Land value and value opinion are the same - UW questioning

[Steve Pendleton]

Well then, you are contradicting yourself !!!
If the comps for the subject are not tear-downs, and people continue to live in them, then they contribute more to the land value than 5k!!
This means the land vacant is worth less than you stated-.


HBU as exists with potential for future development -if the owner-occupants upgrade and /or stay in the house, vs if all or most asre sold to tear down then HBU is as vacant

What sales were you calling comps that got torn down for townhouses? Are there vacant lots sold in the area for a land value?

I have five solid comps (within a mile, sold in last 5 months) for sales comparison in approximately the same condition that run from $212k to $245k, with one at $155k unadjusted. After adjustment the sales comps are $210k to $241K with gross adjustment % of 17 to 35%. I have five land comps from 18 to 21,000 sf (subject is 20,000 sf) that sold for $200 to $275,000 within the last 18 months.

 

[Steve Pendleton]

Now you give is info that the subject lot is 20,000, but the lot sizes of the comps you used are 14,000, 7000, 9000 sf - the subject is on a lot that is dividable for subdivisions and valuable -
did you find any sales on a 20,000 sf lot range - 18,000=24,000 sf lot?
A comp is a similar sale, not just any old sale - and while a house on a 7000 sf lot can be a comp, it would need a huge lot size adjustment and there should have been, if possible, comps on lots near the subject lot size -

do any exist? did you look for them? The comp on the 14,000 sf lot is the closest in lot size to the subject subject...what did it sell for vs the ocmps on smaller lots?

I put the subject lot size in the original post but its not surprising it got lost in the back and forth. The 14,000 lot is the largest. 20,000 sf is an unusual but not unheard of in this area. (One issue that may be having an effect here is the off market sales. Wholesalers scoop up lots of these older properties and sell them to developers and we never know about it.)

I looked at increasing the adjustment for the lot size but the already high gross adjustment numbers then exceed 40% and the effect on the adjusted value of the comps still doesn't approach the value of the cost approach.

The comp on the 14k sf lot sold for $215,000 and adjusted out to $232,000.

 

[Steve Pendleton]

I put the subject lot size in the original post but its not surprising it got lost in the back and forth. The 14,000 lot is the largest. 20,000 sf is an unusual but not unheard of in this area. (One issue that may be having an effect here is the off market sales. Wholesalers scoop up lots of these older properties and sell them to developers and we never know about it.)

I looked at increasing the adjustment for the lot size but the already high gross adjustment numbers then exceed 40% and the effect on the adjusted value of the comps still doesn't approach the value of the cost approach.

The comp on the 14k sf lot sold for $215,000 and adjusted out to $232,000.

To answer your question about other sales with 18K sf lots. There are 2 within 1.5 miles. One is 1583 GLA and 21,500 sf lot. Completely remodeled and it sold for $327k in July 23. The other is 2100 GLA and 16,200 lot. Partially remodeled and sold for $310 in January.

 

[Steve Pendleton]

Perfectly good, livable dwellings are torn down everyday when the vacant land value equals or exceeds the value of the site with the dwelling. This is very common. People live in dwellings that have no contributory value all the time. Sooner or later, the dwelling is razed.

If you graph it out and the point where the line for land value exceeds the value with the dwelling, the house becomes bulldozer bait.

This is a transitional property and it appears that the improvements have a very short remaining economic life. Be honest with your client and let them decide if they want to make a loan on the subject. They will probably reject the loan; not your problem.

I think this is the answer. There's no other way to interpret the data. Owner buyers and developer buyers will value the property about the same but for different reasons. I guess the lender will have to decide if they are comfortable with the asset. Since its a reverse mortgage I cant see why it would matter, by the time they get it, it will definitely be a tear down. But then again I dont know what the FHA regs are for these types of assets.

 

[Tom D]

$200,000 land sales what are they building and what are they selling for. i would have never sent in a report with those 2 wide numbers. well, now you know why. everyone here seems to be confused to about what the hay did u do. a $327,000 sale, completely remodeled, wouldn't be a profitable sale to the developer with a $200,000 land cost
that sale is telling me the land is less that $100,000 maybe closer to $50,000. but guessing, don't know the GLA of that comp.

