Mr Rex
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The market value is revealed in a sale. The H&BU tests are put to the tests in a sale.
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Bad advice from Fannie--"Multiple Parcels" from Dec. 2019 'Appraiser Update'
- Thread starter Lee Lansford
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The market value is revealed in a sale. The H&BU tests are put to the tests in a sale.
George Hatch
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The market value is revealed in the many sales, not the one sale. Otherwise the only sale we would ever analyze would be the pending contract.
"MV = 1 willing buyer + 1 willing seller" is realtor-talk, not appraiser-talk.
Which reminds me of the Appraiser's Motto, which used to be a thing back when I started out:
"Never trust anyone in a gold jacket"
Andrei Fin
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Nope, you brought nothing to my attention. The main thing I learned from all this, is that this forum is driven by ego more than facts. And I'm sure you learned nothing, because you already know everything. Hopefully one of the people reading learned something or was at least entertained.
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Lee Lansford
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Mr Rex
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Never one sale in a rural area, and often you have to dismiss the highest and lowest. I have a handful of RE agents that I trust, some use me as a Home Inspector, others not so much. As an appraiser, I only see the property as an Appraiser. Pretty clear
USPAP says stuff. You say other stuff that is not in USPAP. Why and for what purpose?
USPAP says stuff. You say other stuff that is not in USPAP. Why and for what purpose?
George Hatch
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I aim to please. But by the same token, I've accrued thousands of hours teach live courses to appraisers over the years and I have a firm understanding of the point that nobody tells an appraiser what to think. About the best we can do is present the material to them, try to draw the parallels that they might relate to and try to help them connect the dots. From there, appraisers do what they want to do.
I've seen amazing progression among many of the Forum regulars over the years, and I've learned some new tricks from them as well. For which I am grateful.
But yeah, I've been called a massive ego on this forum before. I've never disagreed with them. After all, it takes considerable ego just to do what we do in our day jobs: "Yeah, based on my say-so it's okay to loan this borrower millions of dollars on this property. Trust me, I know what I'm talking about".
Within that context, consider how much MORE ego it takes to stand in front of a room full of appraisers, some of whom are hostile to even having to take a CE course, and to presume to tell them anything about what they do for a living. Now THAT takes a big ego. So that means me, too.
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Andrei Fin
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It's all fun and games until the overvaluation!
George Hatch
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Borrowers complain about undervaluation, too; and although they're not an intended user you can get into just as much trouble for undervaluing a property as overvaluing it.
Supposedly (and you might be interested in this one) something like 30% of the complaints the BREA gets are on reviewers.
Supposedly (and you might be interested in this one) something like 30% of the complaints the BREA gets are on reviewers.
CANative
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Denis D and I have had a conversation about this topic and have been emailing each other about. He gave me his thoughts and summarized them in an email to me the other day. I asked if I could share them here because it seems there is something for everyone in what he had to say. He told me I could but it's just in the context of our personal conversation.
The summary is too long for a single post so I'll post the rest of it as soon as the minimal wait time has elapsed.
Definitely confusing (at least to me); glad you sent me the true copy!
Delete
dd multi lot graphic 1 newsletter.png
As I understand it…
#1: This establishes that multiple, legal parcels can be valued as a single subject if they meet the requirements bullet-pointed below. Ok.
#2: Poor choice of wording here. Better stated would be:
As an appraiser, you must determine if the additional parcel’s H&BU is for separate development, or as surplus land for the subject.
So, determine if this second parcel has its own H&BU for separate development or its H&BU is to act as surplus land to the subject. A simple example of a separate parcel acting as surplus land to the subject would be this: Imagine an improved property with a rectangular lot. Along the one side of the lot there was a 10’ easement for potential utility use. The utility use was never put to effect and the utility company sold that parcel to the subject’s owner. That parcel, individual and under with its own ownership separate from the subject’s parcel, cannot be independently developed. Likely, the H&BU of this parcel would be to act as surplus land to the primary parcel. In this case, the only other likely buyer would be the neighbor on the other side of the easement and it is very likely that it would act as surplus land to that neighbor as well. The value would be whatever contributory value surplus land has (most likely, the larger yard area this space creates).
Some may want to get very granular and evaluate how the separate lot’s tax assessments impact the value. For example, if this second parcel has additional assessments that apply to it because it is “separate” rather than part of the original, then the value may not be the same as if it were just a larger portion of the single lot.
