Retrospective appraisal for tax purposes with HBU challenge

[TSSRoldan]

I've accepted a the following assignment: Client is requesting, per advice from her CPA, a Date of Death (DOD) appraisal of a family home for tax purposes. Date of her sister's death was April 26, 2019. The home was kept in the family until they sold it in July 2024. The challenge? The home was a single family residence, but zoning in that area changed a few years prior to DOD, allowing for 2-unit duplexes. And on the DOD, there were several duplexes already built in the subject property's market, including on the same street as the subject with one being built right next door. My question: If market data shows HBU for subject property on the DOD would have been to scrape and rebuild as a duplex, would the cost approach be the most reliable method to determining value?

 

[Dublin ohio]

They want the value as is on the DOD. Not a what if value. If it it is common for the situation you describe as "scrape and rebuild" the sales should show that. You should have sales sold for that purpose or at least vacant site sales.

 

[CCAAMO]

Either the highest and best use is as a single family home as of the DOD, or it would be the land value if its worth more vacant and as it was improved with the SFR.

 

[J Grant]

I've accepted a the following assignment: Client is requesting, per advice from her CPA, a Date of Death (DOD) appraisal of a family home for tax purposes. Date of her sister's death was April 26, 2019. The home was kept in the family until they sold it in July 2024. The challenge? The home was a single family residence, but zoning in that area changed a few years prior to DOD, allowing for 2-unit duplexes. And on the DOD, there were several duplexes already built in the subject property's market, including on the same street as the subject with one being built right next door. My question: If market data shows HBU for subject property on the DOD would have been to scrape and rebuild as a duplex, would the cost approach be the most reliable method to determining value?

My reaction is (without knowing the area or seeing the subject, of course). My reaction is, just because teh zoning changed to allow Duplexes and a few are built, why is the HBU of subject to tear it down? If the subject is a nice enough/liveable house, I don't see why HBU is torn it down to build a duplex ( even if the duplex is worth more )-

What kind of house is it, is it big or small, nice or depreciated etc.-

The house, in fact, did stay a house, and sold in 2024. But back in 2019 is the DOD appraisal - and I fail to see why in 2019 the HBU is to tear it down and build a duplex - the cost of razing and building a duplex might not be financially feasible wrt if you factor in the loss of the value that the house was worth at the time..

 

[TSSRoldan]

They want the value as is on the DOD. Not a what if value. If it it is common for the situation you describe as "scrape and rebuild" the sales should show that. You should have sales sold for that purpose or at least vacant site sales.

Yes, it is common in this particular market for scrape/rebuild as duplexes. So far I've identified 3 sales of single family homes that were scraped and later sold as duplexes within the year prior to DOD. I've got calls in to some local brokers relating to other sales I'm assuming were investor purchases with the same intent.

 

[CCAAMO]

Yes, it is common in this particular market for scrape/rebuild as duplexes. So far I've identified 3 sales of single family homes that were scraped and later sold as duplexes within the year prior to DOD. I've got calls in to some local brokers relating to other sales I'm assuming were investor purchases with the same intent.

So it sounds like its land value

 

[TSSRoldan]

My reaction is (without knowing the area or seeing the subject, of course). My reaction is, just because teh zoning changed to allow Duplexes and a few are built, why is the HBU of subject to tear it down? If the subject is a nice enough/liveable house, I don't see why HBU is torn it down to build a duplex ( even if the duplex is worth more )-

What kind of house is it, is it big or small, nice or depreciated etc.-

The house, in fact, did stay a house, and sold in 2024. But back in 2019 is the DOD appraisal - and I fail to see why in 2019 the HBU is to tear it down and build a duplex - the cost of razing and building a duplex might not be financially feasible wrt if you factor in the loss of the value that the house was worth at the time..

The house was built in 1942. Ranch style with basement, 1105 GLA, same sized unfinished basement. After the parents passed, the house went to one of their adult children who lived there until her death in 2019. There weren't many updates, but the home was well maintained. When the remaining siblings sold the home in July of this year, the person who bought the property stated when they made their offer that they intend to scrape and rebuild as a duplex. Just to give you an idea about this market, in 2019 the median sales price for duplexes was $797,500. Median sales price for single family homes was $513,750.

 

[togatour]

Be careful here. You are providing a retrospective appraisal of the subject as of the date of death, probably for tax purposes. As of the date of death, the subject was a single family home that had value? It was not improved as a duplex at that time. So, the question is , what would the land value be based on the new zoning at that time versus the value "as-improved" as a single family home. You are not appraising a duplex, and should not be providing the value of a new duplex, other than perhaps in your highest and best use commentary.

What could thay have sold the real estate for as of the date of death....its market value so look at the market data to solve the problem.

 

[Fernando]

Are you doing a retrospective appraisal reevaluating subject as a duplex as highest and best use? Appraiser back then should have analyzed if HBU was as a duplex appraisal.
I can understand why with step up basis at that time and now with new sale in 2024, the owner wants a reevaluation now that he/she will now pay more capital gain tax.

 

[Terrel L. Shields]

I've accepted a the following assignment: Client is requesting, per advice from her CPA, a Date of Death (DOD) appraisal of a family home for tax purposes. Date of her sister's death was April 26, 2019. The home was kept in the family until they sold it in July 2024. The challenge? The home was a single family residence, but zoning in that area changed a few years prior to DOD, allowing for 2-unit duplexes. And on the DOD, there were several duplexes already built in the subject property's market, including on the same street as the subject with one being built right next door. My question: If market data shows HBU for subject property on the DOD would have been to scrape and rebuild as a duplex, would the cost approach be the most reliable method to determining value?

Nonono. HBU use is what it is. All that is impacted potentially is the land value could be higher. Which means as a SFR, the value is exactly the same regardless the zoning, but the land value is higher and there is a functional obsolescence that is deducted off the value of the improvements.

2019 the median sales price for duplexes was $797,500

But were they built in 1942? Ignore the duplex sales. Ignore the future use. Clearly, the buyer thinks the LAND VALUE today is what they are paying for. So the remaining life 5 years previous was 5 years.

In DOD treat it " as is" and I wouldn't develop the cost approach. Comment and go on and try and find comps that are also impacted by a zoning change so that you shouldn't have to adjust the land value as much. But it looks like the value of the lot is very high compared to the value of the improvements.

Appraiser back then should have analyzed if HBU was as a duplex appraisal.

The HBU as an ideal is not what we are addressing. The HBU "as if vacant" would be a Duplex Lot. But the HBU "as is" was its current (2019) use - and current then was a SFR. And it remained the HBU until the sale where the house is becoming a tear down.

Basically, this is a land appraisal with improvements, not a home appraisal with land.

BTW, these are excellent assignments and learn to do them. Use the Fair Market Definition from the IRS, and do not use the FNMA forms - use the non-lender forms.