Appraise House Combined With Extra Lot?

[Lee Lansford]

Dee Dee--

Well said! Very well said, indeed!

Thanks for offering a new perspective to the situation.

 

[Lee Lansford]

And one more thing...

I believe that it will help appraisers a great deal if we are aware of the differences between EXCESS LAND and SURPLUS LAND.

As my source, I utilize the 12th edition of "The Appraisal of Real Estate" published by the Appraisal Insitute (though I am not a member, I have great respect for the AI and, besides, this is the text that I used when I taught appraisal principles at the local junior college).

Quoting:

"Excess Land: In regard to an improved site, the land not needed to serve or support the existing improvements.
In regard to a vacant site or a site considered as though vacant, the land not needed to accomodate the sites's primary highest and best use.
Such land may be separated from the larger site and HAVE ITS OWN HIGHEST AND BEST USE (note: I added the emphasis!), or it may allow for future expansion of the existing or anticipated improvements."

"Surplus Land: Land not necessary to support the highest and best use of the existing improvements but, because of physical limitations, building placement, or neighborhood norms, cannot be sold off separately.
Such land may or may not accomodate contribute positively to value and may or may not accomodate future expansion of an existing or anticipated improvement."

THUS...

1) Excess Land has its own Highest & Best Use.

2) Surplus Land does not have its own H & B Use.

By the way...the text is a very good reference book for appraisers. I assume that if you were to visit the AI web-site, you would find a way to easily order your own personal copy (ps: I'm not tied to the AI and I receive nothing if you make such a purchase).

 

[Timothy Wixted]

Originally posted by Doug Walker@Oct 23 2004, 09:52 AM
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.

Doug-

If you could find some support for that statement in USPAP or any standard text, I'd be glad to read it.

Tim

 

[Timothy Wixted]

Originally posted by Dee Dee@Oct 23 2004, 12:05 PM
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.

Dee Dee-

Your comments on the mortgage situation may be true or it could be that the buyer has $500,000 in the bank. None of which has anything to do with the assignment. It is the lender's job to decide who to lend money to and under what terms.

The client has asked for two separate appraisals to be communicated in one appraisal report. According to Lee Landsford, this is perfectly acceptable and can be USPAP compliant.

The appraiser's assignment in this case is to estimate the market value. I know of no definition of market value which includes consideration of any mortgages, blanket or otherwise, or what the proposed buyer may or may not do once the property is purchased (without a HC), or the proposed buyer's financial condition.

And while having one mortgage may impact on the marketability of the buildable lot, it is not a component of market value.

If Dave had produced an appraisal report in the way I described, he would have produced a defensible, USPAP compliant report. And Lord knows, we could use more of those. :lol:

Tim

 

[Dee Dee]

Thank you leelansford (or is it just Lee? ).

The reason why this really strikes a chord with me is that on two different occasions I have run into problems where homes and vacant parcels were either encumbered under one mortgage or would have been if I hadn't brought up highest and best use prior to the loan being made. In both cases the homeowner thought it was okay to sell the vacant parcels, and in both cases the home and the site that it was on couldn't appraise out for the value needed to have the parcels released from the mortgage.

In one of the incidents the homeowners had a Realtor who listed the vacant lot (DUH!), and there was a contract for purchase on the property. Get this....the guy with the contract on the vacant parcel was so certain that everything was on track that he paid a surveyor as well as a contractor to begin the excavation for the new house he was going to build...BEFORE they figured out that they weren't going to be able to close (Double DUH!). The buyer was NOT a happy man and was threatening both the listing agent and owner that he was going to sue them in order to recoup his expenses, arguing that the land shouldn't have been listed to begin with. Last I heard the HO was going to have to give up all but $10,000 of the purchase price back to the lender at closing in order to buy down their loan amount, with $35,000 going straight to the lender before they'd sign the release. Homeowner wasn't happy at all, said that if they had known what they were going to end up with so little in their pocket they'd have kept the land vacant until the home went up in value before splitting off the lot, rather than give up the extra privacy and horse pasture space that the lot had provided. They were a young couple, and the LO from the refi they had done the year prior had advised them to combine the two parcels into one loan, not telling them of the pitfalls of doing so.

Not long after that happened I got another request to do a refi appraisal on a house with, according to the LO, a total of 46 acres. Public records showed that the residence was on three acres and the 40 acres was an adjoining vacant parcel owned by the same guy. When I called up the HO to set up an appointment I asked the man if he realized that it might be better to keep the two parcels separate, and told him about highest and best use and how he would probably be unable to sell the 40 acres off if the house and 3 acres didn't appraise for around 80% of the total loan amount, IF the lender approved the release. After I explained it all (without throwing out any values) the guy must have been figuring it out himself and was really upset at me. He didn't want to believe that a lender could dictate whether or not he could sell the vacant parcel, so I suggested that we set the appointment and in the meanwhile he discuss it with his LO. Two hours later the LO called me, pissed off but with his tail tucked between his legs, and told me that the HO had backed out of the loan. Apparently the HO had asked the LO about what I had said, and the LO (who wasn't sure if I was correct) called someone else and confirmed that I had told the truth.

Turned out that the homeowner had intended do a cash out refi for 80% of what the two parcels combined would have probably appraised at, then sell off the 40 acre parcel. Combined, the vacant parcel and the house with three acres would have appraised at somewhere around $500,000. The house and three acres appraised separately would have amounted to about $300,000 and the vacant 40 acre parcel was worth about $300,000. His outstanding loan amount at that time was about $230,000. His plan had been to do an 80% LTV cash out refi on the combined parcels, which would have put an extra $170,000 in his pocket, then sell off the vacant 40 acres and put another $300,000 in his pocket. And that was his little retirement plan.....to end up owing $400,000 on a $300,000 home and have $470,000 in the bank. He even had a neighbor who was ready to buy the 40 acre parcel!

