Fannie Mae's New Highest and Best Use 2020

[Russ Kitzberger]

I just had one of these come through the commercial side, likely because they couldn't underwrite the H&B use and it's full value conventionally.

Sounds like it is just a change in the interest in the real estate valued when there is excess land.

For those doing the FNMA projects, is this now Fee Simple Encumbered by Mortgage rather than Fee Simple? We have that for some legal projects, Fee Simple encumbered by deed restriction, certain leases, ect.

Do you use the terms of the Fannie Mae Master Mortgage Form as the guide for the encumbrance on the fee simple?

The item they missed out on is what is the cost/market reaction is to the encumbrance. Sounds like a complicated project for anything with excess land!

 

[George Hatch]

I don't split the baby, I just cut off one arm. My client is Fannie and she says, as I understand it, 'one house, one site.' I always try to bracket the site size and zoning (especially acreage) so there is "market evidence" of HBU. If someone wants a feasibility study of surplus land, then that's a different assignment. There are more assumptions and hypothetical in developing 'more value' for surplus land and has less support. If the house and land has sat together for 30-years, then why didn't the owner develop it into three additional sites and maximize its value? How could they have ignored that potential money in their pocket 30-years ago? Are they really that stupid or maybe just rational?

If you're signing for the MV of the property then that does not occur outside the HBU. Regardless of how much or how little work it takes to perform that analysis.

It costs at least $60k do to a lot split in this region, so even if everything else about the scenario is the same, the cumulative land value for (2) 1/2ac parcels can be a lot different than for a single 1ac parcel. Not that they WILL be different, but that they CAN be different; so that's what makes it unreasonable to invoke the arbitrary assumption that they ARE the same.

It's all fun and games when the underlying land values are low but that's not always the case. So when the potential error from such a scenario is getting into 6 figures that's when having a consistent approach to these problems becomes useful.

I don't know about you folks but I've seen the house+extra convey in two separate transactions to the buyer and under separate financing, and I've also seen them convey to different buyers. So just the fact that it can sometimes occur justifies doing the analysis.

 

[J Grant]

Caveat, I did both of my excess lot sold with a house adjacent ( one 4 years ago, the other about a year ago ), before Fannie's latest HBU /encumbered by one mortgage riddle -perhaps they are trying to reassure skittish appraisers ? But the advice or way they expressed it is inane.

A lot encumbered by a mortgage no more has its value affected by it than a house encumbered by a mortgage does. If I own house 32 Cherry Street and it has a mortgage, when I sell it the mortgage is paid off. Likewise IF I own 32 Cherry ST and the lot adjacent and now the lot is sold alone, the blanket mortgage either gets paid off on sale and then a new one for the house, or a partial pay off releasing the lot happens - however it happens, a new buyer gets the lot free and clear of the old mortgage. Just as if they bought a house. So what affect does encumbered by one mortgage has beats me.

What affects value is the fact the house and the lot are offered/sold together, and that would be true if the sale was for cash with no mortgage involved. Fannie is as I Said in another post though increasing demand for these properties by offering such blanket mortgages , no problem there they can lend on anything they want. But their advice most recently (if that is advice?) about HBU and the lot encumbered under one mortgage is a riddle that they imo were trying to reassure appraisers about just led to more confusion it seems.

 

[J Grant]

I just had one of these come through the commercial side, likely because they couldn't underwrite the H&B use and it's full value conventionally.

Sounds like it is just a change in the interest in the real estate valued when there is excess land.

For those doing the FNMA projects, is this now Fee Simple Encumbered by Mortgage rather than Fee Simple? We have that for some legal projects, Fee Simple encumbered by deed restriction, certain leases, ect.

Do you use the terms of the Fannie Mae Master Mortgage Form as the guide for the encumbrance on the fee simple?

The item they missed out on is what is cost/market reaction to the encumbrance. Sounds like a complicated project for anything with excess land!

IMO, it is no different than any property encumbered by a mortgage. The mortgage is in place till paid off or sold, -a property fee simple rights are the rights of the property, a mortgage is a loan between a lender and parties. - the fact that the mortgage holder has a lien on a property, or in the case of a package , properties, does not change the fee simple rights of the properties that transfer on sale.

