Reporting Highest And Best Use

[Ray Miller]

Highest and Best Use

I would like to toss this out to the group.

Working in a rural areas. I always question the highest and best use of farms, and farms that have been cut up into smaller tracts with homes. Knowing the area, what is happening in the area, trends in the area, tourist and new business moving into the area, new development. Highest and Best use enters into the appraisal process all the time.


1.

A property I work on last year. I had done a feasibility study to turn the subject into to a recreational ranch. Along comes a bankruptcy, now the court and bank holding the paper want to know four values of the property. Recreational Ranch, Subdivision, Estate, working farm..

The following are the values we came up with.

Recreational Ranch 7.5 M, subdivision 4.5M , estate 1.5M, working farm 1 M. Clearly the highest and best use in this case is a recreational ranch.

Now say this farm sells and you are ask to do an appraisal on it, just as an estate. However, there are four approaches to value that you can take. The recreational ranch, working farm, subdivision, estate. If you just look at it as an estate. Report it that way, you have not complied to the Highest and Best use question on the 1004. Should you not note in your report the other values or at least the highest and best use.

(I know because of the acreage 640. ag land, forest land, river frontage, trout creek, it really is very complex appraisal and it was.)


2. An appraisal I completed this week on another subject. I looked at the subject just as I did at the above property and noted the four different values that the property could be worth. All four values are legal in the zoning and could be done on the property. No additional improvements. They were needing 750,000 to cause the loan to fly. But they were needing it with out the additional acreage or the other uses. The LO called and said to leave the subject home at the 750,000 mark, but make no mention of the additional acreage and the other uses. I told him there was no way I could do that. The subject home is not worth the 750K but the home and land would be. That the subject used as a recreational ranch, or Bed and Breakfast, or a youth camp, or subdivided would be worth more. Highest and Best use as improved: Present use or Other use. Then to explain the other use. The question is if an appraiser fails to check other use, when there is a higher and better use. Then is not that appraiser completing an incorrect appraisal?

What say you?

 

[Frederick R. Ruffell]

Ray,

Just report what the highest and best use is, nowhere is it written that you HAVE to appraise the property at its highest and best use.

I have a an appraisal right now that might demonstrate this point to you. Subject property is currently a 2 unit, 1 building (i.e. the units are attached), 2400 square foot lot about 20 yards from Mission Beach here in San Diego. The identical lot 2 blocks away, identical building (original builder built several about 50 years ago) just sold for 1.5 million. Building was scraped and 2 new townhouses are being built and will be sold as condominium ownership.

My client has asked me to appraise the property "as is". I have 2 unit comps that support a value of 750,000 to 850,000, I have rents that support the same range. My only problem is the cost approach. The land value is going to be out of whack.

So what do I do?

Just what I did. Report the H&BU as a vacant lot and appraise it as a 2 unit property with a value somewhere between 750,000 and 850,000.

hope this helps

 

[xm39hnu]

Ray,
Frederick is right. You can appraise it at any use. However, you have to disclose your H&BU conclusion, and you have to show a summary of how that conclusion was reached. I'd show that H&BU analysis, and then add something like:

"The highest and best use of the subject as improved was determined to be a recreational ranch. However, the client has asked for the value of the property as an estate. This appraisal is developed under the hypothetical condition that the highest and best use of the subject as improved is an estate. It is obviously necessary to use this condition to effect a reasonable analysis under the conditions imposed by the client. The use of this condition results in a conclusion of value that is substantially less than the conclusion which could be reached if the property were to be valued at its true highest and best use."

Then go on and complete the appraisal pretending H&BU is "estate," using estate comps, etc.

 

[Ray Miller]

Thank you for your answers.

Just need to prove a point with some of the folks that I went to classes with over the past three years. To make a point about what should and should not be in appraisal reports. What approaches you need to take, what you should have in your work file and the reason for it.

Many fail to look at the scope of work, may fail to study the assignment. They get the order and try to get it done in 24/36 hrs. Leaving out a lot of information that might come back to bite them in the hind quarters. They seem to always be looking for the short cut.

This is a great site and I could never obtain the kind of advise and information that is given here without taking a Post Grad courses in Appraisal. Most all of the time you get different answers from different directions, by different people with different insight to the question.

Thanks for all the back up and answers to my questions. It also gives me a chance to introduce appraisers in the area I work to what I deem to be good and correct information.

 

[Mark K]

Re-read the definition of "Highest and Best Use". It does not leave much wiggle room. I think that once you ignore the use that is maximally productive and returns the highest value, you've left the realm of "highest and best use" and have crossed into "value in use". If the client is comfortable with that value, so be it, but you better put "USE VALUE" in large letters everywhere in your report and explain the difference.

Example: Recently I appraised 200 acres of residential development land. Everything around it selling for $20,000/acre. My value was about the same. Bank calls and says they want a value of it for what its being used for currently, agricultural, row crops (beans/corn). It dropped the value from $4M to about $750K. I called it "use value" and included about 2 pages of discussion on the difference between "market and use value". Use Value can result in SIGNIFICANTLY higher or lower values than market value. I'd make sure that an engagement letter is very clear in this situation and fill the report with disclaimers.

