Highest and best use

[Richard Goodfellow]

I did an appraisal of a small marginal home in an area where there are substantial homes and high land values. zoning is village commercial which allows single family homes. It is just under an acre and minimum lot size is 20,000 sq ft. There is little demand for commercial properties. most of the development is for single family. Because the house is marginal and sits close to the road I believe if it were to sell someone would either tear it down or build out back and convert the older home for some kind of home occupation, home office, guest qtrs etc. I said highest and best use was not its present use since the present home is an underimprovement and most of the value is in the land. The underwriter is asking - "isn’t the current use of the home being used as a residence? So wouldn’t its current use be the highest and best use?" My point is the particular improvements are not the highest and best use of the site and the improvements contribute little value. should I have checked yes and just stated in the report that the existing home is an under improvement? I had warned the client up front that most of the value is in the land but they still wanted to go ahead with it.

 

[Deleted member 77547]

In my market many homes are torn down an new, high quality homes are built. Like you, I have checked "no", that the highest and best use would be to tear it down and rebuild in line with the other higher quality homes in the neighborhood. I have had one underwriter (and one reviewer) tell me I needed to check the "yes" box instead. The underwriter because it was already "residential" and the reviewer because "you can always build a bigger home on any site." Both, in my opinion, didn't considered the "most profitable" part of the HABU definition.

 

[George Hatch]

Answer this one question and you will have completed the HBU analysis for this assignment:

The way the property sits right this minute, would the typical buyer occupy it as a house or would they build a new house or two on it?

Pretty simple, huh?

 

[hastalavista]

Richard-

Are you reporting this assignment on a Fannie form?
If so, then the HBU analysis is "as improved"; i.e., if the value of the subject with its existing improvements exceed the value of the site if it were vacant and ready for improvement, then the HBU is "as improved".

If you are not reporting your assignment on a Fannie form, your HBU might be "other".

I think the Underwriter is confusing permitted use (per zoning) and HBU analysis.

 

[hastalavista]

Uhhh....

Disregard my post and just listen to George Hatch.

 

[Howard Klahr]

... the reviewer because "you can always build a bigger home on any site."

Actually the reviewer's comment does not reflect concept of legally permissible (i.e. max lot coverage, set back lines, etc - In addition there may also be private restrictions - see HOA docs) No you can not always build a bigger home on any site.

The highest and best use analysis is applied specifically to the use of a site both as if vacant and as improved. It is recognized that in cases where a site has existing improvements, the concluded highest and best use, as if vacant, may be different from the highest and best use given the existing improvements (as improved). The existing use is considered to continue, however, until the land value, in its highest and best use, exceeds that total value of the property under its existing use plus the cost of removing or altering the existing structure.

Another often neglected principle of H&BU is the concept of the ideal improvement.

 

[Michael Schendel]

My question about HBU has always been, if I do nothing but residential properties and come across a property similar to that stated in the original posting, how do I know what the highest and best use would be?

It could be anything and everything other than its present use. But if I am only licensed and don't do commercial, how do i know what the highest and best use is if I don't know anything about alternative uses?

What if a hotel would be a higher and better use, but a SFR would be a higher and better use than an 8 unit apartment complex. I, as a licensed appraiser only, would not know the highest and best use for an exact piece of property witout analyzing all types of properties meeting HBU.

I have always turned down an assignment if thee was ever a doubt concerning HBU, but I have always wondered how could anyone who is not Certified General determine a HBU for a particualr parcel of land?

 

[Richard Goodfellow]

Thanks for all the quick responses. Pretty much confirms what I thought. To answer Georges question. No, If this property sold it would either be razed or gutted and converted to a barn workshop etc. Would someone pay a little more than the site value for the existing improvements? Hard to tell. There are so few comparable sales. It is clear in this case that the value of the property is pretty much land value. Thanks again

 

[Brad Ellis]

Richard,

You answered your own question with your partial statement that ..."most of the value is in the land."

If that is true then the improvments do add at least something to value and if they actually do, then the consistent use theory dictates that current use is H+B use.

Brad

 

[Richard Goodfellow]

But if the existing improvements add a small amount of value (possibly) but would be substantially altered, isn't h+b as improved something else? I still think someone will buy it and either remove it or convert it to another use. workshop home office etc. It is possible that someone could buy it and live in it because you cant find anything that cheap. In reality it would probably sell about the same as a vacant site, or as a fixer upper. Should i give it the benefit of the doubt and say the improvements are still contributing value but is an under improvement.