I could be wrong, but I think the fannie missive about one mortgage encumbering both properties and an appraiser can make a report subject to that was to calm the fears of appraisers - who were shrieking OMG what if they sell the excess lot and I included it in the value? So fannie had to explain to them that no, the owner can not sell the lot as long as the lot is encumbered by the mortgage. But that is no different than a seller can not sell the house when encumbered by the mortgage ( unless a lender agrees to transfer loan to new purchaser but most times the mortgage is paid off at closing )

The MV question is not the cost /market reaction to the encumbrance , it is the cost/market reaction to the sale of the two properties together as a package. If there is no mortgage encumbering ( a cash purchase), the MV opinion should be the same because the MV opinion is about the properties, not about the mortgage .

The way in which financing has an influence on value is the fact that fannie is willing to lend on these properties . Result is a buyer can purchase a vacant/buildable lot at the better residential terms , ( as long as they also buy a house along with the lot). This opens up a potential pool of purchasers /demand for these properties.

 

[Carnivore]

I just had one of these come through the commercial side, likely because they couldn't underwrite the H&B use and it's full value conventionally.

Sounds like it is just a change in the interest in the real estate valued when there is excess land.

For those doing the FNMA projects, is this now Fee Simple Encumbered by Mortgage rather than Fee Simple? We have that for some legal projects, Fee Simple encumbered by deed restriction, certain leases, ect.

Do you use the terms of the Fannie Mae Master Mortgage Form as the guide for the encumbrance on the fee simple?

The item they missed out on is what is the cost/market reaction is to the encumbrance. Sounds like a complicated project for anything with excess land!

In your CG Work you probably run into these issues quite often when you develop the HBU for your Assignment. Your format does not cause a Problem because YOU are making the Format to Fit the Assignment, not the other way around.

The current issue being discussed is limited to Residential. Specifically FNMA SFR Formats; 1004. Its actually a reporting problem not a development Problem. The FNMA form creates the issue. All this is auto-generated into the Loan Package. The MV stated at the bottom of Page two of the URAR is auto-populated into the Loan Doc's - Settlement Statement. So if you have one of three examples below.

Example Assignment 1

SFR on one Subdivision Lot and the HBU is just that. No Problem. Everybody's Happy!

The MV for Above is Stated at the Bottom of Page two of the URAR and that $ amount is auto-populated into the Loan Documents

Example Assignment 2

In the Same S/D you have another SFR and it is located on one Lot at HBU and the Dude buying that SFR-1 lot also buys the Adjacent lot that may or may not be build-able. Lets say it is not buildable because of some storm Drainage required for the Subdivision. OK, this extra site area is Surplus. Its a Junk Lot that happened in Subdivision Development CAD Program. In this scenario We have NO ISSUE WITH THE FNMA Format. the SFR is at it's HBU and the Surplus is just that surplus. Is there Value to the Surplus? Maybe there is some. Does it contribute to the Value of the Subject and its Site? Maybe maybe not. That requires research and analysis. Either way at this point there are no problems with this being reported on the FNMA Mandatory Format. You will answer YES to the Question; Is the Site + the little Extra area and Improvement at the HBU? Somewhere in an addendum you have written out your HBU Analysis demonstrating that conclusion.

The MV for Above is Stated at the Bottom of Page two of the URAR

Example Assignment 3

In the Same S/D you have another SFR and it is located on one Lot at HBU and the Dude buying that SFR-1 lot also buys the Adjacent lot that is build-able(HBU SFR). It has its own HBU which happens to be Identical to the Subject Site- SFR OK, this extra site area is Excess. In this scenario We have ISSUE WITH THE FNMA Format. the SFR is at it's HBU and the Excess is just that Excess. Is there a market Value for this extra Site. Yes. This will be determined and stated somewhere your Report

Does it contribute to the Value of the Subject and its Site? Maybe maybe not. highly likely it does. That requires research and analysis. Either way at this point there are now problems with this being reported on the FNMA Mandatory Format. Until you answer NO to the Question; Is the Site + Extra Site a and Improvement at the HBU? Somewhere in an addendum you have written out your HBU Analysis demonstrating that conclusion. Also in the Report you will State the MV of Each Site. I can do that via an addendum.

