Highest Adn Best Use

[tommcsherry]

During a conversation, it came up that if the land value is exceeding 50% or so of improved value, there might be a highest and best use issue. Not wanting to appear ignorant, I didn't press the issue....I'd rather appear ignorant here

I cannot see the relevance of a different HBU in a circumstance where, for example, in Las Vegas ...or even coastal regions of CA, etc. (with a limited amount of land left that is capable of being developed) the value of the land sitting under a SFR is equal or greater than the cost of the improvement. LV needs SFR's, and if the land should cost more than the structure built upon it, so be it. I can't see how the value of the land, by itself, would impact HBU (given that all other conditions of HBU are met).

Someone please clue me in?

 

[CANative]

Tom, you ignorant nut!

I agree with you. Coastal properties in Mendocino and Sonoma Counties typically exceed 50% and often appraoch 90% ratio of land/improvements.

 

[tommcsherry]

So...where are we going wrong Greg? WTF was this comment referencing?

(looking around very defensively for squirrels.......)

 

[Scott Kibler]

We get high land value percentages in some markets here in the flatlands too.

 

[Walter Kirk]

It's a good idea to closely examine the H&BU when the land value exceeds the improvement value however there are many reasons for high land values including government limitations, avalibility of utilities, view ammenities etc. In some cases the use ie. single family residential could be the same however the 50 year old rancher may be replaced with a mcmansion.

Unfortunately many people have adopted the FannieMae 30% guideline as a rule. Last month a stupid underwriter demanded an explanation from me because the land value was 34% of the indicated value.

 

[CANative]

I think you may be thinking of a response to a thread I started. The person who was questioning my HBU analysis may have been overly concerned about secondary market guidelines.

 

[Tim Hicks (Texas)]

High land to value ratios have nothing to do with HBU in many high end residential areas. That is usually why they are high end areas. Why should older properties be penalized because they were there first and got the benefit of appreciation.

If high land to value ratios are typical, then it would take changing an entire neighborhood to change highest and best use? Is that feasible? I think not.

 

[Don Clark]

B) Many, many properties in our resort area on the ocean, on the bay, and near each of those often have land values that exceed the value of the improvements. Reason is we have many older homes in those area built 40, 50 or more than 80 years ago. Remember my posting of the $1million dollar adjustment I had to amke? Reason was that a comp had 2 parcels where all other sales only had 1 parcel, and in that area land slae were between $1million and $1.5 million for lots of the same size as that extra lot/parcel. I have done appraisals here where the improvements may be worth far less than the land but, based on a number of factors, they are at their highest and best use.

 

[tommcsherry]

OK...I get all that....that's why I couldn't see what HBU had to do with anything.

Let me rephrase the question:
Can anyone think of a reason why HBU could possibly be an issue in a new construction subdivision (or even perhaps in older construction) strictly as a function of a high percentage of the value being in the site?

 

[George Hatch]

If the improvements have contributory value to the site, then the property is worth more as improved than as vacant. That makes the existing improvements the HBU as the property sits, whether the rate of contribution of the improvements is 5% or 95%.

Contributory value below a certain threshhold may be indicative of an interim use situation with an overly limited remaining economic life, but that's not automatic. I can think of a number of examples that would be exceptions to that line of thinking, like some ranch and rural properties wherein the land is the thing. There can also be other legal physical and/or financial conditions in effect that would basically prevent redevelopment.