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HBU, Residential Improvement On Commercial Parcel

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ZZGAMAZZ

Senior Member
Joined
Jul 23, 2007
Professional Status
Certified Residential Appraiser
State
California
If HBU of a single family residential assignment reveals that the SFR exists on a parcel zoned commercial, I would notify the client that the assignment is beyond my competence and licensure.

HOWEVER, in retrospect I'm wondering whether the "as is" nature of an assignment, as well as the form-based requirement to address the "as improved" rather than "as vacant" HBU status, preclude the need to consider alternative, commercial improvements/uses in the HBU analysis--with consideration for the facts that SFR is among the legally permissible uses, and that other parcels in the 'hood are similar.

Your perspectives please.

Comments/Disclosure:

--Not necessary to describe intended use/user because topic affects all assignments.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
By definition, H&BU determines what should exist on the property; as-vacant and as-improved.

The decision to change from what exists to something else is highly dependent on what the as-vacant H&BU concludes. Based on the as-vacant H&BU, a change could include:
A. Demolition
B. Remodel (a change of USE)

Therefore, IMO, your proposition:
I'm wondering whether the "as is" nature of an assignment, as well as the form-based requirement to address the "as improved" rather than "as vacant" HBU status, preclude the need to consider alternative, commercial improvements/uses in the HBU analysis
is not valid.

BTW, just because the pre-printed form doesn't have a space for the as-vacant H&BU analysis doesn't mean that the as-vacant H&BU shouldn't be completed. Indeed, I argue that it must be completed in order to determine if the two options (Demolition or Remodel) are necessary.

Also, in your specific (residential use in a commercially zoned area), if the H&BU as-vacant is commercial use but the existing improvements still contribute value, a few things are likely to happen:
A. When doing the cost approach, the land value is based on the site's value at its commercial H&BU
B. It is very likely there is going to be some additional depreciation to the improvements (they are the wrong improvements for the site, based on the as-vacant H&BU)
C. The remaining economic life of the improvements will be impacted; i.e., they will likely be shorter than if they were located on land that had a residential H&BU

So, no. We cannot exclude the H&BU as-vacant just because the form is designed for a residential property. This assumes that the value being opined is Market Value. Value-in-Use might be another story.
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
"HBU as improved" includes consideration of the underlying site usage ( as well as the site+improvements) with the existing zoning.

It doesn't always come down to an all-or-nothing proposition with the existing improvements, either. One of the alternatives is converting the existing SFR use to a non-SFR occupancy of some sort. SFRs on non-residential zoned sites get converted to office or commercial yards on a regular basis. Retail less often, but that also occasionally happens. Depending on the orientation of the structure and access, a mixed use is sometimes also another possibility.

The question at hand comes down to this; if a knowledgeable seller puts the property on the market, what kind of buyer will pay the most for it just the way it sits? If it's worth more as an SFR then that's its because that's what the market perceives the HBU to be for that site. If it's someone looking to convert to a non-SFR use or else redevelop the site entirely then it's because the site value or the conversion potential is higher.
 

Terrel L. Shields

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Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
just because the pre-printed form doesn't have a space for the as-vacant H&BU analysis doesn't mean that the as-vacant H&BU shouldn't be completed.
Exactly.
The as if vacant value and HBU may be commercial but if the improved value is residential, it is residential property though impacted by an obsolescence. That obsolescence is reflected as a loss in value of the improvements. Say a house is contributing $100,000 to a $100,000 residential lot for a total of $200,000. Then a similar house is located on a $150,000 commercial lot. As a residence, it is still "worth" only $200,000 total because you cannot utilize the HBU of the lot as is. Therefore, since land isn't supposed to depreciate per se, rather can only change in value, the dwelling contribution is now $50,000 and 50% of its contributory value has been lost as external obsolescence.

