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Home to be demolished--HBU and Rem. Eco Life issue

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J in Florida

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Jan 17, 2002
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Certified Residential Appraiser
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Florida
Got one today on the most expensive lake in the city. House is 30 years old, still livable, but all similar homes on this lake have beed knocked down and replaced with million dollar buildings. SP of Subject=$750000. Land value of subject (plenty of land sales--all knockdowns)=$750000. Borrower wants to go owner occupied with accompanying DP and rates, doesn't want to do lot loan. LO and Listing agent (pres of area board of reeliters--a big one) insist on 30 year financing (which requires property be HBU and have 30 years rem economic life).

I believe this deal is a land sale, and can't decide wheter this should be done on the land form, or on URAR with HBU box checked no, and remaining economic life 2-3 years (there is plenty of sales to support this)

Any ideas?
 
Joined
Jan 13, 2002
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Florida
Ouch!

Sounds like you've got it right. Go ahead with URAR if it really has a little life left. Just tell it like it is - I know you will anyway.
 

Mike Garrett RAA

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Certified Residential Appraiser
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Colorado
Sounds like a land sale to me also. Complex appraisal. My wife's sister had a house in Manhattan Beach, CA ....little thing but on an ocean view lot. They sold it for $420,000 and the purchaser tore the structure down. Expensive lot!
 
W

walt kirk

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This type of sale is common in resort areas. As the appraiser your job is to report value, if you believe that the land contributes 100% to value of the subject property say so and be prepared to spend lots of time doing so. Your best bet is to use comparable sales which were demolished after settlement. If the structure will contribute to the lot you must consider it.
 

George Hatch

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The big question for your lender is going to be whether the property would most probably be purchased for site value or as a home for long term occupancy suffficient to amortize the loan. Ergo, the Highest and Best Use issue. Keep in mind that although the HBU may currently be as improved, those improvements may have a very limited remaining economic life because of neighborhood trends. Regardless of your value conclusion, the proper categorization of these elements will likely kill the deal.

Your comps will show you what is happening. If more than about 15% of them were marketed as being primarily land value and are being redeveloped, then that is a trend that you should at least consider and disclose in your report. If more than 60% of them are being redeveloped then I'd say you're probably dealing with land value and the improvements are of only minimal contributory value.

Even if you do decide to appraise it as an SFR because the majority of the comps are being purchased for use as such, you may end up estimating a remaining economic life (which is the only aspect of depreciation that the lenders really care about when setting up amortizations) as being limited to less than the ever-popular 30+ years that the underwriters want. Yes, it's currently a house, but with the trends in redevelopment, the estimated remaining economic life may be less than 5 years. This is another example of the value conclusion itself not being the big issue in an appraisal.

I've seen a number of occasions where readily redevelopable properties were purchased with 90+% LTV loans and then promptly redeveloped. Congratulations go out to the appraisers involved with those deals because they have essentially facilitated a 90% land loan, which no lender in their right mind would have made had they been aware of the facts. Even if the final value conclusions were correct in those appraisals, the appraisers' respective failures to disclose the trends borders on fraudulent conduct. They have allowed the FNMA-Guidelines-centric attitude (the only rules that matter are FNMA guidelines; everything else be damned) to interfere with an honest and accurate appraisal of the problem. Thereby reducing their role from that of appraiser to that of forms-filler.

These are the types of analyses and perspectives that are missing with the AVMs; the types of value-added services that can extend our own economic life span if only we'll do it right. If we aren't willing to do our jobs properly and play to our own strengths (judgment and perspective) then we shouldn't be complaining when technology trumps us using their strengths (speed and cost). We win by adding in the 'extras', we lose by only filling out the form.

In the end, the definition of Market Value is dependent on the concept of Highest and Best Use, and must also give at least cursory consideration of remaining economic life (another reason not to arbitrarily discard the Cost Approach) as part of the valuation, even if the assignment is ordered as a limited appraisal. So, go ahead and appraise it how you will. Just be sure to also include a fair and reasonable estimate of remaining economic life, because that is the big question here.


