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

[George Hatch]

You are defending Fannie's methodology and expressing the opinion that they're right, and then cited Garfield in support of your opinion. I'm challenging all of it.

Back to the question. Comps #1-6 in your SCA; if you can find enough of each, which dataset would actually be more comparable than the other? A or B?

You can quit the discussion now if you want. It's not going to stop me from following through on disassembling your sole reliance on Garfield's sales history. I already have all I need.

 

[Andrei Fin]

I don't think you're not challenging all of it. I think that unlike Lee, you actually get the concept. From what I'm hearing, your concern is that it might cause some appraisers to get lazy and develop a value that is overly conservative. I'll bet Fannie Mae has considered this, and decided who freaking cares because there is no risk to the lender here. This makes you mad because it's not good appraisal practice, fair enough.

At the start of this thread, there were those who simply could not believe that a vacant lot would transfer for anything less than its full market value as if sold separately. I provided Garfield as an comp (sold twice and is still not developed) showing that this often does happen. We can argue as to how heavily the lot was discounted, did the owners buy it as a lawn, family compound, or for future development etc, but the fact is there was some discount. This jibes with the definition of "value in use" which clearly states that it might not always match the HBU. But even if the lot sold at equal or greater than the price if sold separately, the concept of value in use still applies to the vacant parcel, and is consistent with market value of the whole by definition, because our subject property is both parcels as if sold together.

 

[George Hatch]

Garfield is one sale. We look for trends. I don't know what the trend for that combination will be in that town because I don't know the town and I don't have access to the data it would take to answer that question. And you're half-right, I am concerned about appraisers skipping the step of considering the alternatives prior to knowing the answer. It's like anything else, if you already know from experience in that area what the answer is then that's not a wheel that needs to be rebuilt every single time thereafter.

The other thing I am concerned about is Fannie conflating a value in use with market value. By definition, VIU is the value to a single user where as MV is the value to many users. As I've said before, even if the numerical expression turns out to be the same the meanings of that number are different -and "same number" is the best case scenario.

It's like HBU analysis in general. While skipping that step in the manner many SFR appraisers do will not be a problem in most SFR assignments because in general WYSIWYG. However, in those cases where it CAN cause a problem the appraiser who doesn't do HBU will be unaware of that problem because they're not looking or thinking in that manner. Regardless of what really is/isn't with Garfield, the house+extra situation is an example of one of those cases where is CAN cause a problem.

We have no way of knowing whether any of the appraisers who touched either sale on Garfield knew what they were doing WRT the vacant lot value; we can only see what the sale prices were. An assumption that the appraisals were equal to the contract price may or may not be correct. What we do know is that the broker in the 2016 sale was considering the alternative of selling them off separately, and the subsequent sale price turned out to be equal to the list price for the SFR + the list price for the lot. No discounting for the assemblage in that particular example.

The facts of the 2016 sale/list ratio are instructive to the topic of discussion here. We had an assemblage that sold for a price that was equivalent to the sum of both asking prices when listed separately. The one sale doesn't establish a trend, but when the 7500sf lot was listed for $89k and apparently ended up adding $89k to the sale price of the SFR that sale amounts to a price/sf of $11.86/sf. That's far in excess of any excess land adjustment we would apply in a $400k SFR market.

 

[glenn walker]

I have no problem with Fannie's opinion or advice to consider this vacant parcel as "...'value in use' for the purpose of the appraisal, so that the land should be described and it contributory value included in the grid?" Note: For Fannie the appraiser is NOT appraising two properties and the appraisers engagement will be to appraise it as one property. All this H & B use analyses is fine for an-assignment where the appraisers engagement and scope of work is to establish two values or even on a consulting assignment where the client wants to know all of his/her options. Ultimately, the only real difference is that excess land has the potential to be subdivided and sold, while surplus land does not. OK that's easy I just describe the excess land may have a potential higher or better use.

BINGO- DONE- lender, buyer, sellers , neighbors everyone has full knowledge that some day Uncle Billy may decide to build his dream home on the other parcel. Also it's rare to ever get a Fannie Mae type property where it has a truley higher or better use. In the rare cases when the appraiser gets an-assignment where it's clearly not residential in nature or zoning then he/she can simply notify the client that the Subject or the adjacent lot or both are not a Fannie-Freddie-FHA-VA type of property, and to reassign it to a Commercial Appraiser.

