House On 40 Acres Do A Land Appraisal?

[Edd Gillespie]

Where I am 40 acres and 5 acres and a lot of other sizes of dry-land sites out in the country qualify as a single family homesite (way too small to be any where near productive) and bring about the same gross price (lots of market support for this folks although my peers still report rural SFR homesites per acre-to heck with the market driving the data). In other places not too far away this phenomenon isn't happening. I've figured out some detailed, legal, historical and geographic reasons for it and those seem to satisy the UW's when they ask about the lack of site size adjustment and haven't yet read the addendum to the report, but mostly the market is why.
What does your market say?

 

[Rich Heyn]

Austin,

Why are you thinking in terms of appraising anything less than the full 40 acres? It sounds as if that is what you are being asked to appraise. Why handle it as two parcels and two assignments?

Rich

 

[Edd Gillespie]

Austin,
Rich's question is a darned good one. How come you are querying about this issue if it doesn't have to be an issue? :question:

 

[Richard Carlsen]

Austin

I think it all depends on what the value per acre is. Up here, at $3000 per acre you have $120,000 site value. Put a $120,000 house on it and you have a quarter million dollar property. I would hate to try and pass that off to a lender especially when there are comps available.

I have an order right now on a house on 41 acres where the lender will only loan on 15 acres. We have devised a way to get around Fannies rules (pg 35, Handbook for Appraisers) whereby I would do a hypothetical on the house and 15 acres. I will do an appraisal on the house and the 41 acres. As part of the assignment within the report, I will give them a site value for the 15 acres that contain the improvements. Of course, there is a charge for this extra work involved. What they do with the site value is their business. If the UW wants to cut the value, they can because it is their money they are lending and I am complying with Fannies rules.

BTW, the lender in this case and the MB had never heard of this rule until I told them we could not do the hypothetical anymore. Good job Fannie on keeping your lenders informed.

 

[Joker]

I've said it until I am practically blue in the face: The value of the whole does not necessarily equal the sum of the value of the parts. A house and 40 acres is worth what a house and 40 acres is worth, not what a house on 5 acres is worth plus 35 acres of vacant ground. Without a survey, the mortgage will be filed on ALL 40 ACRES! What possible reason is there for not appraising the subject being offered as collateral?

To answer your question, the best approach is to exercise due diligence and appraise the subject: a house and 40 acres. In some areas, it may not be a "non-complex 1-4 family residential property" and requires additional research and a higher level of certification. In areas where it is "non-complex", the comparables should be readily available.

 

[Fred]

Richard,
This type of appraising doesn’t reconcile for me.

Do they just lien an undefined 15 acres that doesn’t have a legal description and go to court for a partition if the borrower defaults?

Other things that don’t reconcile easily are the statements

We have devised a way to get around Fannies rules

I am complying with Fannies rules.

I also wonder about this

it is their money they are lending

Is this lender a federally regulated financial institution? If they are, isn’t this taxpayer insured money, like with the SL crisis?

 

[Terrel L. Shields]

As the guy says, "I'm not making this up."

One, if the land value exceeds the value of the dwelling, then the emphasis should be on a land appraisal with improvements. And the flipside is true as well. $100,000 worth of land, $50,000 home, its a land appraisal. $250,000 house, 150,000 land value...its a house appraisal. having said that I do a ton of these.

I use 3 or more vacant land sales. At least until next year when USPAP gets in the appraisal business, land is appraised as if vacant and available to its highest and best use. IF the property is rural and not facing full transition to developable acreage, then comparable land sales are adjusted dollar for dollar against the value of the subject land. Once I have developed a value for the land, I do the house. So long as HBU is not an issue [i.e.-land is not commercial development property], then the dwelling should be appraised with site improvements but no land.......that sounds stupid to a lot of people but it works for me. Obviously, i hope, the comparables also need to be large tract land sales w/ houses, and the same analysis applies to them. Assessors and others artificially extract a single acre out of the 40 as a site and make comparisons that way....I prefer to use bare land value and treat site improvements (well, septic, landscaping) as a separate lump sum adjustment.

Adjust LAND (I try to bracket the sale with land sizes not more than 50% smaller or 100% larger than the subject)
Adjust SITE IMPROVEMENTS (should be little or no adjustment)
Adjust IMPROVEMENTS (barns should be estimated in size, condition, age, and quality) Lots of judgment can take place here, but it is not a big deal once you do it some.
Last, Adjust for the house....if you have extracted the per SF value of the dwellings, and chosen dwellings with similar age / quality, size is overcome by adjusting per SF, leaving only location & condition affecting the unit value [ie.-don't try to adjust for kitchen appliances, # of bedrooms, etc. or you will drive yourself nuts and invariably make adjustments that "double dip"]

A narrative makes a better report. fannie mae is not going to accept it anyway. I have one client that has a very small mortgage dept, and the bulk of their loans are for rural residents with acreage tracts, farmers, etc.

The key is the separate analysis of land [no step for a stepper is it? Key is relating unit value of a sale to the features and location of the property. Most land sales are outside the Realtor arena in my area. Most are fsbo.] AND, the clear and consistent analysis of the comparables. You are adjusting by bracketing the values of the components (that is not the same as summation.)

Don't make it harder than it is. Use only sales with similar acreages (not small tracts that could go fannie or huge ranches which usually have Functional obsol of buildings and dwelling). I will send you an old Comparable analysis if you PM your email address.

