HBU Brain Game

[23Degrees]

This is not an urgent or entirely real situation but for those who enjoy the HBU/"legally permissible" threads and have some spare time please read on:

Here is the (not entirely) hypothetical scenario -

Subject was originally a duplex with all required permits and CO's. Additional third unit added as an addition to the rear without permits. Zoning was and always has been R2. Third units are documented as not permissible in this zoning with no variances ever issued. Market is full of these no permit third unit add ons with plenty of recent sales of such and also contains unmodified two family properties and also SFR's which are permissible as well and many of which are new construction. No record of JA crackdown on these third unit properties to date.

HBU as vacant - analysis clearly shows that SFR is the HBU as vacant

HBU as improved - as improved the three family setup passes all HBU tests with the exception of one - "legally permissible" is negative so as currently improved the subject use cannot qualify as HBU.

Vacant vs improved: HBU as vacant - SFR - is higher in value than either of the other two relevant uses, duplex or bootleg triplex, even after considering any modification, demolition and other costs.

Appraisal assignment condition was to produce a report based on the improvements as they stand or "as is". The appraisal is to report market value for a lending use. Intended user/client listed is a bank.

Appraiser summarizes and provides support data for the HBUA above and appraises the property as a 3 unit based on the abundant market data available after consultation with the client with the understanding that zoning compliance would be checked as "illegal". Among other things permits are required by zoning and the third kitchen violates the zoning code in addition to the presence of an entire separate third unit so the improvements are clearly not in compliance of zoning. In addition, because "as improved" the property represents a use that is not permissible the HBU box is checked as "no" and supplemented with the HBUA as noted above. So in effect, using market data, the appraiser appraised the property as a use that was not eligible for HBU due to not being able to be declared a legally permissible use but was clear in this by checking the "no" box on the form and fully explaining within the report.

Appraiser stands accused of violating USPAP by one party for not declaring the "as is" condition unacceptable and not appraising the property to its true HBU of SFR.

Appraiser stands accused of violating USPAP by a second party for not following Fannie Mae's caveat of HBU and appraising the property as a legal duplex with a value consideration of the third unit as that, in their opinion, is the HBU as improved which must be utilized for completing the appraisal in order to follow both USPAP and Fannie guidelines:

"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".

Did the appraiser proceed correctly, or did the appraiser violate USPAP in either of the fashions noted or in another way not brought up, or was there a different and optimal way to proceed?

 

[J Grant]

My head is spinning...but a few thoughts...( since it is your example, does R2 mean Residential 2 family ? I assume so,,,,

You say per research vacant , HBU is to build a SFR,, however vacant is a lot ready to build and the owner can decide to build a SFR or duplex., either is allowed by zoning

For lending purposes, they ask if HBU is existing or other.. The determination made do existing improvements contribute more to value, than land is worth vacant...if they do, then HBU is existing use ( duplex present use) The fact that a third illegal unit is on the site does not change the HBU.

The HBU can not include this third unit since it is not legal (legally permissible one of the tests) .

If purpose was for an " as is" market value, should have appraised it as an existing legal duplex, and then in narrative explain there is a third not permitted unit on the property. Then, if a third not legal unit is accorded value per research, on the SCA grid list it and explain why it commands value in market even though the structure is not permitted .

 

[hastalavista]

You accurately reported the legality of the subject, as-is.
You valued the subject, as-is (with its non-legal addition).
Your assignment is for market value, as-is.

It sounds to me like your approach is correct, if and only if: Whatever influence exists regarding the non-permitted/illegal configuration is accounted for in the value.

 

[Michigan CG]

.............If purpose was for an " as is" market value, should have appraised it as an existing legal duplex, and then in narrative explain there is a third not permitted unit on the property. Then, if a third not legal unit is accorded value per research, on the SCA grid list it and explain why it commands value in market even though the structure is not permitted .

Wrong. If the assignment was for an As-Is appraisal then the property, As-Is, is a three-unit property.

...............Appraisal assignment condition was to produce a report based on the improvements as they stand or "as is". The appraisal is to report market value for a lending use. Intended user/client listed is a bank....................................

Appraiser stands accused of violating USPAP by one party for not declaring the "as is" condition unacceptable and not appraising the property to its true HBU of SFR.

Appraiser stands accused of violating USPAP by a second party for not following Fannie Mae's caveat of HBU and appraising the property as a legal duplex with a value consideration of the third unit as that, in their opinion, is the HBU as improved which must be utilized for completing the appraisal in order to follow both USPAP and Fannie guidelines:................

The assignment was for an as-is valuation. Looks like the hypothetical appraiser did that.

As to party one stating that the hypothetical appraiser violated USPAP I would ask the person to point out what part of USPAP was violated. The only way to appraise the property to its "true" H and B would to write a report where the third unit hypothetically does not exist.

