H&B Use, Multi Family

[CJ1234]

FNMA: QUOTE
"Highest and Best Use
Fannie Mae will only purchase or securitize a mortgage that represents the highest and best use of the site as improved. If the current improvements clearly do not represent the highest and best use of the site as an improved site, it must be indicated on the appraisal report.

The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value on the effective date of the appraisal. For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site.

The appraiser’s highest and best use analysis of the subject property should consider the property as it is improved. This treatment recognizes that the existing improvements should continue in use until it is financially feasible to remove the dwelling and build a new one, or to renovate the existing dwelling. If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use."


Help me with the underlined section. First paragraph is clear. Must be H&S for FNMA to purchase or securitize a mortgage.
Subject is a duplex, zoned R-4 which allows up to 4 units.

• Test 1: current use if legally permissible; 3 unit is also legally permissible
• Test 2: the current use is physically possible; 3 unit is possible
• Test 3: The subject has a rear entry with stairs leading down to basement. Basement has door to mechanical and storage and a second door to a finished area. Finished area has a living area, egress, bathroom. As the basement already is finished, adding a kitchen would be a relatively minimal cost. The property easily lends itself to conversion to 3 unit property. MLS when the property sold in 2014 marketed it as having "Triplex" potential in the basement (for whatever that is worth). (Side note: this space is being used by the owner, the occupant of the main level unit)
• Test 4: an additional (3rd) unit would be most profitable.

There are ample duplex sales with zoning R1-R3 (All allow 1-3 units in Minneapolis). I have sales of properties that are R4 zoning, but duplex use. I have 1 sale of a triplex, over 12 months ago, same configuration of units (but with one additional bedroom) with a value about 20-30% higher than the duplexes. I have another triplex that sold for 15-20% more, different configuration (two units on main level, one on second level--but equal bedroom counts)

H&B is not AS IS, in my belief, but that last sentence from the selling guide (underlined above), is giving me pause.

EDIT TO ADD:
This is a refi
Also: site size, set backs, parking, etc would allow for 3 units.

 

[Terrel L. Shields]

HBU is "as is", creating unlikely or likely scenarios are not "as is." There are two basic tests. FIRST, "as if vacant" and SECOND "as is". So if the value of the lot exceeds the value of the improvements and land as is, then the HBU is as if vacant. That happens when say an old house on a highway is now in transition to commercial. The lot might be worth $200,000 as vacant. But the old house to live in may only be worth $100,000. Therefore, as if vacant is the HBU. The house contributes zero to the property.

To create some third unit out of whole cloth is a hypothetical. It is not a cost to cure. You are creating a mess. Appraise it "as is" unless the client has asked that a construction subject to appraisal is requested and they specify what changes they want made...which is all going to be a hypothetical condition.
"

 

[Michigan CG]

Sounds like your Highest and Best Use is to add a stove and frig but there are problems you are going to have with that.
1. Checking the "No" box on the form negates the ability to finance with FNMA.
2. Your client will be unhappy as they will not be able to sell the loan.

They want and AS-IS appraisal. In order to appraise it as-is you can note in your highest and best use what you noted above although as of the effective date it was not permitted for the third unit and the improvements do not yet have that third kitchen. would the city allow for a third unit in the basement? How long does the permitting process take?

I would guess, in my area, I would discuss all of the above in the Highest and Best Use section of the report and check YES on the highest and best use, but that is what I might do in MY area.

 

[Terrel L. Shields]

Most multifamily zonings allow SFR and duplexes as well as larger units here. They also allow day cares (with limits), churches, fire stations etc.

 

[J Grant]

FNMA: QUOTE
"Highest and Best Use
Fannie Mae will only purchase or securitize a mortgage that represents the highest and best use of the site as improved. If the current improvements clearly do not represent the highest and best use of the site as an improved site, it must be indicated on the appraisal report.

The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value on the effective date of the appraisal. For improvements to represent the Must be H&S for FNMA to purchase or securitize a mortgage.
Subject is a duplex, zoned R-4 which allows up to 4 units.

