FHA Excess Land

[themole]

HI Good folks of the forum,

I am working on a house in rural location. Site is 107 acres. house needs 2-5 acres of land to support existing improvements...well, septic, buffer, pond by house for view. Rest of land is not developable as access is via private gravel road and not a lot of demand for housing sites in area. Anyway, reverse mortgage situation. I am hoping someone can provide clarification/guideance on the FHA guidelines for excess land. From what I can tell, there is an example of excess land being treated with hypothetical condition but the example in the FHA manual is of two lots sitting side by side and one is seperately saleable. This is 107 acres in one tract. Homeowner/client seem anxious to have all of the land included in appraisal. Any help would be appreciated.

 

[themole]

Any land area that is greater than that required to support the existing improvements is, by definition surplus land. An example would be a residential property in a zoning which permits one dwelling per 10,000 square feet and the subject property has a 15,000 square foot site. There is 5,000 square feet of surplus land. Surplus land that has a different highest and best use and/or can be legally separated from the subject property and sold off, becomes excess land. Thus, all excess land falls within the definition of surplus land but has the additional feature of a different highest and best use and/or can be separated and sold off.
You must include the highest and best use analysis in your appraisal report to support your conclusion that there is excess land. If there is surplus land, you must include it in the valuation.

 

[alebrewer]

Redacted.

 

[glenn walker]

Any land area that is greater than that required to support the existing improvements is, by definition surplus land. An example would be a residential property in a zoning which permits one dwelling per 10,000 square feet and the subject property has a 15,000 square foot site. There is 5,000 square feet of surplus land. Surplus land that has a different highest and best use and/or can be legally separated from the subject property and sold off, becomes excess land. Thus, all excess land falls within the definition of surplus land but has the additional feature of a different highest and best use and/or can be separated and sold off.
You must include the highest and best use analysis in your appraisal report to support your conclusion that there is excess land. If there is surplus land, you must include it in the valuation.

Any land area that is greater than that required to support the existing improvements is, by definition surplus land. An example would be a residential property in a zoning which permits one dwelling per 10,000 square feet and the subject property has a 15,000 square foot site. There is 5,000 square feet of surplus land. Surplus land that has a different highest and best use and/or can be legally separated from the subject property and sold off, becomes excess land. Thus, all excess land falls within the definition of surplus land but has the additional feature of a different highest and best use and/or can be separated and sold off.
You must include the highest and best use analysis in your appraisal report to support your conclusion that there is excess land. If there is surplus land, you must include it in the valuation.

l true so now all you have to do is find some comparables to support how you value that excess -surplus land and thats when it can get tough . Good Luck and God Speed I'm happy its you and not me- But it will be one you will never forget

 

[Terrel L. Shields]

Any land area that is greater than that required to support the existing improvements is, by definition surplus land.

Or excess... As an ag appraiser, the problem with the neat pigeon holing of "excess" and "surplus" relegates the land component to a decidedly secondary consideration when, in fact, often the land value exceeds the value of the improvements. That according to Henry Harrison some 30 years ago is the definition of a land appraisal with improvements, not a house appraisal with land. Boy, doesn't that open up a can of worms?

Again, I would go back to the client and say, "Hey, the value lies in the land (if that is the case) and will exceed the 30% barrier (if that is a reverse mortgage issue). Because I know exactly what I saw once from an appraiser in Oklahoma. The land was about 90 acres or so and the house was old and needed substantial work. To fit the narrative and make adjusting to smaller parcels easier, the land value was said to be $400 per acre...at at time the land would have sold for $1000 or more per acre. So you had 90k land with a 30k house but flipping that on its head the land was only 36k and the house was some 80k or so. The appraiser ended up getting the FHA boot in Oklahoma and seriously, showed me the appraisal and complained about how she had been "treated" by FHA. I suggested the land value was low and perhaps they were right and we kinda left it at that. It was a few weeks before I was in that area and saw the house and then I knew for sure that the house value was overstated.

So I do not take the "excess" and "surplus" arguments very seriously. What a property COULD be (subdivided) and what it is seems somewhat strained. So I see two strategies in rural appraisal. I will describe the one that most assessors around here apply and no small number of appraisers as well. Then the method I use.