In California, special assessments that are applied on a per-lot basis could add up and might wipe-out any additional value that was contributed by this second parcel (and, in theory, could be a negative value impact).
#3: Poor choice of wording here. Better stated would be:
If the second parcel’s H&BU is for separate development, then the valuation of that parcel would be similar to that of excess land. The contributory value of excess land is based on its value as-if it were separate, less any market reaction to the costs and risks involved in creating a separate parcel. In this case, the parcel is already separate; therefore subdivision costs would not be a factor; but other factors such as selling costs, holding costs, and risk-incentive can be part of the market reaction and would have to be accounted for.
I bolded “similar” because the process is very similar in both cases but not the exact same.
The client can define the subject anyway it wants to. In this case, the client (with good reason) is defining the subject as a primary and secondary parcel, with conditions the second parcel must meet if it is to be eligible for the loan. An appraiser faced with this assignment would first need to determine the eligibility. If it wasn’t eligible, the appraiser should notify the client (the client may want to still move forward… maybe they want to make the loan and keep it on their books?).
But assuming the second parcel meets the conditions, then the subject is defined as parcel 1 (improved, which I’ll call “primary”) and parcel 2 (“secondary). The value of that subject is a legitimate appraisal problem to solve.
As with any market value assignment, a fundamental question to be answered is, “what is the H&BU of the subject?”
In the above scenario, there are two possibilities:
1. The H&BU of the subject (primary and secondary parcels) is for them to act in tandem; the H&BU of the secondary parcel is as surplus to the primary. Therefore, the value of the second parcel is surplus land (with some potential adjustment due to tax consequences). This would be the easier path for this complex assignment.
2. The H&BU of the subject (primary and secondary) is to separate the secondary from the primary and develop the secondary to its separate H&BU. Its contributory value to the subject (as defined) is the value as-if separated, less the market reaction to separating it, etc., etc. Similar, but not exactly the same as excess land. This would be the more difficult path for this complex assignment.
The sticking point with the Fannie form is the way their form asks about Highest and Best Use vs. what its selling guide states. The form asks this question:
Delete
dd multi lot graphic 2 form.png
I’m not going to repeat what the Selling Guide says here but the thrust of their concern is, do the current improvements contribute value to the site such that they should not be demolished or renovated.
In the case where the second parcel acts as surplus land, the box can be checked “yes” without hesitation.
In the case where the second parcel should be developed separately, the improvements on the primary parcel, unless they should be demolished or renovated, would be retained. So the improvement stays and the use stays. What changes is the subject (2 separate parcels) should be separated and the secondary parcel be developed.
The summary is too long for a single post so I'll post the rest of it as soon as the minimal wait time has elapsed.
Definitely confusing (at least to me); glad you sent me the true copy!
Delete
dd multi lot graphic 1 newsletter.png
As I understand it…
#1: This establishes that multiple, legal parcels can be valued as a single subject if they meet the requirements bullet-pointed below. Ok.
#2: Poor choice of wording here. Better stated would be:
As an appraiser, you must determine if the additional parcel’s H&BU is for separate development, or as surplus land for the subject.
So, determine if this second parcel has its own H&BU for separate development or its H&BU is to act as surplus land to the subject. A simple example of a separate parcel acting as surplus land to the subject would be this: Imagine an improved property with a rectangular lot. Along the one side of the lot there was a 10’ easement for potential utility use. The utility use was never put to effect and the utility company sold that parcel to the subject’s owner. That parcel, individual and under with its own ownership separate from the subject’s parcel, cannot be independently developed. Likely, the H&BU of this parcel would be to act as surplus land to the primary parcel. In this case, the only other likely buyer would be the neighbor on the other side of the easement and it is very likely that it would act as surplus land to that neighbor as well. The value would be whatever contributory value surplus land has (most likely, the larger yard area this space creates).
Some may want to get very granular and evaluate how the separate lot’s tax assessments impact the value. For example, if this second parcel has additional assessments that apply to it because it is “separate” rather than part of the original, then the value may not be the same as if it were just a larger portion of the single lot.
In California, special assessments that are applied on a per-lot basis could add up and might wipe-out any additional value that was contributed by this second parcel (and, in theory, could be a negative value impact).
#3: Poor choice of wording here. Better stated would be:
If the second parcel’s H&BU is for separate development, then the valuation of that parcel would be similar to that of excess land. The contributory value of excess land is based on its value as-if it were separate, less any market reaction to the costs and risks involved in creating a separate parcel. In this case, the parcel is already separate; therefore subdivision costs would not be a factor; but other factors such as selling costs, holding costs, and risk-incentive can be part of the market reaction and would have to be accounted for.