Damn - UNCLE BILLY just wants his freaking house or duplex appraised so he can get his loan and some goofy guy showed up with a clipboard and Disto, walked around the duplex and told him a higher and better use was to sell it to Disneyland !! Uncle Billy screams at the guy and tells him he is not stupid and if it had a higher & better use he would have sold it a long time ago and moved to the beach.

 

[George Hatch]

Getting back to the analysis of the subject's prior sale, I'm a big advocate of comparing a prior sale to its respective comps to see how the market previously reacted to those attributes. If we're using sales of SFRs on smaller lots in our current SCA, then how did the subject previously compare to such SFRs on smaller lots that sold in the same time frame?

You may recall I posted some sales involving two datasets - homes with larger lot sizes and homes with smaller lot sizes. The purpose of that (unqualified/un-analyzed) data dump was to see what the effects were, generally, of the additional lot area in that market segment at that time:



Now you are critical of my use of sales with a narrow size and age range in that market, and maybe you're right. I normally start by looking for "most similar" and stop when I find enough comparables to make my case, the idea being that the fewer variables I have to account for the less room there is to screw the value conclusion up.


The top group is obviously smaller in number and consists of the "A" sales we were discussing earlier. I didn't go into each sale to see if there were multiple parcels involved, so just looking at them will require assuming they're all single lot sales. I don't have access to the local MLS so I have no way of finding any house+extra assemblages selling to the same buyer other than the one I stumbled across on Maple (I only found that one because I was looking at lot sales).

Anyhow, the smaller "A" group above includes homes built in that narrow age and size range on the larger lots. One having a larger lot, one having a somewhat smaller lot and the middle two with 15,000sf lots. I assume that expanding the geographic radius would turn up more of these sales, and same for expanding the size or age ranges. Sales with disparate ages are generally a no-go for me unless I am coming up short WRT "more similar". It's something I do when I'm desperate, not as a default.

The larger and more proximate group in the 2nd dataset involves similar size/age homes as the subject but on smaller lots (relative to the subject's 15,000sf 2-parcel assemblage). We can call them the "C" group because they're neither an assemblage nor do they have the comparable lot sizes. The other wrinkly with the C group is that homes built on the smaller lots will often be of inferior design/quality so that's a variable we'd have to suss out when using them in an appraisal.


These are small datasets, so when it comes to comparing them that's a problem. Needs more cowbells

But the two things that jump out in looking at both these datasets is that the median price for the smaller group of "A" homes above is actually smaller than the median for the similar sized homes on smaller lots. Probably because the one $235k sale screws up the range. Tossing that 1 outlier sale and just using the remaining 3 cuts down on the pricing spread.

Median for A (@3sales) = $325,000
Average for A (@ 3 sales) = $323,333

Median for C = $326,000
Average for C = $322,863

The A group is tough to take seriously because the dataset is too small. Regardless, a comparo of these two datasets - which differ primarily in lot size - doesn't support ANY adjustment for lot area. I wouldn't have expected to find that, but my expectation didn't stop that from happening.

--------------------------

The other thing that's interesting from looking at both datasets is that all of these sales were 2016 sales, and not one of them - even among the A group - comes close to supporting the subject's 2016 transaction price. OTOH both the medians and averages of both groups DO line up pretty closely with the list price for the SFR itself on its 7500sf lot - which we can plainly see it ended up selling for - when it was listed in 2016.

These are the kinds of things I look for when I analyze a prior sale for the market's reaction to a variable.

 

[George Hatch]

I have no problem with Fannie's opinion or advice to consider this vacant parcel as "...'value in use' for the purpose of the appraisal, so that the land should be described and it contributory value included in the grid?" Note: For Fannie the appraiser is NOT appraising two properties and the appraisers engagement will be to appraise it as one property. All this H & B use analyses is fine for an-assignment where the appraisers engagement and scope of work is to establish two values or even on a consulting assignment where the client wants to know all of his/her options. Ultimately, the only real difference is that excess land has the potential to be subdivided and sold, while surplus land does not. OK that's easy I just describe the excess land may have a potential higher or better use.

