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Land Exceeds 30% Of Value

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Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
I spoke to an underwriter today who indicated they needed a comment, within the appraisal report, as to why land value exceeds 30 percent of the value as improved. When I asked why, she seemed dumbfounded, stammered and said, because we just like to see an explanation. It was obvious she really did not know the reason why. Rather than embraces her I let it go. Has anyone else been asked this? Is there a legitimate reason for addressing this issue or is it something that justifies review appraisers salaries?

Steve Vertin
 

George W Dodd

Senior Member
Joined
Jul 9, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
Steve,

It is my understanding (not necessarily 100% accurate), that this "guideline" dates back a ways. The assumption was that if there was a high land to value ratio (>30%), then the "property" might be something other than residential.

Of couse, these days 30% might be somewhat the norm in some markets. I have always made a comment when land value > 30%, that goes something like this:

It is noted that the subject's site value exceeds 30% of the appraised value. The subject is located in a neighborhood with high land value and this factor does not adversely affect the property. The subject's land value is typical for the neighborhood and market area and is a result of postive locational factors.
 

Claudia Cullen

Sophomore Member
Joined
Dec 18, 2002
Professional Status
Licensed Appraiser
State
Massachusetts
I've always included a comment in my cost approach whenever my land value exceeded 30%. I'm not sure if this is a FannieMae guideline or not, but in the office where I trained, and the office from which I now subcontract, this is expected.
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
My guess is that 30% is not a typical land to value ratio for that type property and somebody wrote a review guideline to ask why if the LVR is not typical because of the possible implications of the highest and best use of the site not being the same as improve. Like in the zipper effect; If H & BU as improved is different than as though vacant that raises questions about remaining economic life, obsolescences, comparability of sales etc. In a nutshell, a red flag problem.
 

Ben Vukicevich SRA

Senior Member
Joined
Feb 9, 2002
Professional Status
Certified General Appraiser
State
New Jersey
Steve,

It's an old secondary market guideline....for a very old underwriter. :D :D but it's very easy to placate the old underwriter...just throw a canned statement like "Land to market value percentage/ratio is typical for the neighborhood" in the Cost Approach Comment section of the URAR-well, because it is, right? :lol: :lol: Works like a charm..assuming they know what a percentage/ratio is.... 8O 8O

Next time when they call, ask them what they do when they review a 2055 form without a Cost Approach......and a land value..... 8O 8O ...

PS: Actually, what they're looking for is the possibility of a subdividable site---and the high land to value percentage was the red flag for the underwriter to start looking for comments from the appraiser. Over 30% required just a comment from the appraiser, like I listed above. The "dare not exceed" ratio" I think was 50%. Above that, the appraiser had to provide land sales with the URAR...

Ben
 

Bill_FL

Senior Member
Joined
Aug 23, 2002
Professional Status
Certified General Appraiser
State
Florida
Stephen,

Yes this is a normal UW guideline. It is not so much a subdivideable (sp?) question, but one of if the property might be rural in nature.

Typically, this only happens when (in the absence of major physical deterioration) the site size is a larger tract of land. I have had underwriters try to tell me if the site size is over 5 acres, then it has to be rural.

That is one of the regular items we watch for ad comment on when it comes up.

Speaking of this, should we start a thread for common underwriter questions? would make a good list to go back and use as a "Did I comment on..." prompt.
 

Carnivore

Elite Member
Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
Steve,

... The "dare not exceed" ratio" I think was 50%. Above that, the appraiser had to provide land sales with the URAR...

Ben

Ben,

Good post Ben, Many times for me the three sales I provided in the report were in fact the very land sales I needed. This takes just a little explaining. The subject were invariably all single wide trailers on waterfront sites. The trailers were 15-20 years old and had very little value. This meant essentially the sales and the subject were Vacant waterfront lot sales. I can still hear them screaming about that one.

LO's and UW's "but, but, but, this is an owner occupied loan."

My answeer, "Maybe true, but these are lot sales!"

tada
 

Monica L. Trotter

Freshman Member
Joined
Feb 7, 2003
Professional Status
Certified Residential Appraiser
State
Florida
The 30% land value ratio is an old Fannie Mae guideline that was discarded back in the mid 1990's. But, some companies still maintain the guideline on their underwriting check list. Although most companies never forward the underwriting guidelines pertaining to the appraisal to the appraiser, it is still a guideline. Don't get caught up and be in violation of Statement 10. Not that they fully understand the Statement.

Better yet, has anyone ever received communication from a lender with this statement: "Your market value and final value don't agree, they are supposed to be the same." My response, read my addendum. They resond that they did. My response, read it again.
 

John Hassler

Senior Member
Joined
Jul 23, 2002
Professional Status
Certified Residential Appraiser
State
California
I can't remember the last appraisal I had where the land-to-value ratio was less than 30%. I have a standard statement that that say something like "the land to value ratio of 40% to 60% [or whatever it is in the area I'm working] is nornal for the area and acceptable to buyers" and haven't heard from an UW on that issue in years. This was a big deal in the mid-late 1980s.

John Hassler
 
B

Bemis Pownall

Guest
I get a kick out of doing reviews were the appraiser forced land value below 30%.
Did one last week homeowner purchased 10 acres for $130,000 less then a year ago.
Cost appraoch should land value to be $99,000. Didn't take much digging to find the right answer on this one.

Land value is often over 30% particularly in appreciating market. Home values have doubled and tripled but incomes and cost of goods havent. The remainder in the equation is land value.
 
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