I don’t think I’m repeating too much covered area, but if I am, I apologize.
I’ve always been told that the reason the lenders wanted a property limited to “5-acres” is because they wanted to make sure that the value was in its “residential aspect” of the property, and not make a land loan (I’ve seen limits from 5 up to 20 acres; who sets these is anyone’s guess).
As far as it being “appropriate” for a mortgage loan to be made with this type of assumption, what do I know? That’s the lenders business; if their number crunchers determine that is the criteria, more power to them. If they think they are better protecting themselves from risk by artificially “reducing” the subject’s actual lot size, maybe they can sleep better at night. I really don't care why they want it like that. What I do care about is if I give them an appraisal that is USPAP compliant only using 5-acres?
There’s no doubt that it can be done using a Hypothetical Condition (that’s what they are for- form an opinion of value on a property based on conditions known not to be factual).
HC’s must be CLEARLY stated & identified in the report so the value is not misleading. I put a big header on my reports when I have to use them, and condition the report “subject to the HC and underwriter review”.
Many appraisers don’t understand what an HC is (even the ones that do new construction assignments and give a value as completed). So rather than stating “this appraisal is based on a Hypothetical Condition”, they’ll accept our 5-acre assignment and state in the report something like “per lender instructions, no value given to lot area in excess of 5-acres” and make the report “as is” (I’ve seen this while reviewing). When the lender goes to bundle that loan with others and sell them on the secondary market, he can honestly represent “None of these mortgages were made using appraisal reports with Hypothetical Conditions”.
Fannie buys the loan, the borrower skips town, Fannie owns the property and sues the appraiser.
While I agree with those who have argued that you should try to identify the now “hypothetical lot”, I don’t think you need to be a surveyor to do so. You have to accurately describe the subject as it is. And I personally would include a comment that specified if the hypothetical lot would conform to the zoning (min. lot size).
But since we’ve created a “hypothetical piece of property” now to appraise, why can’t we make additional “hypothetical conditions” such as the lot would be in compliance with zoning, it will have access to roads, utilities, proper set-backs, you-name-it, etc. I don’t see any reason why we couldn’t.
(Ok, so when we get the order, we ask the client, “you know, I can do this, but it will be based on a several Hypothetical Conditions which I’ll clearly state in the report, is that what you want?” Their only response is going to be “Ok, ok, but I need it tomorrow- can you go out there tonight?”)
Is there anything else I’d want to add to this “Hypothetical Report”? Yes, a statement saying something like-
A. The use of HC’s as requested by the client makes this report non-compliant with Fannie’s guidelines, and may render the report unacceptable in the Secondary Market.
B. The possibility of the Hypothetical Conditions used in this report actually occurring in any meaningful time frame in regards to the effective date of the appraisal is so remote that it is reasonable to conclude that the HC’s will not occur and are not likely to occur.
OK, let me go through my checklist:
1. USPAP compliant? Yes.
2. Client advised of approach and agrees? Yes.
3. Report misleading? No. Hypothetical Conditions clearly stated and additional statement included saying the likelihood of those conditions being met is remote.
4. Is the report “credible and reliable”, and meaningful to the client based on their intended use? I would think so- In fact, it is custom made to their exact specifications.
5. Did I collect COD? Yes, always on an assignment like this.
Well, looks like I’m in pretty good shape.