 

[Steve Pendleton]

Thank you everyone for the help and constructive feedback. As a newby its a little intimidating to post here (maybe I did something wrong?) and I've seen some pretty rough feedback in the past, but all the discussion has been very helpful. Personally I think being able to come here and have a discussion is one of the most effective tools the profession has for continuing to develop skilled appraisers.

 

[Steve Pendleton]

$200,000 land sales what are they building and what are they selling for. i would have never sent in a report with those 2 wide numbers. well, now you know why. everyone here seems to be confused to about what the hay did u do. a $327,000 sale, completely remodeled, wouldn't be a profitable sale to the developer with a $200,000 land cost
that sale is telling me the land is less that $100,000 maybe closer to $50,000. but guessing, don't know the GLA of that comp.

That comp was a remodel of an existing structure. The developer most likely bought it from a wholesaler and didn't pay more than $100-$125k. Original sellers are unsophisticated and dont know what their house is worth or are deceased and heirs just want some quick cash. Wholesalers prioritize turn time over big profit. They're often willing to take $10k. Flippers are also prioritizing turn time because of hard money rates.

 

[George Hatch]

"Economic life" is an economic construct, of which physical condition is only one component.

The "financially feasible" element of highest/best use analysis takes under consideration whether any existing or proposed improvements will have any contributory value to the land. Hypothetically, an SFR can be a physically possible and legally permissible use for a site and the SFR can be of new construction; and yet still have zero contributory value if the underlying land is worth equal to or more than a new home on that parcel.

So it looks to me like you have a wobbler - the property is worth the same to a developer for redevelopment as it is to a happy homeowner for continued use. Depending on the market conditions the property might be more marketable and in higher demand to SFR buyers, and for sure the financing is a lot cheaper and easier. Or, the property might be more marketable to the developers.

One aspect you might consider is how the SFRs are being marketed and how they're being financed. If you're seeing comments in the listings "the value is in the land" or other comments about development potential that might indicate that the sellers or their brokers are taking the redevelopment potential under consideration. If there is a pattern of thse SFRs being bought with all-cash or 50% LTVs that might indicate to developer activity - you can't get a 90% land loan for the site acquisition for a redevelopment project.

On the other hand, if all or almost all of the SFRs are being marketed as such and being financed as such and occupied as such then that's an indicator of continued use as an SFR.

Lastly and in your depreciation analysis, this is the equation that M&S has used (in the past, at least) in conjunction with their depreciation table.

Total Economic Life
-Remaining Economic Life (as opined by the appraiser)
Effective Economic Age

That's a different equation than the version we teach in the Appraisal 101 courses in that it takes into account the economic depreciation, not just the physical condition. Effective age for their depreciation chart becomes the residual of the equation, not the primary opinion being made by the appraiser.

 

[George Hatch]

So with your application, if - after consideration of the prevailing trends in that neighborhood - you conclude that the REL for the SFR structure is only 5-10 more years then the equation would look like this:

55 yrs (Economic Life)
-5 yrs (REL)
50 yrs (Effective Economic Age), which will max out the depreciation rate on the M&S table at (IIRC) 80%.

Of course, stating this in a 1004 for a conventional lender probably will sink the deal regardless of the value conclusion. I'm not going to tell you to just do what most appraisers do and just hold your nose while (mis)stating the REL is 30 more years, but I will suggest that if you can find a way to avoid performing a CA altogether for this assignment that might be a more expedient solution for the lender's usage of the appraisal. After all, the average holding period for an entry-level SFR is only about 7 years anyway. And if the pricing for SFRs drops within the next 7 years the market demand among the developers will drop to zero and the property won't be marketable as land at all.

 

[Steve Pendleton]

There's alot to your comment. Addressing just the part about how these houses are being marketed...If a wholesaler can get to the owner first, then the property will probably go off-market to a flipper or scrape-and-replace developer. If a Realtor gets there first then it hits the MLS and will sell to an occupant owner because it will be too expensive for either the flipper or developer. Texas is a non-reporting state so it's nearly impossible to get solid numbers on what the flipper/developers are paying. In some areas of the city (very expensive areas) SFRs are being sold on MLS and subsequently redeveloped, but that's a relatively small part of the market.