Appraise House Combined With Extra Lot?

[larryhaskell]

Dave:

Based on your description, it seems to me that the lender may just want the value higher for the house to make that deal work and aren't concerned about the total value.

Jerry:

I heard in a USPAP class recently that Fannie Mae guidelines are not considered to be supplemental guidelines because FNMA is no longer a GSE.

 

[Joker]

Tim, given your logic, the value of a recently developed subdivision would be worth the sum of the individual lot values. Additionally, my farm, consisting of a 1.2 acre parcel, a 20 acre parcel, two 75 acre parcels, and a 12 acre parcel should really be valued as 5 different tracts.

 

[Eminent Domain]

It would appear that the market is indicating the contribution of the excess acreage in this particular case: $45,000 (330,000 - 285,000) and not $61,000. We face this all the time in this area and generally the only way to satisfy the underwriter is to find at least one comparable sale with an extra lot and then make a site adjustment to the others for the lack thereof. However, if your area is like mine this never happens since these are far and few between. Its not a value issue but an underwriter, or investor, issue because the property does not fit into a nice neat package. I feel your pain on explaning this to the buyers too. Most do not understand the concept of excess acreage and could care less and are just mad because you do not 'just make it work'.

There needs to be a mass marketing campaign by someone that conventional mortgages are not meant for all transactions and that sometimes the banks must think outside the box. Banking has evolved from 'personal in nature' to 'must fit uniformly into a nice neat box.' As a result, subsequently the threshold for many bank employment levels have went from professional status jobs to that of ordinary run of the mill jobs. THE SAME THING THAT HAS HAPPENED TO THE APPRAISAL INDUSTRY. The whole system is being watered down by this standardization process and will continue to be done so until something happens that demonstrates the improtance of these fields. When this shakes out those of us lucky enough to survive will be OK but many will be left by the wayside along this journey.

BF

 

[Timothy Wixted]

Originally posted by Doug Walker@Oct 22 2004, 04:01 PM
Tim, given your logic, the value of a recently developed subdivision would be worth the sum of the individual lot values. Additionally, my farm, consisting of a 1.2 acre parcel, a 20 acre parcel, two 75 acre parcels, and a 12 acre parcel should really be valued as 5 different tracts.

Doug-

The land value of a recently completed subdivision is the anticipated gross sale price of the developed lots minus any development costs and subject to an appropriate discount rate. So yes, you have to add them up.

As far as your five parcels, I don't know if each should be valued separately. The only question is " What is the HBU?". Are the parcels worth more combined than separated? Should parcel A be combined with parcel B or C? It's a complex HBU analysis to determine what gives the highest rate of return on the land.

Tim

 

[Timothy Wixted]

Originally posted by Bryan Farley@Oct 22 2004, 04:50 PM
It would appear that the market is indicating the contribution of the excess acreage in this particular case: $45,000 (330,000 - 285,000) and not $61,000.

Brian-

It's not excess acreage. It is a separate buildable lot with it's own HBU.

Tim

 

[Timothy Wixted]

Maybe I've taken too many stupid pills today, but can someone tell me what appraisal principle states that if your assignment is to appraise two separate but adjoining parcels, that you are required to treat it as one parcel, even if it violates the principle of HBU?

Additionally, where is USPAP does it state that you cannot communicate the results of two appraisals on a single report?

Tim

 

[Lee Lansford]

In my opinion, Timothy has given the best advice.

There are two properties, each with their own H&B Use. Each requires a separate market value estimate.

IF the two parcels were to be combined as a SINGLE parcel, such would require the employment of a Hypothetical Condition (assuming something to be true that is not) and I know that Fannie Mae would not accept a Hypothetical Condition in an appraisal.

Timothy suggested, in my own words, that the two appraisal reports be combined into a single report. No problem. What is contained in the single report is in fact two separate appraisals.

As appraisers, we can not unilaterally (okay...at the prompting of the client) combine two separate parcels...EACH with their own separate H&B Use...to form a SINGLE parcel WITHOUT employing a Hypothetical Condition.

Excess Land: Has its own H&B Use.
Surplus Land: Does not have its own separate H&B Use.

An appraiser CAN NOT CHOOSE to decide "hey, I'll just treat the vacant parcel--with its own H&B Use (aka, Excess Land)--as Surplus Land." CAN NOT! ! !

