Highest and best use

[George Hatch]

I still think someone will buy it and either remove it or convert it to another use.

That's what HBU analysis is all about - developing your opinion about the basis upon which the property will sell. Now all you gotta do is back that analysis up in your report.

This is not some minor little housekeeping issue like requiring an appraiser to include their license number wherever they sign their name in an appraisal report. The Market Value of a property will be attained as a result of the HBU (as improved). Identifying the basis upon which the property would sell enables the appraiser to identify which attributes are of the most effect on value, which types of buyers the property would be marketed to, and which comps would be considered by those buyers to be the most similar.

For example, in this assignment if the property is worth more as land then the dominant attributes of the property would include the lot area, topo, utilities, zoning, etc. The house would be considered by the average buyer to be an expense, not an extra. Conversely, if the property is worth more in its current residential use then the house is the thing and the lot attributes are very secondary. If an appraiser approaches the valuation portion of the assignment under the wrong HBU conclusion it causes them to look for the wrong comps and make the wrong adjustments, most likely resulting in an unreasonable value conclusion.

You may very well be facing an underimprovement for the site; and while the existing structure does have some contributory value it ain't much. It is very possible that the remaining economic life of these improvements is limited when considering the trends and economic cycle in its neighbrhood or market segment. If so, you'd still base the appraisal on the existing use because it still represents the market value of the property. However, you would also include your opinion about the limited remaining economic life so that your readers could understand your valuation in context. This is one example of where the final number on the appraisal may not be the most important piece of information to their decision process. Having provided them with this information, your intended users can then make an informed decision.

I would go so far as to suggest that if an appraiser is unable or unwilling to develop a reasonable HBU analysis for an assignment involving MV they probably shouldn't be appraising the property.

 

[Thomas N. Morgan]

Some years ago, an appraiser wrote an article for the Appraisal Institute's Journal about hightest and best use. He had a very simple way to look at it: H & B use is the most likely use, he said. He gave a number of convincing examples and arguments to support the concept.

His idea has a lot to recommend it.

 

[Richard Goodfellow]

Thanks again on your input. really appreciate it

 

[Thomas N. Morgan]

An MAI I knew expressed the idea contained in George Hatch's second paragraph (#10061 above) by asking this simple question: "Who would want it, and what for?"

 

[Hall McClenahan]

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.

In this case, the current use is single family.
In your opinion, the best use is single family.

regardless of the quality of improvement present they are both the same use.

Now correct me if I'm wrong, degree of payoff in use does not warrant the no box being checked.

 

[Brad Ellis]

Richard,

It does not matter at all if the improvments only add marginally to value. If they add anything at all, then current use is the highest and best use. All done.

That said, if you think that a potential buyer will buy the site and then replace the improvments, it probably indicates that the improvements have reached the end of their useful life and are no longer adding value. You just have to demonstrate that.

You are the one with the data. What does it really show you? Keep personal feelings out of it- either you can meausre it or you cannot. If you cannot then you have no basis for such an assumption.

What the consistent use is really saying is that typical buyers do not discard things of value; hence if they pay more for the site improved vs. what they would pay unimproved, they are assigning value and H+B use is current use.

Sometimes it is not too easy to show it- but we must try.

Brad

 

[Lee Lansford]

I'm with Brad on this.

There are two points of discussion taking place in this string, but if I assume correctly, the question is whether or not the improvements contribute to the market value of the property.

If the improvements do contribute to market value, and assuming that the appraiser is responding to the question posed on page 1 of the URAR ("Is the highest and best use of the subject property as improved...the present use?"), the answer is "yes".

At times it is very obvious that the improvements do...or do not...contribute to market value. At other times, the task is a bit more difficult.

 

[Otis Key]

Also agree with Brad and Lee. As long as the improvements, as is, still contribute, then it is still the H&BU. However, it could also be a transitional use to a future H&BU, even tomorrow. The market is dynamic and so that use could change tomorrow and then change again the next day. As of the effective date of the appraisal, the improvements "as is" still contribute, even one cent worth, it's still the H&BU.

 

[Fred]

Brad

It does not matter at all if the improvments only add marginally to value. If they add anything at all, then current use is the highest and best use. All done.

Not true. Improvements can add value and it can still be more profitable to knock them down. That’s what an “interim use’ is. Need examples?

Thomas

He had a very simple way to look at it: H & B use is the most likely use,

The HBU is the mostly likely use. The first person to try to get around the semantics issue (that "highest and best" sounds like one-and-only-one use) was Kinnard. He used the phrase “most probable use.”
See: “New Thinking in Appraisal Theory.” William Kinnard, The Real Estate Appraiser, 1966

It seems odd to me, that after Kinnard died in 2000, the AI created an “education award” that bears his name. And the yet the AI text never adopted or recognized Kinnard’s unique contributions.

 

[Richard Goodfellow]

In my case the value of the site and what the proprerty was worth as improved is very close. This is Vermont and the only village land sale was over two years old. There was such little data of land sales and marginal houses that it becomes a judgement call. after discussing the situation with other appraisers I gave it the benefit of the doubt and decided H&B use was its present use and compared it to other marginal homes. Where you have a more active maket with plenty of sales I can imagine it would be easier to determine H&B with more confidence. In this area it seems that it is not very cut and dry. Maybe thats the way it is in most areas. I have seen many cases where properties sold for other uses than what I would have thought. There was a sale recently of a 4,000+ sqft run down home that was across the road from a manufacturing plant and near other industrial properties not to mention a busy road. It was an attractive home but I didn't think any one would want to fix it up and live there as a residence. Figured someone would turn it into apartments. nope. A guy that lived about 1/2 mile away sold his 1,000 sq ft home and bought it to live there. Glad I didn't have to appraise it. Thanks again for all the good discussion and theory.