Highest and Best Use

[madeluca1]

I've been toying with a highest and best use question. I'm a certified residential appraiser. My license clearly states that I can appraiser 1 to 4 unit properties. I appraiser in a complex area with cities, rural markets, and oceanfront. Frequently, I appraiser properties with zoning that allows both residential, professional office, commercial, and small apartment buildings. Am I qualified to determine the highest and best use if it is not 1 to 4 family given my license does not permit me to appraise commercial, professional office, or apartment buildings?

 

[Terrel L. Shields]

Yes

 

[George Hatch]

State licensing requirements are a somewhat separate issue from technical competency.

The central question for appraising an existing use (like an SFR) is whether the existing structure adds to the value of the whole. Is the property worth more as land value or in the existing use (even if the typical buyer would remodel). Would the property be marketed for its underlying land value (listing says "the value is in the land") or in that existing use? Would the buyer who would pay the most being a user or investor in that existing use or would they be a developer looking at a redevelopment opportunity?

If you have access to the sales data for that type of land and the competency to analyze those values using the appropriate unit of comparison then that would enable you to make those comparisons. If the property is worth more as an SFR then that's where lies its MV. If it's worth more as land or as conversion to a non-residential use like an office or car sales lot then THAT is where lies its MV and that's how it should be appraised.

How the client wants you to appraise the property or what their opinion of it isn't part of your HBU analysis.

 

[Fernando]

On the subject of highest and best use.
Subject can build a new home on a vacant lot but that takes more money and time especially with permits and such.
However, easiest way and quickest time is to add an ADU.
Since time is a factor, would it be most profitable adding an ADU as HBU?
However in long term, it may be more profitable by building a new home there.

 

[PushinValue]

I have this same question.

100 year old homes in old town/down town have commercial zoning (originally constructed as sfrs). Some parts half the homes are sfrs and the other half are small hair studios, insurance office, or other misc office type space. The only difference between the buildings are a wheel chair ramp and a few parking spaces (usually enough room in the front yard/lawn area for pavement). The interior of the” commercial” properties are not structurally modified and usually have a few interior walls removed.

Sometimes commercial use sells for a little more, but sometimes not (very few sales in these mixed areas).


It seems to me like the highest and best used question is not “is the value of the property higher as vacant commercial lot vs legal non conforming SFR use”. The question is “what buyer would pay a higher price? The owner occupant or the investor or small business man who will spend 1-5% of the purchase price to use the SFR building as a commercial property?

Am I incorrect here? Seems to me like I would need a commercial license in order to establish a value of the property being commercial even though the current structure is a single-family home.

To those of you, that would say the modifications come in to play… What if a single-family home has the wheelchair ramp and the parking spaces in the front but is currently occupied by family. Current use is single-family, residential, but current set up would allow either single-family occupancy or a small office type situation…

 

[Fernando]

I have this same question.

100 year old homes in old town/down town have commercial zoning (originally constructed as sfrs). Some parts half the homes are sfrs and the other half are small hair studios, insurance office, or other misc office type space. The only difference between the buildings are a wheel chair ramp and a few parking spaces (usually enough room in the front yard/lawn area for pavement). The interior of the” commercial” properties are not structurally modified and usually have a few interior walls removed.

Sometimes commercial use sells for a little more, but sometimes not (very few sales in these mixed areas).


It seems to me like the highest and best used question is not “is the value of the property higher as vacant commercial lot vs legal non conforming SFR use”. The question is “what buyer would pay a higher price? The owner occupant or the investor or small business man who will spend 1-5% of the purchase price to use the SFR building as a commercial property?

Am I incorrect here? Seems to me like I would need a commercial license in order to establish a value of the property being commercial even though the current structure is a single-family home.

