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Highest and Best Use

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Tim Hicks (Texas)

Thread Starter
Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
Bear with me, I rarely run into this problem. I was asked to appraise a home sale of a 1945 home. This is a little old couple that has lived in this home since it was built. When I pulled up in front of the property, my "spider sense" started tingling. This is the only residence on this side of the street. Every property to the north and south on the entire block is newer and commercial property. When they first moved in, they were the only house on the street. Across the street is a subdivision, but none of the homes face the street. It is becoming a high traffic street because of the commercial properties. One side of the home has a professional office and the other side has a nursery and landscaping business. My problem, to me, the highest and best use would be a commercial property. I checked with the city and this lot is zoned residential. Every other lot on this block is zoned commercial. I asked the nice lady at the zoning office if there was any "grandfathered" zoning for this property and a re-sale would require commercial use. She stated that it was currently zoned "residential" as each lot is zoned separately and any change would required applications at their office. Now, I don't know the buyer or his intentions, the mortgage company says it is going to be an investment property. I would bet that he intends to make it a commercial property, but I have nothing to support this assumption, but logic and "spider sense". The home looks every bit of 57 years old and the old couple does still live there. I am looking for options to handle this. Can I state the highest and best use as commercial if it is zoned residential? Am I just over analyzing? The loan officer thinks so, but her commission motivates her brain. The property is not worth much ($69,000 contract price) and I am not sure I will get that value, but similar residences in residential areas sell from $80-90,000 in average to good condition. Of course, I have a little old couple that want to move out to country that inhibits my view point. Any helpful advise would greatly be appreciated. I am sure I left some important data out, so please ask me to clarify anything that is not clear. Oh, of course, I have no other sales that are surrounded by commercial properties.
 

Don Clark

Elite Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
Tim,

I did one very similar a few years ago. At that time, and prior to lender select, I was an FHA Staff appraiser. I went out to look for the property. It was not on the block where I thought it should be. I then looked on the other side of an interstate(new) loop. There it was. I had Texaco oil storage facility tanks on 2 sides, the interstate on another, and a Vietnamese cultural center on the other. The Regional Director said HUD would not insure it as it had lost "it's residential characteristics". That sounds like what you are dealing with as well. When I told the lender this there was weeping & wailing and knashing of teetch. You would have thought I had killed their first born. Hell, i thought I was doing a good thing. I could have finished the assignment and let them find out then, but no, I had to go and be a nice guy. Next day the lender calls up and says "what are we going to do about this?". We says I ? Me appraiser kemo sabe, you lender. There ain't no "we". Well, to make a long story short, they could not finance the property under any program. Why? Same reason you have. Residential was not it's highest and best use. Don't go by current zoning. Apply the test of HBU:

1. Legaly possible.
3. Physically possible
3. Economicly feasible
4. Maximally productive.

If it is possible to get a zoning change, then it is legaly possible.

And, I know you did not mean that you would let the old folks desires and situation sway you, but be careful. Our job is to be an unbiased third party.

"if it looks like a duck, quacks like a duck, and walks like a duck, chances are it's a duck.

Don Clark, IFA
 

Tim Hicks (Texas)

Thread Starter
Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
No, Don, I am not letting the little old couple sway my decision making (and I know you did not think so). But because of them and their situation, I want to be double sure when I say " no way", that somebody else does not come along and say "yes way". I know there are plenty of other appraisers out there that will just look the other way, but I can not/will not ever operate that way. The loan officer will have their argument why the property should be "residential". The borrower will have their argument supporting "residential". The poor home owners are at their mercy and just want to sell their home. So, as usual, the appraiser is the big, bad guy in the whole mix. The truth will set you free....Free from clients. This client is not a major player in my client base, but I hate losing clients over issues that should not have to be questioned. I have already fielded the first wave of complaints. Tomorrow, I will get to hear how appraiser x or realtor y sees no problem with the property or the transaction. By the end of the week, I will be that "idiot appraiser" again. Then I will get to hear how they made it work without me and how I refuse to see gray areas in black and white issues. This is a recurring story in our area.
 

larryhaskell

Senior Member
Joined
Apr 23, 2002
Professional Status
Certified General Appraiser
State
Nevada
Tim:

Even though your client is the lender, I'm glad to hear you care for the older folks because we will all be one some day. That said, the thought that came to me was that the buyer wants it to sell as a SFR and not commercial because the price may be lower and the interest rate lower as well. As was stated earlier and I agree, zoning isn't the only factor for H&BU. You might be doing these people a favor if you stand your ground on the H&BU issue if that is what you conclude. Of course, the LO won't be happy because he/she won't get the loan. Let us hear how it turns out.
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
And now for another view...

The legally permissible portion of the highest and best use analysis is based on "existing land use regulations, reasonably probable modifications of such land use regulations," etc.

