Converted 2br From 3br HBU Question

[J Grant]

In the spirit of debate, from Denis post above

Denis -"The situation that you describe is part of the H&BU, as-improved, analysis."

But this is not an "As improved" assignment ( provide an opinion of market value as improved/ to obtain the highest price).

The assignment is opine the market value (most probable price ) of subject "as is" ( a 2 bedroom converted from prior 3) Nearly every property could be improved to get a higher price (renovate , upgrade etc) Yet we don't call for that on properties unless it is an assignment condition,

Investors love problem properties. They make $ on the spread between their cost of fixing a problem, ( repair or retrofit or upgrade), and the anticipated profit when sold as improved.

Whereas (most) owner occupant buyers shun problem properties. They plan to live in the property, not profit by flipping, so the headache and cost outlay of repair or improvement is unappealing .They'd rather spend more upfront for a property that has no issues than take on a project (unless they are a handyman type, there are exceptions)

Of course we have not seen this particular house and it's possible, in some markets, that a large 2 bedroom having the same sf as a cramped 3 bedroom won't see any loss of value.

 

[Tim The Enchanter]

I am crushed by the weight of Denis analysis.
Thank God it's Friday.

You should write a book.

 

[J Grant]

He just did, lol (gentle teasing )

 

[Valueseeker]

Denis I appreciate this response. The word "use" I wasn't taking as "residential / commercial / vacant etc" but rather 2 bedroom 3bedroom, 4, etc.

My thought was ... clearly a 4,5 or 6 bedroom isn't going to work because the rooms would be closets. 3 makes sense since the floor plan previously catered to it and they do sell faster and for a little more money.

I asked a question last week about how if a property generally conforms to a neighborhood and if and when you check the box 'no'. Someone mentioned we just report what we see and we don't try to make deals happen- state the facts. With that in mind I would think the same thing thing would apply here. Highest best use is as a 3 br.

J grant's response has a good point in that I think i just feel more comfortable NOT playing designer with floorplans. every home can be improved. I just thought even still, if it's profitable to do the improvement then it's not in its maximally productive HBU.

I don't want to scrutize each home like this as I don't think I'd be qualified to do so. If the general consensus on HBU is simply it's use in regards to whether it be residential or not, I'll stick to this. I just want to do what other appraisers do on this.

Thanks again all for the engaging in this discourse. Definitely helpful and even more of a thanks for no one tearing me a new one for asking this type of question

 

[hastalavista]

Denis I appreciate this response. The word "use" I wasn't taking as "residential / commercial / vacant etc" but rather 2 bedroom 3bedroom, 4, etc.

My thought was ... clearly a 4,5 or 6 bedroom isn't going to work because the rooms would be closets. 3 makes sense since the floor plan previously catered to it and they do sell faster and for a little more money.

I asked a question last week about how if a property generally conforms to a neighborhood and if and when you check the box 'no'. Someone mentioned we just report what we see and we don't try to make deals happen- state the facts. With that in mind I would think the same thing thing would apply here. Highest best use is as a 3 br.

J grant's response has a good point in that I think i just feel more comfortable NOT playing designer with floorplans. every home can be improved. I just thought even still, if it's profitable to do the improvement then it's not in its maximally productive HBU.

I don't want to scrutize each home like this as I don't think I'd be qualified to do so. If the general consensus on HBU is simply it's use in regards to whether it be residential or not, I'll stick to this. I just want to do what other appraisers do on this.

Thanks again all for the engaging in this discourse. Definitely helpful and even more of a thanks for no one tearing me a new one for asking this type of question

I hear you.

I think the fundamental challenge is understanding H&BU is more than just determining what should be there (if vacant) and if what exists is consistent with the H&BU.

You don't have to be a designer to figure things like functional obsolescence to the degree that is expected.
And, determining if a property is ready for renovation (a "flip" in many markets) or is good as-is (owner-occupancy ready) doesn't require a Level C market analysis.

Most of us do this somewhat on an intuitive level. What I am suggesting to you is that what you may have done intuitively up to now is part of a very fundamental and recognized process called H&BU.
Understanding that process and correctly knowing how to apply it likely won't significantly improve the quality of my work for a standard tract house. Those assignments aren't that difficult and typically don't require a deep analysis.
Understanding that process, however, can save my *** and help me recognize when what might appear at first glance to be simple, is really a complicated and complex problem.
And, understanding that process will give me confidence to expand my assignment-boundaries and be competent to take on challenges that I would have foregone before.