• Test 1: current use if legally permissible; 3 unit is also legally permissible
• Test 2: the current use is physically possible; 3 unit is possible
• Test 3: The subject has a rear entry with stairs leading down to basement. Basement has door to mechanical and storage and a second door to a finished area. Finished area has a living area, egress, bathroom. As the basement already is finished, adding a kitchen would be a relatively minimal cost. The property easily lends itself to conversion to 3 unit property. MLS when the property sold in 2014 marketed it as having "Triplex" potential in the basement (for whatever that is worth). (Side note: this space is being used by the owner, the occupant of the main level unit)
• Test 4: an additional (3rd) unit would be most profitable.

EDIT TO ADD:
This is a refi
Also: site size, set backs, parking, etc would allow for 3 units.

This is not a HBU question. The HBU is 2- 4 family and your subject is a duplex so it fulfills its legally permissible etc HBU. You seem ( from your post ) to be trying to create a third unit out of thin air -from your description it is a 2 unit with a basement and a "second door to a finished area " ( whatever that means)

• The property easily lends itself to conversion to 3 unit property. MLS when the property sold in 2014 marketed it as having "Triplex" potential in the basement (for whatever that is worth). (Side note: this space is being used by the owner, the occupant of the main level unit)
• Test 4: an additional (3rd) unit would be most profitable.

Right now it is NOT a 3 unit, it is a 2 unit with potential for conversion to add a third unit. So unless the assignment is per client, made subject to completion of a third unit, it is what it is - a 2 unit with a basement and POTENTIAL to have a third unit if work is done to make that happen.

Sure a 3rd unit would be most profitable, but fact is at this time there is no rent able/finished/habitable existing third unit.

 

[bnmappraisal]

There are ample duplex sales with zoning R1-R3 (All allow 1-3 units in Minneapolis). I have sales of properties that are R4 zoning, but duplex use.

(my bold) I think this is a MN/Minneapolis specific situation - I know (from a friend/fellow appraiser in the "Twin Cities") and from other "recent" posts, that zoning has been an issue in that region

 

[glenn walker]

It's vary rare that an-owner -Raises a building until there is a real and a big profit incentive to do it . My father once owned a 12- unit motel -a real POS --all the sudden developers were coming in and land prices had gone from 50 cents a foot to $3.00 in less than 36 months --I knew at that point there was a H& B use that was not a motel : ) LOL

 

[Terrel L. Shields]

land prices had gone from 50 cents a foot to $3.00 in less than 36 months

I knew a fellow with two large lots with old duplexes on them on prime beach front property in Florida. They were consistently making $800/mo each side and he was reluctant to give up the properties but when a developer offered him $2 million....well, how could you not sell?

 

[Michigan CG]

This is not a HBU question. The HBU is 2- 4 family and your subject is a duplex so it fulfills its legally permissible etc HBU. You seem ( from your post ) to be trying to create a third unit out of thin air -from your description it is a 2 unit with a basement and a "second door to a finished area " ( whatever that means)

• The property easily lends itself to conversion to 3 unit property. MLS when the property sold in 2014 marketed it as having "Triplex" potential in the basement (for whatever that is worth). (Side note: this space is being used by the owner, the occupant of the main level unit)
• Test 4: an additional (3rd) unit would be most profitable.

Right now it is NOT a 3 unit, it is a 2 unit with potential for conversion to add a third unit. So unless the assignment is per client, made subject to completion of a third unit, it is what it is - a 2 unit with a basement and POTENTIAL to have a third unit if work is done to make that happen.

Sure a 3rd unit would be most profitable, but fact is at this time there is no rent able/finished/habitable existing third unit.

The above is REALLY bad advice.

 

[jay trotta]

CJ1234;
The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value "on the effective date of the appraisal". For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site.

The appraiser’s highest and best use analysis of the subject property should consider the property as it is improved. This treatment recognizes that the existing improvements should continue in use until it is financially feasible to remove the dwelling and build a new one, or to renovate the existing dwelling. If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use."

My bold; I highlight that portion for you to re-read again, if the subject, at the time of inspection meets the (4) Tests on the effective date it's at the H&B. If there is no approval, by permitted application to create a 3rd unit (PZC) on the effective date of the appraisal, it is, as it exists.
IMO