George Hatch
 

Ben Vukicevich SRA

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Certified General Appraiser
State
New Jersey
George,

I think this is the problem..the Intended User stuff.

Here are FNMA's guidelines: Notice if the improvements contribute $1 to the land value it is a "go" deal

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.

Next they don't care about REL so why should the lenders/clients??

Section 405.10 – Remaining Economic Life


Because our appraisal report forms that are used for manually underwritten mortgages are designed to meet the needs of several different user groups, they address the remaining economic life for the property being appraised. However, the appraiser does not need to report the remaining economic life for a mortgage that will be delivered to us. Even if the appraiser does report this information, the lender does not need to consider it because any related property deficiencies will be discussed in the sections of the appraisal report that address the improvements analysis and comments on the condition of the property. We have no requirement that the mortgage term have any correlation to the remaining economic life of the property


So I wouldn't necessarily fault the appraiser for meeting FNMA appraisal guidelines just as I wouldn't for meeting FHA/HUD guidelines. They are the Intended Users and a good reason to get rid of USPAP for FNMA/FHLMC/FHA/VA work.

Ben
 

Mike Garrett RAA

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Colorado
Lets just get rid of everything! First it was the Cost approach....now it's USPAP. Go figure?????

 

Restrain

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Jan 22, 2002
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Certified General Appraiser
State
Florida
I have numerous neighborhoods like this. Lots run $500K-$1,000 K, homes that are being rehabilitated and renovated sell for approximately $100K-$200K more than lot value. However, the mix is approximately 50-50, so there's sales showing that there is a possibility of the home being used as a owner occupancy.

If ALL sales show teardowns, then what you have is a lot value, with a probable economic life (considering that the owner does want to live in it) of the typical time an owner lives in the home. If the typical owner occupancy is 10 years, then you can give a reasonable economic life of 10 years, because if this owner doesn't demolish, then the next one will.

Be sure to cite that the owner occupancy of the existing structure is part of the scope of the work as a special requirement. It will show the basis for your value.

Roger
 

Ben Vukicevich SRA

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Feb 9, 2002
Professional Status
Certified General Appraiser
State
New Jersey
Hey Mike G,

Hang around the forum some more...we'll get you up to speed and... one approach to value. :lol: :lol: Damn, I thought you were old...I guess not. Don't you remember those FHA appraisal forms with no Cost Approach and no adjustments in the Sales Comparison Analysis? I did lots of them. They worked well from when FHA was founded, I think in 1936, until the 1980's. Yep, <=> or +-=. All you did was delimit a value range set in the report. That's all you do now in the URAR or 2055 but you throw in some amenity specific $$ adjustments to attempt to narrow down the bracketing process. Big whoop. The end result is the same. It's just that now your fully responsible under USPAP for those $$ specific adjustments in the Sales Comparison Analysis..which nobody can be absolutely certain of.

So I'll be a nice guy and give you a little quote I use in my appraisal reports so that if I am challenged at a state board on a specific adjustment that some one thinks should be made another way or differently.. I'll point them to this. It's in all my reports. Plagerize it at will.

"As adjusted, all sales are indicating a reliable value range for the subject. The appraiser's opinion of the subject's market value has been effectively bracketed by the sales prices of the comparables analyzed in the Direct Sales Comparison Analysis. This bracketing method was of primary importance and was given the most/greatest weight in the valuation process and in the formation of the appraiser's opinion of the subject's market value via the Direct Sales Comparison Analysis. The adjustments made in the Direct Sales Comparison Analysis were only an attempt to further refine and support the bracketing process."


Let me ask you something..when you complete one of your VA appraisals, don't you read/know/memorize the VA manual to be VA compliant first and then back into USPAP compliance? When you complete an FHA, don't you do the same thing? Outside of messing with a USPAP 3 year prior sales history, what isn't covered in the appraisal process inside the FHA and VA appraisal guidelines. Not much. They know what they want/expect and your job is to meet their specifications for report submission. All I'm hearing from the USPAP gurus is that Scope of Work now rules. What the hell are those appraisal guidelines they all write---nothing more than Scope of Work.

