Explaining HBU Of Vacant Land

[Pat Butler]

It's late and I'm getting myself confused doing a vacant land appraisal. I'm doing a HBU analysis and it seems the HBU is as-improved (details as to what improvements don't matter for this point.) Sites are selling for around $200K and purchasers then build a house and have a total package worth $500-600K.

Anyway, I've found some great comps of vacant land that have a similar HBU (shortly after selling, someone started building.) My client is going to sell his site and has no intentions of developing it. What's the best way to explain the HBU? I would certainly say the HBU is as-improved YET the appraisal is based upon its present use based upon my client's intentions and instructions to me. Would I describe the HBU and then explain the appraisal is for the value in use?? Or should I just indicate the HBU and say that the property is NOT being appraised at its HBU?

 

[Bill Rose]

Cemetary

 

[Travis McGee]

Cemetary

"Biggest wastes of prime real estate are golf courses and cemetaries"

Al Chervak


As played by Rodney Dangerfield of course

 

[xm39hnu]

Originally posted by Pat Butler asked...
Would I describe the HBU and then explain the appraisal is for the value in use?? Or should I just indicate the HBU and say that the property is NOT being appraised at its HBU?

From my own perspective, the HBU analysis stands alone. The H&BU is what you conclude it to be, and that's what I'd be sure to say. The definition of value you use depends on the scope of work, as defined by you and your client. The value conclusion you reach is in turn determined by the definition of that value (to get more basic than you probably needed.) I would definitely not leave anything out of the H&BU determinations, but would probably go on to say that the appraisal is developed to determine its value in use as, say, a convenience store (cemetary, golf course ... whatever).

Then I'd go looking for sales of property which had been closed while the comp property was being used for that purpose.

If no such properties are available, the H&BU analysis serves to help you identify and determine the amount of functional obsolescence to assign to the use for which you are determining value.

 

[Mark K]

I'm somewhat confused by your original post in regards to the possibility of appraising vacant land "as-improved". My feeling is that vacant land is by definition "unimproved".

As to valuation, a very similar topic on another post discussed this only this past weekend. If you want an opinion, here's mine:

If you value a piece of property for a specific use other than its highest and best use, you are appraising "Use Value" or "Value in Use", take your pick, and not market value.

Market value: Put a "for sale" sign out front and see what it brings on the open market. My shortened version of the definition.

Appraising an old house on a prime commercial corner as a residential property is not a market value appraisal, in my opinion. You are appraising its value in use as a residence. Even if the owner tells you to value it as a residence, its still not market value. Even if the scope of the appraisal says its limited to valuation as a residence. Even if you include hypothetical conditions. Its still not market value, once again, in my opinion. Others will probably disagree.

My opinion on HC's is that they should be use on properties to assume something that isn't yet reality, i.e., subject to buiding a home per plans and specs, or subject to repairs, or subject to a zoning change, etc. A HC should not be used in an attempt to ignore reality, such as the fact that the corner is already worth a Million. This isn't hypothetical. Its reality.

 

[Fred]

Pat
When the zoning is residential, there usually isn’t much to say.

Sites are selling for around $200K and purchasers then build a house and have a total package worth $500-600K.

Judging from here, with ratios like that, it sounds like the HBU of the vacant site is dirt.

Mark,
It is nice to have another value theorist on the forum. I appreciate your comments here and in the “fixer upper” thread. Let me see if I can push the envelope a bit.

I don’t think that use value and market value have an either-or relationship. That is, I don’t’ think it works to say either it is use value or market value; like one is a dog and one is a cat. The idea of use value and the idea of market value are very intertwined. When we estimate the value of property – we first presume some use.
Generally, we presume the highest and best, which may be the current use or not the current use.
We can appraise the market value in existing use (MVIEU) when this use is not highest and best.
We can appraise the market value of a presumed use that is not the highest and best.

I can think of at least four applications of the term “use value” that do not include market value at highest and best use, but no one published definition of use value (that I have seen) refers to them all.

For example, the old residence you mention that is now on a commercial corner. The lower value (as a residence) isn’t just use value; it is the market value in existing use. In a regular appraisal, you would have to estimate that anyway to find if the market value of the land is higher.

 

[xm39hnu]

Steve,
If we "presume a use" (not necessarily the highest and best use), do we need a hypothetical condition at all in order to appraise at a use which is less than H&BU? It was my understanding that you had to appraise at H&BU. I reasoned that anything less than that would require a HC.

Jim

 

[Fred]

Jim,
I hate it when you ask these really good questions.

If we "presume a use" (not necessarily the highest and best use), do we need a hypothetical condition at all in order to appraise at a use which is less than H&BU?

