HBU Question

[Greg Parker]

This question is mostly for my education. I have a distinct scope of work on the assignment and have nearly finished.

In my area, we have houses called twins. I know they are not called this all over the usa, but for those who do not know, picture a single home, with each half being a distinct parcel. Typically, two different owners. When I lived in Kansas, we called these duplexes... but I have learned differently since then.

I got an order Monday to do a property, listed as a duplex. Looked up public records, this was shown as a single parcel, zoning is good, etc. No issues.

I get to the home, and it is clearly a twin, as is every other house on the block. From what I can research, sometime in the late 60's, two parcels were combined to create a single dwelling, but nothing physical was done... it is still a twin, but is zoned as a duplex in the city.

Here's my issue. So far as valuation goes, these two properties if sold individually would probably fetch close to $200,000 each based on similar sized sales in the area. Since it is being used as a duplex, is zoned as a duplex, and has the one parcel number, my value is coming in at a little over $250,000. Multi family properties simply have not done well in the past 24 months.

After speaking with my client, they want this done as a duplex as outlined on my engagement letter, which I have done. Honestly, unless he gets the parcel legally divided, on an as-is basis, I can do no differently.

Should this be addressed in HBU however? Clearly, this property is worth significantly more as two single homes. All that needs to be done for this is the change with the township. I feel as though the owner knows this as well, because I was walking around doing the sketch, he let drop twice that since he has it on one parcel, he only has to pay 60% taxes of two single family homes -- he owns three others on the block across the street.

Finally, not that it has anything to do with my whole post... this place had 16 bedrooms and eight bathrooms total between the two units...I felt like I was in a funhouse or something with all the rooms.

 

[PropertyEconomics]

Sounds to me like its a cat house (oh wait .. that would be a fun house wouldnt it).

Question .. is this a Fannie loan? If so I think you should conclude highest and best use is "as is" in accordance with Fannie guidelines. Supplemental standards would apply which would technically change the highest and best use and a subject to split appraisal would not be accepted.

If its not for a Fannie loan ... I would think the highest and best use would be for a lot division and the property would be appraised as such. In that instance it would be value of two units, separately described ... less the costs of making them divided.

Eight bedrooms a piece ... what the heck kind of house (duplex) is this? Do you have rents and sales of other units like this that have EIGHT bedrooms?

As a final question ... are these bedrooms rented by the hour ... could make for one tremendous income approach and analysis. If so .. I think you should interview the tenants .....

 

[Michigan CG]

If you are coming in at $250,000 without the property divided, and $400,000 if the property were divided like other properties then you definitely have a Highest and Best Use issue because as is, is not maximally productive.

highest and best use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasi-bility, and maximum productivity.

 

[PropertyEconomics]

If you are coming in at $250,000 without the property divided, and $400,000 if the property were divided like other properties then you definitely have a Highest and Best Use issue because as is, is not maximally productive.

highest and best use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasi-bility, and maximum productivity.

Impossible to disagree with you Tim.

 

[Greg Parker]

HBU of this property meets all four of the typical criteria.. which is what got me thinking in the first place. Since you are bringing this up, I know how to proceed now, and will go ahead and make my comments, etc. In the long run, no matter how this fellow looks at it, it's in his benefit to have two parcels here. Were it me, I would take it a step further and make it into two parcels with two or three units each... It would be an extremely easy physical conversion, and net probably double the rents he is presently getting.

This is not a fannie loan. Hard money lender.

This type of home is actuallly not uncommon in the area. There's a lot of them around, and all 8 of the bedrooms were built to be bedrooms. The only change made to the structure of the house was small closets this owner installed in rooms without them (it's an older home... not many closets for some reason in the olden days pre-1960).

The cost to divide this is minimal. Essentially the price of a survey to re-establish property lines (we are talking a 0.12 total acreage parcel for both, 0.06 if divided) and the minimal fees the township would charge.

I really think the owner is concerned about the taxes though, and for the life of me I do not know why. Each of the units is renting for $1800, tenants pay all utilities. I figure he is making $36,000/year gross on these (student housing, 2 months a year vacancy) and from what i can figure looking at similar parcels he is making a tax savings of $500 by keeping them together. He did ask me if the appraisal woould be sent to the assessors office, so maybe he thinks I have the power to raise his taxes... /shrug. Our back and forth communication was not great, as english was not his first language, so I may have mis-understood.

For PE... you sir, are nuts There were hardworking (or hard drinking...) college students living there. To insinuate college students would behave in a cathouse ... hell, who am I kidding. I was in college once...

 

[redfish]

If you are coming in at $250,000 without the property divided, and $400,000 if the property were divided like other properties then you definitely have a Highest and Best Use issue because as is, is not maximally productive.

highest and best use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasi-bility, and maximum productivity.

I would analize rents in the immedaite area, you mention that the street is full of these. Maybe rents are higher in these single family twin homes than the market area you are forced to enter to find similar property types (competing duplexes). I would consider what the combined rent of two single family properties in the immediate area to develop your market rent opinion. The subject property is going to compete directly for renters from that street and the other individually owned twin homes. If the typical SFR twin rents for $800 a month than your market rent will be $1600 for the subject would be twice as much. You say that a single family twin will sell for $200,000. 250 GRM. The subject property will collect $1600. 250 x $1600=$400,000. The income approach will support your value. The subject use is legal. I am assuming that it would be relatively easy to convert this back to 2 parcels, but if you are appraising an income property than the than income approach is relavant. If rents are depressed and the area is primarily owner occupied than the income stream may not be what typical market participants are looking for.

HBU analysis must consider more than just the "reversion" price(I think that is the term I am looking for) of an income property, but also the potential value of the income generated. Obvisouly the seller would individualize the homes back to SFR to sell. The motivaition of combining the two parcels? I don't know. Did the H.O. give you any reason why it was combined. Be sure to develop your market rent including some of the other SFR twin homes on the street. A call to the city could reveal the ease of split. If the competing twin home properties (SFR) rent for $800 two would rent for $1600. $250,000... I would be all over that depending on the potential income stream.

 

[Greg Parker]

For rentals, the area has an excellent history. The owner of the property is getting $1800/unit. $3600 a month. The rents divided or combined will not change, unless the conversion was taken a step further to make each of the individual parcels into duplexes or triplexes. Each of the indiividual homes is lare enough to support such a use, it's physically possible, and legally permissable. I know of two from personal experience on the block. The whole area is student rentals, and when a home does come on the market, they are typically snapped up in less than 30 days.

So far as the conversion from two parcels to one? No clue. The closest the home owner knew is that it was done sometime in the early 70's. He bought it at an estate sale. I am assuming he has not changed it back to two parcels for the tax savings.

 

[Jerry Bone Jr]

it is still a twin, but is zoned as a duplex in the city.

Does this "duplex" zoning allow a split? In order to split the property, back in to a "twin", would the owner need to make an application to the city? Would someone at the city need to review & approve the split? The review could go either way.
Anyway, it sounds to me like the H&BU is "present use", because currently it's not legal to sell as two properties or "twins".