all residential. How many classifications do you see?

And “allowable” uses might say that a church or daycare can exist on R1b and R1c but not on RE lots or R1a lots. Or, worse, you can ask for variances and likely to get them. So, what’s the point of zoning if you can merely apply and get a variance? I mean how is the appraiser supposed to anticipate that???

I am not criticizing Hagar's article. I am simply pointing out that we don't always get such simplified analysis as he describes. It is far more nuanced. And, frankly, we are wading in deep weeds when we try to project what the "typical" buyer would do in the situation where the use and zoning differe, when we don't know what they will do. And few buyers want to show their hand before the deal is closed.

 

[George Hatch]

Either the parcel is worth more in the market for its land value or it's worth more in the current configuration. Fretting about what the most profitable GLA and paint colors and type of flooring might be in a finished product is pointless by comparison. We are doing HBU analysis in order to figure out who the typical buyer will be so as to identify what the dominant unit of comparison and which sales share that attribute.

As for potential changes to zoning and such after the fact, that question speaks to the assumptions a potential buyer can reasonably make in the here and now. Usually limited to WYSIWYG in the current zoning and development criteria. Not what could happen if a genie popped up and gave a property owner an unearned wish.

If I'm appraising a property with development potential I can support the existing criteria I can see. I can't support a bunch of speculation beyond that point. Besides, if there is a trend for variances the other properties being used for comparison will be subject to that same trend so my comparison is still between apple vs apple..

 

[Terrel L. Shields]

I can't support a bunch of speculation beyond that point.

That's my concern. How am I to know what the buyer might do? I mean I saw a couple of houses that were not even 5 years old get torn down. One because a Walmart Warehouse was built next door. The new owners redeveloped it into a restaurant. That failed a few years later. Then another, then it became a mower and tractor dealer which lasted maybe a year. Vacant currently.

To me, "as is" means exactly that, I am not making a hypothetical guess as to a future use.

 

[George Hatch]

What does it matter what any particular buyer would do? We're not brokers and our definition of value doesn't parallel their "one special buyer for this one special property". We are in search of the prevailing trend, not the outliers.

One aspect of HBU that I seldom see comment on is what happens when the property is worth the same as land value as in its current condition. We can call those a wobbler. It could go either way in a listing/sale scenario. What then? Or when the REL is obviously limited in duration given the prevailing redevelopment trends.

The financing for an existing SFR is generally quite different than what is available for a redevelopment acquisition. The potential loss factors for leaving an existing use to continue on is different than for a redevelopment project. Then we can get into forecasting REL which is an economic construct, not solely a measure of physical depreciation. Avg condition SFR might already be at the end of its overall economic life.

My point being that sometimes the value conclusion itself isn't always the most relevant factor in a client's decision making.

 

[Elliott]

Be wary of anyone who 'sets up' a HBU analysis with their self-selected facts. It is kind of like John Lenon sang, "Now they know how many holes it takes to fill the Albert Hall.

A big city appraiser once came to a small Oregon town and there was an old elementary school they were to appraise. Now the zoning only allowed 'public use.' The property 'could' be made into four residential lots and that's how the appraiser valued it. What was his basis for changing the HBU zoning to residential? He asked a planner, "Is it possible that the zoning could be changed?" The planner said, "Well, I guess anything is possible." The property has sat for 20-years because of the disagreement in value between the city, its use, and the school district. The asbestos mitigation has consumed all its 'appraised value.' And so it sits, but it has a HBU.

 

[RCA]

Trying to decipher Richard Hagar’s article in Working Real Estate (Fall 2025) – I have a paper copy but I think you can read on line. The title is “Highest and Best- and the Highest Value”. He discusses a few of the basics of HBU but his main theme (based on a simple example of a SFR on a site zoned for Multi-family) is that a property with a different zoning may, in fact, not mee

I couldn't find the title you were referring to in WRE. Did you mean his January article "The Attack on Single-Family Zoning?"

I had ChatGPT parse the article, translate it into Prolog (Logic Programming) and report imperfections in Logic. There is a long list. Here we go:

ME: First, do you see any logic imperfections in the logic of the article?

ChatGPT said:​

ChatGPT: "Yes, Bert — quite a few logical and empirical imperfections exist in Richard Hagar’s article, even though his narrative coherence is strong.
Below is a formal, multi-section critique analyzing the structure of his reasoning, consistency of inference, and empirical support.

---

1. Category Confusion: “Single-Family” as Preference vs. Policy​

Claim: “Most Americans want single-family homes; therefore zoning that restricts them is contrary to public desire.”
Logical issue:

• The article conflates observed prevalence with revealed preference. The Census data (73.6 % SFH) describe existing stock, not necessarily aggregate demand in constrained markets.
• Housing mix is jointly determined by supply restrictions, infrastructure, land cost, and policy. A high share of SFH units may reflect zoning constraints rather than pure consumer preference.
  Result: A post hoc ergo propter hoc fallacy—treating prevalence as proof of intrinsic desirability.

---

2. Historical Analogy Fallacy​

Claim: “Harlem and early-20th-century unzoned cities show that mixing uses destroys neighborhoods.”
Logical issue:

• The causal mechanism (multi-family adjacency → decline) is asserted without controlling for racial segregation, macro-economic shocks, or transportation shifts that actually drove Harlem’s demographic change.
• It generalizes a unique historical period (industrial urbanization) to modern planning contexts with building codes, setbacks, and environmental standards.
  Result: Weak analogical reasoning—false historical equivalence.

