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Highest and Best Use In Proposed Construction Appraisals

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George Hatch

Thread Starter
Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
Okay gang, here's the deal. I keep coming across new projects that clearly have poor design elements or inappropriate uses in relation to the highest and best use of the site. I know these projects are mostly being built with construction loans and I assume there are appraisals in those loan files that are not mentioning these issues or giving them serious consideration.

One example is the overbuilt SFR; you know, the new 4,500 SqFt monster in a tract of little 30-year old 1,200 SqFt dogboxes. Or design elements like an asphalt shingle roof or below average construction quality in a high dollar neighborhood. I can think of a number of examples in this vein...

Another example is the new multi-tenant office buildings or multi-tenant retail uses in areas where the existing uses can't maintain a stabilized occupancy (oversupply). There is no way a new building can generate enough income in a saturated market to debt service its construction loan or permanent financing. Why are appraisers apparently not mentioning this crucial element in their appraisals?

Have you ever told a lender that a proposed floorplan has functional problems that will detract from marketability? Or that the demand is insufficient for the project to reliably absorb in the next year; or that the existing supply is going to cut into the market rents?

Sure, telling your client this will probably kill the deal, but I think it's better an unviable project dies before it gets built than after. To me, such an appraisal is not only filling its intended measure, but is actually saving everyone a lot of grief later on.

George Hatch
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
Your example of comp shingle roof is, in my area, not a negative but a positive in a neighborhood of wood shingle roofs (fire hazard and a general ban against them in many cities). That out of the way, it seems to me that until you complete the report, you really don't know if it's an issue. If you identify the problems and their affect, then the lender and borrower/builder can determine whether to proceed or adjust the project. But this is not like a refi where the borrower is $50K upside down and it's real apparent. If you go to your client and say that "it appears that" or "it may be that", you are not doing your job. These issues are part of your job to identify and quantify so that all parties are well informed.

Roger
 

Ross (CO)

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
George, ..... Your wording leads one to think you might be seeing these examples in a task as Reviewer, rather than as Appraiser. While I have less review experience than perhaps is desired, I have been sent quite a number of key form pages from report(s) a client has so as to share the aesthetics around a particular property that I am then being asked to re-appraise. It is very clear that many others in this trade insufficiently perform the duty of "tell me about the property" ! You know, canned and cloned and extremely brief descriptions of neighborhoods, and markets, and improvements on the site, and just how one rationalized the grid data and adjustments. Whatever it takes to just get it done, rather then getting it done a little better. I recently alluded in a posting that we are "greed detectors" as we see over-zealous attempts to re-fi at some pie-in-the-sky guesstimate of value. Likewise, I guess we are also "grief savers", as you say it, but too bad not enough of those who hire us want those two tasks to be readily completed. Like Frank G. said a few days ago......"They just won't stop."
 
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