Condition: Arms-length Commercial activities

[J Grant]

Sorry so long to respond:

Conditions: Please provide a dated addendum summarizing what has been revised in the report. Thank you
(1) The subject property have a horse stalls as per photos, Appraiser to provide comment as there is any income producing activity going on

That's a simple question. Just disclose whatever income-producing activity you learned about or asked about.

I dont see them using the word commercial btw.

 

[ZZGAMAZZ]

That's a simple question. Just disclose whatever income-producing activity you learned about or asked about.

I dont see them using the word commercial btw.

I almost hate to bring it up, but this morning I was thinking about what makes commercial commercial, and remembered numerous prior AF threads that cautioned the res appraiser to focus on real property rather than activiies being conducted on the real property....but if that is true, how can the "maximly productive" HBU test be conducted? [Like every damn day it's like back to appraisal 101...]

 

[Mark K]

Are they paying over MV due to boarding horses for monthly income? Around here people pay hundreds of dollars per month to board one horse. If there are several stalls they could be receiving several thousand dollars per month. That may be enough for a buyer to justify paying in excess of the value of the real estate and improvements but then you have a business component to analyze.

They get about $500-700/month per horse in this area. Sure its a serious part time job for the owner but, even after expenses, its a pretty good amount of income. You could have a mixed res/comm property.

Arms-length or non-arms-length is a non-issue. The property is worth what its worth; we're not appraising the buyer or owner.

 

[George Hatch]

Not commercially viable means the non-res operation won't support itself.

About a month ago I appraised a 10ac parcel of which 5ac was freshly planted with avocado trees. That operation won't return enough income to justify the effort. Not in a market where they're using 10ac groves as SFR lots and treating the trees like landscaping, which is how this parcel will end up being developed.

 

[George Hatch]

Are they paying over MV due to boarding horses for monthly income? Around here people pay hundreds of dollars per month to board one horse. If there are several stalls they could be receiving several thousand dollars per month. That may be enough for a buyer to justify paying in excess of the value of the real estate and improvements but then you have a business component to analyze.

They get about $500-700/month per horse in this area. Sure its a serious part time job for the owner but, even after expenses, its a pretty good amount of income. You could have a mixed res/comm property.

Arms-length or non-arms-length is a non-issue. The property is worth what its worth; we're not appraising the buyer or owner.

They're basically buying themselves a job and/or using it to subsidize their own recreation and lifestyle. They didn't buy it as a passive investment like an apt building. There's no offsite profit margin involved until it gets to a certain size that fully supports the administrative and management functions.

Small motels operate this way, too. The family has purchased a job..

 

[Terrel L. Shields]

whether the extensive equestrian improvements are commercial if used to create income.

A Business Enterprise Value is not real estate

that is strong evidence that the transaction is not arm's length.

I might argue that isn't relevant and the transaction is simply above market.

if the income is substantial enough, then it could be.

Again, can we attribute the income to Real Estate? Or, more likely, it is a Business Enterprise Value that relates to management and operation of an income producing enterprise and not to the real estate per se. And one test is what non-real estate items are included in the sale? Saddles and tack? Horse walkers? Drinkers? Feeders? Is someone managing the business? Does it requiure someone to operate the business.

 

[J Grant]

Appraising it for business income is a going concern and that would make it a commercial appraisal, which a res license typically does not do -

Regarding HBU of a property, I like to imagine it as vacant - that way, one does not get sidetracked about who actually lives there or rents there and what activities they engage in. A house and a 4 stall barn is probably a hobby farm. A property with a house with a 20-stall barn and extensive facilities is typically set up for boarding. Especially if the RE agent is bragging about it. Seems the client asked the appraiser how many stalls there are and if there is any income present. Which should have been disclosed anyway.

WRT HBU, the question for a residential loan is whether to continue the present existing use or other . If a horse farm or hobby farm is on a large lot or a parcel that can be subdivided, in some areas, especially semi-rural, where development is encroaching, the land can be worth a lot more than the improvement. HBU is other/ land value in that case. I grew up in an area that used to have many stables, most of which have closed and been made into subdivisions. Kind of sad, but a clear illustration of HBU. In a rural or wealthy equestrian area, it is more likely that the horse farms will remain.

There is a saying- how do you make a small fortune with horses ? Answer: start off with a large fortune.

 

[Tom4value]

Assignment is the purchase of a large home on a large parcel without r.e. agents, without marketing.

1) I defined the seller/buyer relationship as "arms length" because nohing about their prior student-teacher interaction affected the contract terms--although maybe that's why my OV was $275,000 less than the offer of $1,250,000. Client says it's non-arms-length 'BC THEY KNOW EACH OTHER.

2) Client condition wants to know whether the extensive equestrian improvements are commercial if used to create income. My memory kinda remebers that the AF advises the real property appraiser of real property to focus on real property. HOWEVER the seller vividly described various equstrian boarding servicess....and I can't igore the condition or un-learn something I learned about the property.

Kinda need advice before I submit my pending response that says "I just don't give AF." [remmbering Newphew Glen's advicee about business decisions.][

For #1- For arms length, “buyer and seller must be acting “in their own best interests“ . Just because the buyers and sellers know each other, does NOT mean they are not acting in their own best interests. This happens all the time between business associates, past interactions or “just people you know”, like student-teacher. True, big difference between your OV and contract price can be a flag of non arms-length but the fact that they didn’t use the expertise of a real estate professional could also mean just ignorance of values; not buyer/seller collusion. Still, more investigation of the relationship is required that more typical transactions to be sure.

For #2- more focus on highest and best use is needed than a typical residential property. If equestrian activity is legally permitted, you have to determine if the potential income is a “significant influence on market value”.

 

[sputnam]

A Business Enterprise Value is not real estate

I might argue that isn't relevant and the transaction is simply above market.

Again, can we attribute the income to Real Estate? Or, more likely, it is a Business Enterprise Value that relates to management and operation of an income producing enterprise and not to the real estate per se. And one test is what non-real estate items are included in the sale? Saddles and tack? Horse walkers? Drinkers? Feeders? Is someone managing the business? Does it requiure someone to operate the business.

You might argue anything. I said 'evidence', not 'proof'. The determination has to be based on all facts and factors... not just the few that we've posted on the forum.

 

[ZZGAMAZZ]

You might argue anything. I said 'evidence', not 'proof'. The determination has to be based on all facts and factors... not just the few that we've posted on the forum.

"Can we attribute the income to R.E." sure puts the issue into perspective IMO... kinda reminds me of the standard IRS deduction for clothing, i.e., purchases qualify as a deduction only if the item is worn only for work but not for work and play. In that context the real property could be.used Only as income producing features. With consideration for admin time, the seller is a retired educator whose FT active retirement income is based on the equine boarding [unsure if a staff is involved or how much time he devotes, although he described how different types of boarding affect the management, i.e. some type requires literally no labor ever cept to lay out bales of hay. Way too late to not accept the assignment that's obv far above my expertise. I don't even understand why anybody would ride a horse, if a car is available... way too much a city boy. Tried to avoid this type of property by moving to the beach, but work requires me to return to the I.E., "just when I thought I was out, they pulled me back in...