As to party #2 I would also ask exactly what part of USPAP was violated? The property IS a three-unit property and calling it a duplex with a third unit would be misleading.

Both parties are idiots and only want that H an B box checked yes which CANNOT be done.

Did I mention they are both idiots?

 

[hastalavista]

Yeah... I'd like to know what USPAP violation you are accused of here as well.

 

[Michigan CG]

I would also send both parties an e-mail and ask them to cite which parts of USPAP were violated and which parts of Fannie's guidelines were violated. Make them look like the idiots they are.

 

[Terrel L. Shields]

The only way to appraise the property to its "true" H and B would to write a report where the third unit hypothetically does not exist.

The HBU "as is" is the issue. The HBU "as if vacant" is for an R - 2 lot limiting to a duplex (or SFR?) Since the third unit (which is a duplex with an ADU as I see it and NOT a 3 unit property) apparently runs afoul the zoning BUT zoning compliance is poorly enforced...suggests that third unit contributes value, but it still seems likely that an externality (the zoning problem) will reduce the value of that portion of the contribution.

Appraiser stands accused of violating USPAP by one party for not declaring the "as is" condition unacceptable and not appraising the property to its true HBU of SFR.

Appraiser stands accused of violating USPAP by a second party for not following Fannie Mae's caveat of HBU and appraising the property as a legal duplex with a value consideration of the third unit as that, in their opinion, is the HBU as improved which must be utilized for completing the appraisal in order to follow both USPAP and Fannie guidelines:

"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".

The "true HBU" is duplex not SFR, right? The HBU use "AS IS" - is the present use (despite the illegal unit). That is because the value of the whole exceeds the value of the bare land. Having said that does not mean it is the ideal for the property, but in the absence of enforcement the market is ignoring the possibility of regulatory problems. I think that means I am agreeing with JGrant on this one.

 

[23Degrees]

Thanks for reading and responding. Neither USPAP nor the Fannie guidelines require that a property be appraised to its highest and best use that I can see either. When I began googling "highest and best use" after a recent discussion here on the forum one of the first articles I clicked on had this as the first sentence - " A property must be appraised in terms of it’s highest and best use." And there seem to be a number of forum posts that follow similar logic - at least that's how I recall interpreting them.

I think examples like this are cause for concern because I am not sure that if you had a dime for every appraiser that would check "NO" here and proceed under the circumstances described you could buy a cup of coffee. I know that I probably messed up something similar at least once years ago and some of it might go back to the Fannie caveat noted in post 1.

I think the appraiser was right in indicating that as currently improved the subject constitutes a use that is not permissible and therefore not eligible as HBU. By completing the appraisal with the "no" box checked for HBU and of course marking "illegal" for zoning compliance they were correct IMO. Defining its use as duplex with a third illegal unit may be correct vs defining it as a triplex but either case is a use that is not permissible and therefore not eligible for HBU. Does Fannie's caveat for defining HBU (as improved) trump the "legally permissible" test required for HBU determination? I'd argue no, at least before getting pummeled in a manner that changes my mind. The other tests of HBU could arguably be overtaken by the terms of the caveat but not "legally permissible".

 

[Terrel L. Shields]

A property must be appraised in terms of it’s highest and best use."

Careful. Interim uses (legal or illegal) may appear to be inconsistent with HBU but the property as a transitional item, is illegal but still the maximally productive use of the property. Should the regulating body enforce zoning, then the property may be forced to dispose of or get an exception for the 3rd unit. The consistent part means the land value and the improvements need to be valued under the same HBU standard. That is the land cannot be valued as an R-3 (3 units) just because the dwellings are 3 units. The land is valued as it is zoned. The building is valued and the third wheel -that illegal unit- now either contributes or does not contribute value. It simply cannot be ignored. So when the HBU of the LAND is different from the IMPROVEMENTS you should discuss and identify that difference. Land valued as if vacant and available for its highest and best use. The property as improved are determined on the continued economic viability of the property in its current state. (from The Appraisal of RE, 12th ed) That state includes the illegal unit and a factor in determining if those illegal improvements add value is if zoning is actually enforced. I think some discussion of that issue would be part of the HBU analysis. If the zoning was rigorously enforced then the improvements may be a detriment to the improvements. Otherwise, if it is a paper tiger with no indication of any action being taken or threatened, is it really zoning? It's unenforced if so.

 

[hastalavista]

... one of the first articles I clicked on had this as the first sentence - " A property must be appraised in terms of it’s highest and best use."

If you have the time, do me a favor and post a link to that article.

Are you sure the article didn't say, "Land must always be valued at its H&BU.." when completing the cost approach for a market-value appraisal?
That statement makes sense; the other one doesn't.