I bolded “similar” because the process is very similar in both cases but not the exact same.
The client can define the subject anyway it wants to. In this case, the client (with good reason) is defining the subject as a primary and secondary parcel, with conditions the second parcel must meet if it is to be eligible for the loan. An appraiser faced with this assignment would first need to determine the eligibility. If it wasn’t eligible, the appraiser should notify the client (the client may want to still move forward… maybe they want to make the loan and keep it on their books?).
But assuming the second parcel meets the conditions, then the subject is defined as parcel 1 (improved, which I’ll call “primary”) and parcel 2 (“secondary). The value of that subject is a legitimate appraisal problem to solve.
As with any market value assignment, a fundamental question to be answered is, “what is the H&BU of the subject?”
In the above scenario, there are two possibilities:
1. The H&BU of the subject (primary and secondary parcels) is for them to act in tandem; the H&BU of the secondary parcel is as surplus to the primary. Therefore, the value of the second parcel is surplus land (with some potential adjustment due to tax consequences). This would be the easier path for this complex assignment.
2. The H&BU of the subject (primary and secondary) is to separate the secondary from the primary and develop the secondary to its separate H&BU. Its contributory value to the subject (as defined) is the value as-if separated, less the market reaction to separating it, etc., etc. Similar, but not exactly the same as excess land. This would be the more difficult path for this complex assignment.
The sticking point with the Fannie form is the way their form asks about Highest and Best Use vs. what its selling guide states. The form asks this question:
Delete
dd multi lot graphic 2 form.png
I’m not going to repeat what the Selling Guide says here but the thrust of their concern is, do the current improvements contribute value to the site such that they should not be demolished or renovated.
In the case where the second parcel acts as surplus land, the box can be checked “yes” without hesitation.
In the case where the second parcel should be developed separately, the improvements on the primary parcel, unless they should be demolished or renovated, would be retained. So the improvement stays and the use stays. What changes is the subject (2 separate parcels) should be separated and the secondary parcel be developed.
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CANative
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Part 2:
So is the highest and best use of the subject, as-improved, the present use if the secondary parcel (which, as defined, is part of the subject) should be sold separately?
On the one hand the answer could be “yes” and on the other hand the answer could be “no” because the answer is not best given in a “yes or no” check-box as asked.
The comprehensive summary* which addresses the Highest and Best Use Analysis as required by the USPAP would be something like this (the answer below is when the secondary parcel should be developed):
Summary of the H&BU as Vacant: The subject consists of two separate parcels, each with their own highest and best use. As vacant, each individual lot should be sold separately and be developed with a SFR.
Summary of the H&BU as Improved: The subject consists of two separate parcels, each with their own highest and best use. The primary parcel is improved with a SFR and that improvement contributes value to the site. That improvement should be retained and continue its use. The secondary parcel has its own highest and best use for SFR development. Its contributory value to the subject is higher if sold separately for development than as surplus land for the primary parcel; this parcel should be sold separately. Therefore, the highest and best use of the subject property, as improved, is to retain the primary parcel with its improvement and sell the secondary parcel for development.
*I’m just presenting the summary; you get to assume that I’ve done all the necessary H&BU analysis steps! LOL!!!
The bottom line is this:
1. This would be a complex assignment; I need both actual competency and my license level needs to allow me to do complex assignments.
2. I’d be inclined to leave the check-box unchecked and write “see H&BU comments with my explanation. If forced to check a box, my first choice would be to check “no” and then reference my H&BU analysis for the explanation. I’d have no problem adding a paragraph explaining why I checked the box “no”… not because the present improvement shouldn’t be retained and represents the H&BU of the primary parcel, but because the simple check-box does not allow sufficient explanation for the complexity of this assignment to be understood in a “yes/no” answer.
It is possible I could be talked into checking “yes” to the box; I’m satisfied that my explanation in the narrative correctly addresses the H&BU issue and explains why I did what I did.
My final thoughts:
Fannie (or any lender) is asking for a legitimate request. They want to make a loan and they want the subject to be more than one parcel. Non-Fannie loans are done this way all the time, so this isn’t nefarious, etc.
Since these are two separate parcels, there are going to be two individual highest and best uses. In the case where the H&BU of the secondary parcel is to serve as surplus land to the primary, the assignment become simplified. The two parcels work in tandem and the H&BU of the secondary is linked directly to the primary (it is more valuable as surplus land to the primary than as an individual, non-developable parcel by itself).
