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HBU Disclaimer

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Pat Butler

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Illinois
I'm working on a tough appraisal of a single family house (with SFR zoning) that will probably eventually be rezoned to commercial because it's on a busy intersection, part of the village's comprehensive plan, etc. Anyway, my client is a prospective purchaser of this property and the seller bought the property just about a year ago for $134,000. The seller practically gutted the place and now has it on the market for $295,000 because she thinks its HBU is commercial. The problem is that she remodled the place just like a house with a fancy kitchen, bathrooms, bedrooms etc. She has a problem with 'consistent use' in that she did a great job restoring a single family house but now wants to sell it at a price more indicative of a commercial property. Her recent improvements have actually help keep the HBU in the residential realm rather than commercial. There are many other reasons for my opinion of the residential HBU anyway.

My opinion of HBU is still residential though I think that intersection will ultimately be commercial. I realize that it's always possible for some uninformed buyer to try and by her place at its high price and some appraiser will just appraise it commercial anyway. I've had this sort of conversation with my prospective buyer client and I've let her know that my whole appraisal is obviously developed based upon my opinion of HBU. Another appraiser might disagree and could develop a higher value based upon a commercial use. Irrespective of the particulars of this particualr property, does anyone have any language that you've used when reporting your opinion of HBU so as to notify the client that different opinions of HBU could result in widely differing values?
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
Four criteria for HBU:

Legally Permissible: You say it's currently zoned for residential. Guess what? "Probably will be rezoned to commercial" is not nearly the same thing as "tenatively approved for rezonng", or better yet, "zoned commercial". For now, it is what it is, and any speculation to the contrary is just exactly that; speculation. The high rollers make above average returns when they speculate because there are increased risks in such speculation. And those risks do include the very real possiblility of failure. Even if it does get rezoned, the existing improvements will probably still be a legal use (albeit non-conforming). Thus, the existing improvements in their current use satisfy this criterion.

Physically possible: Duh, the existing use is there, so it must be physically possible for it to be there. Thus, the existing improvements in their current use satisfy this criterion.

Financially feasible: This one's a little more tricky, but not by much. What uses among those already identified as fitting the above two criteria would have contributory value on this site? The existing use will if it's current value exceeds the value of the site as if vacant. The next question is related to the first question. Assuming the site really can be rezoned, which is a big assumption, would converting this existing res use to a non-res use also have contributory value to the site?

Maximally productive (profitable): Okay, we have identified the existing use in its current form as being among those uses that are legally permissible, physically possible and financially feasible. Now we have to figure out if it is the most productive use for the property as it sits. Again, we look to the underlying site value as an indication. Kinda like stop-go logic wherein the highest value of the property as it sits will either come from selling the property in it's existing use or as a redevelopable site/remodellable alternative use. The shortcut is to ask who is the most likely buyer and what would they use the property for? Are there any legal uses that would economically justify the redevelopment of the site or the conversion of the existing use? It's either worth more as a house or it isn't.

Unless you have a pending proposal for redevelopment or a very clearly identified trend toward rezoning in the area, I wouldn't be making such assumptions. If they press you to do it anyway, the way you CYA is to do it both ways; the "As Is" value estimate based on the existing use, and a "subject to" value based on a hypothetical that the zoning is legally changed. Your readers can then make an intelligent and informed decision accordingly. Under no circumstances should you be required to take the responsibility for making such an assumption on your own without also indicating what it really is and being able to render your opinion on that "As Is" condition. There is no legitimate reason for anyone to ask you to not comment on the "As Is" value or the liklihood of conversion. Anyone who does ask you to do it is going to be up to no good.

As for the language you use to communicate that another appraiser might legitimately come up with a different conclusion of HBU, I don't think it's necessary or even advisable. If you did your job properly and have offered opinions of value both with and without the rezoning and conversion, you have already covered both bases anyway. If you don't cover both bases, even if it's to discount the possibility for conversion in the HBU analysis, how can you say for sure that the "As Is" really does represent the HBU?
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Typically it's highest and best use is going to be the present use because if it was otherwise it would be changed already.

Highest and Best Use....A brothel! Gee, guess that isn't legal here so that is out the window....but it sure would be maximally productive.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
If the prospective use per the city planning is to change it to commercial, then I would comment. I would also comment on the problems changing the use. However, if the most probable use is for commercial, then you're going to have to hit the home for functional obsolescence (design), which will probably offset any site increase.