To those of you, that would say the modifications come in to play… What if a single-family home has the wheelchair ramp and the parking spaces in the front but is currently occupied by family. Current use is single-family, residential, but current set up would allow either single-family occupancy or a small office type situation…

Commercial properties is worth as much as rent you can get. Investors will only pay to get a decent return.
Residential has more potential to get higher price because income approach plays less of role in value.

 

[J Grant]

I have this same question.

100 year old homes in old town/down town have commercial zoning (originally constructed as sfrs). Some parts half the homes are sfrs and the other half are small hair studios, insurance office, or other misc office type space. The only difference between the buildings are a wheel chair ramp and a few parking spaces (usually enough room in the front yard/lawn area for pavement). The interior of the” commercial” properties are not structurally modified and usually have a few interior walls removed.

Sometimes commercial use sells for a little more, but sometimes not (very few sales in these mixed areas).


It seems to me like the highest and best used question is not “is the value of the property higher as vacant commercial lot vs legal non conforming SFR use”. The question is “what buyer would pay a higher price? The owner occupant or the investor or small business man who will spend 1-5% of the purchase price to use the SFR building as a commercial property?

Am I incorrect here? Seems to me like I would need a commercial license in order to establish a value of the property being commercial even though the current structure is a single-family home.

To those of you, that would say the modifications come in to play… What if a single-family home has the wheelchair ramp and the parking spaces in the front but is currently occupied by family. Current use is single-family, residential, but current set up would allow either single-family occupancy or a small office type situation…

what you describe above is mixed use - SFR with half of less allowed for light professional or home office use - hairdressers, architects, etc but not heavy commercial use.

HBU is not always about commercial vs residential; it can continue as is residential or tear down the house and build another newer/larger residential SFR or, in some cases town, townhouses.

 

[George Hatch]

Sometimes you'll run into a wobbler - the property has similar value to either type of buyer. Not just with SFRs vs office, either. Most redevelopment projects start with the acquisition of a previously improved parcel that was worth more for the land value than for the previous use.

In my view it isn't the license mode itself that is the dividing line between getting to "most profitable" element of an HBU analysis, but whether you have enough access to the data involving these non-res properties. That's because some of them don't get sold through the local MLS. Secondarily, the appraiser needs to have a basic understanding of how to analyze the prices. The unit of comparison for a house is its sale price itself, but the dominant unit of comparison for office and retail and industrial and special uses like religious or schools is price/sf. I can count on one hand the number of appraisals I've seen on office or retail that was performed by an SFR appraiser where they used the correct unit of comparisons or took into consideration the location, parking, utility and all the other considerations which are of effect on value in those markets.

"Yeah, it was a small freestanding restaurant but it has no provision for a drive-thru, so none of the drive-thru comps the appraiser used are directly comparable to this subject."

 

[Zoe]

We have them in Memphis. Most are like very small houses and like tax people, hair salon, insurance office, daycare, etc. They have good road traffic and visibility. People don't usually live in them though. They buy them to run the business. They can live in them with the business. The structure is not usually big enough to accommodate both business and living quarters. But sometimes it is.

Many times there is a small owner occupied residence right next door to the commercial business. Sometimes the zoning can change that quick and sometimes the person that lives next door in a small residential property just wants to stay there and don't want to sell to a business.

 

[Terrel L. Shields]

Sometimes you'll run into a wobbler

I like that term. Dealing with it often in vacant agri land in transition. Is it better to leave it as agri land for an interim use until it ripens into development? Or is it best used for a single family "estate" on acreage? Or, should it immediately be developed into smaller lots? Often these are competing uses. Once the price of land exceeds that which the enterprise (raising cows say or perhaps crops) cannot support upon itself, a buyer might simply raise cattle there for 5 or 10 years with the goal of selling the land for more than they gave for it. Or, equally viable is someone going to use the property to build their dream "hobby farm". Even woodlots here now are bringing up to $8,000 an acre, and being used as both hunting or recreation and building a house. Developers like a few woods in many cases but rarely want a full woodlot. So they have an eye towards what will require the least dirtwork.