Property cannot be rebuilt - If damaged by fire

[Mr Rex]

A buddy of mine had a situation almost exactly like the one in Rich's example. House burned down, about 60% damage. The lot was too small to be rebuilt and meet the current setbacks (corner lot). He and the insurance company went back and forth until the City made them tear the house down because it was a nuisance as it was, he settled with the insurance company (they split the difference of what he was short on paying off the mortgage) and he later sold the lot to the adjoining landowner for parking for a few bucks, but not nearly enough to cover his loss.

 

[Carnivore]

A buddy of mine had a situation almost exactly like the one in Rich's example. House burned down, about 60% damage. The lot was too small to be rebuilt and meet the current setbacks (corner lot). He and the insurance company went back and forth until the City made them tear the house down because it was a nuisance as it was, he settled with the insurance company (they split the difference of what he was short on paying off the mortgage) and he later sold the lot to the adjoining landowner for parking for a few bucks, but not nearly enough to cover his loss.

Want to bet the Quick, Lean and Cheap crowd use the real property appraisal for the mortgage to determine Insurable value?

 

[Joyce Potts]

If you do the cost approach and you're supposed to appraise the site as if vacant and ready to be put to its highest and best use, and it doesn't meet the minimum requirement for building--ponder that one.

 

[The Warrior Monk]

The lender as no exposure since the loan amount is covered by property insurance.

Why would this have any impact on opinion of value for this property?

These are two separate issues. One is from the lender side, the other is from the buyer (and thus appraisal) side.

Mr. Potato already covered the point with regard to the insurance covering the improvements and not the land. Land as vacant has a much lower value than as improved, so the property owner ends up taking a big hit, and possibly the lender, depending on whether or not the insurance amount is greater than the loan amount.

We've come across a few examples where this situation impacts value, mainly indirectly, though it's typically related to utility issues. Properties that can't be rebuilt typically can't be improved greater than a certain amount either.

 

[Ariba]

Ron,
This doesn't answer both of your questions, but may shed a little light on the first one.

"For example, a home was built on a 10,000 sq. ft. site, which was permitted under the ordinance then in effect. Changes were later made to the ordinance that increased the required site size to 15,000 sq. ft. Existing homes became nonconforming but were still recognized as “legal.” They were “grandfathered” in under the new ordinance. Later, the dwelling suffered fire damage. The new ordinance specified that if a structure involved in a grandfathered use was damaged more than 50%, the grandfathered use would no longer be allowed. In this hypothetical case, the replacement value of the dwelling was $100,000, the land value $30,000 and the loan balance $85,000. Damage to the house was estimated at $55,000, or 55% of replacement value and the insurance company issued a check for that amount, payable to the homeowner and the lender. Per the new zoning ordinance, the dwelling can’t be rebuilt. The owner compared the check from the insurance company to the loan balance, then handed the check to the lender and walked away."

Taken from "Professionals Guide to the Uniform Residential Appraisal Report" Copyright 2005 Richard Heyn, Baroda, MI all rights reserved

A buddy of mine had a situation almost exactly like the one in Rich's example. House burned down, about 60% damage. The lot was too small to be rebuilt and meet the current setbacks (corner lot). He and the insurance company went back and forth until the City made them tear the house down because it was a nuisance as it was, he settled with the insurance company (they split the difference of what he was short on paying off the mortgage) and he later sold the lot to the adjoining landowner for parking for a few bucks, but not nearly enough to cover his loss.

Thank you. I really appreciate the input. These are two great examples for me to think about.

Those two examples however raises other questions, like the government taken land by eminent domain. The Fifth Amendment of the U.S Constitution guarantees payment of just compensation upon appropriation of private property. :Eyecrazy:

 

[Carnivore]

The Fifth Amendment of the U.S Constitution guarantees payment of just compensation upon appropriation of private property. :Eyecrazy:

Ron, the issue of regulatory taking is very emotional one for most property owners as should be expected. People use real estate as investment vehicles and dont like being told there going to be cashing that investment in againts there will(emminent domaine). I also think that most recognize they have been screwed over when they become a victim of regulatory taking(zoning change). This would be especially true in residential property. The tax situtation is absolutely unfair, imo, because private residential usually does not qaulify as a capital loss, but unfairly is taxed as a capital gain.

