Out of Option, Need Help!

[djamesgoodwin]

Hello all. I’m new here, and have a question about an appraisal. I hope it’s okay to ask.

My wife and I are relocating to Virginia and trying to buy an old farmhouse. The house is on just over 8 acres, near Harrisonburg. It’s not unlike most rural farmhouses. It’s a big pretty farmhouse in a rural area, with outbuildings.
It has a small horse barn, a basic horse riding arena, and most importantly, a 30x50 metal building, with a large garage door, heated with upgraded electric. The owner used it as a workshop for his electrician business, and it has several rooms in it.

The house is 2900 sqft, in good condition, and is zoned A2, which in this part of Virginia, is the most common zoning outside of any town. It is generally rural homes, etc. but could permit commercial with certain conditions.
Closest neighbors are a cattle farm, several homes, and a church.

for deeper context, I am doing a non-QM bank statement mortgage, which as I understand it, limits my pool of lenders, of course. And I've been told that because the lender uses an AMC, it essentially is expecting a normal cost residential form appraisal, and because this is more complex, many won't want to take the job.

Here is what I know:

In Virginia, A2 means :

(a)The predominant land uses in the A-2 district shall be agricultural production and forestry. Agritourism and agribusiness-related support uses shall be permitted in order to supplement farm income.
(b)The A-2 district shall allow more community-scale retail, service, and recreational uses than the A-1 district, primarily through special use permits.
(c) Agricultural and forestal activities shall be regulated only to the extent necessary to protect public health and safety. People who choose to live in this district should expect agricultural and forestal activities to produce noise, odors, and other effects as part of day-to-day operations.

The appraisal management company put out the card and the first residential appraiser came back saying it is commercial in his HBU analysis. The AMC rejected it and put the card back out, and apparently either no CGA has picked it up, and others have just looked up the property and also called it commercial or passed on it. Now they want to do a commercial narrative report on it. I don't really know what that means.

I am frustrated and at a loss for what to do. The house is very clearly a single family residence, where the owner ran his own business, and built that building. But in my mind, it is inconceivable that the property would pass the HBU test as commercial. it isn't big enough to farm, the horse facilities are not advanced enough to be a working horse farm. I suppose one could rent out a stall or two, but that's insignificant income, and also comes with liability. And any owner living in the house would likely not be renting out the building to a third party. No infrastructure for parking, retail, etc. Not to mention, it has always been a residence since 1920. And the county tax card calls it a single family residence in A2 zoning. The guy just built this building so he didn't have to rent a building in town for his business. It seems fairly obvious to me that the building(s) would be considered accessory secondary usage, at best. it looks not unlike hundreds of rural small hobby farms I've seen. Maybe I am missing something here.

One thing I was told by an outside observer, is that it's possible the first appraiser muddied the waters by noting that the real estate agent is a commercial agent, which is true. What I understand is that the agent is a contractor who has worked for the seller for years, and took on the property because of that. I don't know if that influences anything, but it's worth mentioning. He was still selling it as a residence with accessory buildings, but...

What do I do? What can I do? This will kill my mortgage and Im scared that I’m powerless in this.

Am I totally out of options? Thanks for any help you all can offer.

 

[Terrel L. Shields]

it is inconceivable that the property would pass the HBU test as commercial.

The owner used it as a workshop for his electrician business,

It is mixed use. Therefore is CG territory. It is not a secondary market type property without a good imagination.

Get a commercial loan from a local bank lender - it is a non-conforming conventional loan you are after.

 

[djamesgoodwin]

It is mixed use. Therefore is CG territory. It is not a secondary market type property without a good imagination.

Get a commercial loan from a local bank lender - it is a non-conforming conventional loan you are after.

Indeed he did - but that doesn't mean it would pass an HBU test as commercial. It is essentially a home-run business. My understanding is that this doesn't make it commercial by default - otherwise half of the converted garages in the country would be impossible to lend on as residential. The primary object of the property is still the residence, no?

 

[Terrel L. Shields]

Indeed he did - but that doesn't mean it would pass an HBU test as commercial. It is essentially a home-run business. My understanding is that this doesn't make it commercial by default - otherwise half of the converted garages in the country would be impossible to lend on as residential. The primary object of the property is still the residence, no?

A - HBU is a test. Is the property worth more VACANT? Or, ,"AS IS".... nothing more

B - It is a MIXED USE. For an appraiser to value it, the question is there 50% of the value of improvements in the buildings, or the house; and, they are quite large and appear newer than the house. The house is old. So is the appraiser supposed to endanger their license by declaring these outbuildings some low value and inflate the house value? For residential secondary market, the value HAS TO BE more than 50% in the RESIDENTIAL improvements. Doesn't matter what zoning is.

