An Open Letter to Fannie Mae RE: multiple parcels

[Terrel L. Shields]

HUD/FHA has the correct approach to solving the problem

By ignoring the second lot? Sure, but why would FHA not a take mortgage of that second lot (they will) but ignoring the value thereof. They basically are asking for a partial estate valuation. The deed says 2 lots. FHA says value one lot with improvements, ignore the second lot, but BTW, we'll take the mortgage on the total property found in the deed. It works but certainly keeps the borrower from borrowing the maximum LTV of the property.

 

[CANative]

Ignoring it? Hardly.

From the old handbook (4150.2 Ch. 4)

4-4 UNIQUE PROPERTY APPRAISALS
Appraisers are sometimes faced with unique properties: a log
home, an extra small home, lower than normal ceiling heights,
etc. Eligibility of these properties depends on whether or not
the property is structurally sound and readily marketable. If a
property meets these criteria, the appraiser estimates market
value. However, depending on the uniqueness of a property, the
final determination to accept or reject the property is made by
the lending institution's underwriter.

Excess land is another area in which to exercise caution. Land
is considered to be excess if it is:

o larger than what is typical in the neighborhood
AND
o capable of a separate use

o If there is excess land, describe it but do not value it.
In this instance, the appraisal is based upon a hypothetical
condition. A legal description of the portion being
appraised is required.

They acknowledge, without explicitly stating so, that excess land must valued separately (or not at all.)

 

[George Hatch]

Personally, I do not see that the HBU is different. The HBU "as is" is the same as "as if vacant" (because it is vacant) for a lot. An improved lot "as if vacant" is the same as the HBU of the vacant lot...a potential for building a new house. BUT improved, it is "as is" with the improvements. So both the vacant lot and the improved lot have the same HBU....vacant for construction, "as is" - what it is today. The vacant lot remains vacant as an interim use. We can speculate about what the IDEAL improvement would be. We can speculate what if. But HBU test does not specify the necessity of improvements for a vacant tract to be at its HBU. Both both it is a reasonable use (vacant lots are common). It is the probable future use for the foreseeable future at least. Therefore it is physically possible, supported, financially feasible (or people would not buy vacant lots), and results in the highest value as is...we don't need to speculate about a future use.

In terms of farm land, numerous farms are composed of smaller parcels which operate as a single economic unit. But certainly what farm couldn't be divvied up into smaller parcels? But that is a future use, not "as is". As is they operate as a single unit, just as most houses with an adjacent lot, excess or surplus.
In the case below these lots were platted in the late 1900s, Lord only knows why. It was all orchards then. and they range from 5 to 20 acres in size and cover over 1000 acres. These are part of only 2 farms, and one property had maybe 20 lots or more. They are nonsensical subdivisions who certainly do not deserve their own individual HBU.
View attachment 43031

All RE is local. It would depend *primarily* on the prevailing development patterns in that market area. That's why "always" and "never" are both the wrong answer.

In a market segment where land values are low and the market is thinly traded and grossly oversupplied relative to the demand you get a different result in your comparisons than you do in an urban area where supply is extremely tight and prices for buildable sites are high. You're far less likely to get the wobbler - the value is similar either way - in that latter tight-market scenario.

And hey, "ignore the 2nd lot" is a complete strawman. There's absolutely nothing stopping an appraiser from putting multiple values on multiple parcels in the same appraisal report. The lender can - and should - decide from there which decisions they want to make.

 

[Carnivore]

The Pictures represent the one Exit street for my Subdivision and on the right are Two houses that were recently built and sold last year. Per my subdivision plat those two houses sit on one S/D platted Lot/site. Per the Plat the Road does not exist. This subdivision was developed back when we were under County Zoning Jurisdiction. Back then HBU was to build one SFR on that site and was subject to Subdivisions Covenants. One of the covenants is you could not divide your lot.

