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Converted 2br From 3br HBU Question

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Valueseeker

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May 19, 2016
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Certified Residential Appraiser
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Massachusetts
Hello again folks hope all are enjoying this winter. It's rather milder than usual and I'm just glad my fingers are freezing on inspections. anyhow...

This property was converted to a 2br from a 3br years ago. The old closet still exists. The HO's children had moved out and had converted a bedroom to make a larger living room.

My question is the HBU a 3br? 3brs sell for more. A previous thread in this forum mentioned cost to cure for putting up a wall. Is the proper way to figure this out to see if more gain will come from converting the current 2br to the 3br after placing the wall? I know this is my second HBU question.

Thanks again everybody
 

Mike Kennedy

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Sep 28, 2003
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Certified Residential Appraiser
State
New York
Again, the answer lies in the comparative market analysis - actives, contracted listings, closed sales of the most similar and proximate props which would serve as a substitute for the subject's real property (Principle of Subsitution). It varies market to market, but, a current to 3 year retro search (by location, style, design/BR utility) will identify the local competitive marketability and market value variances - if any. :)
 

Michigan CG

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If three bedrooms sell for more than two bedrooms then you have functional obsolescence. The question is it curable or incurable. If the cost to convert is less than or equal to the increased value then it is curable, otherwise it isn't.
 

Valueseeker

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May 19, 2016
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Certified Residential Appraiser
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Massachusetts
So is that a separate issue? I normally adjust for the bedrooms if I compare to a 3bedroom. I guess I'm just hung up on "is the HBU of the subject propertyas improved the present use?"

I feel like if it's cheaper to put up a wall and make it a 3br, then I would say it's not at it's highest and best use.
 

J Grant

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Dec 9, 2003
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Certified Residential Appraiser
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Florida
So is that a separate issue? I normally adjust for the bedrooms if I compare to a 3bedroom. I guess I'm just hung up on "is the HBU of the subject propertyas improved the present use?"

I feel like if it's cheaper to put up a wall and make it a 3br, then I would say it's not at it's highest and best use.

Imo you are misapplying and misunderstanding the purpose of HBU analysis and where it fits in the appraisal process.

Before I go any further, I assume this is an "as is " market value purpose appraisal?
 

DARREN GODFREY

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Nov 15, 2006
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Licensed Appraiser
State
Maryland
Imo you are misapplying and misunderstanding the purpose of HBU analysis and where it fits in the appraisal process.

Before I go any further, I assume this is an "as is " market value purpose appraisal?
Yes they are , it is definitely and obsolescence issue , the highest in best use is likely it's current one which is a residential property which is probably zoned residential.
It it had a different zoning maybe it would be best served as a gas station ...that is highest and best use.
Obsolescence it the scenario you guys are describing.
 

Valueseeker

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May 19, 2016
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Certified Residential Appraiser
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Massachusetts
Yes I definitely am.Ok I'm misunderstanding the "maximally productive" part then.

As is for a refi.
 

J Grant

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Dec 9, 2003
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Certified Residential Appraiser
State
Florida
The property is already at its HBU (existing residential, assuming res zoning and no excess land/other issues )

Now your HBU analysis as existing residential is finished, the appraisal is no longer concerned with that. The as is value is just as stated, what is the market value (most probable price ) of the property as it exists, warts and all.. We are not playing designer changing a floorplan back to 3 bedrooms to maximum the value/price. We only impose subject to a repair or change if it;s a health or safety or illegal zoning issue or agreed client condition to do report subject to X . ( not the case here).

As exists for as is purpose, the subject is 2 bedrooms. I'ts the same sf as some area, 3 bedroom homes, and perhaps larger than 2 bedroom homes in area. The obsolescence relates to cost to cure vs possible los of value (Much CG explained) Buyers are not idiots and can envision putting a wall and door back up to retrofit back to 3 bedrooms...what would it cost them to do that, as a means of supporting an adjustment/ discount (if any ) for deficiency of 2 bedroom utility vs 3.

In some markets, there may not be a penalty for turning it into a 2 Bedroom Having 2 spacious bedrooms vs 3 cramped ones can add to appeal, so figure out what kind of market you are in and what buyers want...survey local RE agents about it.
 