Let's assume 40 acres and a house. The assessor here breaks out land with a HL (house lot) at X dollars per acre- usually in rural areas something between $10k and $50,000. The bigger the house the more expensive the lot (?) and the cheapest is a single wide MH. The remainder 39 acres is valued as "ag land" (rates based on 10x the local pasture rentals) or for appraisers, on actual land sales. Generally that "house lot" value will include site improvements like landscaping, well, septic, and driveway.

The alternative is to treat the entire 40 acres "as if vacant and available for its highest and best use" - which is textbook language- in fact, early editions of USPAP included that until they recognized that for insurance value it wasn't really appropriate. Then the appraiser estimates the contributory value of the dwelling with an allowance for those site improvements included in the HL above.

Is one a better way than the other in analysis? Not really. But I am circling back like Ms. Jan to the issue. Since the land is NOT subdivided to pretend that it is, smacks of a hypothetical consideration to me. It is contrary to what exists to assume a subdivision. So when you say, ....

Site is 107 acres. house needs 2-5 acres of land to support existing improvements

the real question is what is the typical lot size in the area? Is it 2-5 acres? Or are there about as many properties that are 20-100+ acres as there are <5 acre parcels and how easy is it to get a split approved?

I am arguing that the property is what the property is. And subjecting the property to an imaginary split of "surplus" land subjects it to a status as a hypothetical consideration in light of the certitude that this imaginary split is not going to happen nor is it being proposed by the owners, is it?

 

[Mark K]

Once again.... As the appraiser, it is none of your business whether a property you've been asked to appraise will be eligible for any particular loan. That is the Lender's responsibility.

Generally, I agree with this.

However, if you go into a situation virtually certain that the property will not qualify for the desired loan, I think its at least worth a call to the lender to discuss it. Otherwise, in this situation, you're going in knowing that the borrowers, who obviously need the cash, won't get the loan but you'll be be taking some of their $$ anyway.

I'd make the call.

 

[glenn walker]

Generally, I agree with this.

However, if you go into a situation virtually certain that the property will not qualify for the desired loan, I think its at least worth a call to the lender to discuss it. Otherwise, in this situation, you're going in knowing that the borrowers, who obviously need the cash, won't get the loan but you'll be be taking some of their $$ anyway.

I'd make the call.

I Agree but I would have contracted the Client as soon as I found out it was on 100 acres because I know in most cases there are going to be issues. Especially on FHA because every reverse I have done the properties are normally barely a C-4 condition wise. BUT I may be too nice of a guy. The worst I saw was someone had talked a 97 year old single man into a 30 year FHA Reverse --I did not believe they would fund it but they did and he died less than a year later. Underwriters said he cannot be denied based on age discrimination.

 

[Terrel L. Shields]

Underwriters said he cannot be denied based on age discrimination.

Everyone talks about racial discrimination but no one about age discrimination and how it is a certitude that 30 year loans to an elderly person is nonsensical. But we have a lot of my generation whose financial planning was amiss from the get-go. And perhaps a few just bad luck - poor health, pension plan bankrupted etc. But it was the same way for my parents generation. My father retired due to disability - 52 years old, he was a member of the Teamsters Union and had worked for Pet Milk for 20+ years. But his union pay was $3.25 or about double the minimum wage. Then after retiring, inflation blew costs out the window. My parents lived frugally husbanding the small pension, SS, and a small VA check for partial disability. Dad tried to get full disability but the Air Force claimed all his medical records were burned up in a fire the very year he retired and so they would not give him 100% disability although he spent over a year in a hospital during WWII with the back injury that forced his retirement.

 

[RSW]

I have a hard time believing 100 acres could be surplus land. A thorough H&BU analysis will need to be done & I am not sure the OP would be qualified to do it. The assistance of a CG may be necessary. Terrell may have something to say about it.

 

[Terrel L. Shields]

I have a hard time believing 100 acres could be surplus land.

The question to me is, while it could be divided almost certainly, is that "as is"? "As is" is it what it is. So excess land but how do we divide it without it already being surveyed? A house on 100 acres is a far different animal that one on 2 or so acres...the buyer's motives and finances come into play.