Call it HBU as is or interim use?

[Fred]

PE,

I dont see where residential appraisers completing a residential reports are allowed to deviate from HBU analysis and HBU reporting requirements on the current Fannie Mae ver 3/05 forms.

Would that be a diminishment of USPAP requirements of 1-3(b)?

Maybe there is no diminishment. Maybe there is. I haven't studied it. It seems to me that only way to go wrong is to put the cart (Fannie-schmannie) in front of the horse (USPAP). The only way to "diminish" USPAP is to deviate from "correctly employed recognized methods" or produce a value for a client that is other than what the client (who isn't Fannie-schmannie) needs.

As Greg has pointed out, my copy of Fannie's guidelines are dated and may have been an addendum to the Book of Exodus. However, I remember a lot of HBU inconsistencies starting with an oddball defintiion. Also, there is some jockeying back and forth between HBU as improved or as if vacant. That's why my opening post and other posts clarified that my response were addressing HBU as impoved.

 

[Brad Ellis]

Greg,

I think I disagree Charles, and here is why:

If the land value is $1,000,000 with no improvements and you build a small house at a cost of $100,000 and this results in a sale of the improved property of $1,200,00 then the improvements increased the value of the land by $100,000.

If you instead built a large house on the lot at a cost of $700,000 and this resulted in a sales price of $2,000,000 then those improvements increased the value of the land by $300,000.

As of the effective date, the lot will be underimproved. But it's typical that a larger house will eventually be built.

I don't think the small house is the HBU of this lot.

Maybe I'm not thinking straight. I've got too many weird assignments on my plate right now.

Disagree. I agree with Charles and Lee on this. Here is why:

This has nothing to do with Fannie. It is basic appraisal theory on H+B use and it is called the Consistent Use Theory.

If existing improvments add to the value and are legal than current use is H+B use. This is based upon the notion that demolishing improvements must either at least produce a land value that is equal to what it would be if no improvements existed or greater. If it does not then it makes absolutely no economic sense to demolish improvements that add value. Essentially, using your numbers, you would destroy $200K out of $1,100,000 leaving a value of $1,000,000.

Remember that you are always valuing land and improvements as a single unit. If it is there and adds value and is legal, the theory itself calls it H+B use.

Now, if the improvements were not always there, different story entirely. But they are.

Brad

 

[Pat Butler]

When I read Fannie's guidelines I don't see where they are deviating other than asking whether or not the PRESENT improvements are the HBU.

It seems that everyone wants to ignore the HIGHEST and BEST part of the definition. If there is another use that would maximize the value of the property then the present use is NOT the HBU.

Also remember that USPAP requires the appraiser to analyze the HBU but does not require a property to be appraised at its HBU. That's a very important distinction.

 

[CANative]

Brad... Thank you for your response and guidance.

I started this thread not because I needed help in this specific assignment. I started it because I thought it might make an interesting discussion and help me learn some more advanced concepts. I have no problem checking the "yes" box for as improved (or proposed) HBU because it's clear that it meets the Fannie treatment of HBU analysis. I just didn't want to leave it at that because it's just not the whole story here.

If they want an appraisal report that simply states "yes" they would have to have the property owner build the big house first and then the little house because HBU is not little houses on big lots. The HBU is big houses on big lots.

It seems to me (I lent my Appraisal of Real Estate, 12th edition to my trainee) that your consistent use theory application in this case may have a flaw. It's clear in this particular location that HBU results from significant improvements to the land such as a large luxury house, an accessory dwelling unit (or two or three even though they're not technically allowed), a couple of large barns, wells, roads, a small (or medium size) vineyard, etc., etc.

In this case I would be stating that the current use is the HBU (simply because it adds a dollar) when HBU is something other than this.

In real life, this isn't too much of a problem for me. I've got comps on the same road of similar tracts with little and big houses.

 

[Mike Boyd]

Sorry, but I agree with Charles on this. Let's say the existing house has 2,000 sf but 4,000 sf would also sell for a greater return. Does this mean that the 2,000 sf house on a 160 homesite is not its H&BU?

Let's examine WHY the question is asked of the form.

My opinion is that the lender is not interested in making a loan if a year later it will be refinanced to build a golf course or something unrelated to a SFR or to utilize the natural mineral springs and sell bottles of water. In other words, if its H&BU is residential, and you think there should be a 4,000 sf home on the property........it is still residential. H&BU is not affected.

 

[CANative]

The current (unfinished) house is less than 1,000 square feet and is a panelized kit home. The kit costs about $35,000.

The other one I'm doing which is amazingly similar, the current (unfinished) house is about 600 square feet.

The lots that are under these little houses are probably worth $1,200,000 to $1,500,000.

One is on Yorkville Ranch Road and the other is on Highway 1 a little north of Elk. The current house has been set on a terrace graded out of the steep hillside along the interior road. Pretty good view. The site plan shows the road going all the way back up the rear of the lot and lists "proposed main residence." I went up there and they have a set of flags where the house is going to be built. The contract working on the little house says the main house will be over 4,000 square feet. The views are unbelievable... and I've seen some pretty good views around here.

 

[Charles Knutson]

Greg --

I'm not sure these houses really add value, but their well and septic systems probably do -- which brings us to the same conclusion, that the present use is the HBU.

If the improvements add ANY value (even as little as one dollar) over and above the value of the land as vacant, then the present use is the HBU.

On the other hand, the property owners are probably building these kit houses to move the properties from the vacant land category to improved residential -- but that is an issue for the lenders, not the appraiser.

This is a case where 90-99% of the cost approach value is in the land -- but so long as the improvements contribute any value, the HBU is as improved.

 

[Carnivore]

From the Dictionary of Real Estate Appraisal, fourth Addition

highest and best use of property as improved
The use that should be made of a property as it exists. An existing improvement should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one.


highest and best use of land or a site as though vacant
Among all reasonable, alternative uses, the use that yields the highest present land value, after payments are made for labor, capital, and coordination. The use of a property based on the assumption that the parcel of land is vacant or can be made vacant by demolishing any improvements.


highest and best use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasi-bility, and maximum productivity.

 

[CANative]

I haven't done all the number crunching on the kit home property yet. It's very difficult and I probably won't complete the cost approach, but rather discuss costs, land value, HBU, etc, etc.

The $35,000 just gets you a truck load of parts. You still have to have a contractor for foundation, building, interior finish, roofing, etc., etc. The cost, for the residence, will probably end up being similar to any other type of construction. By the time we account for building the road to the house including drainage culverts and fire department turns, site preparation, the cost of the well system, the onsite power system, wildfire requirements, blah, blah, blah, they've probably got $200,000 or more invested.

 

[Fred]

If existing improvments add to the value and are legal than current use is H+B use. This is based upon the notion that demolishing improvements must either at least produce a land value that is equal to what it would be if no improvements existed or greater.

The statement that there is no higher and better use if the improvements add value is not always true. Interim use is an exception.

Also, in evaluating the current improvements, demolishment is only one alternative. One must also consider permissible and possible renovation and expansion of improvements, as this instance shows.