Residential ???

[jtmilby]

I would like to request some information on a situation that I have ran into. It is one of those things that the more I think about it the more things I find wrong.
Please review the following and feel free to critique.
The subject property is as follows: A 3200 sq. ft. concrete block exterior building with a 2 car built in garage / walkout basement. The property is located in a typical rural setting, ie, 19 miles from the nearest town and or "Country Store". It was orginally constructed for a furniture shop, this owner went out of business, the second owner tried it as a car battery outlet store, he too went out of business. The current owner/seller transformed it into a residential setting and finished 2000 sq. ft located in the rear of the building and it consists of a living room, dinning room, kitchen, utility, 2 baths and 3 bedrooms. All beddrooms and living room have carpet, kitchen, utility, baths have vinyl coverings, the walls are drywall but the ceiling is a "drop tile" There is 1200 sq. ft located in the front of the building (soon as you walk through the front door) that is not finished. It possess a drop ceiling metal support posts and a plywood floor.
The PVA office has it listed as residential property, and after researching the past owners of the building I would state that its "Highest and Best Use" is not commerical?
My question is has anyone ever experienced something like this? If anyone thinks this would work as residential another problem is comps. I have found only 3 within the past 24 months that could possibly work, and they are all 1 1/2 story aluminum older homes but they do possess GLA of 2200 to 2500.
Please relinquish any comments on this situation.

 

[David S. Roberson]

From the rural location you describe, it's doubtful that there would be any demand for commercial use. Sounds like you have a residential property (highest & best use) with severe functional depreciation (construction quality, having to cross the unfinished area to get to the living area, etc.) and superadequacy (overbuilt) problems. Good luck!

 

[Ray Ohler]

unless it could POSSIBLY be a "mixed-use" type structure. Small office area (if supportable) or perhaps an apartment. 1,200 SF would make a nice apartment. Of course it all depends on zoning (if any), I don't know your market. Then again, if doing for a refi, doing a full scale H&B Use study and then appraising it to that use isn't going to be feasible.

 

[Mountain Man]

I tend to agree with David. Two past and failed biznez uses in a rural location doesn't sound like a real winner for commercial demand. Residential may require lots lots of depreciation. You noted it was listed as residential in the PVA office. Is that who controls use or zoning? Or is there any zoning?

 

[jtmilby]

There is no planning or zoning within this area. The only thing that really bothers me is the unfinished area in the front. But if you take into consideration of the purchaser this improvement is perfect for him. (I just found this out today) This property sold for only $50K. The buyer is a retired armed forces individual who makes furniture as a hobby. His intentions are to use the front unfinished area as a show room, live in the finished area in the rear and use the basement as a workshop and wood strorage area.
Now does anyone know how I could possible explain this situation in a report (1004) so a underwriter will not destroy my phone line?

Any help would be greatly appreciated.

 

[airphoto]

Beware ..

Most of your dirtbag lenders won't touch ANY commercial use!

 

[Mountain Man]

Oh boy. JT, that is a NO win situation. I don't know how you could make the UW happy, without lying and being misleading. This is not a typical URAR kinda report. Call the lender and tell them what you have seen and tell them like it is. Like Airphoto said, most lenders will not touch mixed residential/commercial use properties. That may have to go to a local lender for an in-house or portfolio loan, SBA loan, or maybe they can workout some owner financing.

 

[Pamela Crowley (Florida)]

I would finish it with all fully disclosed and with a hefty fee appropriate for the work. Send it in to the Lender. After they finally figure out that they can't do it, suggest a local bank and collect a fee to change the report to that bank after you get the release letter from the original lender.

Since when is it up to the Appraiser to decide where the loan can be placed? If the LO didn't get enough information regarding the property, which I doubt s/he doesn't know that this is a unique property already, it's really not up to the appraiser to make those loan placement decisions. They are just hoping that you'll fall in step, ignore the reality of the situation and find a way to make it sound FNMA compliant. It's NOT your problem if the property doesn't 'fit'.

As to H&BU, it is what it is. Sounds like the current owners idea likely is it's H&BU. He will find various other marketing ideas that will not need a trip to his property. He has a workshop/office/home all in one building in a rural location. A commercial enterprise that would need the customers to come to a showroom would not work well there as is already proven. What other use is there for the existing structure? Just do the best appraisal report you can, I would definately have a General Appraiser work with me as this appears to be beyond the scope of Residential. Deliver it and let the chips fall wherever they must. They need an appraisal, you are an appraiser. Just do it and do it right.

 

[George Hatch]

This is an H&B use question again. As with all H&B, there are only a limited number of options for this property:

Existing use of residential in the rear and non-res in the front. In most cases and considering the existing use is legal, this will be the most common outcome of your H&B analysis. However, the non-res use need not necessairly be commercial in nature. This might be a 'hobby' type workshop, similar in contribution to a barn or other outbuilding.

Repair/remodel existing use to either all-residential or non-residential. you would do this if the contributory value of the repair/remodel would exceed the costs.

Raze the improvements and start over. You would do this if the value of the site as if vacant, less the cost of demo, exceeds the value of the existing use. If so, do this as a land appraisal.

Of the three, the first scenario looks to be the most likely. Since the building is not configured for 100% residential occupancy, I would recommend you avoid comps for a 3,200 SqFt house. Instead, find indicators for each component. For example, the contributory value of an extra 2,000 SqFt apartment for the rear portion; and the contributory of an extra 1,200 SqFt of retail/workshop/office or whatever for the front portion. This is not the same thing as a 2,000 SqFt house or a 1,200 SqFt commercial. Actually, the contributory value on each component will probably be diminshed by the lack of homogeneity of uses onsite. I.e.; an apartment at a mixed use property will not usually generate as much rent as one at a regular apartment building because the tenant will have to deal with the non-res uses onsite, and vice-versa.

No matter what happens, I doubt the average mega-lender will be interested in this loan. If that describes your client, you might do well to inform them of the situation before you go any farther. You might save yourself and everyone else involved some headaches. Some assignments are more trouble than they're worth.

George Hatch

 

[Judy Whitehead (Florida)]

I would assume that PVA is the governing authority who decides what the zoning is. If that is the case, I would then have to say that the zoning is Residential and it appears that the highest and best use would be also Residential. If the interim use has been commercial, I would disclose that, as well. Are you sure you are not in my home town?

Anyway, we do run into this. I would consider any "extra" square footage as a "utility, or Home shop" type thing, and possibly deduct funtional depreciation for it "not" being total living area, or "external" as not being common in the market. Obviously it is NOT common in the market that it is in. I would also feel free to use older sales if you feel that the marketing time is acceptable.