MPLS Zoning, Part 2, The Aftermath

[CJ1234]

I think this is the crux of the matter. Over time, and given enough actual data, it should become easier to properly develop and defend one's work. Under current circumstances, I would tend to avoid assignments with the potential for such adverse consequences.

And I believe many are following suit. When asked many appraisers, my husband included, said they will not appraise in MPLS.
On the DoC advisory meeting, a panel member said that their AMC had many clients stating they were having difficulty finding appraisers willing to work in MPLS. He said that they advised the lenders to reach out to the DoC and inform them of this situation. The DoC member 1 said: haven't heard from any lenders. DoC Member 2 said: only anecdotal stories. DoC 3 Said: No, our second magical letter explaining that the first letter was just an "oops" made everything better! (I'm clearly paraphrasing).

The thing is, I will do work in MPLS, but I know the *blank* will hit the fan when I get a SFR home in Linden Hills that could easily be converted to a duplex, and H&B indicates 2 or 3 family use. I *know* that order will ultimately be cancelled and sent down the line to the next appraiser. I also know fine appraisers who will avoid Mpls. My husband for one. He is a good appraiser, but doesn't feel he needs the extra stress of doing this work now, in this transitional period, after the original letters went out stating appraisers were under review for a complaint, and potentially on the hook for the cost of investigation, plus sanctions.

 

[George Hatch]

HBU as vacant is not the thing in these assignments. The MV will hinge on the HBU of the property in its "as is" condition. We call it "as improved" but a lot of people don't really understand the concept when it's expressed like that.

All you're trying to do with an HBU analysis in an MV appraisal assignment is to figure out whether the property is worth more *the way it currently exists* in its current use or as land value. Will the typical buyer buy the property for the existing use or will they buy it for its redevelopment value.

If the property is worth more as a house then its comps will be other houses with similar attributes. If the property is worth more as land value then the property will be valued on the site attributes. Different buyers, different motivations, different dominant attributes, (and often) different units of comparison.

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Let's try an example: SFR on subdivision parcel that's zoned for up to 3 units. How much that property will sell for TODAY and without anyone doing anything to the property will depend on whether or not the property is currently worth more to a homebuyer or a developer. If the property is worth $500k as a house but only $400k as land value then the HBU of the property in its as is condition (aka "as improved) is as the house. You won't get to the MV of this property by using land sales and valuing this property as land.

But if the property is worth more to a developer because such lots are selling for $250k/unit (x3 = $750k) then the HBU "As Improved" is to redevelop into the 3 bigger/better units. In that case (and even though there's a structure onsite) you won't get to the MV of the property without valuing it as land via the use of land sales as your comps.

Where people sometimes get hung up is in speculating what the resale value of the 3 finished units after construction is: That is not the question at hand because this site doesn't have those 3 units yet, and it won't have those units unless/until someone pumps a lot more money into the project.

So that is the primary question in an SFR appraisal assignment: Is it worth more as this house or as a redevelopable lot? Or, in the case of properties that are underimproved like the ones in this town we're talking about, as some combination of the two? SFR + additional development potential for 2 more units.


And example of the above might be in this town where you have 2 otherwise similar SFRs except one has more lot area or the configuration that will enable the addition of 2 more units, whereas the other one might have a smaller lot or topo or configuration which will only enable the addition of one more unit. Both properties are the same except that the one has a lower lot value due to the reduced development potential. Your adjustment for this would be whatever the contributory value is of the additional development potential the larger property has.

To do this analysis you would have to understand land valuation as it relates to multi-family development. If Lot#1 has the potential to put 3 units on it and it sells for $300k that amounts to $100k/allowable unit; so guess how much that makes Lot #2 upon which only 2 units can be built?

So, SFR with enough lot area for 2 more units vs SFR with enough lot for only 1 more unit might be $100k apart in this market. Or not - it depends on how savvy the brokers and owners are. That's a question to be answered, not an assumption to make. The point being that the appraiser needs to be savvy enough to look at both the subject and the comps to see what their respective potentials are for adding more units. And that means understanding the zoning *and the other development criteria*.

We don't value vacant land by taking the proposed finished SFR and working backwards off the cost. The land value is the same whether they max out its potential utility on it or not. The same is true for SFRs with extra developable lot potential.

 

[George Hatch]

The first couple assignment like this will go slow because you're working in a new skillset and writeup, but it gets way easier and faster as you get more exposure and experience with it. And if other appraisers are dodging these assignments or screwing them up then developing the additional competency sets you apart from the others. So you probably will take a beating on the fee of the first couple, but after that you'll be in a position to make more money.

One way or another, someone is going to do those assignments. Better that someone be competent at it than not.

 

[Flakey]

The first couple assignment like this will go slow because you're working in a new skillset and writeup, but it gets way easier and faster as you get more exposure and experience with it. And if other appraisers are dodging these assignments or screwing them up then developing the additional competency sets you apart from the others. So you probably will take a beating on the fee of the first couple, but after that you'll be in a position to make more money.

I agree with this except, in this instance, it appears someone in a regulatory position has an agenda and wants to enforce it under the threat of sanctions.

 

[George Hatch]

I will suggest that there's no good reason for SFR appraisers to not be in the habit of performing an HBU anlaysis in every MV appraisal assignment. As far as I can tell, the primary reason the SFR appraisers are already not in the habit is because the form doesn't prompt for the actual analysis. In fact I think the GSE forms confuse the issue by relating is solely to the zoning instead of addressing all the other considerations in an HBU analysis. In the non-res appraising niches HBU analysis comes AFTER the improvements analysis and takes into consideration everything else up until that point including the neighborhood composition and trends, the site and improvements analyses and how the subject stacks up to the other properties in the neighborhood.

The point being that HBU analysis isn't solely about the zoning.

The actual valuation part won't be tough when these properties all share the same zoning and other dominant attributes. You'll be able to see real quickly when the brokers list certain properties higher than others due to having different potential for additional units. If/when that becomes the case. They'll comment on it right in their listings, so the appraisers will be seeing it at the same time the buyers and the other brokers are seeing it.

 

[CGinMN]

I'm just getting caught up here. As far as I'm concerned, and as expected, the new zoning law has not changed much in the Minneapolis housing market, and the Department of Commerce has no idea what they got themselves into. (They ended up reassigning an investigator to another department as a result of this.)

I checked last month and there was one permit that was pulled for a duplex/triplex conversions in a city of ~150,000 single family homes. Duplex and triplex conversion is cost prohibitive because of code requirements, the cost of labor, land, and materials. I pointed this out to the DOC several times, well before their follow-up emails, but they didn't care. They haven't done any analysis of their own, and for them to be the ones educating appraisers about this is a joke.

Regarding workfiles supposedly not containing adequate support for HBU, this is BS too. If you have comps in your report, their use after sale is support for a conclusion of continued use. If in the course of my research I come across a comparable that is converted to a duplex or triplex, I will begin to question whether a change in HBU is supportable. Again, as of last month one permit has been issued.

Look at it this way, how many duplex or triplex appraisals have you done where you researched the possibility of converting back to a single family? Does the DOC want conversion cost figures in every duplex appraisal I prepare for me to be USPAP compliant? Religious uses are allowed in all SF zoning districts. How about converting to a house of worship? It's pretty much the same applicability, isn't it?