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Highest and Best Use?

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kristofer

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Freshman Member
Joined
Jul 8, 2008
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Licensed Appraiser
State
Colorado
I am appraising a property that was a model home which was also their sales office (1980 YOC). To make room for the sales office, they finished the garage as GLA with 2 outside entrances instead of a garage door. They took a tract floor plan of a 1500 sq ft 4 level w/ a two car garage and finished it as a 2000 sq ft home with no garage. Then the developer/builder sold the sales office home "as-is". I am sure the home was at it's highest and best use after construction had completed, but seriously doubt this is the highest and best use as vacant land (as there are no other known homes built this way).

Here is the issue that I am dealing with; the home has been completely messed up inside and out. There are walls built incorrectly, doors that do not fit, exterior needs replaced, no door casings, no baseboards, no updating, etc. Here is my question; since the home needs to be remoedeled anyway...Is the highest and best use remodeling the home to a 1500 sq ft home with a two car garage or back to 2100 sq ft no garage? Would I need to break down the cost to cure on each and then determine the value of each after each hypothetical situation. I am thinking maybe 1500/2 car. :huh:
 

Don Clark

Elite Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
I am appraising a property that was a model home which was also their sales office (1980 YOC). To make room for the sales office, they finished the garage as GLA with 2 outside entrances instead of a garage door. They took a tract floor plan of a 1500 sq ft 4 level w/ a two car garage and finished it as a 2000 sq ft home with no garage. Then the developer/builder sold the sales office home "as-is". I am sure the home was at it's highest and best use after construction had completed, but seriously doubt this is the highest and best use as vacant land (as there are no other known homes built this way).

Here is the issue that I am dealing with; the home has been completely messed up inside and out. There are walls built incorrectly, doors that do not fit, exterior needs replaced, no door casings, no baseboards, no updating, etc. Here is my question; since the home needs to be remoedeled anyway...Is the highest and best use remodeling the home to a 1500 sq ft home with a two car garage or back to 2100 sq ft no garage? Would I need to break down the cost to cure on each and then determine the value of each after each hypothetical situation. I am thinking maybe 1500/2 car. :huh:

It would seem to me that HBU would be as a 1,500 sq ft with a 2 car garage. HBU as if vacant would be as unimproved. Since it appears obvious that the HBU is as improved, I would not consider any other use. But, based on condition, it should be subject to repair. Whether you need to break down the cost into a line item cost to cure would depend on what your client wants. If they would be satisfied with a total estimated cost to cure, that is what I would give them. If not, you just might be getting into dangerous territory unless you are also a contractor or have experience estimating line item cost to cure. M&S Repair handbooks would help you work that out, or you could affiliate with an appraiser who has that experience if you do not. Hint......most big box hardware stores can be of immense help as well such as Home depot, Lowes, etc.
 

Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
kristofer said:
Is the highest and best use remodeling the home to a 1500 sq ft home with a two car garage or back to 2100 sq ft no garage?

As I am not located in your market area or more importantly do not have access to the local data, it is impossible for me to provide an answer. However, you are asking the right question and yes it will take more analysis than is typically required if the home were not in poor condition. You are headed down the correct path.

Due to conformity, I would imagine that the more likely answer will be 1,500 sqft w/a 2car garage, but without data from the local market I can not nor can anyone provide a supportable answer.
 

Webbed Feet

Elite Member
Joined
Feb 11, 2005
Professional Status
Certified Residential Appraiser
State
Canada
I'll toss out a monkey wrench. The "Use" is SFR. Is the H&BU the current use, SFR? ... I'm not so sure the keyword(s) here should be H&BU... Rather maybe they shoud be "over-improvement" and "Curable" or Incurable Functional Depreciation."

So are you looking at a cost to cure, or should you be looking at burden on ownership for an over-improvement with loss of utility due to lack of a garage?

Just a thought.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
The only real way to answer your question is to appraise it (in your notes) as a 2100 square foot residence with no garage (considering the costs of renovation) and as a 1500 square foot residence with a two car garage (considering the costs of conversion) using the appropriate comparables for each residence size. Comparison of the two values (considering the costs of capital expenditure in each instance) will answer the question as to which provides the highest return to the land. The highest and best use is for Single Family Residential, I think you are looking for the Optimal Use of those available to the subject given its potential configurations.
 

Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
Webbed Feet said:
The "Use" is SFR. Is the H&BU the current use, SFR?

PropertyEconomics said:
Optimal Use of those available to the subject given its potential configurations.

The required test is here is Highest and Best Use "As Improved", which includes an analysis of the ideal improvement. It is this part of the analysis that indicates if there is functional obsolescence and if it is curable.
 

Don Clark

Elite Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
I gave my opinion that it should be appraised as a 1500 sq ft SFR with a 2 car garage, which would require conversion from a sales office, for a very good reason. We literally have hundreds of homes in my market that have been built in a similar fashion. It is often the case that the owners of those homes would have preferred to not have an area that can only be used as a second living room, game room, big den, or some other almost useless area, and instead have a sizeable garage. That is not always the case, but it is often enough to tell me that the market does not need that extra space. That is especially true for the larger homes. On the other hand, it is very typical for the market to convert a 1 car garage into additional living space of some type. Sometimes it is done well, and sometimes not. But, in a market where such converted areas that are used as sales offices are not common, i would tend to believe that a garage would be preferred. But, that is just my opinion. I have no idea what the OP's market is like.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
The required test is here is Highest and Best Use "As Improved", which includes an analysis of the ideal improvement. It is this part of the analysis that indicates if there is functional obsolescence and if it is curable.


With all due respect Howard .. I dont think any of us considers different styles of homes, different sizes of homes, different amenitites of homes, etc in our highest and best use analysis. It would be a never ending analysis and one would nearly always conclude the property was not developed to its highest and best IDEAL use.
The question of which configuration provides the highest return can be solved as noted in my prior post where comparisons of capital expenditures and returns can be measured one against the other. Its simply a feasibility analysis to see whether conversion of the garage to a garage or remodeling for living space provides the higher value when measured against the cost of each. Not overly complicated.
 

stefan olafson

Senior Member
Joined
Apr 2, 2003
Professional Status
Certified General Appraiser
State
North Dakota
When completing a highest and best use analysis always complete the H&B Use 'as if' vacant first. "Among all reasonable, alternative uses, the use that yields the highest present land value, after payments are made for labor, capital, and coordination. The use of a property based on the assumption that the parcel of land is vacant or can be made vacant by demolishing any improvements.

Once you've taken a look at that scenario, what is the use that yields the highest value, you consider the h H&B Use as improved; "The use that should be made of a property as it exists. An existing property should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one..

Taking that into consideration, it appears the H&B Use as if vacant would be for residential development, the current use. It also appears from your post that the present improvements do not conform to the others in the neighborhood. The H&B Use still appears to be residential with renovations to the existing structure.

I like PE's suggestion that you complete two appraisals, one as is and one with conversion to garage space and repairs completed. That will give you a good indication of which use is the best use....
 

Richard Carlsen

Elite Member
Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
I am sure the home was at it's highest and best use after construction had completed, but seriously doubt this is the highest and best use as vacant land (as there are no other known homes built this way).
I think you are confusing H&BU with utility. In both cases, the 1500SF and the 2000SF configurations, both H&BU is single family residential.

However, due to the size differences, floor plans and rooms available, they may have a different utility (family room vs no family room as an example).

Most of the time, in a plat like this what you are looking at is a little bit of superadequacy if there are no other houses with this size and/or configuration. I would call it more functional than anything else as a non-typical floor plan.

But the H&BU of both is the same.
 
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