NOTE that the client in this instance has a problem. The appraiser does NOT have a problem IF the appraiser provides an appraisal...or, rather, APPRAISALS...in a manner that is not misleading. To provide an appraisal that combines (i.e., treats the vacant parcel as though it were Surplus Lane) the vacant parcel--with its own separate H&B Use...into a single appraisal along with the other improved parcel WITHOUT EMPLOYING THE "Hypothetical Condition" would BE MISLEADING! !

--Lee Lansford, IFA
AQB Certified USPAP Instructor.

 

[Joker]

Like you said Tim, subject to a discount rate. Why the discount rate in a subdivision appraisal? The same reasoning applies to this assignment, but on a smaller scale.

 

[Lee Lansford]

FOR PURPOSES OF ILLUSTRATION:


A single entity owns two adjacent parcels.

The FIRST parcel is a typical for the neighborhood residential dwelling on a typical site and conforms with zoning. There is proven market demand for such a property.

The SECOND parcel is a typical for the neighborhood residential dwelling on a typical site and conforms with zoning. There is proven market demand for such a property.

Your client, a crazed mortgage broker, gives you this request:
"Give us a market value opinion for the two properties as though they were one. But, don't discuss matters of H&B Use (other than to check the "yes" box on the appraisal form). And, for gosh sakes, don't employ a Hypothetical Condition! And, remember, the appraisal will be used in the underwriting of a first mortgage that will be sold, most likely, to Fannie Mae."

Okay, all of you who would accept this assignment...raise your hands!

Is the picture gettng clearer?

 

[Dee Dee]

What's happening here is that the lender can't or won't lend on vacant land, which is why they're trying to combine the two parcels together to push the loan through. Lending terms for vacant land usually require a higher down payment and shorter time frame to pay off the loan than the typical 30-year mortgage that you'll see on loans for residential properties.

If you combine the acreage of both parcels and find similar properties with similar double-lots as comps, you still wouldn't be appraising the property at it's highest and best use. The vacant lot would then be encumbered under the same mortgage as the residence, and the only way that the buyer would be able to split out and sell that vacant lot would be if the house and lot that it sits on would appraise for approximately 20% or more above the existing loan balance, effectively keeping the loan collaterol at an 80% LTV. At that point the owner could request that the vacant parcel be released from the mortgage, and depending on the lenders terms they will determine if that is possible.

That being said, you've already determined that the house and lot that it sits on would not, by itself, appraise for the contract price of $330,000. The vacant lot, if encumbered by the same mortgage, is technically little more than excess land. A new construction loan could not be gotten on it since the lot is encumbered by a mortgage tied to the existing residence, and it can't be sold as a vacant buildable parcel.

Many buyers don't understand how this all works. They're trying to get the smallest mortgage at the best interest rates possible, but by doing so they've effectively cut off the possibility of taking advantage of the properties at their highest and best use, which is to keep the parcels separate. The buyer in this case may be thinking that as soon as he closes on this loan that he'll sell that vacant lot and stick $65,000 in his pocket, but the fact is that unless he's put one heck of a big downpayment on this loan he'll be prevented from doing so until the house and lot it sits on appraises for $330,000 all by itself, or he can negotiate with the lender that a portion of his profits would buy down the existing principal balance on the loan to bring the LTV into line.

I would never ASSume that the buyer understands all of this, or that the loan officer or selling agent would bother to explain it to him. I would assume that if dividing up the properties after the loan is closed is what is on the buyer's mind, he'll be very upset at someone, and that someone would probably end up being the appraiser who didn't value the properties at their highest and best use. I'm sure that any good real estate attorney would point him in your direction if he's not sure who to blame for his dilemma.

You don't know anything about this buyer's financials. It's possible that he's putting as little down as possible and COUNTING on selling that vacant lot just so that he can make his payments. How are you going to explain yourself if the guy ends up defaulting and your appraisal gets reviewed and you didn't value the properties at their highest and best use? Even if the buyer and/or mortgage broker swear on a stack of Bibles that the buyer has no intentions of doing anything with the extra lot, you're still on the hook.

Dave, if I were you I'd stick with the separate parcel appraisals. The contract can be renegotiated to be two separate parcels and sales, and financed separately. It may not be the best loan scenario for the buyer if they had no intention of doing anything with the vacant parcel, but that's not your problem.