I wouldn't feel comfortable using a hypothetical condition statement and calling it market value on something with a value difference in the millions. Misleading report in my opinion.

On another note, the IRS has some regs that allow estates to be valued at their use value at time of death as opposed to highest and best use. Get good advice on these.

 

[xm39hnu]

Originally posted by Mark Keutzer wrote...
I wouldn't feel comfortable using a hypothetical condition statement and calling it market value on something with a value difference in the millions. Misleading report in my opinion.

Huh? Mark, I'm not necessarily disagreeing with you, but how can a HC-based report be misleading if the "subject to" box is checked an "Appraisal subject to hypothetical conditions; see comment addendum" in the comment box?

IMO, I'm not required to write a report which can be understood by third-graders. I will assert that stating prominently all over the place that the value conclusion reached is subject to hypotheticals should not be misleading to a person of average intelligence.

If the client asks for the fee-simple market value of the property as if used as an estate, I would think that conditioning H&BU on the HC, fully complying with USPAP disclosure requirements about the effect of the HC, and plastering "subject to's" all over the place would preclude the report being misleading. Anything is misleading if you don't read it correctly, even the directions on an aspirin bottle: take two and keep away from children.

 

[Diana Malcolm]

I have a problem with determining Highest and Best Use and how to report it.

In another thread, I discuss I am currently appraising an REO property, old homestead, 1920's house used as meth lab, but now clean. (?) The house sits on an acre + and is surrounded by newer development. Zoning allows for 7,500 lots (or even possibly 5,000 SF if you jump through hoops), according to City Planning Department.

Because it is an REO, the bank wants to know the market value "as is" and "subject to repairs". I don't believe they are asking me what is the value at Highest and Best Use. Which brings me back to that.

Apparently the Highest and Best Use was meth lab, until they lost the home. But prior to druggie occupants, why wasn't the land chopped up with the surrounding subdivisions? It is surrounded by homes less than 5 years old.

At this point in my research, it appears tearing down (formerly) poisoned, old, creepy improvement and dividing into smaller lots would by H & B. If so, why didn't they do it before? How do I know what is possible without presenting a feasability plan to City Planning Department? No one at the City will commit to anything on the phone.

I consider the Function of the appraisal is to assist the client in pricing the property for sale and estimate cost to cure of physical deficiencies. I really don't believe they want it valued at Highest & Best Use, and I don't really know what's possible without a bunch of additional research, do I? With any certainty?

So, what is H & B Use of this property and how do I state it?

I am speaking with a fellow forumite later today and learning about meth labs. I am so grateful for the help.

 

[CANative]

Apparently the Highest and Best Use was meth lab, until they lost the home.

To determine that you would need to determine if zoning would allow for a meth lab.

I think you can value the property "as is" (as currently improved) But depending on what is legal, H&BU may be "other" or develope to full potential.

 

[Ray Miller]

"Example: Recently I appraised 200 acres of residential development land. Everything around it selling for $20,000/acre. My value was about the same. Bank calls and says they want a value of it for what its being used for currently, agricultural, row crops (beans/corn). It dropped the value from $4M to about $750K. I called it "use value" and included about 2 pages of discussion on the difference between "market and use value". Use Value can result in SIGNIFICANTLY higher or lower values than market value. I'd make sure that an engagement letter is very clear in this situation and fill the "


Good article in today’s “State Journal” out of Madison. Stating how land owners across the country are taking advantage of the a loop hole in tax laws where ag land can be valued thousands of dollars below the actual use. Some land is worth $20,000 to $40,000 an acre and the developer has a few cows on it or row crops and values it as ag at sat as in this area $500 per acre for taxes.

I see it every day around here. When checking the zoning and tax rolls, part of the place maybe residential, part maybe productive wood lands, part may be swamp/wetland, part may be Certified Trout Stream. You bet I note it on the appraisals.

I may state some where in the appraisal that this was appraised as a smiple fee estate for single family use. No other use of the land were considered. Such as Ag, Recreational and etc. Orther use could increase or decrease the value of the subject. Then give a short overview of the other values.

Yet when I do reviews I can find no mention of things like this in the appraisals. Question: Am I going beyond scope of work to expect such things in a report?

 

[Austin]

Ray wrote:

The question is if an appraiser fails to check other use, when there is a higher and better use. Then is not that appraiser completing an incorrect appraisal?

Reply: It is my naptime Ray, so take this with a grain of salt but what I gather you are doing is a limited scope appraisal by using an intermediate value estimate that may be enough to make the deal work. Here is something I have done before that may answer your question: I had a local bank call me to appraiser two local golf-country clubs. The purpose of the appraisal was to finance new clubhouse facilities. I asked him how much was owed on the property and how much the improvement loan was. Both clubs were old established country clubs with no debt and they wanted to borrow a fraction of the market value, so I suggested a cheap way out, appraise the land as though vacant which was far in excess of the amount needed to support the loan amount. Why spend a fortune appraising the whole when a fractional portion will serve the intended use of the client. Both country clubs were in urban residential areas so why complicate things. I see this as a question of scope versus intended use. I don’t see this as being incorrect appraising at all. I clearly explained what I did and why so where is the problem?