H&BU - As Is Surplus Vs Hypothetical Excess Land

[Michigan CG]

When you asked if it could be put on the 1004 form I assumed the intended use was for lending. Given it is for an estate you would not put on the 1004 form but rather a General Purpose form or do the report in narrative.

 

[Jaketnt]

What Marion said. Plus time to accomplish everything and all of the costs involved in selling a second parcel of land. It may be one of those deals where you tell the client the house and 4+ lots are worth $1,000,000 and the vacant 2 lots are worth $500,000 when completely freed up and available for immediate sale/development. However, to free up those two lots is going to cost $100,000 in legal, permits and various fees and will take a minimum of one year to accomplish, then you will have XX number of DOM and another $50,000 in seller related closing costs. So maybe the 2 vacant lots are only worth $300,000 if stand alone and maybe only add $200,000 incremental value to the existing dwelling and 4+ lots. Give your client the benefit of your knowledge and a well thought out breakdown of your analysis valuing the house & 6+ lots, the house & 4+ lots and two lots "as is" contributory value, then the house & 4+ lots and the "as projected" value of the 2 lots once they are ready for immediate sale and development. Let the client decide if they want to sell potential or shovel ready.

Personally I would use a narrative format, just because of all the moving parts. You could probably use the a 1004 form (non-lending), but I might consider breaking it down into three reports, each of which would refer to and include the others by reference. First would be "as is" for the house and 6+ lots. Then would be for the house and 4+ lots and lastly would be a vacant land form for the 2 vacant lots valuing them both "as is" and ready for immediate sale/development. You will have to do the same amount of analysis anyway so why not show your work.

Thank you for the response and the pointers on how to approach the format of report either as a narrative or three 1004 forms . That's a very good point when you mentioned "when completely freed up and available for immediate sale/development", that's something that I haven't given much thought too as of right now, but will definitely have to look into it.

 

[Jaketnt]

Do these lots have separate parcel numbers? If all the lots are under one parcel number, you also need to consider a parcel split for your hypothetical.

Hi, The lots do not have separate parcel numbers. I guess I should have identified the property as one single parcel consisting of 6 1/4 lots.

 

[George Hatch]

I know of a handful of municipalities in this region where if there's a parcel with 2 or more mapped lots they can be separated and built out individually even if the parcels are substandard in size relative to the current development criteria. No "lot split" is necessary, and the city has no discretion on it. Sell off and build out a 25x100 lot? No problem - they just have to adhere to setback, height and lot coverage maximums.

In these neighborhoods it's actually been *common* for underimproved SFR properties to be split up with the existing improvements remaining on one portion and the other lot(s) sold off and developed separately. It just depends on the supply/demand factors.

 

[Jaketnt]

In the early 1900 hundreds it was not uncommon to have residential areas subdivided in small lots as low as even 15-25 ft lots street frontage. This was done in the small towns all round the nation. The purpose was pretty smart when you think of who was going to live in these small town. Think of a small pond with a few large fish and many small fish. So if a person wanted to build a housei n town he could buy the number of lots he needed but not more than needed to build. Outside of these towns and villages was farmland or just vacant land. There was no such thing as a suburb.

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OK, i have one issue with your valuation problem as you have described. "I am working on a 4,000 sf+ historic home built in 1921 located on a larger-than-typical lot of 19,700 sf (it is actually six 25' x 125' lots + 1/4 of a 25' X 125' lot.) The current improvements are located on the four northern lots (+ 1/4 lot), and the two southern lots (total of 6,250 sf) are vacant."

I suggest before you go though all these Gyrations with the owners is you first must determine what "Historic Home" actually means to your Valuation Problem. If this property is registered with a Historic Society of some sort: https://www.nps.gov/subjects/nationalregister/index.htm

The reason I am bring this up may help you solve just what you can or can not do. Its very possible that you don't have excess or surplus property. In other words the owners may not be able to severe any portion of the total property because of some Historical Society Agreement that may limit the Use of this Subject site.

Just a thought to consider.

My second thought/recommendation is this/ Abandon the FNMA Series Format. Go with a some other format. Either complete Narrative or a mix and match of GP or AI Forms for grids pages and photo addendum.

Again get rid of any reference to lending if that is NOT the purpose and intended use of the Appraisal report.

Thank you for your input on this one regarding the historic registry and the better format option for the report.

 

[Terrel L. Shields]

I would bet selling the lots separately will simply reduce the value of the remaining lots quid pro quo. That is, the HBU "as if vacant" differs from its value "as is" and division will create a functional obsolescence in the dwelling. I would want to step back, look at the lot and imagine a new home. Will it affect the view? This is a problem you solve from curbside...imho.

 

[Restrain]

We have that issue down here, having to separate surplus land out. We hav found that often times the surplus land has a higher contributary value as a sellable, buildable lot that as part of the whole. As the lots are already platted, the cost to separate may well be minimal, perhaps only a survey cost.

Just some thoughts.

 

[Deleted member 152047]

However, shouldn't I have to report three values:
i) An as-is value with the surplus land
ii) Value estimate of the house with the remainder of the land after subdivision
iii) and the value of the new subdivided lot

if i) is greater than both, ii) and iii), with consideration given to the discount required by the bulk value, then the H&BU is as-is with surplus, but if the value of as is is less than the value of ii) and iii) less the bulk discount, then the H&BU is the
subdivision of the current property into two separate properties. Does that make sense or am I missing something? I guess what I'm trying to say is do I prepare a report that illustrates why the most maximally productive use is i) and not ii) + iii) or viceversa.

Thank you for your help Sir!

No, I wouldn't report it this way. I should caveat that I am a commercial guy, but I have dealt with many surplus vs. excess land situations. With the values that you are describing and the manner in which the subdivision was platted, my feeling is that you have excess land. This would obviously need to have some support by the existing zoning code. If you cannot obtain definitive evidence that the land can be subdivided (it could be very easy or very difficult), then you would report all the preceding values.

However, if you can get some sort of indication that it is legally permissible to subdivide, this is how I would handle it:

1. Provide a value of the "economic site," which is the improved parcel(s) less the estimated excess land area

2. Determine the retail value (the sales price as though subdivided and available for sale) of the excess land. From that, you would deduct the cost to subdivide the parcel (someone mentioned $100,000 that is way too high), holding costs over the subdividing period (2-6 months of taxes & lawn maintenance), sales costs (6% broker commission or whatever is typical), and finally, you would total the conversion costs and apply entrepreneurial incentive (typically 10-20%). This would provide you with an indication of the "as is" market value of the excess land, subject to the extraordinary assumption that the land can be subdivided for $X cost and within X months.

3. You then provide a bulk market value of the economic site and excess land together in which you may or may not choose to apply an additional discount to the excess land only (you don't apply a discount to the economic site).

All that said, your highest and best use section needs to analyze whether the value of the property, including the excess land as surplus land, is greater than the value of the bulk market value as though it is excess land. When you handle this in the H&B use section, you can skinny down the analysis a lot, just retain the support in your work file.

 

[Terrel L. Shields]

All that said, your highest and best use section needs to analyze whether the value of the property, including the excess land as surplus land,

That is key. What impact does the excess land have on the value of the other (improved) lot(s).