Highest & best use question?

[Fred]

"It seems to me that to determine highest and best use, one would need to perform both a commercial and a residential appraisal."

Bingo! You would have to perform both to determine the most probable price. If you are operating under a value definition that assumes a prudent, knowledgeable seller, then that seller will be smart enough to turn down any lower offers from buyers who do not understand the property's HBU.

 

[Austin]

Tom: I had that same though about 20 years ago. High and best use always has to be in your mind starting with the vacant site and continuing through the economic life of the property and neighborhood. I was even taught to evaluate highest and best use of the property as improved, which means determining it if is profitable to make any improvements. For example, is the value of the property as if improvements are made higher than the as is value less cost of improvements. I mentioned this once in a debate on this forum and nobody had ever heard of the concept. I think the whole appraisal profession has lost the reference point anyway. You should have read the debate we had a few months ago on functional and economics obsolescence. The bottom line is that there is no officially recognized body of appraisal knowledge and I don’t think there ever can be. To many nuances, to many different situations, etc, that makes it impossible to have a uniform standard. That is why I am so down on actions taken against appraisers by state appraisal boards. If justice were done a number of state boards would be locked under the jail. Responsible people know it too, but just don’t have the gonads to do anything about it. All the real leaders were killed in the wars or have to much moxey to put up with Federal government crap and we are left with the go along to get along crowd whose chief aim in life is to not rock the boat. Maintain the status quo and don't make waves is their motto.

 

[George Hatch]

Austin,

I don't find your line of reasoning on H&B use to be at all obscure or out of fashion Far as I know, the method you describe is exactly what we're supposed to be doing. I don't see why it would be debated. One of the other posters above was asking if it was necessary to do two separate valuations in order to determine the H&B use. I don't think going that far is necessary at all. A quick glance at the data should be sufficient to tell an appraiser whether the typical buyer is paying more for the existing use or for conversion or redevelopment into a different use.

I get bugged when I see appraisals ordered and accepted without regard for the highest and best use. You know, current use is residential but the zoning and most of the comparables involve non-residential uses or conversions. The appraiser invariably says that their client ordered it as an SFR so it can be stuffed into an SFR loan program, therefore it is an SFR as far as the appraisal is concerned. Another example was alluded to in another thread. Existing SFRs being purchased and then scraped to make way for new construction. The purchase being financed under the existing use and encumbered with a long term loan at normal 80% - 95% LTVs, when it is really a land purchase that would normally be eligible for 50% LTV if they could find a lender adventurous enough to do a land loan. IMO, the appraiser is misleading the client by not correctly reporting an obvious trend toward redevelopment and reporting a limited or even zeroed remaining economic life span (and resulting in an interim use) for the subject improvements. They simply focus on the number, fill out the form per Fannie, and think that's all they have to worry about. These are perfect examples of an opinion of value being a secondary consideration to other elements of the appraisal from an underwriting standpoint.

Again, IMO these types of assignment are not simple little deals that can be completed by a semi-concious appraiser on autopilot. They call for an appraiser who has the competence and is willing to pursue the process so that the client receives not just a number, but enough information to make an informed decision. Those appraisers who are not interested in working at this level should stick to assignments that don't require such performance.


George Hatch

 

[Fred]

George,
I am under the impression that taking a "glance" at the data and forming a conclusion about the price that a certain propery type commands IS doing a valuation.

 

[The Bob]

A client intends to buy 2 currently-zoned residential properties with older dwellings on them (adjacent to his commercial property, both are now occupied residential homes in average condition) and convert them to a commercial-type use. Although, a commercial-type use would be the highest & best use, since they are currently zoned residential, can their highest and best use be commercial if appraised "as-is"?

It is likely that these properties could be converted to the desired commercial use since there are other commercial properties in the vicinity, but it cannot be said with certainty. With the present residential zoning in place, can it be said that highest and best use is as commercial? (commercial land sold as vacant would be more valuable than the current property which is zoned residential)

If highest and best use is commercial, does it make sense to give much value to the present residential improvements since they would (at a minimum) need to be converted for office or institutional use. My guess is that the buyer would raze the dwellings and replace them with new structures. Leaving the current residential structures would be out of character with the current structures on adjacent commercially-zoned properties. So, if commercial zoned, I would anticipate a cost to clear the land for commercial use rather than add the value of the present depreciated structures.

After all the posts, I went back and re-read the original question. I think most of us got at least part of it right The whole purpose of doing a H&B use study is to determine what comparbles will be used to analyze the subject. It would appear that a knowledgeable buyer wants to purchase the existing residential use for conversion to commercial use. It would also appear that other, similar properties have been converted. Regardless of the current zoning, it would appear that other properties have been converted and the highest and best use is commercial, with a caveat as to zoning.