Roger
 

Pat Butler

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Illinois
My issue isn't with the actual HBU determination, but rather the language used to express my opinion.

The seller has basically tried to do a historic restoration and used top of the line residential fixtures for the kitchen & bathrooms. It makes a really nice house with a market value of about $200K. If it were to be commercial then those residential improvements would be nearly useless, especially the kitchen which takes away from the building area and the two luxury bathrooms that are very large and also take away from the building area.

There's no commercial parking and the parking would have to be created by taking down a garage and putting in a small lot. Even then, the parking would be very minimal-- maybe 4 cars.. All in all, the demo & remodeling costs and parking situation would make conversion to a commercial usage financially impractical. Ironically, nearby older two-story houses that are zoned for commercial are only selling for $175-200K so the restored residential usage definitely is the HBU. As a conversion to a commercial usage, you might have another $30-40K into it, on top of the $295K asking price!

The owner is selling FSBO and the buyer is buying without an agent. Somewhere along the line the seller got the idea that if she could convince someone that the building would make a nice commercial building with a small retail store that that would be the HBU. What's interesting is that the present zoning is for a duplex. It would have been a great rental unit except that the owner removed an interior staircase and now there is no separate entrance for the upstairs unit and she also removed the upstairs kitchen. Like I said before, the owner has practically forced the HBU into its present use as a single family residence by making such signficant upgrades that are most appropriate for a single family house.

My client has a small retail store nearby that she would like to move into this house. That's where the seller first got the idea that her house is a 'commercial' enterprise. It's on a busy corner that is planned to be commercial in the village's long range plans but it is still subject to approval by the village board and nearby neighbor's objections.

That's why I was looking for some appropriate language. I'm convinced that the HBU is as a single family house. However, if my client purchases it as such, then does convert it to commercial, I wanted her to be very aware that she may have too much money into the property.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
In my view you can’t say this.
“…that different opinions of HBU could result in widely differing values?”
You have to solve the problem.
 

Patrick Egger

Sophomore Member
Joined
May 29, 2003
Professional Status
Certified General Appraiser
State
Nevada
Good points mentioned in the posts ... but before you get to far, what is the scope of your assignment? who is the client? and what are they asking you to do?

You can (at the client's request) consider only the current use ... you have some USPAP requirements here ... if that's what the client has requested. Its more likely, that you're doing "market value" without any special directions regarding use ... maybe you need to advise the client of the H&B use issue and get further direction.

There can be multiple potential uses provided they meet the tests ... as George pointed out ... and if there is a H & B use issue, you also have to consider your ability to complete the assignment (experience, qualifications, etc) ...

Since you state the possibility of commercial and since there can be multiple types of commercial uses ... what's to preclude commercial uses that utilize a more residential setting and hence, much of the improvements made by the owner may still be usuable or contribute value.

We have similar residential homes converted to counselors offices, interior decor consultants, real estate offices, etc ... that still keep the residential look and feel ...

The bottom line ... H&B use is a very complex issue ... get some clarification from the client as to the use, scope etc ... from that you will have an idea of what's required and what you'll have to do to meet those requirements.

Good points from George and Steven ... one last thing ... H&B use requires meeting the 4 tests ... which means when you get to max. prod. ... you're going to need to evidence some demand for the use ... lots of vacant land gets zoned commercial and sits forever ... not all corner's are best for commercial simply because they're a corner ... you'll need to justify demand in some way ...
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
Good points, Patrick E. Patrick B’s second post was not there when I posted and I think he clarified some of the issues.

HBU is critical, not so much because of some elaborate working of the tests, but because use category determines comps. We have, probably, two use categories -
1. A house on a noisy corner in a soon-to-be commercial district
2. A small commercial building with bad parking needing renovation
It’s dysfunctional either way. I think you have begun to show that conversion is not feasible for general use, but perhaps it is for that special user whose business is suited to this space – like a fortune teller or appraiser (if there is a difference there).

It sounds to me like this will likely end up as a small shop. You may also find that this type of fringe property commands a similar price (or price per usable square foot) as surrounding properties even if its use appears to be inconsistent with its surroundings (use category 1) or hurt by design (use category 2).

I find that to do these assignments efficiently, one needs to track the “oddball” sales that most appraisers (in my market) ignore, because they are never going to be a comp for the average, common, typical subject. I also find that the oft-ignored oddball sales create good pairs for adjustments to use in other assignments.
 
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