Doug is right. This is a complex residential (or residential slash agricultural/recreational/whateverkindoflanditis) assignment, but remember it is the job of the bank, NOT THE APPRAISER, under federal regulation, to determine if the appraisal is "complex." Just because there is a house does not mean fannie mae has a say in its appraisal. Again many rural banks make most of their loans without a single mortgage lender in sight. 90% of my work does not involve secondary market loans. I have never got a call from an underwriter on these loans.

 

[Richard Carlsen]

A house and 40 acres is worth what a house and 40 acres is worth, not what a house on 5 acres is worth plus 35 acres of vacant ground. Without a survey, the mortgage will be filed on ALL 40 ACRES! What possible reason is there for not appraising the subject being offered as collateral?

You are absolutely right Doug.

You will note that in my case described above, I am appraising the entire site, in this case 40 acres. The legal description is two metes and bounds that have been joined under one tax ID number. The zoning is Ag so the land division act has some heavy restrictions on splitting it. In my case I am giving the client the value of the full 40+ acres plus a site value for 15 of the acres which includes the improvements. The leap of faith that they take in moving the pieces on their we-gee board in order to come up with a number they will loan on is their business and not part of the appraisal process. That is call the lending consideration. The fact that this is all they will loan on but put the mortgage on the full 40 acres is a problem for the lender, the borrower and the borrowers attorney if he choses to have one. Worrying about what adults do with their legal rights vis-a-vis their real property also is beyond the scope of the appraisal and not part of the assignment.

My problem is that I have lost 2 orders recently because I cannot do the hypothetical 5 or 10 acre assignments anymore. Loosing business is where it becomes my problem. This type of assignment is my way of compiling with Fannies edicts on Page 35 and supplying an appraisal that is useful to a lender with an arbitrary acreage limitation.

Steven

Perhaps my words "to get around the Fannie rules" were ill-chosen. What I should have said was that we have a way of complying with Fannie's rules and at the same time fulfilling the needs of the client to come up with an amount they will loan.

Is this lender a federally regulated financial institution? If they are, isn’t this taxpayer insured money, like with the SL crisis?

I think they are but you are assuming that because this lender will not do more than 15 acres, they are a scam outfit and will default on their loans. Bad assumption I think. In fact, I think the limitation on lending makes this a more secure loan as the amount being loaned due to the 15 acre limitation will be lower than if they loaned on the whole 41 acres. Therefore there, the HO should be less likely to default.

 

[Alan Simmons]

I always hated the undefined 5-acre appraisals. I never accepted these assignments unless the client could produce something (official) specifically defining the site. Mostly because in such cases the appraiser is really being asked to answer two dependent questions. What is the contributory value of the site and what is the site (usually in that order)? By not specifically defining the site the client is free to use such to affect value. In other words the appraiser is also being ask to determine (even if the appraiser does not specifically define such) the best site for the dollar. I am more than willing to answer such open ended questions but not at the standard fee they are paying.

My question is what value does the 40th acre contribute to the SFR? How much extra would the typical SFR buyer pay just for that 40th acre? My favorite appraisal saying is quickly becoming, “the market does not hide.” Meaning that if something really does add value there will be data supporting such as people rush to acquire it (or its substitute).

 

[Fred]

Richard,
I ask about this because I don’t know how to support this use of hypotheticals with relevant standards. So, I am not picking on you, but just trying to see if someone can find an explanation that I can’t.

You say,

you are assuming that because this lender will not do more than 15 acres, they are a scam outfit

Isn’t that backwards? I am not assuming anything, but rather questioning an (hypothetical) assumption. If someone happens to have a policy to issue loans on properties made up of 15 acres or less, that’s their business – but - 41 acres would be outside the policy.

You also say,

Therefore there, the HO should be less likely to default.

You may be right. On the other hand, the loan payment is the same percentage of take-home pay regardless of how much collateral is pledged. Staying on point, though – There is no connection between an appraiser’s opinion of default risk and whether a using a hypothetical condition is “necessary to produce a credible appraisal?”

Perhaps my words "to get around the Fannie rules" were ill-chosen. What I should have said was that we have a way of complying with Fannie's rules and at the same time fulfilling the needs of the client to come up with an amount they will loan.

If I get a vote, “to get around the Fannie rule” sounds less egregious than the correction.

Alan writes,

I never accepted these assignments unless the client could produce something (official) specifically defining the site.

And well you shouldn’t. The definition of real estate is land – and what is permanently attached to land. To say, “A house on 5 or a house on 15”is not the essence of a legal description. An unspecified tract has no boundposts, no boundaries and thus lacks the definiing characteristics of real estate, like permanence and fixiity of location. Value is going to vary depending on how the 15 acres is divided out.

It is one thing to play "what if" with someone trying to figure out whether to divide a property, how to divide a property, etc. Obviously, the answer to value questions like what if we make eight 5's versus four 10's, make it "necessary" for the appraiser to assume eight 5's and four 10's. That's how intneded use drives scope of work. However, these are mortgage loans.

In other posts, I have shown where this type of hypothetical doesn’t seem to fit standards in the Ethics Rule, SR 1-2, SMT’s 9 and 10. Even the little that FIRREA says about appraisals includes a definition that appraisals involved adequately identified property. If the subject property is not identified enough that a mortgagor can file a first lien mortgage against it, then how can it be "adequately" identified for use as mortgage collateral?