So yes, you could get rid of USPAP for FHA/VA and the rest. Remember, they didn't cause the S&L collpase and the on-set of licensing and USPAP. They all have very well written appraisal guidelines to follow to submit appraisal reports to them. So you feel this need to have even more instructions to complete an appraisal??? They all functioned fine without USPAP..and still can. They just got sucked into the USPAP morass with the bad guys (interagencies)..you know, the ones that let things run amuk 8) 8) 8) then after USPAP and licensing were invented to straighten the mess out, they decided to raise the DeMinimis so high so as to avoid appraisals and USPAP altogether. So the little guys who had nice little appraisal instruction books and played it conservative got stuck with USPAP (something they never needed) and the big regulators (interagencies) got around it. HUH????

The day we need USPAP is when they all stop publishing appraisal guidelines and different definitions of market value and they IMPRIMATUR USPAP solely as the appraiser's catechism.

Hell will freeze over.

Ben
 

George Hatch

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Certified General Appraiser
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California
Ben,

You are a licensed appraiser, no? You are required to have and maintain that license if you want to do FHA or VA work. That requirement is no accident or fluke. Do you think it's an coincidence that the FHA/VA guidelines look more and more like USPAP every year? Think again. FHA/VA are following USPAP, not leading it. Not as well as they should sometimes, but they are definitely not a rule unto themselves. I'll bet money that the state laws that govern your appraisal license and hence your livlihood require that all your work complies with the USPAP. This is not a request, it is not an option and it is not an extra. If anything, you should make sure your reports comply with the USPAP first, then add whatever extras are required under the FHA/VA guidelines or whatever other guidelines you agreed to. Minimums first, then extras; that's scope of work in action.

FNMA themself may not care about REL and that's their perogative, just the same way as with any other lender. That does not give the appraiser a license to ignore REL or relevant economic trends. Bear in mind that virtually every other lender that participates with them does care about REL, as well they should. A 95% land loan is an abuse of the system and an abuse of the taxpayers who ultimately underwrite it. The appraisers that cooperate with such schemes, even if it is only by being lazy or ignorant, are presenting some unnecessary risks to the system. On the other hand, if the appraiser simply does their job according to standards and Fannie ignores the information, deliberately or not, then it's all on them.

I will agree that the biggest losses in the '80s were not from residential lending, but that wasn't the result of exemplary programs run by FHA/VA or any of the GSEs. It was simply the result of the abuses of the big commercial guys drawfing the abuses of the little guys by sheer volume and audacity. There were plenty of abuses in the residential appraisals as well. Don't kid yourself that the appraisals currently being turned into the VA are somehow better than anywhere else or that the VA appraisers are turning in better work as a group, because I've seen the field reviews. From what I've seen under their random review processes, about 75% of it is at least relatively reasonable and the other 25% or so is really hurting. These were not reports that were red-flagged here, but reports pulled by the VA at random. I'm not talking about minor little USPAP stuff, I'm talking about some really lazy and sloppy work product that would never fly in the regular market. I'm talking about (a lot of) value issues, lack of relevant disclosure, lack of interior inspection, obvious single signers, and the whole nine yards. The closed panel has in no way produced a superior work product from what I've seen. Obviously, there are many of the panel appraisers who do a first rate job, but there is also an unnecessarily large percentage that do some really funky stuff because they know they can get away with it. From what I've seen, the criteria for getting booted from the VA panel requires at least double the amount of misconduct than what the typical lender uses. Reviewers are instructed by the VA to go easy on them and only downrate the worst of the worst.

So if you want to cling to the notion that the back in the good old days the lenders had everything wired and that the appraisals done back then were somehow better than what is being produced by the masses today, go right ahead. Just make sure you don't go talking to the professional reviewers (the veterans, anyway) because they are going to tell you a completely different story.


George Hatch
 
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