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Highest and best use

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Diego Lopez

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Member
Joined
Sep 11, 2006
Professional Status
Certified Residential Appraiser
State
Florida
The highest and best use as improved of an average vacant lot zoned residential with residential properties all around would be no other than?


(single family residence)


On the report when speaking of the HBU we would use the highest and best use as improved or as vacant? As improved and as vacant would still yield single family as the HBU?

More specifically do I mark the precent use as the best use (vacant) or other: Single Family Residence?
 

Ken B

Elite Member
Joined
Feb 18, 2004
Professional Status
Certified General Appraiser
State
Florida
Is the subject a vacant site? If so, it is rather difficult to appraise it "as improved." If you are asking if HABU of a vacant site is to remain vacant, that is so rare an option, I cannot think of a situation where it would be true. It may be true that the HABU is to hold for future development at some specified future period in time.
 

stefan olafson

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Joined
Apr 2, 2003
Professional Status
Certified General Appraiser
State
North Dakota
All H&BU analysis values the land as though vacant and ready for its highest and best use. A vacant single family zoned site with all sites around it zoned residential, with improvements built on these sites leads me to believe the H&B Use is Single Family Residential. You have to think what are the physically possible uses? From those uses what is legally permissible, after you decrease the number of options you decide what is financially feasible then what is the maximally productive use of the property.
 

jhillas

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Feb 4, 2002
Professional Status
Certified General Appraiser
State
California
Thats never been clear to me on the appraisal forms. Its my understanding that if its an existing home, the intent is to know whether the home is generally consistent with H&BU as improved.

If you are appraising a proposed home on that lot, the user will want to know whether the proposed home is consistent with H&BU.

"H&BU of the subect site as vacant would be the construction of a single story home of +/-1,600 to +/-2,000 square feet with 3-4 bedrooms, 2-1/2 baths and a two car garage." You could get more specific.

"If the site were vacant, construction of a home not unlike the subject would be consistent with the highest and best use of the site. It is not likely, however, that the inground swimming pool would be recommended as its cost exceeds added value."

Bottom line, check the box then explain in words what you mean to say.
 

stefan olafson

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Joined
Apr 2, 2003
Professional Status
Certified General Appraiser
State
North Dakota
jhillas! I think you are mixing up a lot of things in the Highest and Best Use analysis!

Get a copy of 'The Appraisal of Real Estate' and read the chapter on Highest and Best Use, it will clear things up for you.

From page 305, The Appraisal of Real Estate' Twelfth Edition "Fundamentally, the concept of highest and best use applies to land alone because the value of the improvements is considered to be he value they contribute to the land. Land is said to have value, while improvements contribute to the value of the property as a whole."

Read the whole chapter and it should give you a better understanding of H&B use.
 

ZZGAMAZZ

Senior Member
Joined
Jul 23, 2007
Professional Status
Certified Residential Appraiser
State
California
This is undoubtedly a naive question, however:

If HBU is comprised of "as vacant" and "as improved," why doesn't the 1004 have 2 check-boxes? I do 99% of my assignments on the 1004. I'm aware from prior posts that both scenarios must be addressed in the HBU addendum, and I'm aware that the Forum downplays the role of the 1004 in appraisal practice. Nevertheless, the absence of 2 check-boxes seems to be a glaring deficiency.
 

Ken B

Elite Member
Joined
Feb 18, 2004
Professional Status
Certified General Appraiser
State
Florida
The OP is unclear (to me) if the subject is a vacant site or proposed construction.

If one is appraising proposed construction under the hypothetical condition that improvements are complete as of an effective date which is contemporaneous with a current inspection date, one would conduct a HABU analysis of the property "as improved" and "as if vacant". In such a case, assuming development of the property is legally and physically possible, the HABU as improved is likely to be its hypothetical "existing use." It is typically not feasible to raze new construction for a different use. For HABU as if vacant, one could be as general as "construct a residential property consistent with surrounding properties" in a specified time frame, assuming surrounding properties are a legal use. As Stefan alluded, HABU is that use which results in the highest land value. An improvement may have functional issues, but that is charged to the improvement, not the land.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
This is undoubtedly a naive question, however:

If HBU is comprised of "as vacant" and "as improved," why doesn't the 1004 have 2 check-boxes? I do 99% of my assignments on the 1004. I'm aware from prior posts that both scenarios must be addressed in the HBU addendum, and I'm aware that the Forum downplays the role of the 1004 in appraisal practice. Nevertheless, the absence of 2 check-boxes seems to be a glaring deficiency.

I think this is one case where Fannie/Freddie did appraisers a favor.
The question the lender has (rightfully so) is this:
If I loan on this property today, today does the value of the land + improvements exceed the value of the land by itself?
Answering this question ensures that the lender will be making (presumably) a residential loan on a property where the improvement contributes to value rather than on a property where the improvement has no contribution (or, maybe a negative contribution) to value that could masquerade a development loan as a residential loan.
 

ZZGAMAZZ

Senior Member
Joined
Jul 23, 2007
Professional Status
Certified Residential Appraiser
State
California
DD: Thanks. Also, would you be so kind as to clarify "development loan" and why that would be disadvantageous or inappropriate.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
DD: Thanks. Also, would you be so kind as to clarify "development loan" and why that would be disadvantageous or inappropriate.

Q: What is considered the lowest-risk type of real estate loan?
A: An owner-occupied one-family residential real estate loan.

Lending is priced based on risk. A development loan has significant risk since a lot of things could go wrong. Consequently, the lending guidelines and terms are significantly different; they usually include a higher interest rate, shorter term, and a bigger owner (developer) participation.
A loan for an SFR is lower risk (presumed) and therefore has a lower interest rate, longer term, and has easier qualification requirements.

So, as a lender, what I don't want to do is make a residential-priced loan that is going to be used for development purposes because I'm taking on significantly higher risk without being paid for it (not to mention if I'm selling these loans on the secondary market, I'm warranting that they are residential loans).
The HBU analysis and the reporting requirement on the 1004 form gives the lender a key piece of information. Effectively, what we say is-
This property has a higher value as-is vs. vacant, ready to development.
If the property is worth more as-is than as a developable property, it is less likely that the borrower is going to take a loan and then use the proceeds to tear what exists down and build something else.
 
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