Residential Property On Commercially Zoned Land

[Janice Krishnan]

If anyone can help me, I would appreciate it.

I am a certified residential appraiser. A mortgage client of mine asked me if I could do an appraisal of a residential house that is currently zoned commercial and is pending for sale. She wants to do a residential loan for the buyer and it will be used residentially. However, it is zoned commercial because it is on a main street of a small town.

Is it possible for me to do this?

She told me that if it is grandfathered in and could be rebuilt as residential, she could get a residential loan on it. But what about the current zoning on the property. Would a commercial appraiser have to do this or could I do it as residential and how would I prove that the highest and best use would be residential?

 

[Rick Urbancic]

Here are some items you will want to look into during your Development process. If it is a residential in a commercially zoned area, verify to items with the public records: 1) is it legal non-conforming?? 2) in case of fire damage, etc, what portion of the home must be left standing in order for the city to allow for a rebuild?? it is typically 50% - this means homeonwers insurance may rate the policy higher.

Make sure your client is aware of these items and make sure the home owners insurance company sends you (or your client) their policy on underwriting a legal non-conforming property.

I worked on one of these at the end of last year (it seems like I see several of these a year) - it was a killer - no comps, etc. I was able to document stuff via the public records but I almost really upset the client because they simply did not understand what was going on with the non-conforming status.

Clarity is the key. Remember, the more accurately you define your appraisal assignment and its scope of work to your client, the better things will turn out.

 

[Walter Kirk]

What's the highest and best use as improved? The land may be zoned commercial but it's improved by a residential structure. Does the value of the improvements make the commercial use feasable? You must consider these factors in your highest and best use analysis.

Sometimes zoning is the government's wish for land use. The economic reality can be quite different.

 

[CANative]

George Hatch posted this in a thread about a similar property. Does it apply to your situation?

The underwriter's concern, of course, is for the appraiser to be able to demonstrate the existing residential use remains the highest/best use of the property. If you can find a couple sales with similar conditions that remain in residential use after their respective sales that would serve as a demonstration the properties were purchased for that use. If the only such sales you can find have all been converted to an office use, that would indicate the office use is considered by typical buyers in that neighborhood to be the HBU. If some of the sales remain in residential use and others are being purchased for conversion then you may have an interim use with a relatively short remaining economic life. If you note that kind of short term interim use in a residential appraisal report, the average residential lender is going to have a seizure, regardless of what the final value itself is.

In your place, I wouldn't attempt to complete this assignment unless I was prepared to write up a reasonable HBU analysis that addresses all these issues. In this case, HBU may not necessarily revolve around the zoning, but it will have to take that element into serious consideration.

 

[Walter Kirk]

What's the highest and best use as improved? The land may be zoned commercial but it's improved by a residential structure. Does the value of the improvements make the commercial use feasable? You must consider these factors in your highest and best use analysis.

Sometimes zoning is the government's wish for land use. The economic reality can be quite different.

 

[Robert Anderson]

Originally posted by Janice Krishnan@Mar 22 2005, 10:02 AM
...how would I prove that the highest and best use would be residential?

Janice,

The fact that you ask the above question indicates to me that you do not have the experience or knowledge to appraise this property. If you want to do this appraisal, I would urge you to associate with an appraiser who has the required qualifications. You would make little money on the assignment, but you would probably learn a great deal.

Bob Anderson

 

[Proactive]

Janice,

Be careful, be VERY careful…

A couple of years ago a very good, well respected residential appraiser in our area appraised a home for a family with an almost identical situation as yours.

Because of a squabble between family members regarding the value conclusion the appraisal was turned into the state board. After a long battle between the state board and the residential appraiser, the state determined that because the property was zoned commercial, the HIGHEST & BEST USE was therefore… COMMERCIAL!

As the appraiser had only a residential license, the board deemed that the appraiser had practiced OUTSIDE THE SCOPE OF A RESIDENTIAL LICENSE, was fined and placed on probation.

Now I'll be the first to say I don't have ALL the facts on this case, but I DID speak directly with the appraiser involved. Other appraisers, including myself believe that this fine appraiser was wrongly sanctioned by the state board. Obviously, there can be strength on either side of that argument.

Just as obviously, Highest & Best Use is a highly important element in your particular assignment (possibly THE most important?), REGARDLESS of what your mortgage client says the subject will be used for.

I have since made it a policy to not jeopardize my residential certification and have turned down any mixed use assignments where there could be EVEN A QUESTION of a non-residential highest & best use. One assignment I turned down went to the local Skippy who was more than happy to appraise a manufactured home and a HUGE shop on five acres with industrial zoning "as residential", at the request of the mortgage client.

I REALLY hope the family members in that transaction get into a squabble... :twisted:

 

[Mike Garrett RAA]

The simple answer to your question is .......................Yes. As a certified residential appraiser you should be qualified to do this appraisal. There is a HBU issue here. Zoning, in it's self does not constitute the highest and best use. I would consult with a "seasoned" appraiser in your area who is familiar with this type issue.

 

[Anthony Blackburn]

And don't forget to verify the zoning on your comps. You really need to have something with the same zoning....even a listing or a dated sale would be appropriate. You really have to have a comp with the same zoning to determine the marketability and market reaction to the zoning.

 

[Fred]

Assuming that the question of can this be appraised as residential is not a grammar question to see if we know the difference between “can” and “may”-

First off, this is amost surely a commercial appraisal. Day one: real estate is land and everything attached to it. We appraise land (and what is attached to it). The land is commerical. Many residential appraisers fall into the habit of thinking they are appraising the house. That leads to question with phrases like: house on five, house on a leasehold, house subject to a life estate, house on commercial land.

I don’t know the laws in all 50 states and 6 territories, but in my neck of the woods, residential appraisers may not appraise commercial land (even if they "can").

It is possible that some rare circumstance (like some exemption in property tax law) could allow the appraiser to bypass HBU and proceed directly to value-as-a-residence. However, this doesn’t seem like one of them. The phrase “mortgage client” sounds like it’s a FFIRA-regulated institution. If so, that means USPAP SMT-10 is in applicable. That means “as-is” value. That means figuring it both ways to see if the vacant land value is higher than the value as a residence.