That's all!

 

[DARREN GODFREY]

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! ).
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.....

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!

That all falls under obsolescence ...we are basing everything on land and it's use. So that whole property that is too small for millionaires is very similar to a property that has been expanded but no one wants.
Don't take it the wrong way I completely get where you are coming from.
The thing is that we get confused in our terms. We can't turn pigs into cattle when someone wants beef. So land use is the first part.

 

[J Grant]

Denis describes what many of us do in our process to determine value, including analyse deficiencies and obsolescence in a property, market reaction to it, and what it would cost to cure . But though one can call that part of HBU analysis, imo it belongs to other steps in appraisal. At a certain point HBU analysis is completed and then one uses that as a foundation to flesh out the rest of the appraisal..

The HBU analysis was completed: present use as improved ( residential SF home )

USPAP says an appraiser must develop a HBU analysis. It does not say the subject property ,must be physically improved to achieve maximum price/value .( unless that is the assignment)

If the assignment was: "Provide an opinion of market value subject to improvements needed to achieve maximum value", then the appraisal would be made subject to retrofit to a third bedroom.

But that is not the assignment. The assignment is provide an opinion of AS IS market value. The property AS IS has 2 bedrooms; OP says 3 bedrooms sell for more. Result is the subject AS IS commands less in the market (obsolescence ). A cost approach can help see what a well informed buyer would recognize ; a low cost to cure to make it a 3 bedroom ( estimate $3000 for drywall, paint, door, misc finish, re floor the bedroom area).

This cost to cure estimate serves an additional purpose of supporting the adjustment for the deficiency. While 2 bedrooms sell for less in the market, this subject was a former 3 bedroom, and has more sf than the 2 bedroom homes. For a buyer, unless they build a costly addition, the 2 bedroom home sf limits it to being just 2 bedrooms. Whereas the subject has the larger sf as a 3 bedroom home, and retains original floorplan access for third bedroom near a bath. So it can be retrofitted back to a 3 bedroom at low/moderate cost (see estimate) ) So the discount (adjustment ) for subject might be less than the price gap between 2 bedroom vs 3 homes, depending on what the difference is. Putting both 3 bedroom homes and 2 bedroom homes on grid and adjust for SF difference is part of a solution..

Above are examples/ assumptions to show how to solve the problem, OP has to research what his market shows and of course the actual house may not be as assumed for example

 

[Mike Garrett RAA]

While I appreciate all the extensive analysis of this issue, I say..."keep it simple".

Highest and Best Use....Residential, as improved. This is not the issue.

Functional Utility...does a two bedroom compete favorably in your market with a three bedroom? In my market those do and I can usually find 2 bedroom comparables to support this.

Is it necessary to do a "cost to cure"? Cure what? I wouldn't even try to go there.

Configuration would just fine for an aging population.

Cheers, Mike

 

[J Grant]

While I appreciate all the extensive analysis of this issue, I say..."keep it simple".
Highest and Best Use....Residential, as improved. This is not the issue.
Functional Utility...does a two bedroom compete favorably in your market with a three bedroom? In my market those do and I can usually find 2 bedroom comparables to support this.
Is it necessary to do a "cost to cure"? Cure what? I wouldn't even try to go there.
Configuration would just fine for an aging population.
Cheers, Mike

Overall I agree with your post, and a 2 bedroom would do fine for an aging population, but not so fine for an area of young families...the OP has to determine the market buyer. (or mix of buyers).
I disagree on cost to cure. While it is not necessary, many clients ask for it, as it provides additional information about the subject, and it helps support the adjustment (or lack of one),

 

[Mike Garrett RAA]

And you are right.... the market is the market and in mine it's an "aging market". The VA doesn't require cost to cure so I don't do those. If your client wants a cost to cure...provide it. Again, my concern is..."how good are you at providing that information and what is your source"?

As an example...What is the cost to cure for the following:

1. Fix or repair an existing 15 year old forced warm air gas furnace?
2. What is the cost to replace a forced warm air furnace?
3. What is the cost to replace a 50 gallon water heater?
4. What is the cost to add central air conditioning to an existing forced warm air system?
5. What is the cost to add central air conditioning to new construction?
6. What is cost to replace a standard toilet with a chair height 1.6 gallon unit?
7. What is the cost to convert an existing standard tub with shower to just a shower?
8. What is the cost to convert a standard tub to a walk in spa type?

Inquiring minds would like to know!