Probably.

It was my understanding that you had to appraise at H&BU. I reasoned that anything less than that would require a HC.

What if the subject is vacant land, then it would be an assumption not an HC.

 

[Mark K]

Steve,

I believe that our thinking is very similar but where we differ is in the semantics.

I generally agree with you except on the definitions of "market value in existing use", "mkt value in presumed use", etc.

In the case of the house on the commercial corner, my highest and best use analysis would look something like this: 1. What is the value of the property as it is currently being used? 2. What is the value of the site as though vacant based on a study of the local, similar properties?

The Market value would be the market value of the bare land - demolition costs. $1M - $10k = $990,000. Again, the value if you put a sign out front.

My position is that anytime you use the term "market value" you have to assume informed buyer/seller, equally motivated, etc. Would the seller of the property sell it for the residential value? Not if he's adequately informed. And if you assume the sellers of the comps were informed sellers, where will the "market value in use" sales data come from? For a "value in use", I'd use any similar size and age home in the local market, most likely a rental home. But is this a "market" value? I keep coming back to the "market", the local buyers and sellers.

For example, I appraised a single family home on 13 acres of which 6 acres used to be the town landfill. No remediation estimate available. Owner was living in this 4 bedroom house and was aware of the landfill status when he bought it. (Fool) Obviously, the appraiser wasn't aware when the owner bought it about 7 years ago because the owner had a mortgage on it. Local municipal authority wanted to purchase it. Hired me to do an appraisal. My appraisal stated "USE VALUE" throughout. No mention of the word market. The property was still usable as a home and the landfill was covered over and planted in clover with horses grazing on it. Told the client that it had some use value for renting the grazing land and for income from renting the house but the actual market value could be negative millions depending on what was buried. I wouldn't put the word market in that report on a bet.

In response to the other post, if you assume a predetermined use for a "use value" report, I see no reason to complete a H&BU analysis. In agreement with client, the scope is already limited to the value in use and a BIG disclaimer that the report is a "use value" and that the "market" value could vary wildly from the "use value" should suffice. Now, if they want both values (and they often do), that's a different story, and fee. This type of report isn't much use to lending institutions but sometimes its needed for divorce, estate, or trust work.

 

[xm39hnu]

Originally posted by Steve Santora...+--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td>QUOTE (Steve Santora...)</td></tr><tr><td id='QUOTE'><!--QuoteBegin-Jim Plante...
It was my understanding that you had to appraise at H&BU. I reasoned that anything less than that would require a HC.

What if the subject is vacant land, then it would be an assumption not an HC.[/b][/quote]But vacant land is the subject of an H&BU analysis. Land has value, improvements only contribute to it. One would still need to do an H&BU as vacant in order to determine the functional obs of land at the projected use.

Hypothetical scenario:
Purpose of appraisal: Market value of fee simple interest.
Use: Owner will use appraisal to determine feasiblilty of opening and operating a small custom leather shop in the middle of the CBD of a small town.

Subject: Vacant lot in the middle of a small town. All around it, commercial buildings--some a hundred years old, some new, predominant 30. No SFR's. Zoning B-1, General Business (no manufacturing; retail sales and professional offices permitted; other uses on appeal).

H&BU as vacant:
Market conditions: (for scenario, assume normal market; nothing going on to supress demand; CBD area rented up; vacancy 5% mostly in older bldgs.)
Typical improvement: 1-2 story retail sales building; brick, block, or tip-up concrete construction with glass store front; 30 years of age; 2,000-4,000 sf., with 3,200sf predominant.
Ideal improvement: New 1-story 3,200 sf glass front masonry bldg. Reasoning: Conformity, balance, and demand shown to be high for these characteristics.

As vacant determination: to improve. Reasoning: Ideal improvement is legal and possible; Leaving it vacant produces negative cash flow: Maintenance required, and taxes every year. Improving with ideal improvement can produce positive cash flow in the form of either rent or business revenue. Therefore, ideal improvement is feasible and produces maximum benefit to owner. Improvement conforms to neighborhood; new improvement improves appeal of area; maximum return to community is an acceptable conclusion.

Where and why do we need an assumption or an HC? At this point, we're not even discussing the owner's proposed use yet.

---- end hypothetical scenario ----

Obviously from Ray's original post, H&BU as vacant would be to improve. Ray's info is conflicting: on the one hand, I infer that the site is now vacant. If so, why is he doing an as-improved analysis on vacant land? Typical and ideal improvements are dictated by the surrounding structures, and serve as an indicator of whether to improve the property or to leave it vacant, based on the market conditions.