Here is my Questions: I can develop the two Site Value, Both have the same MV as Vacant Ready for Improvement SFR? We now have to answer the Question for the assignment on page one of the URAR. The Assignment is to Appraise the SFR and its Site and Include the Extra Site(excess) combined. Since the assignment is to appraise both sites combined into one site Improved is the Total of the two Sites at HBU as combined? Is the answer to the Question is the Subject HBU Yes or No.

The Answer on page one of the URAR is No! This sets off auto-generated alarm bells at the Lender! The Software loan generation program says so. The Appraiser will have to explain in an addenda WHY! No problem really I can do that!

So here is the Problem in the form of a Question: Is the Combined (lots 1 & 2) + Improvement on one site the AS-IS Value as Stated at the Bottom of Page two consistent with the Preprinted MV Definition of the Form?

See I am not that Bright and my Inquiring Mind really want to know the Direct Answer to that Question. I am not looking for one of those answers that seem to be on a merry-go-round.

 

[J Grant]

Since the assignment is to appraise both sites combined into one site Improved is the Total of the two Sites at HBU as combined? Is the answer to the Question is the Subject HBU Yes or No.

The above is NOT the assignment ! ( The subject of assignment is not to appraise both sites combined into one site )

The subject of the assignment is the improvement (house) on its site , conveyed together with the excess lot.

Now, as part of the SOW, we might develop an analysis of the HBU of the excess lot if sold alone as well as an estimate of site value for subject - and then an estimate of contributory value of the excess lot when sold as part of the package. But that is part of SOW , it is NOT the assignment purpose

Assignment purpose is provide a MV opinion for house and excess lot sold together. And what does the URAR form ask? It asks as improved or not, yes or no. So as long as the improvement adds more value to the site and lot then it, then question of page one UAR checkbox for HBU is yes, as improved. ,

 

[George Hatch]

How can you get to the MV of a house+extra without analyzing such transactions of that combo and/or of each of the components?

You cannot do it via "per client instructions they're assumed to be the same thing as a house on the same overall lot area".

As far as lenders go, it's sometime more expedient to appraise both separately because that allows the lender to use their discretion later on if they want to release the lot because the LTV has dropped.

 

[J Grant]

How can you get to the MV of a house+extra without analyzing such transactions of that combo and/or of each of the components?

You cannot do it via "per client instructions they're assumed to be the same thing as a house on the same overall lot area".

As far as lenders go, it's sometime more expedient to appraise both separately because that allows the lender to use their discretion later on if they want to release the lot because the LTV has dropped.

I agree, as part of SOW , one would need to analyze each component to reach an opinion of the two combined....which STILL leaves the MV purpose of the assignment is for the house WITH extra lot
But many incorrectly believe the MV purpose of assignment is an opinion of MV for the two lots together -

Sure it is expedient to appraise both separately but - since that is not what client needs appraised, the two appraisals are useless or their lending purpose.

IT is not an appraiser concern wrt to a lender wanting to release the lot later because LTV has dropped. ( as it is not our concern if LTV drops on any property we appraise )
IF a future severed sale of the lot occurs later, it would cause a pay off of the mortgage or a release of the lot with a partial payoff or restructure of mortgage, but that is a loan issue, not an appraiser issue

 

[Carnivore]

I agree, as part of SOW , one would need to analyze each component to reach an opinion of the two combined....which STILL leaves the MV purpose of the assignment is for the house WITH extra lot
But many ( see post # 35 ) incorrectly believe the MV purpose of assignment is an opinion of MV for the two lots together -

Sure it is expedient to appraise both separately but - since that is not what client needs appraised, the two appraisals are useless or their lending purpose.

IT is not an appraiser concern wrt to a lender wanting to release the lot later because LTV has dropped. ( as it is not our concern if LTV drops on any property we appraise )
IF a future severed sale of the lot occurs later, it would cause a pay off of the mortgage or a release of the lot with a partial payoff or restructure of mortgage, but that is a loan issue, not an appraiser issue

1st Bold statement above does not make any sense.

2nd bold Statement above; I never said anything about LTV nor did I say anything about a future event.

The point of my post 35 was to illustrate the Conundrum FNMA has created for the wide range of Residential Appraisers who have to deal with the 1004 confines.

I said this before and I will say it again. This issue is not one of development. No, it is a problem of reporting. That can be overcome by use of Addendum(s).