AMF13

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Jan 24, 2002
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California
It's not a HBU issue. It's functional. Likely the cure is not too expensive. Build a wall to replace the one removed.
Just don't ask Mexico or DT to pay. :leeann:
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
I'm going to slightly disagree with a small part of JGrant's and Lee's comments (well, maybe a larger degree of Lee's comments... sorry Lee! :ROFLMAO:).
They are right that the big picture is the "use" (residential- that is what should be there and that is what the improvement is). They are also right in that for most, that is where it stops (and I could agree that in many cases, that is where it would be expected to stop).

But if you want to be technically correct and apply the methodology to a deeper extent..... :ohmy:

The situation that you describe is part of the H&BU, as-improved, analysis.
The use has been established (residential) and the improvement is a residential improvement which is consistent with that use. Assuming the improvement still contributes value to the site, then the improvement is consistent with the H&B USE as-is.
But H&BU as-improved doesn't stop there.
There are four things to consider for the as-improved analysis:
1. Remodel; i.e., change the USE or utility/functionality (I'll come back to this in detail later)
2. Renovate: update/modernize. For a historical property, this may include restoration
3. Retain as-is: You don't need to really do anything accept continue to maintain the property, repairing items when they break and replacing short-lived (carpet, appliances) items when they need replacing.
4. Demolition: Bring the wrecking ball. But if the improvement continues to contribute value, this isn't an option.

Your improvement, based on your description, falls under #1: Remodel to improve the utility/functionality. If it is financially feasible to do (the value addition is more than all costs to do it), then that is what should be done. If it is not financially feasible (value addition does not cover the costs) then as far as we are concerned, there is no option to do it. Doing this analysis will tell you (in part) how much to adjust in the approaches.

All of those tests are measured against the "ideal improvement". What you have determined is, based on your subject's size and its market/market demands, the ideal improvement on the site would be a 3br home and not a 2br home. Because it isn't what should be there, there is a loss of value. If you want to name it in your case, it would be functional obsolescence (what causes the loss); the actual loss is the depreciation (dollar amount) it impacts your property.

So, H&BU as improved analysis is used to measure and identify functional obsolescence. We use that information to determine if we need to make adjustments in the three approaches and it is used as part of the equation to determine how much of an adjustment is warranted.

H&BU as improved also tells us what kind of comparables to use. And, who the likely buyer is and what will they do with the property when they buy it and when will they do it.

I just finished an appraisal of a home. It was for estate purposes. Pretty simple analysis. It was adequately maintained, no repairs needed, some replacement of components (windows, some flooring) had occurred, but no significant renovations (kitchen, bath renovations or significant interior renovations). The house was built in the 1970s and all the homes were from the same development. Most of the homes had some level of renovation; from at least the kitchen and interior, to the entire interior (kitchen, baths, interior finish, landscaping, roof, windows). Homes that are not updated when sold will likely be updated (the one comparable I found with no updates has since been renovated after the sale).
Who is the likely buyer for my home? In this neighborhood, it would be an owner-user; they out-bid investors. My property, while not updated to the neighborhood standard, was not in such poor shape that it made economic sense for an investor to purchase, renovate, and flip.
What is the likely buyer going to do with my property? The likely buyer is going to renovate the kitchen and baths, and perhaps update the interior further. That is what homeowners are doing in this neighborhood.
When will the likely buyer do it? No need to do it immediately, but more likely sooner (next few years) than later (10+ years from now).
What are the best comparables to use? This may seem readily apparent in this situation, but that is not always the case. The best comparables to use are similar homes without upgrades who were purchased by owner-users and not investors. That is why I had to spend some time to find that match in my comparable search.
But if I had an investor-type home, I'd want to find investor-purchases. If I had a renovated house that was needed no work, I'd want to find similar homes purchase by owner-users.

So you are going down the right path in the H&BU analysis by trying to determine if your improvement should reconfigure to a 3br house. H&BU analysis is where one would make that conclusion. From here, it is all about the kind of type of adjustment to make and the comp and buyer-type selection.


Good luck!
 
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