Appraisal Multiple Lots

[ragmail]

Is the additional vacant lot considered 'excess land'? It is on it's own deed with its own unique tax identification number, and can be sold off separately. It has it's own highest and best use. It has no ties to the improved lot other than that the same person happens to own it. Isn't it just the property next door?

I understand the valuation aspects of the appraisal problem regarding the MV of the improved lot vs MV of unimproved lot vs bulk discount for them being sold together. What I don't understand is how to report this in a way to keep the GSE's and USPAP happy. From what I've been able to research there does not appear to be a standard method for reporting this. I have seen the following in the selling guide: https://www.fanniemae.com/content/guide/selling/b2/3/04.html but what does it mean? It doesn't explain. Does it only apply to surplus land? Or does it apply to the situation I have described above? In which case, I am back to, how do I report this?

I thank you very much for all your responses and help on this.

 

[hastalavista]

Is the additional vacant lot considered 'excess land'? It is on it's own deed with its own unique tax identification number, and can be sold off separately. It has it's own highest and best use. It has no ties to the improved lot other than that the same person happens to own it. Isn't it just the property next door?

(My bold)

Here's the definition of excess land (Dictionary of Real Estate Appraisal, 5th ed.):

Land that is not needed to serve or support the existing improvement. The highest and best use of the excess land may or may not be the same as the highest and best use of the improved parcel. Excess land may have the potential to be sold separately and is valued separately.
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From your description, you have two parcels; one improved and one not. They are legally separate and the unimproved site has its own H&BU. The 2nd lot isn't excess; it isn't part of the improved lot to begin with.

And, just for clarity, here is the definition of an Economic Unit:

1. A portion of a larger (parent) parcel, vacant or improved, that can be described and valued as a separate and independent parcel. Physical characteristics such as location, access, size, shape, existing improvements, and current use are considered when identifying an economic unit. The economic unit should reflect marketability characteristics similar to other properties in the market area. In appraisal, the identification of economic units is essential in the highest and best use analysis of a property.
2. A combination of parcels in which land and improvements are used for mutual economic benefit. An economic unit may comprise properties that are neither contiguous nor owned by the same owner. However, they must be managed and operated on a unitary basis and each parcel must make a positive economic contribution to the operation of the unit.​

From what you describe, the two parcels are not an economic unit. The one offers no benefit to the other and they are not managed on a unitary basis.

Since the 2nd lot has its own H&BU and is not needed to maximize the value of the improved lot, I am very sure of two things and reasonably confident of another:
1. For sure, this is not a single economic unit
2. For sure, the value of the two in-bulk are not more than the individual values combined
3. I'm reasonably confident that the bulk value is less than the individual values combine.

I recommend that the 1004 form value-line report the value of the improved site.
There is nothing from stopping the appraiser from valuing the second lot within that report with all the support the client wants.
If they want the market value of the two properties combined, than I would describe that as a bulk value.
I can report that bulk value in the addendum... it is going to have the discounts previously discussed.

One other thing:
In the link you posted, that is reference to multiple lots but not excess land per se. Indeed, in the short description Fannie Mae provides, I'd say those would be possible examples of a single economic unit.
It makes sense that Fannie doesn't describe what you actually have because the scenario you have is not excess land; it is two properties and the methods to value two properties (individually or in bulk) are well disseminated.

Good luck!

 

[Mr Rex]

H&BU requires (3) financially feasible, and (4) maximally productive. Just because the additional lot has the capability of use as a separate entity, in many cases there is not sufficient demand for vacant land so that the contributory value to the improved lot is greater than the value if sold separately. An analysis of absorption of vacant lots and DOM etc are in order IMHO.

 

[hastalavista]

H&BU requires (3) financially feasible, and (4) maximally productive. Just because the additional lot has the capability of use as a separate entity, in many cases there is not sufficient demand for vacant land so that the contributory value to the improved lot is greater than the value if sold separately. An analysis of absorption of vacant lots and DOM etc are in order IMHO.

Except in this case, we don't have excess land. The unimproved lot is already separated from the improved lot.
We have a vacant lot with its own independent H&BU; independent of the improved lot (now, whether the H&BU of the vacant lot is to build now or hold for future development is another question which will determine how it is valued).

 

[Mr Rex]

i'm not disagreeing, I'm saying that just because it is a separate lot does not mean that it meets the H&BU requirements that make it more valuable as a separate entity versus contributory value to the improved lot. I'm sure in your area of Cali that's a no brainer, in rural NC it ain't that simple.

 

[hastalavista]

Just in case you go back to this client and it gets into a professional back & forth....

