Highest & Best Use - not in its current use

[c w d]

Yes, you'll want to discuss the change in HBU for the market area past, present and future because it is changing. I would not get into detailed projections but, inform the client that your opinion of HBU is interim and change is likely over the next few years or decade. That is unless your opinion of HBU is what it is changing to. Then it wouldn't be interim.

 

[Mark K]

I think you've answered your questions.

1. You say... "I can't imagine that a residential buyer would pay $185k for a home on a busy street when they could get a renovated one two blocks away for the same money if not less." This indicates that the value is less than similar dwellings in superior locations. H&BU, most likely, is not residential.

2. Also... "It is worth more as vacant land less the costs of demolition?" "No" So now we know that its not economically feasible to demolish it for the land.

This leaves some sort of interim (transitional) use or mixed use (owner occupied running business out of the property).

Try to find similar residences being used for commercial use (CPA, Tatoo, Lawyer, Insurance, etc.) as comps. You can also use the residential comps a few blocks away and make a negative adjustment for location. I usually include a couple residential comps and the rest are transitional properties even if you have to go several miles away to find similar busy streets with SFR/interim use sales. I've found that the values are about the same whether they are still used for residences or they have some small office being run out of them.

Problem is, these properties aren't particularly good for residential neither are they are good offices. They often have incurable (economic) obsolescense in their design, parking, etc. to make good offices and incurable (external) obsolescence for residential use due to the traffic, noise, etc. There just aren't that many small businesses that want these properties and nobody with kids wants to live there. Expect extended marketing times.

Often the values in these areas will remain stagnant and even depreciate over time until the land is more valuable than buildings and someone buys several together for assemblage and bulldozes them for to build a nice commercial or office building.

 

[stefan olafson]

I refer to my first post, you need to take a look at the market, not make up stuff or say I think in the future this will happen so that's why this is the H&B Use.

The analysis is at this point in time, not if a lawyer buys the property. What are the neighboring properties selling as? Is the preponderance of evidence that almost all the sales in the past five years have transitioned to commercial? Then you have your answer. If most sales are still residential they you also have your answer. You should use the market to determine your answer, not your opinions.

 

[phoebe33764]

Great advice. Thanks to all who responded. It is sincerely appreciated.

 

[ZZGAMAZZ]

I was recently told by the instructor in a HBU seminar that if the property is improved as SFR, and if the pending mortgage loan is based upon residential improvements, and if HBU is not the current use (improved as SFR), the appraiser should not complete the 1004, but contact the client instead, because the 1004 is not intended for non-residential-HBU.

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[George Hatch]

phoebe,

Currently, my estimated market value is roughly 185k. If a law firm or an accounting co came purchased the building, I would think it would be worth more utilized as an office generating income.

So is the subject worth the $185k as residential or not? When you say that you think it's worth more utilized as an office building, what do you base that opinion on? Have you performed a rent survey under both residential and commercial usage? Have you run the numbers through an income/expense analysis yet? Are you aware that residential rental agreements sometimes call for different rental terms (as is, who pays what expenses) than commercial rental agreements? What are vacancy rates like for single tenant office uses in the area? How much are such properties selling for when they sell, and how does that compare to their value if they sold as homes?

This, in fact, is my dilemma. If a lawyer or small business operation decided they wanted to buy the building, they would not need to convert it to a legally permitted use because it is on the corridor and currently the corridor allows residential and offices as legally permitable uses. I believe that if a small office was in place and they made some conversions, I believe they might get more out of it however, in the current market in Florida that is a big question. IMO busy street properties have "free advertising" as they are seen by many. Access to parking is an issure as in order for a business client or owner to enter property, they'd have to drive to the end of the block, turn around and enter through the alley to park which appears to be a nuisance.

These comments make me a little nervous for your situation.

Depending on the local development criteria, if a residence is being converted into an office use there may be some costs involved. Those costs can add up really quickly. Commercial uses usually require offsite parking, and in some jursidictions they will require one of the spaces to be a handicap space. A jurisdiction may require access ramps and other accessibility requirements to comply with the Americans for Disabilities Act. If so, you may be looking at widening doorways, installing new doors with automatic returns and levers instead of knobs, remodeling bathrooms and enlarging them so a wheelchair can get in and out, etc.. Office uses will frequently require additional electrical service, data and phone lines, and high efficiency air conditioning. Then there are the finishes.

Forget what other property owners have done at some point in the past. You need to know what this jursidiction requires for a conversion as of today.

Office uses are frequently located on interior streets because most office tenants don't need or want the traffic exposure.

There are lots of questions here and you will need to have some answers for most of them before you finish this assignment. This property may have some overlap between the residential and office markets. If so, you will need at least a little familiarity with the data in both markets before you can come to an informed opinion.

 

[Couch Potato]

Know what you know.