Having said that, I think Mr Potatoe is saying that zoning change has an impact on value and it MUST be ascertained what that impact was. This in my mind is especially critical in comparable selection. I dont agree with some that buyers are not sophisticated enough to recognize the difference. Quite the contrary, with proper disclosure, I belive most buyers of real estate who are looking for a place to live would run like the dickens from a property such as this. If that aint impact on value I dont know what is.


In conclusion the real problem here is the impact of the current zoning on current MV and on future MV. I dont believe the insurance problem is the appraisers concern in a typical mortgage finance transaction appraisal.

If someone has already said this, then I should read more carefully before posting.

 

[Couch Potato]

If you do the cost approach and you're supposed to appraise the site as if vacant and ready to be put to its highest and best use, and it doesn't meet the minimum requirement for building--ponder that one.

And one is also suppose to evaluate the site "as improved" and always keep in mind consistent use. Central Florida is one of the easiest places to deal with legal non-conforming properties. Everyone I encountered allowed at least rebuilding to the footprint of the prior structure and construction on vacant lots as long as required setbacks were obeyed.

Knowing one's local zoning is very important and getting someone to "translate" the regulations can be helpful too. The rules in Orange County, FL were very plain, but here in Orange County, NC take a bit more work to understand:

A nonconforming residential structure destroyed to the extent of 75 percent or more of its floor area may only be reconstructed in accordance with the regulations of the district in which located, including those regulating minimum lot area per dwelling unit and minimum lot width, required front setback, required side and rear setback and maximum building height; provided, however, that a nonconforming residential structure located on a nonconforming lot shall not be required to comply with either or both dimensional requirements regulating minimum lot area per dwelling unit and minimum lot width, but shall comply with the dimensional requirements regulating required front setback, required side and rear setback and maximum building height. Appeal for variance from the requirements of this subsection shall be heard by the board of adjustment.

The nature of a non-conformity is important to understand and can affect a property's value. Even when similar non-conforming sales are available, a full description of the non-conformity and its implications is needed for a good quality report, IMHO. There are times when an appraiser can say, "not my job" and move on, but this is not one of them. Now, if they want an official "rebuild letter" from local officials, one can say, "not my job," but it's more helpful and profitable to do it for a reasonable additional fee.:new_smile-l:

 

[Joyce Potts]

And one is also suppose to evaluate the site "as improved" and always keep in mind consistent use. Central Florida is one of the easiest places to deal with legal non-conforming properties. Everyone I encountered allowed at least rebuilding to the footprint of the prior structure and construction on vacant lots as long as required setbacks were obeyed.

Knowing one's local zoning is very important and getting someone to "translate" the regulations can be helpful too. The rules in Orange County, FL were very plain, but here in Orange County, NC take a bit more work to understand:The nature of a non-conformity is important to understand and can affect a property's value. Even when similar non-conforming sales are available, a full description of the non-conformity and its implications is needed for a good quality report, IMHO. There are times when an appraiser can say, "not my job" and move on, but this is not one of them. Now, if they want an official "rebuild letter" from local officials, one can say, "not my job," but it's more helpful and profitable to do it for a reasonable additional fee.:new_smile-l:

Well said, Tater. Unfortunately, too many are more concerned with chasing down possible unrecorded deeds rather than looking at factors that may have either an immediate impact on their valuation opinion.

 

[Renee Healion]

Here most properties predate zoning. It is an unusual state in that there is no county (or other regional) government, so zoning is enforced on a town-by town basis. Each town's regs have to be searched and, though they are loathe to commit, some zoning officers will state what they would permit, but very few. It sounds usually much like what Mr Spud described with rebuilding being allowed with no enlargement of footprint as the only condition.

I agree Andrew in general that buyers do often ask the right questions, but in the densely built areas here they do not seem to question the matter of rebuilding.

Like many other issues on this forum, it may be affected by local practice. This area must sound odd to appraisers who work in areas more recently developed, where there is more planning in their zoning. Here Planning is where they can stake out policy for future enforcement, but zoning lives with the past every day.