Residential Use---Zoned Industrial

[Birdman]

Here's the deal. Have a single family home zoned Industrial. There are no comparable sales that are zoned industrial. This property has good appeal according to a MLS photo, not run down etc., was on the market for 195K and the listing expired. There are good comps that are zoned residential. How would you procede? The broker is calling Lenders now to ask for their advice.

 

[George Hatch]

Highest and best use issue again. There was a very similar thread on the "Urgent, Help Needed" board.

There are three ways to approach any H&B question. The subject property will be worth more:

In its existing use, with or without additional repairs, rehab or other remediation; or,

Converted to an alternate use, like an office or contractor yard; or,

As a site suitable for development under the industrial zoning, less costs of removal of the existing improvements.


Of the three, the first option is the most common, as the existing use is generally considered to represent your H&B use until the underlying land value exceeds the value in its current use. Your client may also be very interested in the remaining economic life of the existing use, as that may be very different from what the physical condition would seem to indicate by itself. If there is a trend toward redevelopment of these uses, that trend should be noted in the report, along with your interpretation of the effects of that trend on your subject property, both in terms of value and the remaining economic life. It's going to be hard for a lender to write a 30-year loan on a residential property with a remaining economic life of less that 30 years. This is another example of how AVMs cannot account for all the relevant factors in loan underwriting, and why the value opinion alone is not always the main issue of an appraisal.


The short cut to this analysis is to see if industrial sites in the area are selling anywhere near the same price level as your subject's listing. If not, then it's still a house as far as the market is concerned. Any external influences can be adjusted for by using comparables with similar or comparable influences. This would be like a house fronting a busy street or located adjacent to an industrial use.


Around here, SFRs on industrial or heavy commercial lots usually get purchased by contractors, towing companies, truckers, or others who have use for the site but still need the structure for their own residential and/or office use. Your market may be very different.

Whatever you do, don't try to gloss over the legal non-conforming use issue. Disclose it and reconcile it with your opinion of value.


George Hatch

 

[Will Granger]

Stephen,
I imagine the remaining economic life on something like this is short. If the property around the house is developing, you know it's a short run for a house. Tough assignment, but not impossible. 8)

 

[bradellis]

George,

Precisely! And, very well put.

The underlying principle is the Consistent Use Theory- a part of Highest and Best Use.

Brad

 

[Ron in AR]

I had a case like this where the subject was on the edge of a residential zone between residential and industrial neighborhoods. First of all, most mortgage companies are going to just turn the thing down right off the bat.

I called the Highest and Best Use residential even though it was in an Industrial zone based on what the market would dictate. If you put the property on the market for sale, would it sell as a single family or as industrial property? To me, the market makes the call on Highest and Best Use even though the zoning was Industrial and the subject was called legal non-conforming.

Am I missing the boat on this one?

Ron in AR

 

[Dan Tanner]

You're the best basketball analyst on FOX...LOL....

 

[Ben Vukicevich SRA]

George,

You stated: It's going to be hard for a lender to write a 30-year loan on a residential property with a remaining economic life of less that 30 years. This is another example of how AVMs cannot account for all the relevant factors in loan underwriting, and why the value opinion alone is not always the main issue of an appraisal.

FNMA has already taken very good care of itself. They don't care about REL anymore and proudly state so. Can you believe it!!!

Check this out from the selling guide:

Section 405.01 - Remaining Economic Life

Because our appraisal report forms are designed to meet the needs of several different user groups, they address the remaining economic life for the property being appraised. For mortgages that will be delivered to us, the appraiser does not need to report the remaining economic life. Even if the appraiser does report this information, the lender does not need to consider it because any related property deficiencies will be discussed in the sections of the appraisal report that address the improvement analysis and comments on the condition of the property. Fannie Mae has no requirements that the mortgage term have any correlation to the remaining economic life of the property.

Roll those AVM's. Stinks doesn't it. What was good underwriting practice in the past is now gone. I guess REL matters only to portfolio lenders today and there's not many of them left.

Ben

 

[George Hatch]

Ben,

I couldn't agree more. The reason the lenders should worry about REL is because they could inadvertantly fund a land loan with an overly high LTV. It goes like this: Buyer buys a beater on a desirable lot, gets 90% or 95% financing and then proceeds to do a 'remodel' where the entire structure is demoed except for 1 wall, and then rebuilt as a new home. I've seen several projects start this way.

Another scenario is the conversion from residential use to non-residential use. SFR gets purchased with SFR financing and then ends up being used as an office, converted to a contractor yard or car sales lot or whatever. There are reasons that non-residential loans seldom exceed 15 year terms and have different underwriting criteria. There are other scenarios involving H&B where not properly disclosing trends could result in improper underwriting results. Appraisers should not participate in the "It-was-ordered-as-an-SFR-and-I'm-gonna-appraise-it-that-way" game.

Granted, things usually turn out OK so there's no harm done. The risk part comes if the project gets aborted anytime between the demo and the time the new structure or the conversion is completed. If that happens, the lender's exposure is much higher than if the existing use had been left alone.

An AVM would never recognize this.

George Hatch