 

[Austin]

Steve: You are correct and that is what Tom was talking about. Every time I do an appraisal I think to myself: “Is the site as though vacant worth more than the site as improved?” How do I know the value of the site as though vacant? Answer is by using appraisal methods in my head based on a metal databank of comparable sales, land to building ratios, etc. That is an appraisal technically.
Another example is that every time I appraise a tract of land that could be subdivided I have to have some idea of what the subdivided tracts are worth in order to determine the value of the whole. If it could be subdivided into from 2 to 20 tracts that takes from 2 to 20 appraisals to make that determination. Again, technically that is an appraisal. Some times it takes a beginner to see these things. I saw all of these inconsistencies with I started out.
Another example of the arbitrary and capriciousness of USPAP. I tell you that document is illegal and dangerous. I agree with the intent but it is a legal nightmare. On sound legal grounds USPAP is a farce. If there was any money to be made by some lawyer in attacking it, we could soon find out. You just wait until we have a flurry of foreclosures and some lawyer will take the bait and go for it.
PS: To add fuel to the fire, highest and best use is an opinion of the appraiser and not a fact to be found. That definition of H & S is a license to steal if there ever was one. Talk about arbitrary and capricious?

 

[Fred]

Austin,
Are you sure you are looking at USPAP? What could be so illegal about correctly employing recognized methods and communicating results in a non-misleading manner? How can HBU be any more of license to steal that a hammer is a license to bludgeon or household chemicals are a license to poison?

I would say that any "bad" appraisal involves misidentifying key components of the subject property and its surroundings. Since HBU is an analysis of key components (legal, physical economic), all distortion is a distortion of HBU.

 

[Austin]

Steven: Nothing correctly employed creates a problem. My point is that the methods can be incorrectly employed based on the definition of Highest and Best Use but under the definition nothing can be done about it. If highest and best use is defined as an opinion of the appraiser and not a fact to be found, then if some one incorrectly employees the procedure, then on what basis can you prosecute the offense? My point is that you can’t prosecute based on H & BU as defined.
This being the case, if an appraiser wants to distort the H & BU, they can determine the value conclusion by distorting the H & BU thus under the definition of H & BU have a license to steal. For example, I have had many calls to do estate work for a client that wanted me to appraise a farm tract under the H & BU as a farm ignoring the development potential for the sole purpose of helping someone steal the property at a cheap price. If I do it and say, “In my opinion the H & BU is as a gentlemen’s farm instead of a tract suitable for tract development, on what basis can some one argue the point. Look at this thread as an example. Look at the different opinions of highest and best use given in answer to the question originally asked. Who wants to point out which answers are correct and which are not, or whose answers are in violation of USPAP and whose are not. After all, H & BU is only an opinion under the definition. Highest and best use determination is the art part of appraising. You can’t regulate the arts because beauty is in the eye of the beholder.
At one time AI's book in one edition, "The Appraisal of Real Estate," had some kind of statement about H & BU of some lands as green areas for the betterment of mankind or some such abstract statement. It was later removed for obvious reasons. The point is if you can't quantify it, can't measure it, and can't clearly define it, you can't prosecute a person for violating what you can't quantify, measure or define. Some people can't separate emotion, feeling, and beauty from the process.

 

[Fred]

Austin,
I don't disagree. I would say that HBU is not "a fact," but a conclusion based on facts (presumably). Facts and conclusions are at opposite ends of the assembly line.

Of course, not all HBU conclusions are 100% certain; especially when a property is in transition from one relatively stable category to another. Vacant tracts and whether they are "ripe" for development can be an area of legitimate disagreement; as is an old house on its way to becoming a vacant commercial site.

I don't see these issues as confounding theory, principles and standards, but as oppurtunities to apply theory,etc. That is what is supposed to make us better than blind software programs.

 

[Austin]

Steve Wrote:

I don't see these issues as confounding theory, principles and standards, but as opportunities to apply theory,etc. That is what is supposed to make us better than blind software programs.

Reply: I totally agree Steve, but that is not my concern. My concern is enforceability of USPAP by state appraisal boards. How can you take an appraiser’s license based on something as arbitrary and capricious as what we are talking about? For example, that example I gave in my last post about the highest and best use determination in an earlier version of the AI’s, “The Appraisal of Real Estate“ about the 9th edition I believe. I think what it actually said to paraphrase was that highest and best use determination had to take into consideration the greater common good of the community. What does that mean? The only logical answer I can come up with is how the appraiser happens “to feel” about the property. For example, if you owned 100-acres of land on which your dwelling is situated, it is surrounded by subdivisions, the market is hot for subdivision development land, you hire me to appraise it, and I determine that the public good would be served more fully if your land was left as a green area thus reporting a price about $10,000 per acre below market, on what basis can someone say I am wrong?
USPAP is full of these inconsistencies. For example, anybody that does a residential appraisal and does not have a fully compliant site valuation included is technically in violation of not giving due consideration to highest and best use. Without a supportable site value, how can you know the highest and best use is not as though vacant? How do you know the land to value ratio does not indicate the area is in transition? Thus technically, every FNMA or FHA appraisal ever done is not USPAP compliant.
Something else I have read in this thread that concerns me is that some have argued that this situation of interim uses creates difficulties for some lenders and to satisfy lender’s needs you shouldn’t mention these situations. How can you sign the certification as presented in USPAP 2002 if you are doing this? That practice is totally giving a misleading opinion of value. Any time a subject property has a higher land to value ratio, most likely it is an interim use and or in transition. How do you know what the land to value ratio is unless you appraise the site? Again, without a complete site appraisal, you haven’t done a proper highest and best use analysis. If you gave consideration to it as George stated above but did not do a proper appraisal, then you are in violation of USPAP because you performed a non-compliant appraisal.