BINGO- DONE- lender, buyer, sellers , neighbors everyone has full knowledge that some day Uncle Billy may decide to build his dream home on the other parcel. Also it's rare to ever get a Fannie Mae type property where it has a truley higher or better use. In the rare cases when the appraiser gets an-assignment where it's clearly not residential in nature or zoning then he/she can simply notify the client that the Subject or the adjacent lot or both are not a Fannie-Freddie-FHA-VA type of property, and to reassign it to a Commercial Appraiser.

Damn - UNCLE BILLY just wants his freaking house or duplex appraised so he can get his loan and some goofy guy showed up with a clipboard and Disto, walked around the duplex and told him a higher and better use was to sell it to Disneyland !! Uncle Billy screams at the guy and tells him he is not stupid and if it had a higher & better use he would have sold it a long time ago and moved to the beach.

That's the expediency argument.

Whenever I run into situations like this I don't go into the appraiser-geek stuff with borrowers except to tell them I will appraise the property in consideration of all the alternatives - whichever is the most profitable alternative is how I value it. My process is invisible to them because appraisal problems like this are usually simple to solve, even if sometimes time consuming to do it.

HBU analysis of a vacant parcel isn't about valuing the "subject to completion of the improvements" on it; we just stop at whatever the "as is" land value as indicated by the sales data. So the sell-to-Disneyland or built my mansion in the sky is not what we're trying to do.

 

[Carnivore]

Carnivore's marketing time scenario is totally flipped against reality, and it is the reason the Garfield lot listing was withdrawn, and why you can't show me any examples where the lots went to separate buyers but I can show you 100 examples where they went to the same buyer. Because although the typical seller may be interested in maximizing profit among other things, the typical buyer is neither interested in developing a vacant lot, nor living next door to a construction site.

How you can take what I said to discredit George about what you and he are discussing is beyond me.

My point in that post was to illustrate how someone goes from a Seller to an Informed Seller. Same goes for Buyers...Smart Buyers from out of town seek professional help to become informed Buyers. Smart Brokers know whats going on in their market. They do this because they are professional and want to serve there clients as best as they can.

FTR Markets are sometimes very Dynamic not Static.

 

[Terrel L. Shields]

. House and its site exposure 15-30 days
2. The Extra Site by itself will sell in about 60 days exposure because demand is relatively high for New Builds sites.
3. Thirdly the Combined House and extra site will take about 365 days exposure because demand is very low for Double Lot SFR's.

I am trying to think of a situation here where either buyer or seller was much concerned about an additional lot or even 2. Perhaps an artifact of our low land prices. In downtown Bentonville since construction of Crystal Bridges Museum, I would aver a lot or teardown would sell quicker than a developed lot. And even all but the slowest markets would lot sales lag and that would mostly be some backwater village.

 

[Carnivore]

I am trying to think of a situation here where either buyer or seller was much concerned about an additional lot or even 2. Perhaps an artifact of our low land prices. In downtown Bentonville since construction of Crystal Bridges Museum, I would aver a lot or teardown would sell quicker than a developed lot. And even all but the slowest markets would lot sales lag and that would mostly be some backwater village.

Fair enough, one of my very active Markets is Plaza-Midwood. Everything is taking place down there: Renovating 1920-30's house to modern interiors but keeping the original exterior. There moving walls or what ever to have that Modern Interior. Craftsman Style are bringing a premium. New Builds after scraping the lot of still useful existing improvement. Its kind of a irrational madness. No one wants a twin of their home next door or even across the street, but a little change in fascia is all that is needed.. What we have is a large group of Buyers flush with cash or heavy borrowing ability.

Something really strange that I observed is there are quite a few SFR that have not been sold, but are being held as a rental. Sorta of a Interim Use scenario!

 

[Lee Lansford]

...

We should also keep in mind that these instructions have been in place for a very long time, this newsletter was just a clarification.

No. Nonsense.

If THAT is what you believe, you fail Principles 101.

In an earlier statement you said that you are not an appraiser. Good.

EDIT to add: Not to comprehend the inherent conflict of entangling a 'value in use' definition of a 2nd property in with the legitimate definition (and valuation) of the other (subject) property for its MV is (almost) amazing.