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Highest And Best Use

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Essential1

Freshman Member
Joined
Dec 10, 2011
Professional Status
Certified Residential Appraiser
State
Illinois
I am appraising a property which is a small ranch home (900 SF) on a 10,000 SF lot. 3/4 of the homes within a 3 block radius have been razed, with custom new construction. I have estimated the lot value of my property at $400,000 (based on numerous sales of similar ranch homes, which were purchased for lot value/razed). Majority of the newly constructed homes sell for over $1M. What is the highest and best use? The zoning only allows for SF dwellings. Its my opinion that the HBU of course is a SF Just not this SF, but a custom construction home. This property is under contract. The improvements add very little to the overall value, the old story - value is in the land. Land value in cost approach obviously exceeds cost to build.

Do I mark the "other" box under HBU - and explain this?
Do I mark the HBU - as current use (after all, HBU is a SF home - just not this SF home)
Can interim use ever be the same classification of improvement IE SF, just a different type of SF? small vs large?

Zoning office is of no help, as they only will tell you what size home can be built on a case by case basis and a submission to plan review - but there are similar size lots with 4000 SF homes on the street.

Please help. thanks so much.
 

gregb

Elite Member
Joined
Sep 3, 2011
Professional Status
Certified General Appraiser
State
California
Have you considered the subject as essentially a land sale, due to its highest and best use determination? I have also seen others in this scenario use the SFR form, noting interim SFR use as its current use.
 

SpartanAG

Member
Joined
Feb 12, 2008
Professional Status
Certified General Appraiser
State
Arkansas
Do I mark the "other" box under HBU - and explain this?

This is likely what I would do. Be sure to work through the four test of highest and best use and add your analysis in an addendum.

Do I mark the HBU - as current use (after all, HBU is a SF home - just not this SF home)

Based on what you posted it sounds like similar properties are being demolished after purchase for the purpose of building a new improvement, so the current use would not be the HBU. So, no to this one.

Can interim use ever be the same classification of improvement IE SF, just a different type of SF? small vs large?

Yes. This is where the HBU analysis comes in handy.
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
compare if you can find them, vacant land sales and sales of small depreciated homes like subject that were raised...I often find the lots with small houses on them sell for more, even if house is razed after sale- showing the house added some residual value...ironically perhaps because the sale could be financed vs a buyer has to pay all cash for a vacant lot, or grading/utilities hookup of a lot due to house being on it adds value. Look up also DOM listed of vacant lots vs lots with small houses on them that might be razed in future.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
Highest and Best Use as vacant is residential use.
Highest and Best Use as improved is still residential.

Removing and replacing the house with another house, does not change the use of the land.

Does an existing house represent the highest and best use of the land, with a highest and best use as residential? Yes it does.

Will a newer larger house be a more maximally productive use of the land? maybe, depends on the numbers. But if we work from the premise that bigger and newer always warrants a value premium... Then we also recognize that there are never any little old homes that are the maximally productive use of the land.

don't confuse USE with anything else.

.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
If the improvements continue to contribute value, then H&BU as-improved is to retain the improvements... but not for long; the remaining economic life is likely going to be very short. Do not confuse "Total Economic Life/Remaining Economic Life" with "Useful Life". Based on your description, the improvements will be remodeled (a change in the utility; i.e., expanded significantly) or demolished within a few years. A brand new house can be 100% functionally depreciated, even if it has no physical deterioration.

If the improvements no longer contribute value and the site's value is greater as a development site, and if you use similar, depreciated homes (tear downs) do no make any adjustments for the physical characteristics of the improvements. The typical buyer of such properties is not pricing their purchase based on bed/bath count or GLA of the soon-to-be torn-down improvement. They are buying such properties as development sites.

If there is tear-down/rebuild activity in the neighborhood, I'm more likely to go with "demolish" as the H&BU as-improved than retain. The market has been and continues to move in that direction, and that's the call I'm going to make.

Have you spoken with the borrower to see if they've had any offers on the house or if they intend to remodel?

If my H&BU use analysis indicates the subject is a tear down, or if the remaining economic life is very short, I'll call my client and tell them what my H&BU analysis is concluding before I finish the appraisal. They may decide to cancel the assignment (which is fine by me); I'll charge them for the work I've done.

Good luck!
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
There are four things one can do with an improvement regarding H&BU as-improved:
1. Renovate (update/modernize)
2. Remodel (change the USE or UTILITY; i.e., expand the size or reconfigure a 2br home to a 3br home)
3. Demolish (start swinging the wrecking ball)
4. Retain as-is (typically while continuing a normal maintenance routine and replacing/modernizing short-lived components at the end of their economic lives).

H&BU of the site, as-vacant, may be residential with or without the existing improvement.
H&BU as-improved may not be as-is. Once you figure out what the H&BU as-improved is, then you'll know how to compare the property and value it appropriately.


Good luck!
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
Razing improvements changes the use from what it was, to vacant and ready for development, but vacant, is not a "use" because no one is "using" vacant.

Replacing improvements might be a change in "use" or a change in utility of improvements. Just depends what you build.

.
 

Essential1

Freshman Member
Joined
Dec 10, 2011
Professional Status
Certified Residential Appraiser
State
Illinois
thank you all for your feedback. so....

Marking highest and best use as "interim use" - with the interim use being its current use: With an estimated interim use of 3-5 years.
The subject is legally permissible as a single family home
The subject is physically possible as a single family home
The subject is not considered financially feasible
The subject is not currently maximally productive. Its current improvements have limited contributory value. The improved property has a limited remaining economic life of 25 years thus financial feasibility becomes a question of the maximally productive use of the site.
Value of the land $400,000
Value of the improvements $150,000 minus demolition costs = $125,000
Redevelopment of the site becomes the most maximally productive use of the property and the continued use of the existing improvements do not represent the highest net value of the site thus considered financially unfeasible.

Does this make sense? Am I doing this correctly? thanks in advance.
 
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