Now, if we could all get away with that, we'd be rich enough to retire in no time at all! :lol:

Gotta hand it to the guy....he sure had a slick plan, but if I would have kept my mouth shut and just did it the way the LO had ordered it, the man would have been in an entirely different financial situation than what he had anticipated.

I know that some would argue that it's not my business to say anything to the homeowner, but there was no way I was going to appraise the two parcels together and leave my butt hanging in the wind, and there was no way I was going to leave an open opportunity for the LO to find a less knowledgeable appraiser that would have done it without understanding the possible consequences.

Sorry to ramble, but I think appraisers need to understand why disclosing H&BU is so important. Not doing so could amount to big liability if a homeowner wishes to pursue it, and it's best to let all parties know that it's their problem to solve, not yours.

 

[Dee Dee]

Timothy,

I follow what you're saying, but would be suspicious that the only reason an LO would ask for two separate appraisals be combined into one, even if it's USPAP compliant, would then be to lump them into a single mortgage that would encumber the vacant parcel from being sold unless certain terms are met.

Yes, it might free the appraiser from being held liable for not disclosing highest and best use, but my experience (and maybe it's just me ) is that the buyers aren't informed about what it will take to sell that parcel if they so desire.

 

[xm39hnu]

I agree with Dee Dee and Lee. Timothy, I don't think I'd use any kind of form for properties with separate and distinct identities. We've done several oddball appraisals around here. The most recent was a borrower who wanted to borrow against all his property. Two vacant lots (HBU: combine into one lot for conformity); one house on 1.3 acres; one house on 51.3 acres (HBU: split off the house and 1.3; continue present use of 50 acres as row-crop land); and contributory value of four large ag-support buildings and accessory structures. We gave'em four appraisals in a single report -- a rather large narrative report though. We gave them the arithmetic sum of the values, and explained that this sum was not to be considered the total value of the combined properties. Given that the intended use was for the client to evaluate the properties as collateral for a possible mortgage loan, we considered that in liquidation, the properties would be more easily marketed if sold separately, and the separate market values developed should be considered in that light.

Something similar might be done in this case. As long as the users are made aware of the complications that can arise in getting collateral released, there should be no problem with reporting two parcels under one report cover. In this case, I'd develop three values: One, under the hypothetical combination of the two tracts, using excess land value; one for the house; and the other for the extra lot. I'd report all three values with their conditions, and would state clearly that arithmetically summing the house value and lot value would not accurately represent the market value of the two sites combined, but that in a liquidation scenario they could be marketed more quickly as separate tracts.

Now all the bases are covered, and you've made full disclosure of the entire situation. And earned a bigger fee.

 

[Timothy Wixted]

Originally posted by Jim Plante@Oct 24 2004, 08:23 AM
Something similar might be done in this case. As long as the users are made aware of the complications that can arise in getting collateral released, there should be no problem with reporting two parcels under one report cover. In this case, I'd develop three values: One, under the hypothetical combination of the two tracts, using excess land value; one for the house; and the other for the extra lot. I'd report all three values with their conditions, and would state clearly that arithmetically summing the house value and lot value would not accurately represent the market value of the two sites combined, but that in a liquidation scenario they could be marketed more quickly as separate tracts.

Now all the bases are covered, and you've made full disclosure of the entire situation. And earned a bigger fee.

Jim-

I certainly agree that this assignment belongs on a narrative. And I appreciate Dee Dee's concerns about having one mortgage encompass both parcels. And your suggestion to state that concern in the report is a good one. Unfortunately, the buyer is the one who needs to understand all the ramifications and that is information he may or may not get.

And, as I previously posted, mortgage considerations are not a part of any definition of Market Value that I am aware of.

You might want to reread Lee's first post as it relates to your scenario about the three values.

I don't see how the value of the vacant lot could be reduced. Even if you employ a HC that the two parcels are combined, the vacant lot still has the same HBU and Market Value. Combining the parcels cannot change that. The only way I see that the lot is worth less is to employ a HC that the parcels are combined and that vacant lot is not excess land but surplus land. And I don't see how you can do that without producing a misleading report.

Tim

 

[Timothy Wixted]

Originally posted by Pamela Crowley (Florida)@Oct 22 2004, 10:13 AM
So I finally did a high priced narrative giving them 3 values - each lot was valued separate, then if they were actually combined into one it had a value. They REALLY didn't like the value of them combined, but I did what I believed was correct first by valuing each one individually, then gave them what they asked for.

Pam-

In light of Lee's post, have you reconsidered your position?

At the time of your appraisals, both lots were vacant and both lots were available to be developed to thier HBU. Reporting two appraisals on one report doesn't change that.

It would seem to me that the only way that the two lots were worth less combined is if you employed a HC that an improvement was placed on the lots in such a way that the HBU of one or both lots was negatively impacted.

Tim

 

[Pamela Crowley (Florida)]

Which is exactly what I did. I already knew the buyer might plan to build on or very near the center lot line and that is the HC I used, fully explained along with the full explanations of Surplus and Excess Land, for the combined value. In this case, the buyers potential purchase of these 2 separate sites was at full value for 2 separate sites. The value of these 2 sites if combined into 1 site by building on or too close to the center line was a lot less than if they stayed separate.

My narrative report was set up with 3 separate appraisal sections within it, very fully explained, and the UW supervisor finally actually read too, then called to thank me. I cannot think of anything USPAP wrong with what I did. If you or anyone else here thinks something is USPAP non-compliant in what I did, please do let me know what it is. The LAST thing I want to do is something wrong!