Once the commercial value gets to $200,000, then the house because worthless economically even though it has physical remaining life. A buyer might choose to demolish the dwelling, repurpose it as Hatch describes, or utilize it as a rental as an interim utility while they decide what to do with the property. At some point, they will pull the trigger and remove the house and build anew.
 

ZZGAMAZZ

Senior Member
Joined
Jul 23, 2007
Professional Status
Certified Residential Appraiser
State
California
While I'm trying to understand your perspective(s), which I sincerely appreciate, please advise:

1) Is your perspective more-or-less industry gospel, or your personal opinions that differ dramatically from other, equally compelling ideas?
2) Your knowledge is the total of your career experiences, but is your perspective based on a single authority, or seminar, or event, or mentor?
3) How can u tolerate such a glaring error of omission (re: the "as vacant" verbiage) in the 1004 form version of the basic industry reporting medium?

(Still trying to deal with the fact that others know so damn much more than I do, although lots of academic research I conducted a decade ago on the concept of "intelligence" revealed the power of genetics, not to disclaim the "early bird catching the worm" effect either.)
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Speaking for myself....


1) Is your perspective more-or-less industry gospel, or your personal opinions that differ dramatically from other, equally compelling ideas?
It is more or less the recognized methodology.
2) Your knowledge is the total of your career experiences, but is your perspective based on a single authority, or seminar, or event, or mentor?
All three: You can read The Appraisal of Real Estate or Appraising Residential Properties. Here is an excerpt from The Appraisal of Real Estate (14th ed.)(my bold for emphasis)-
If land is valued as though vacant in an appraisal assignment- for example, if the cost approach is applied in the assignment, requiring an estimate of land value- then a conclusion of the highest and best use of the land as though vacant is needed. When land is already vacant, an appraiser values the land as it exists, i.e., as vacant. When land is not vacant, however, the land's contribution to the value of the property as improved depends on how the land could optimally be used. Therefore, the highest and best use of land as though vacant must be considered in relation to its current use and all potential alternative uses.
This is repeated in the seminars that I attend.

As far as "mentors", I credit George Hatch in this forum with shining the light into my brain-box regarding the importance of H&BU and my woefully inadequate knowledge of that component when I first joined this forum. I have since (as you are) taken steps to make up for that deficiency.

3) How can u tolerate such a glaring error of omission (re: the "as vacant" verbiage) in the 1004 form version of the basic industry reporting medium?
I don't tolerate it. I analyze and report the H&BU as-vacant in each of my residential reports (for market value), I give that advice on this forum, and I make it a main point of emphasis in the CE presentations I make on that subject (most recently, a 7-hour class I gave in Seattle).
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Retired Appraiser
State
California
3) How can u tolerate such a glaring error of omission (re: the "as vacant" verbiage) in the 1004 form version of the basic industry reporting medium?

Fannie Mae forms are designed for one purpose and the HBU section is what they use to determine if the property meets their eligibility requirements. Here is what Fannie wants to know, per www.efanniemae.com

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.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
I think they say it pretty clearly...
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)

Hard to estimate a vacant site value if one doesn't first determine what the H&BU is of the site, as-vacant. :)
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Retired Appraiser
State
California
I think they say it pretty clearly...
(my bold)

Hard to estimate a vacant site value if one doesn't first determine what the H&BU is of the site, as-vacant. :)

They don't care if that part of it is retained in the work file. :)

But how far do you need to take the HBU summary when zoning won't allow any other uses, the current improvements are just like everything else in the neighborhood and nothing really needs changing?
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
They don't care if that part of it is retained in the work file. :)

But how far do you need to take the HBU summary when zoning won't allow any other uses, the current improvements are just like everything else in the neighborhood and nothing really needs changing?

Not far.
But SR2-2(a) requires a "summary" of the analysis and this is emphasized in AO-11.
So, analyze the H&BU (as vacant, as improved). Check the box on the form as appropriate and summarize (a short paragraph) of the analysis and conclusions.
 
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