Highest & Best Use - not in its current use

[phoebe33764]

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.

Actually it is a wood frame house built on piers. The flooring is original hardwood with new ceramic tile in the bath. The front has a very larger cov porch/ cov entry with a large wood deck.

 

[George Hatch]

As I was saying, if the residential use remains legal, even as a non-conforming use under the current zoning, then chances are pretty high that it remains the HBU. Not only would the different use have to be worth more than the existing use, it would have to be worth so much more that there's a sizable profit to be made for making the conversion improvements.

The difference between the two uses would not just be limited to the hard costs. Otherwise the buyer would have no incentive to take the risks and go to the hassle of dealing with the remodel and the X factor - that element of the unknown that invariably jumps up to bite entrepreneurs when they least expect it.

As an example: If the costs for paving a parking lot and marking a handicap stall, converting the bath to an ADA restroom and installing some additional electrical or data lines totalled out at $15,000 and your "residential value" is $185,000, the "as completed" value would probably have to exceed $225,000 in order to provide the contingency and the profit incentive necessary to motivate a buyer to do this remodel rather than buying a competing office unit. Anything less than that and an office buyer would have no reason to get involved.

I think that once you get a look at the commercial sales data that would be the comps for such a property you'll be able to see right away whether there's a big difference on a price/SqFt basis. If there's not much demand for such properties then that only increases the risks involved (and the necessary profit margin), regardless of any price differentials.

The challenge for you may be in obtaining those sales data. If you don't normally run in those circles you may have a tough time finding the data.

 

[Couch Potato]

Actually it is a wood frame house built on piers. The flooring is original hardwood with new ceramic tile in the bath. The front has a very larger cov porch/ cov entry with a large wood deck.

In that case, Mark's points are quite valid about conversion costs.

 

[phoebe33764]

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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I consulted an instructed today and he pretty much said the same.

 

[phoebe33764]

I spoke with a zoning rep from the city today and he state that the current zoning is brand new and it allows for SFR and office but no retail. He also said that this zoning should be in place for at least 15 years.

In essence, no retail establishment could come in and set up shop, it would have to be a "service" related industry; legal, accounting, appraisal,etc . There appears to be, within a 7 block radius of similar zoning, 51% for SFR's and duplex and the remaining split between offices and religious entities.

I don't normally run into that data, but I did research it today to see what was selling in the immediate area and it wasn't much.

Back to the drawing board....

As I was saying, if the residential use remains legal, even as a non-conforming use under the current zoning, then chances are pretty high that it remains the HBU. Not only would the different use have to be worth more than the existing use, it would have to be worth so much more that there's a sizable profit to be made for making the conversion improvements.

The difference between the two uses would not just be limited to the hard costs. Otherwise the buyer would have no incentive to take the risks and go to the hassle of dealing with the remodel and the X factor - that element of the unknown that invariably jumps up to bite entrepreneurs when they least expect it.

As an example: If the costs for paving a parking lot and marking a handicap stall, converting the bath to an ADA restroom and installing some additional electrical or data lines totalled out at $15,000 and your "residential value" is $185,000, the "as completed" value would probably have to exceed $225,000 in order to provide the contingency and the profit incentive necessary to motivate a buyer to do this remodel rather than buying a competing office unit. Anything less than that and an office buyer would have no reason to get involved.

I think that once you get a look at the commercial sales data that would be the comps for such a property you'll be able to see right away whether there's a big difference on a price/SqFt basis. If there's not much demand for such properties then that only increases the risks involved (and the necessary profit margin), regardless of any price differentials.

The challenge for you may be in obtaining those sales data. If you don't normally run in those circles you may have a tough time finding the data.