---

3. Selective Causality on Property Values​

Claim: “Multi-family next to single-family lowers the SFH’s value.”
Problems:

• Empirical studies are mixed: some find no effect or even positive spillovers when multi-family is well-designed and amenity-adjacent.
• The author ignores reverse causality: multi-family is often built in already lower-valued areas, producing correlation without causation.
• He also omits transition dynamics—temporary value dips followed by stabilization as neighborhoods densify.
  Result: Overgeneralization from anecdotal valuation experience.

---

4. Infrastructure and Cost Oversimplification​

Claim: “Higher density will overwhelm utilities, raising costs and taxes.”
Issues:

• Neglects economies of scale: in many systems, per-capita infrastructure costs decrease with density.
• Ignores developer impact fees and phased capital-recovery mechanisms that often finance upgrades.
• Treats capacity as static when modern utilities plan multi-decadal expansion cycles.
  Result: One-sided inference—plausible locally, but not universally true.

---

5. Affordability Paradox Mischaracterized​

Claim: “Upzoning increases prices and hurts the poor.”
Counterlogic:

• In the short run, redevelopment may raise site value, but in the long run, increasing total unit supply generally reduces equilibrium rents.
• Economic literature (e.g., Gyourko & Molloy 2015; Been et al. 2019) shows that restrictive zoning drives higher regional housing costs; loosening it tends to improve affordability over time.
  Result: Temporal fallacy—confusing transitional price turbulence with steady-state outcomes.

---

6. Financial-System Threshold Misinterpretation​

Claim: “Changing zoning to 5+ units converts the lot to a commercial lending track.”
Flaw:

• Zoning potential ≠ property classification. Lenders and appraisers categorize by actual use or intended use, not merely legal potential.
• A single-family house on a multi-family-zoned lot still qualifies for a standard residential mortgage.
  Result: Category error—mixing use zoning with loan underwriting classes.

---

7. Local-Control Idealization​

Claim: “Zoning decisions should remain purely local; state intervention is undemocratic.”
Issues:

• Local control can entrench exclusionary patterns (racial, economic). State and federal overrides historically corrected such externalities (e.g., Fair Housing Act).
• The U.S. Constitution’s Tenth Amendment allows state police power; it is not inherently anti-democratic for the state legislature to regulate land use.
  Result: Normative bias framed as constitutional necessity—appeal to tradition.

---

8. Cherry-Picked Legal Quotation​

He quotes early Supreme Court dicta about “monopolizing the rays of the sun” to imply perpetual judicial hostility toward multi-family housing.

• The quoted case (Village of Euclid v. Ambler Realty, 1926) upheld zoning but did not establish a constitutional hierarchy privileging single-family use forever.
• Subsequent jurisprudence treats zoning as modifiable under rational-basis review.
  Result: Quotation fallacy—extracting early 20th-century rhetoric as timeless doctrine.

---

9. Unsupported Quantification​

Examples like “25 % of housing cost is due to government fees” or “appraisal fees will double” are presented without sources or variance bounds.
Result: Argument from assertion—statistical claims without evidence or confidence intervals.

---

10. False Dichotomy and Strawmen​

The article sets up binaries:

• Local vs State → ignoring possible cooperative regional planning.
• Single-family vs Multi-family → ignoring middle housing (duplexes, triplexes, courtyard clusters).
• Preserve values vs Destroy neighborhoods → neglecting incremental-density design.
  Result: Over-polarized framing that precludes nuanced policy options.

---

11. Circular Normative Reasoning​

He concludes that officials suffer from the Dunning–Kruger effect because they disagree with him—an ad hominem substitute for evidence.
Result: Rhetorical flourish, not logic.

---

12. Net Evaluation​

Dimension	Logical Soundness	Empirical Support	Normative Transparency
Historical premises	Weak (false analogy)	Low	Moderate
Economic mechanisms	Partial	Mixed/contested	Moderate
Legal interpretation	Flawed (selective)	Outdated	Low
Policy prescriptions	Internally coherent	Weak evidence	Clear bias toward SFH preservation

---

13. Conclusion​

Richard Hagar’s essay is a coherent advocacy piece, not a logically rigorous policy analysis.
Its argument chain contains multiple category errors (zoning ≠ use ≠ loan class), temporal confusions (short-run vs. long-run effects), and unsupported empirical leaps (density → infrastructure failure → cost increase).
Nevertheless, it can be fruitfully modeled in Prolog—as you have begun—to test those causal links explicitly. Formalizing the logic reveals where assumptions must be parameterized or probabilistically weighted rather than treated as axioms.
If you wish, I can now show how to annotate each of those weak inferences as defeasible rules (using :– with confidence levels or argument weights) to create a non-monotonic reasoning version that mirrors the article’s rhetorical uncertainty. Would you like me to do that next?

 

[RCA]

Yes. This is the new world we live in.

 

[RCA]

Note, that last comment under "13. Conclusion" is referring to the Prolog code it created to represent the logic in Hager's article. If you want, I can provide that.

 

[RCA]

We can go back decades to have various articles analyzed. Stupidity can be exposed, or in any case lack of perfection.

Is such AI always right? No. It can have misconceptions.

Nonetheless, it is juicy stuff.

 

[RCA]

I will add, that ChatGPT generated initial Prolog code to execute Hager's logic, but then corrected the logic imperfections through a second set of code.

So, consider, articles and diagrams (such as floorplans) can be converted AND corrected to create actual executable code that has value and can be monetized one way or another. Interesting. But in this case, I feel I am relying more on ChatGPT than Hager.