I have come across this situation before, last week in fact, and after researching I did not feel comfortable rebutting the lenders 'guidance' so I declined the previous assignment. Now here it is again. It seems to me this is clearly 2 appraisals, yet what are my reporting options when it comes to Fannie Mae? In the previous assignment the lender indicated they wanted me to report both appraisals on one FNMA 1004 form. They wanted both tax ID numbers and identifying characteristics in the improvements section. They wanted me to fill out the site section of the grid excluding the additional lot, then 'complete a separate appraisal on additional lot', as if it were sold separately, include the supporting documentation for the value in the addendum of the report, and add the value of the additional lot as an additional line item in the grid.

IF this were excess land (a section of the single parcel) then this outline is partially correct.
Within the form, the easiest way to value excess land is to do it separately in the addendum and conclude a value. However, what is not explicit in the instructions your received is that the value of excess land isn't typically the value as-if it were already split. Back to the basics, if there is excess land (it meets all the criteria for independent H&BU and is not needed to support the existing improvement; either as-is or for future expansion), then that would be values as if it were a stand-alone lot but then the costs to get it split/holding costs/selling costs and my favorite (EI) would be factored into that analysis; the result would be the contributory value of the excess land.
For example...
If split and sold: $100k
Less selling costs: -$5k
Less lot split costs: -$2.5k.
Less holding costs: -$2.5k
Less EI: $10k
Contributory value = $80k
This would then be added in the sales grid as a line-item, to the indicated value of the cost approach if the cost approach were completed, and to the value of the income approach, if the income approach were completed. It would be the value conclusion as identified on page 2 of the form.
This would be a correct method for valuing excess land for a Fannie Mae compliant loan.

The resulting opinion of market value on the FNMA 1004 form would then be the MV of the vacant lot added to the MV of the improved lot. This did not seem right to me so I declined, yet I was not able to find any documentation to show this was incorrect, and propose another 'correct' method.

This would be incorrect for excess land unless the excess land was analyzed as I've outlined.

Now another has come across my desk. Is this simply two separate appraisals, one FNMA 1004, and one separate land only appraisal? Is there more than one way to handle this situation? Thanks in advance!

You do not have excess land. Therefore, the process for valuing excess land is not appropriate for this assignment.

 

[Mr Rex]

What is the cut off for "hold for future development" as H&BU analysis? 1 year, 2, 5, 10 ? Financially feasible and maximally productive would suggest some degree of immediacy associated with the effective date of the appraisal.

 

[hastalavista]

i'm not disagreeing, I'm saying that just because it is a separate lot does not mean that it meets the H&BU requirements that make it more valuable as a separate entity versus contributory value to the improved lot. I'm sure in your area of Cali that's a no brainer, in rural NC it ain't that simple.

A separate lot, not ready for development, might very well have the same value as surplus land on the improved property.
But I don't think that makes it surplus land to the improved property because it isn't; it is its own lot. Its H&BU may be hold for future development; current value the same as surplus land.
What wouldn't make any sense (as I see it) would be to incorporate the second lot into the first and create surplus land because then you are potentially incurring two costs that would result in negative plottage value from the assemblage; negative because utility isn't improved.

And I don't think we disagree; I'm just being very precise in the OP's case because I think his/her client is disconnected from what exists: they seem to think it can be valued as excess land (and even in that method they are missing important pieces in the valuation process) but it isn't excess land.

 

[hastalavista]

What is the cut off for "hold for future development" as H&BU analysis? 1 year, 2, 5, 10 ? Financially feasible and maximally productive would suggest some degree of immediacy associated with the effective date of the appraisal.

There is no cut-off, but the further out, the less reliable the forecast. And, the further out, the more likely the value will reflect the next best H&BU (which may be surplus residential land).
Certainly, one could conclude, "No reasonable development potential in the foreseeable future; the long-term holding period results in a value similar to surplus residential land".
The fact that it can be developed is an additional right that surplus land doesn't have. That additional right, in theory, has value. But, if the development is so far out, the value of that right can diminish to the point of non-significance.

There are three things I can do with vacant land:
1. I can take some action with it now
2. I can take some action with it later
3. I can buy it with the hope that I can take some action later which wouldn't be allowed now

Some may argue there is a fourth option: I can buy it and put it into a conservation so it never gets developed... but that falls under #1 in my book because that's an action I'm taking now.

#1 is more valuable than #2.
#3 is typically speculative, and would be less valuable than #1 and likely #2.

But what I'm not going to do is buy it with the intent that it doesn't fulfill some action to take or to be taken. Because, if that were the case, why would I buy it?

 

[Mr Rex]

Most eloquent response, but your response (and I read your H&BU published article in research of my response) does not fully address the issue, because the OP has left voids to be filled with imagination... hopefully his reports fill these voids. My main point of contention is that there are 4 separate and distinct tests of H&BU and way too many appraisers stop at the first 2 and consider the second 2 with little literal analysis.