Did you read the last letter that was co-authored by Lee Lansford and Rich Heyn. How can you be so right and those two so wrong?

Question: Do understand the applicability of Standards Rule 1-2 and its relation to the FNMA Definition of Market Value specific to this Assignment Scenario? More Specifically Item #3 in the 1004 Definition of Market Value?

So kindly remove any reference to my Post 35 out of your post.

FTR GH's Last Post above did not surprise me at all. GH is always very helpful on this forum. He literally makes post that are Instructive.

 

[Zoe]

In your CG Work you probably run into these issues quite often when you develop the HBU for your Assignment. Your format does not cause a Problem because YOU are making the Format to Fit the Assignment, not the other way around.

The current issue being discussed is limited to Residential. Specifically FNMA SFR Formats; 1004. Its actually a reporting problem not a development Problem. The FNMA form creates the issue. All this is auto-generated into the Loan Package. The MV stated at the bottom of Page two of the URAR is auto-populated into the Loan Doc's - Settlement Statement. So if you have one of three examples below.

Example Assignment 1

SFR on one Subdivision Lot and the HBU is just that. No Problem. Everybody's Happy!

The MV for Above is Stated at the Bottom of Page two of the URAR and that $ amount is auto-populated into the Loan Documents

Example Assignment 2

In the Same S/D you have another SFR and it is located on one Lot at HBU and the Dude buying that SFR-1 lot also buys the Adjacent lot that may or may not be build-able. Lets say it is not buildable because of some storm Drainage required for the Subdivision. OK, this extra site area is Surplus. Its a Junk Lot that happened in Subdivision Development CAD Program. In this scenario We have NO ISSUE WITH THE FNMA Format. the SFR is at it's HBU and the Surplus is just that surplus. Is there Value to the Surplus? Maybe there is some. Does it contribute to the Value of the Subject and its Site? Maybe maybe not. That requires research and analysis. Either way at this point there are no problems with this being reported on the FNMA Mandatory Format. You will answer YES to the Question; Is the Site + the little Extra area and Improvement at the HBU? Somewhere in an addendum you have written out your HBU Analysis demonstrating that conclusion.

The MV for Above is Stated at the Bottom of Page two of the URAR

Example Assignment 3

In the Same S/D you have another SFR and it is located on one Lot at HBU and the Dude buying that SFR-1 lot also buys the Adjacent lot that is build-able(HBU SFR). It has its own HBU which happens to be Identical to the Subject Site- SFR OK, this extra site area is Excess. In this scenario We have ISSUE WITH THE FNMA Format. the SFR is at it's HBU and the Excess is just that Excess. Is there a market Value for this extra Site. Yes. This will be determined and stated somewhere your Report

Does it contribute to the Value of the Subject and its Site? Maybe maybe not. highly likely it does. That requires research and analysis. Either way at this point there are now problems with this being reported on the FNMA Mandatory Format. Until you answer NO to the Question; Is the Site + Extra Site a and Improvement at the HBU? Somewhere in an addendum you have written out your HBU Analysis demonstrating that conclusion. Also in the Report you will State the MV of Each Site. I can do that via an addendum.

Here is my Questions: I can develop the two Site Value, Both have the same MV as Vacant Ready for Improvement SFR? We now have to answer the Question for the assignment on page one of the URAR. The Assignment is to Appraise the SFR and its Site and Include the Extra Site(excess) combined. Since the assignment is to appraise both sites combined into one site Improved is the Total of the two Sites at HBU as combined? Is the answer to the Question is the Subject HBU Yes or No.

The Answer on page one of the URAR is No! This sets off auto-generated alarm bells at the Lender! The Software loan generation program says so. The Appraiser will have to explain in an addenda WHY! No problem really I can do that!

So here is the Problem in the form of a Question: Is the Combined (lots 1 & 2) + Improvement on one site the AS-IS Value as Stated at the Bottom of Page two consistent with the Preprinted MV Definition of the Form?

See I am not that Bright and my Inquiring Mind really want to know the Direct Answer to that Question. I am not looking for one of those answers that seem to be on a merry-go-round.

Complicate it even more and assume vacant adjacent site or multiple adjacent vacant sites have a higher MV than the improved site.