Now the appraiser COULD lie about the value of the buildings, which I bet are worth about as much as the dwelling. They could pretend this is "residential". And if it goes into foreclosure the appraiser could be hoisted upon their petard and blown up by the state board, or worse, a lawsuit from the lender claiming the appraiser lied. So, I can understand why residential appraisers would run backward. Determining a contributory value to those outbuildings is a hair shirt job. It is the kind of job I do...and I NEVER see those as secondary market assignments. They are in house lenders lending the boss's money, not FNMA or FHA.

So, are you married to the loan you want? You might consider going to Farm Credit. They have "homestead" loans but those vary in minimum acreage size from area to area. So, 8 acres may not be big enough for them to tackle. If I was a lender, I would want an experienced agricultural appraiser to tackle this one. There is too much money tied up in the outbuildings and to pretend they do not contribute value, suggests a wild imagination and hope upon the part of a residential appraiser. Such appraisers may well be out there, but if the AMC picks the appraiser, not you, then you might have to pay for several appraisals until the "right" appraiser is found to be complicit in a fraud.

 

[djamesgoodwin]

A - HBU is a test. Is the property worth more VACANT? Or, ,"AS IS".... nothing more

B - It is a MIXED USE. For an appraiser to value it, the question is there 50% of the value of improvements in the buildings, or the house; and, they are quite large and appear newer than the house. The house is old. So is the appraiser supposed to endanger their license by declaring these outbuildings some low value and inflate the house value? For residential secondary market, the value HAS TO BE more than 50% in the RESIDENTIAL improvements. Doesn't matter what zoning is.

Now the appraiser COULD lie about the value of the buildings, which I bet are worth about as much as the dwelling. They could pretend this is "residential". And if it goes into foreclosure the appraiser could be hoisted upon their petard and blown up by the state board, or worse, a lawsuit from the lender claiming the appraiser lied. So, I can understand why residential appraisers would run backward. Determining a contributory value to those outbuildings is a hair shirt job. It is the kind of job I do...and I NEVER see those as secondary market assignments. They are in house lenders lending the boss's money, not FNMA or FHA.

So, are you married to the loan you want? You might consider going to Farm Credit. They have "homestead" loans but those vary in minimum acreage size from area to area. So, 8 acres may not be big enough for them to tackle. If I was a lender, I would want an experienced agricultural appraiser to tackle this one. There is too much money tied up in the outbuildings and to pretend they do not contribute value, suggests a wild imagination and hope upon the part of a residential appraiser. Such appraisers may well be out there, but if the AMC picks the appraiser, not you, then you might have to pay for several appraisals until the "right" appraiser is found to be complicit in a fraud.

I see. What you wrote makes more sense to me now.

For sure those buildings have value, but it seems easy to conclude that the primary value of the property is the fact that it is a residence with an accessory usage building, no? The horse barns are newer than the house of course, but they're quite cheap pole barn type buildings. The main outbuilding - the workshop - is certainly newer and well built, but seems to me that it has questionable value *without* the residence. In my eyes, it makes the residence more valuable for sure, but without the house, it has pretty limited commercial viability on its own, knowing the area and location, not to mention property infrastructure.

I guess my point is that properties like this are not uncommon in rural Virginia, and I have a hard time imagining non residential buyers for this property. I do understand that this is more complex than a typical residential form appraisal, but I also don't think this an obviously commercial property, based on values. It seems to me, albeit a layperson, that calling that fraud is a tad hyperbolic.

Maybe a better question would be this : considering that I am doing a bank statement mortgage, and unable to do a conventional type loan (I'm self employed, etc), I am stuck with this route. And as a result of that, is there a world in which this property could be appraised as a complex residential property and it not being 'fraud'? And does that simply mean paying for multiple appraisals?

 

[Elliott]

I've done a half dozen properties like you have described and never thrown on the HBU as "commercial" since they typically are purchased as a home on acreage by people who like horses. It is common for 'farm' properties to have a commercial aspect, but its usually a conditional use. If I were in your position I'd find a lender who 'knows how to finance' your kind of property; not all lenders expect only round pegs in round holes. Ask your neighbors who they have their mortgage with. Watch "Clarkson's Farm' if you think you have problems with 'zoning.' : )

 

[George Hatch]

First off, I'd like to note that your summary of the situation is the most useful that we've ever seen on this forum from a non-appraiser. Good job.

The entire purpose of performing a highest/best use analysis is to identify the basis upon which the property would be marketed, which types of buyers will pay the most for it and how they would proceed to use the property. From there we can identify which properties would directly compete for those buyers and upon which basis.