But in the case where the secondary parcel should be developed separately, the lender is asking us to value a subject (defined as the two separate parcels) that has a different highest and best use then retaining as-is. The lender has described a subject which is not functioning at its highest and best use.
Whenever we value something that is not at its highest and best use, a couple of things are going to happen:
1. The value of the parts is likely more than the value of the whole.
2. Exposure time very likely will be longer than if the property was at its highest and best use.
When I should separate the two parcels of the single subject, the value of the whole sold-together is going to be less than the parts. If they were already separate, I could sell them at their H&BU. They are not separate; they are defined as being a single subject. While I can separate them once I buy them together, I have to buy them together (the premise of the subject as it is defined) before I can separate them. That inefficiency creates a discount in the value if for no other reason than I have additional costs and risk involved as a package than I would have if they were sold individually. Further, because they are not at their H&BU, I’ve eliminated a lot of the potential buyer pools (those who want just a house and those who are looking for just a development site); that is likely going to extend my exposure time.
So is the highest and best use of the subject, as-improved, the present use if the secondary parcel (which, as defined, is part of the subject) should be sold separately?
On the one hand the answer could be “yes” and on the other hand the answer could be “no” because the answer is not best given in a “yes or no” check-box as asked.
The comprehensive summary* which addresses the Highest and Best Use Analysis as required by the USPAP would be something like this (the answer below is when the secondary parcel should be developed):
Summary of the H&BU as Vacant: The subject consists of two separate parcels, each with their own highest and best use. As vacant, each individual lot should be sold separately and be developed with a SFR.
Summary of the H&BU as Improved: The subject consists of two separate parcels, each with their own highest and best use. The primary parcel is improved with a SFR and that improvement contributes value to the site. That improvement should be retained and continue its use. The secondary parcel has its own highest and best use for SFR development. Its contributory value to the subject is higher if sold separately for development than as surplus land for the primary parcel; this parcel should be sold separately. Therefore, the highest and best use of the subject property, as improved, is to retain the primary parcel with its improvement and sell the secondary parcel for development.
*I’m just presenting the summary; you get to assume that I’ve done all the necessary H&BU analysis steps! LOL!!!
The bottom line is this:
1. This would be a complex assignment; I need both actual competency and my license level needs to allow me to do complex assignments.
2. I’d be inclined to leave the check-box unchecked and write “see H&BU comments with my explanation. If forced to check a box, my first choice would be to check “no” and then reference my H&BU analysis for the explanation. I’d have no problem adding a paragraph explaining why I checked the box “no”… not because the present improvement shouldn’t be retained and represents the H&BU of the primary parcel, but because the simple check-box does not allow sufficient explanation for the complexity of this assignment to be understood in a “yes/no” answer.
It is possible I could be talked into checking “yes” to the box; I’m satisfied that my explanation in the narrative correctly addresses the H&BU issue and explains why I did what I did.
My final thoughts:
Fannie (or any lender) is asking for a legitimate request. They want to make a loan and they want the subject to be more than one parcel. Non-Fannie loans are done this way all the time, so this isn’t nefarious, etc.
Since these are two separate parcels, there are going to be two individual highest and best uses. In the case where the H&BU of the secondary parcel is to serve as surplus land to the primary, the assignment become simplified. The two parcels work in tandem and the H&BU of the secondary is linked directly to the primary (it is more valuable as surplus land to the primary than as an individual, non-developable parcel by itself).
But in the case where the secondary parcel should be developed separately, the lender is asking us to value a subject (defined as the two separate parcels) that has a different highest and best use then retaining as-is. The lender has described a subject which is not functioning at its highest and best use.
Whenever we value something that is not at its highest and best use, a couple of things are going to happen:
1. The value of the parts is likely more than the value of the whole.
2. Exposure time very likely will be longer than if the property was at its highest and best use.
When I should separate the two parcels of the single subject, the value of the whole sold-together is going to be less than the parts. If they were already separate, I could sell them at their H&BU. They are not separate; they are defined as being a single subject. While I can separate them once I buy them together, I have to buy them together (the premise of the subject as it is defined) before I can separate them. That inefficiency creates a discount in the value if for no other reason than I have additional costs and risk involved as a package than I would have if they were sold individually. Further, because they are not at their H&BU, I’ve eliminated a lot of the potential buyer pools (those who want just a house and those who are looking for just a development site); that is likely going to extend my exposure time.
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