Bad advice from Fannie--"Multiple Parcels" from Dec. 2019 'Appraiser Update'

[George Hatch]

It goes without saying that some deals are a steal and some deals should never get done. But that's not the assignment. The assignment isn't whether or not to ratify the pending transaction. The assignment isn't whether or not the lender is making a safe lending decision. The assignment is to get to the most probable when everyone is both knowledgeable AND acting in their own best interests. AKA the greed factor. If most probable in an adversarial buyer/seller relationship is below the contract price then we do that, and if it's above the contract price then we do that.

So just because this seller and their broker doesn't mind leaving some money on the table isn't the dividing line. Just because a property owner might not be familiar with the attributes of their property doesn't comprise the dividing line. The definition doesn't refer to all buyers and sellers, it refers to the ones who know what they're doing and are also acting in their own best interests.

 

[Andrei Fin]

The assignment is to get to the most probable when everyone is both knowledgeable AND acting in their own best interests.

After we backed out another buyer came along the next day and offered the same price, I drive by the property occasionally and they are still using it as one property, nothing has been sold off or developed. I would wager that you get the same result ten out of ten times. So this is the value that best reflects the actions of market participants. Perhaps the market is considering the fact that anyone who sells off the second lot has just signed up the first lot for a year of living next door to a construction site while the HBU analysis does not. Personally I was thinking it would be nice to build a little cottage there for the inlaws someday and then cash in both properties way down the road. Again there is no USPAP requirement to appraise the property in its HBU.

 

[Terrel L. Shields]

The market tells us that the buyer for one is not the buyer for the other.

That's where I have a problem with this. Most double lots here will sell to the buyer of the house. Long time since I have seen one split and sold off in this market. Sometimes larger parcels, 20 acres or more are offered choice, small lot with house and land, but side by side lots? Nope.

 

[George Hatch]

I've seen it both ways, too. It will depend somewhat on what the market is like for vacant lots.

What I'll say is this: In this situation - and unless I had direct comps with the same combo - I would have put a value (and exposure time) on each and let the lender make their own underwriting decisions, and any reviewer who actually criticized that workproduct had better be prepared to demonstrate how either value conclusion was unreasonable or unsupported.

 

[Andrei Fin]

It goes without saying that some deals are a steal and some deals should never get done. But that's not the assignment. The assignment isn't whether or not to ratify the pending transaction. The assignment isn't whether or not the lender is making a safe lending decision. The assignment is to get to the most probable when everyone is both knowledgeable AND acting in their own best interests. AKA the greed factor. If most probable in an adversarial buyer/seller relationship is below the contract price then we do that, and if it's above the contract price then we do that.

So just because this seller and their broker doesn't mind leaving some money on the table isn't the dividing line. Just because a property owner might not be familiar with the attributes of their property doesn't comprise the dividing line. The definition doesn't refer to all buyers and sellers, it refers to the ones who know what they're doing and are also acting in their own best interests.

Here's another way to look at it. Is the HBU test for maximum financial return, but the MV component "best interest" not necessarily defined as financial? Also, is HBU defined in the present tense but "best interest" might extend into the speculative future?

 

[George Hatch]

You know that one of the other assumptions in that definition refers to the value being expressed in terms of cash or cash equivalency; not feelings. Right? Sure, the movie star buys the mansion next door because they like their privacy, not because they actually have any use for another mansion. But that doesn't make it a typically motivated buyer. Unless that is typical for such properties.

So back to the property you referred to. Do you really think that appraiser came up with direct comps consisting of 2 parcels? Because that's what would actually be comparable to that particular combo, not the house+13000sf lot and then make a lot size adjustment at $1/sf.

I think you and I both know the answer to that question.

 

[Stone]

Dumb question from someone who hasn't done residential mortgage work in years: Is Fannie basically trying to find out what they could sell the whole thing for in one shot if the loan went south? If that is the case, I can easily see why this type of valuation makes sense, but the point about checking a box saying it is "market value" doesn't change. Of course you can't just call this MV in many/most situations as has been discussed here, but it does make sense to find that value out if they are trying to keep tabs on what they have that they want to get rid of fairly fast and without messing with multiple sales (for some reason). If that is the case, they should order an appraisal to market value (two opinions assuming the HBU calls for it) and another appraisal to meet their needs that doesn't require checking a box saying it is MV. I realize that is the opposite direction they want to go, but...

 

[Eli]

I would likely do qualitative but one could do extraction or allocation on land sales and make an adjustment in grid. If there were vacant land sales, it would be easy. The hypothetical thrown out by Fannie is a pure hypothetical. No way to stereotype it. Market value vs Use Value is the key. Disclosing as market value puts the appraiser at more risk imho. Disclosing as use value or value in use puts the appraiser in less risk imho.

 

[George Hatch]

Dumb question from someone who hasn't done residential mortgage work in years: Is Fannie basically trying to find out what they could sell the whole thing for in one shot if the loan went south? If that is the case, I can easily see why this type of valuation makes sense, but the point about checking a box saying it is "market value" doesn't change. Of course you can't just call this MV in many/most situations as has been discussed here, but it does make sense to find that value out if they are trying to keep tabs on what they have that they want to get rid of fairly fast and without messing with multiple sales (for some reason). If that is the case, they should order an appraisal to market value (two opinions assuming the HBU calls for it) and another appraisal to meet their needs that doesn't require checking a box saying it is MV. I realize that is the opposite direction they want to go, but...

I don't have any problems whatsoever with them asking the question or making their decisions accordingly; but I want the lender to assume the responsibility for that decision. If the lenders can be cut loose to rely solely on a value in use that's fine by me - let's just call it that in our reports and not conflate it with the MV.

 

[Eli]

By the same token, the appraiser should know whether the sites are maximally productive separate or combined. Then, a hypothetical comes into play on H&B use if they are maximally productive being combined. If you do "use value" or "value in use", the hypothetical leaves the arena. H&B use too. I don't think any value definition requires H&B use analysis except "market value" definition.