Move forward to last year, Well the City decided to annex us(different zoning) and they took that street(former construction entrance) in an illegal taking. They put a fire hydrant at the road entrance and this was there basis for not allowing the road to be closed. OK, I get that; fire truck access.

The owner of that site did not contest it...he just rolled over and let them do it, without compensation. Yes, he is an idiot! So he sold it and the buyer was a builder and he promptly built both houses. Why, because that was the highest and best use. City is happy because that represents $1,000,000 dollars Assessed Tax Value where before it was roughly 40k in assessed tax value.

Its called progress. This is two of the Five vacant lots in my S/D that have been built on in the last year.

OOOPs for got to make my point. This subdivision was developed 1985. It gone all this time with Vacant Lots, until now, Demand is way up for Vacant lots to build on.

 

[Elliott]

A couple of observations:

1. Fannie gets burned from time to time. They want as much security as possible.
2. Fannie likes production. They prefer fast and simple rather than maximizing the additional parcel.
3. Fannie as the biggest stakeholder ever can modify their engagement anyway they want. They wag USPAP, USPAP doesn't wag Fannie. (Remember concession valuation?)
4. USPAP is an ideal, subject to proper explaining and restriction in accordance with engagement.

 

[George Hatch]

We've already noted the expediency angle. We've also noted that it's unlikely an appraiser would get yanked by a lender as a result of lowballing a value per their instructions. What we're really taking about here is the wisdom of appraisers rolling over for the lenders's attempts to actually interfere with the fundamental concept of MV.

USPAP is not aspirational. It represents the bare minimum which we expect of every appraiser, every time.

Moreover, this situation is not an example of the Kobayashi Maru. It is not a no-win scenario where it's impossible to meet the legitimate requirements of both USPAP and your users. It can be done easily enough. Appraisers just need to come off of autopilot and put some thought and effort into what they're doing.

It's a simple question: is the 2nd lot marketable on its own at all; and if so is it worth more as a separate sale or as additional lot area to the adjacent SFR?

Sure, you can do the mechanical thing where you take single lot SFR sales as your comps (to the complete exclusion of any of the 2-lot sales) and apply a lot size adjustment without any consideration at all about whether that parcel can and would more profitably be split off. Even a monkey can do it. But just because you can punch the buttons doesn't make that the optimum mode of analysis, nor does it make that result as credible as actually finding sales involving a vacant lot and performing a comparison.

This is parallel to the "land-value-by-I-backed-into-it" process that many appraisers use in lieu of an actual land sale analysis in their Cost Approach. Just because it's possible to do land value by extraction doesn't make that the optimum way or even the most common way that vacant land is valued.


How would Andrei's scenario look if the appraiser used actual site sales data (I had no trouble finding several of them in that area) to value the land in their Cost Approach instead of backing into a site value using a residual model "Land Value = Sales Comparison - Depreciated Cost? "

 

[CANative]

The premise of FNMA's take on this that the excess land (lot) will stay with the property for the life of the loan. Why would someone do that? It sort of defies the very definition of Excess Land.

 

[Mr Rex]

The premise of FNMA's take on this that the excess land (lot) will stay with the property for the life of the loan. Why would someone do that? It sort of defies the very definition of Excess Land.

No, if the "excess" has such great value than as part of the larger parcel, then it will be sold off at some point and at that time FNMA or whoever has full rights to renegotiate the terms as part of the release. What do they have to lose and where is the lose of protection of the public interest? Silly USPAP bullsheit! hiding way behind a little common sense.

 

[Lee Lansford]

Thank you for your thoughtful contribution.

Right back at you. Who appointed you to dictate FNMA policy? I'm guessing nobody? What does Fannie or the public trust have to lose in this scenario. Elaborate....

Good luck.

 

[Mr Rex]

Good luck.

You too. Can't accept you are wrong is not a good sign for future endeavors, and you are way off track. Again I ask, where is the Public Trust diminished by this publication and edict and/or why is Public Trust improved by your opposition opinion. Please elaborate.