Retrospective appraisal for tax purposes with HBU challenge

[J Grant]

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.

, in 2019 the median sales price for duplexes was $797,500. The median sales price for single-family homes was $513,750.
One of the tests of HBU is financially feasible.

Your SF house is already built. And you could sell it in 2019 for 514k.

For a duplex, you have to tear down the house, haul it off, prep the site, then build the duplex. Price per sf build now is expensive. Let's say you pay 300k to build the duplex. 797 k minus 300 k nets 497k The sale of the house without doing all that work nets 514k.

For an investor buyer who intends to hold and rent for yeas, the extra cost might pay off, but for the owner seller DOD back in 2019, it would not.

 

[Tom D]

Grant got it right. The house as it sat, was worth how exactly much. Then what would be the total costs, hard costs & soft costs, coming and going to tear it down and build your duplex. By the way duplex is not a good description. Around here a duplex is a 1025 2 family, somewhere else it a 1004 twin. So are you saying a 1004 semi det, or a 1025 2 units. So after you have all those costs what is the difference or the profit. At that risk price range it should be around 30%. If that ain't there it ain't being done. So you have quite a bit of work to do, and how much did you charge to prove your brilliance.

 

[GWISC]

HBU as vacant land is potentially a duplex:
So, land value (retrospective to DOD) less demolition costs (at that time) = $Vacant Land

HBU as improved is as a single family residence (retrospective to DOD).
So, retrospective market value of subject = $Improved.

Outcomes:
1) If $Vacant Land (less demo costs) is greater than the market value as $Improved, then HBU is:
Land held for development of a duplex type residence. If that is the case, then the property should be appraised as a vacant lot less demolition of improvements (retrospective to DOD: both retrospective comps and demo costs).

2) If $Improved (retrospective to DOD) is greater than $Vacant Land, then HBU is:
As improved as a single family house. If that is the case, then appraise as a single family residence (retrospective to DOD).

You are basically doing two market evaluations to determine the HBU. The winner of the value game determines the HBU and helps you decide on a path moving forward in problem solving.

The above is just the basics, but you get the idea.

 

[J Grant]

An assignment needs to meet the needs of its users.

The DOD estate /heirs were not going to get a conventional loan, raze the house, and build a duplex to sell. They needed to sell the house "as is." Thus, the value , regardless of HBU, to meet the needs of the users, was the value "as is". Which needs to be explained. If HBU the property would be worth X $ but as is, the property was worth $Y, then explain why Y $ was the value sought.

The other side of the issue is the " as is" MV - what a buyer would pay .. The subject house on DOD is put on sale and competes against other similar properties. Is every houss there raxed and made into a duplex , or just some of them? Regardless, if part of the market are investors looking to build a duplex, that i spart of th emarke segment of buyers (or most o fthem) and their offers get baked into th demand for houses that can be razed for a duplex build. If the investors compete against owner-occupant buyers who want the house for a house, that gets baked into the prices too.

 

[Mark K]

If, as some suggest, you only consider what exists in place to determine the HBU, you can end up with a 'value in use' not the HBU. You want the HBU. If there are comparable properties that sold and were razed then it is likely that these are your best comps. If there are vacant sites similar to your subject you'll also want to include those also in your analysis.

You are basically doing two market evaluations to determine the HBU. The winner of the value game determines the HBU and helps you decide on a path moving forward in problem solving.

Exactly right. This is the proper approach when appraising properties, especially in a transitional area.

 

[GWISC]

Of course, if the current improvements are considered a liability rather than assets (in the eyes of the buyers), then the potential price paid for the subject(or similar competing SF houses in that neighborhood) may have already discounted the improvements as a future cost of demolition. If that is the case, then the land as if vacant is likely worth more than currently improved.

In some markets where the neighborhoods are in transition from one use to another, the present improvements may be an asset (for the time being, or interim) or a liability (cost to remove).

It sounds as if you have already researched the nearby SF sales and discovered they were bought to be razed and redeveloped. I would ask the agents involved in those sales if they could opine as to how much more the properties would have sold as vacant land if unimproved. The agents often know their buyer's thought process and their collective estimates to demolish and remove improvements. It just gives you more insight into solving the problem. That way you can find vacant lot sales which would be considered substitutes for the subject and then discount (deduct) for the costs to demolish and remove the subject's current improvements.

 

[sputnam]

Unless the retrospective date is before sales records were kept, the hardest part of developing a retrospective value is getting good information about what the improvements were like in the past. A few months is usually no problem. Looking back years can be a challenge.

 

[Tom D]

What would you do if this was a refi, tell the bank it's worth more if they tear down the house.

 

[J Grant]

Keep it simple. If the below applies:

"HBU determined to raze the house for a duplex."

" At DOD effective date, the sale of the subject would have been "as is, "an 1100 SFR house on the lot. The property would compete with other similar offerings. The comps are in the same zoning and include two SFR houses that might be suitable to raze and two vacant lot sales."

The comps, IMO would not be duplex/small income properties because even if the HBU is to raze for a duplex, the subject was still a SFR and not a duplex at the time of the DOD.

It would be relevant to comment on small income area sales and their prices..

Whatever you conclude, explain what you did why you did it and how that resulted in your comp choices.

 

[Mark K]

What would you do if this was a refi, tell the bank it's worth more if they tear down the house.

If that was the HBU, why wouldn't you?