I operate on the other side of the nation, and all real estate is local. However, in our region an Ag-oriented zoning category which allows commercial uses by use permit will either be built out with a residence, either with or without supplemental uses; or with a small onsite caretaker unit and the remainder being in some form of ag use or sometimes as a trucking or contractor yard or such. MOST of the non-residential uses will be located either on or near the main access roads. Some of the hospitality or vacation rentals or related will be a little more off the beaten path.

War story: A few years back I appraised 19ac of avocado grove with a 900sf home and a recently built 16,000sf metal industrial building with 20ft truss. That property owner had been using the building for their hot rod fetish. The zoning did not allow for renting or occupancy as an industrial use. My comparables were other properties nearby with a home and barn or shop. I added some land/grove sales on the side as an extra in order to support the adjustments I used to account for the differences in land area, but none of those had structural improvements and were not marketed for other than land value. But as far as the sales I presented as being more directly comparable to the combo I was appraising, 100% of those had been marketed for their residential usage, with the outbuildings being an extra.

My point is that - in this region - your property would more commonly be marketed as a residence. The 1500sf shop building is not commercially viable as a non-residential use except to an owner-user. The property itself might not fit some of the conventional residential lending programs, and the average residential appraiser working for an AMC won't have had much exposure to this type of assignment so the work it would take to do it properly will be overwhelming.

Your best bet for getting a fair shake on this is to try a local community-oriented lender which will be working with appraisers who are willing to work the problem. (In my region) this type of property wouldn't be purchased by a rental-income oriented investor so there's really no point in bothering with a rental survey or income approach. Appraisers and lenders who don't understand the property type might possibly think otherwise, but all doing an income approach is going to do is increase the amount of work and the cost; it's not going to return a usable value indicator.

But as I say, all real estate is local so the market might work a little differently in your local.

 

[George Hatch]

The smaller equestrian operations are almost always a labor of love, not monetary return. A lifestyle more than a business that can be profitably managed by employees without any owner-involvement. Even if there is some monetary interest the buyers are basically buying a job for themselves.

 

[djamesgoodwin]

First off, I'd like to note that your summary of the situation is the most useful that we've ever seen on this forum from a non-appraiser. Good job.

The entire purpose of performing a highest/best use analysis is to identify the basis upon which the property would be marketed, which types of buyers will pay the most for it and how they would proceed to use the property. From there we can identify which properties would directly compete for those buyers and upon which basis.

I operate on the other side of the nation, and all real estate is local. However, in our region an Ag-oriented zoning category which allows commercial uses by use permit will either be built out with a residence, either with or without supplemental uses; or with a small onsite caretaker unit and the remainder being in some form of ag use or sometimes as a trucking or contractor yard or such. MOST of the non-residential uses will be located either on or near the main access roads. Some of the hospitality or vacation rentals or related will be a little more off the beaten path.

War story: A few years back I appraised 19ac of avocado grove with a 900sf home and a recently built 16,000sf metal industrial building with 20ft truss. That property owner had been using the building for their hot rod fetish. The zoning did not allow for renting or occupancy as an industrial use. My comparables were other properties nearby with a home and barn or shop. I added some land/grove sales on the side as an extra in order to support the adjustments I used to account for the differences in land area, but none of those had structural improvements and were not marketed for other than land value. But as far as the sales I presented as being more directly comparable to the combo I was appraising, 100% of those had been marketed for their residential usage, with the outbuildings being an extra.

My point is that - in this region - your property would more commonly be marketed as a residence. The 1500sf shop building is not commercially viable as a non-residential use except to an owner-user. The property itself might not fit some of the conventional residential lending programs, and the average residential appraiser working for an AMC won't have had much exposure to this type of assignment so the work it would take to do it properly will be overwhelming.

Your best bet for getting a fair shake on this is to try a local community-oriented lender which will be working with appraisers who are willing to work the problem. (In my region) this type of property wouldn't be purchased by a rental-income oriented investor so there's really no point in bothering with a rental survey or income approach. Appraisers and lenders who don't understand the property type might possibly think otherwise, but all doing an income approach is going to do is increase the amount of work and the cost; it's not going to return a usable value indicator.

But as I say, all real estate is local so the market might work a little differently in your local.

Thank you! This is very helpful and informative.

 

[Sid Holderly]

Any place that used an AMC for this type property will have many qualification problems. Look to a local bank that holds its own loans and know the area. The rural residential lending arm of Farm Credit is: https://www.fcsamerica.com/products-services/rural-1st-home-loans

Local banks that loan to farmers and contractors (small service businesses) or Rural First are better routes to go. They will work with self-employed buyers. In this area farm outbuildings have little value compared to the house, but that has to be analyzed for your typical area.

Where I am it would not take a CG to do the appraisal, but that depends on State Laws.