There are lots of questions here and you will need to have some answers for most of them before you finish this assignment. This property may have some overlap between the residential and office markets. If so, you will need at least a little familiarity with the data in both markets before you can come to an informed opinion.

Know what it is you do not know. :new_smile-l:

When the possibility exists that the HBU is something other than what one is competent to appraise, one either needs to become competent to appraise that type of property, or decline the assignment. In either case the client needs to be informed. My business decision is to decline such work since the clients generally do not want to pay for all the needed work. They just want someone to ignore the problem and give them a residential appraisal.

 

[phoebe33764]

My BOLD

phoebe,

So is the subject worth the $185k as residential or not? When you say that you think it's worth more utilized as an office building, what do you base that opinion on?

If the HBU was not an issue and I just performed the appraisal utilizing busy street comparables located on major roads like the subject, I would estimate the value at $185k.


Have you performed a rent survey under both residential and commercial usage? Have you run the numbers through an income/expense analysis yet?

No I have not.

Are you aware that residential rental agreements sometimes call for different rental terms (as is, who pays what expenses) than commercial rental agreements?

Yes, I am aware that they call for different terms.


What are vacancy rates like for single tenant office uses in the area? How much are such properties selling for when they sell, and how does that compare to their value if they sold as homes?

I am still working on this....

These comments make me a little nervous for your situation.

Depending on the local development criteria, if a residence is being converted into an office use there may be some costs involved.

The zoning matrix for zoning districts and compatible land use catagories for the City states that that the current CRT zoning for the subject has a compatible land use catagory of Planned Development - Mixed Use (PD-MU). If doesn't state that it is entirely moving to commercial. As the property sits right now, there are several SFR's (non office) on the same block, and there are several offices located within a 3 block radius on both sides of the street. I have a call or shall I say several calls into the city to find out if they are changing the zoning any time soon.


Those costs can add up really quickly. Commercial uses usually require offsite parking, and in some jursidictions they will require one of the spaces to be a handicap space. A jurisdiction may require access ramps and other accessibility requirements to comply with the Americans for Disabilities Act. If so, you may be looking at widening doorways, installing new doors with automatic returns and levers instead of knobs, remodeling bathrooms and enlarging them so a wheelchair can get in and out, etc.. Office uses will frequently require additional electrical service, data and phone lines, and high efficiency air conditioning. Then there are the finishes.

Forget what other property owners have done at some point in the past. You need to know what this jursidiction requires for a conversion as of today.

I will check into that.

 

[Mark K]

My BOLD

phoebe,


Those costs can add up really quickly. Commercial uses usually require offsite parking, and in some jursidictions they will require one of the spaces to be a handicap space. A jurisdiction may require access ramps and other accessibility requirements to comply with the Americans for Disabilities Act. If so, you may be looking at widening doorways, installing new doors with automatic returns and levers instead of knobs, remodeling bathrooms and enlarging them so a wheelchair can get in and out, etc.. Office uses will frequently require additional electrical service, data and phone lines, and high efficiency air conditioning. Then there are the finishes.

Forget what other property owners have done at some point in the past. You need to know what this jursidiction requires for a conversion as of today.

I will check into that.

The building codes will tell you what modifications are required, plus the local zoning may have additional requirements. It might take an architect familiar with ADA design to tell you exactly what your specific property needs if you are thinking about the commercial alternatives. The ADA is one of the reasons that these types of properties are much less attractive than they once were for small offices.

The cost of retrofitting can be prohibitive and it often makes more sense to build new than trying to modify the existing structure. By the time you widen halls, enlarge bathrooms, install ramps, add handicap parking, railings, automatic doors, enlarge doorways, etc., many business owners realize that its easier and cheaper to go for a new property.

If the property can be used in its current condition it might not need updating. But in many areas as soon as you pull a permit for any commercial alterations, the entire property will have to be updated to ADA standards.

 

[Couch Potato]

The building codes will tell you what modifications are required, plus the local zoning may have additional requirements. It might take an architect familiar with ADA design to tell you exactly what your specific property needs if you are thinking about the commercial alternatives. The ADA is one of the reasons that these types of properties are much less attractive than they once were for small offices.

The cost of retrofitting can be prohibitive and it often makes more sense to build new than trying to modify the existing structure. By the time you widen halls, enlarge bathrooms, install ramps, add handicap parking, railings, automatic doors, enlarge doorways, etc., many business owners realize that its easier and cheaper to go for a new property.

If the property can be used in its current condition it might not need updating. But in many areas as soon as you pull a permit for any commercial alterations, the entire property will have to be updated to ADA standards.

The original post is from someone in Florida. It is very likely the modifications required by building code are minimal. There is a high probability the structure is concrete block on a slab with ceramic tile as the floor covering. The front entry may not even need modification to meet ADA standards. It's a different world down there when it comes to residential construction.