If you can articulate how you believe there is a reasonably probable change to the current zoning, that's one thing. In the absence of such probability, you should probably consider the existing use under the existing zoning. Assumptions in cases like this can be hazardous to your health, if you know what I mean. Personally, I wouldn't make such an assumption unless there was a request pending and some indication from the zoning authority that it might pass. You never know, the zoning authority might have some requirements that this parcel doesn't fill, like a minimum lot size, minimum frontage, or some arcane requirement for vehicular access, or who knows what. Take it from me, these kinds of glitches do occur from time to time. I prefer the 'show me the money' routine when it comes to possibilities.

There are also other elements to highest and best use. Economic demand is next on the list. How much demand is there for non-res uses there, either as a conversion or a redevelopment site? The property might well be worth more as a residence than as a conversion or as a redevelopable site. Having not seen it, I would still guess this to be the case.


The way I look at these properties is to compare the existing use in its current condition to vacant site values to see whether the improvements have contributory value. They either do or they don't. If they do, then just appraise the property in it's "as is" condition as it's still a house. If you are concerned the existing use is an interim use and can articulate how you came to this opinion, you might want to estimate a remaining economic life. Kinda like saying, "Yeah, it's worth the sales price as an SFR, but the development trends in the neighborhood are such that the remaining economic life of the structure in its current use is less than 5 years." This way, your lender not only has the value opinion, but also some indication that this property might not be a suitable candidate for a high LTV mortgage in a regular program. There is probably still a loan in there somewhere but the lender needs to find the appropriate program and exercise some judgment.

Don't worry about killing the deal, as this condition existed before you got the appraisal assignment. Besides, there's no such thing as a dead deal, there is only more collateral. :twisted:

This is another example of the value opinion maybe not being the most important feature of an appraisal. Even if your value is dead on, failure to consider and disclose these other elements (not that I think you would) could conceivably open yourself up to some problems later on. We have all seen instances where a property was purchased as an SFR with a high LTV mortgage, then demoed for redevelopment; in effect, using an owner-occupant residential loan program to finance a land purchase/development deal or a non-residential conversion.


George Hatch
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
Let's see some USPAP gurus here discuss the possibility of Tim turning down this assignment from the lender and offering his services to the current owners.

I agree with Don so far and would make this a H&BU issue. It's commercial just waiting for the zoning to make it official. Like Tim, I really hate to see someone taken advantage of when I can plainly see what's happening. We all know the lender will find some other appraiser to make it happen with the deal they have right now as residential and a misleading appraisal report if Tim doesn't come up with some way to legally fix this situation.
 
A

Anonymous

Guest
My experience in transitional properties is that the "middle man" is necessary for the property to achieve its highest and best use. i.e.- the lil' lo' man and lil' lo' lady are not going to get the zoning changed. Whoever buys it will get the property zoning changed and will benefit from the difference in (apparent) value.

In a secondary market situation, I would likely explain the H & B will change soon in all probability, but the 2ndary mkt should be waving red flags if you have described the property correctly. And you are going to do that right? The nearby commercial property should be mentioned in the neighborhood description. The district is now commercial with occasional residential property.
 

Ben Vukicevich SRA

Senior Member
Joined
Feb 9, 2002
Professional Status
Certified General Appraiser
State
New Jersey
Tim,

I'm at home right now so I can't help you with the exact verbiage but pull out your copy of FNMA revised appraisal guidelines (you are doing this on a FNMA form, hopefully) and read the Highest and Best Use section. You may be pleasantly surprised at how they look at it; if I remember correctly, something about if the value of the whole is greater than the land value then the H&B Use is the existing use for FNMA. Hey, those crazy Intended Users, you just gotta love them and their instruction books.

Let's us know what you find out when you read the H&BU section.

Ben
 

Tim Hicks (Texas)

Thread Starter
Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
Ben, you are correct sir! FNMA states:

Section 404.02 - Highest and Best Use

The highest and best use of a site is the reasonable and probable use that supports the highest present value on the effective date of the appraisal. For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of these criteria must be met if the improvements are to be considered as the highest and best use of a site.

A strict theoretical highest and best use analysis identifies the perfect improvements for a site-assuming that the site is vacant and available to be developed. The appraiser's highest and best use analysis of the subject property should consider the property as it is improved. This treatment recognizes that the existing improvements should continue in use until it is financially feasible to remove the dwelling and build a new one, or to renovate the existing dwelling. If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use.

On the other hand, if the current improvements clearly do not represent the highest and best use of the site as an improved site, the appraiser must so indicate on the appraisal report. In such cases, we will not purchase or securitize a mortgage that is secured by the subject property.

This is going to take a high level of thinking and I had better be ready to defend how I handle this appraisal. Their definition sems to contradict itself in every paragraph.

Thanks,

Ben.
 
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