Retrospective appraisal for tax purposes with HBU challenge

[George Hatch]

Unless the homes of similar size and on similar zoned lots are being purchased for their respective land values and subsequently being redeveloped as new construction it is unlikely that the underlying land value exceeds the value of the property in its existing use.

Look at the sales of the comparable SFR properties of similar age and attributes. Who are the buyers and what is the financing? If they're all being purchased by owner-users or rental income investors and being financed with conventional SFR financing then that probably indicates to the existing use being the thing. OTOH, if they're being purchased by builders and financed by all-cash or LTVs at or below 50% then that would indicate to the land value being the thing.

Or, you can just analyze for the underlying land value by looking for comparables with the same zoning and development potential, and just compare those prices to the prices of the SFRs. Whichever is higher is the more profitable basis upon which to market your subject.

There is no need to get into forecasting the value of a new 2-unit; that's basically irrelevant to the question of the current value of the property and upon which basis it will command the highest price in the market. The comparison is between the values of the existing use vs the values of the land because that's what will dictate which types of buyers will pay the most for this property in its current condition, which in turn leads to which units of comparison are relevant to those buyer and what the pricing structure is like for those properties.

 

[sputnam]

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

What I would do would be complete the assignment as requested and agreed to. What the Client does with your opinion of value and with the subject property is not my concern... except maybe as a matter of curiosity. If they hired me to be a consultant... then I would certainly include advice on the best course of action.

 

[Tom D]

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.

That is not enough of a spread for me to re develop the property into another use. As someone who does this, profit is too small, or maybe non existent. You just proved as is for now.

 

[George Hatch]

What I would do would be complete the assignment as requested and agreed to. What the Client does with your opinion of value and with the subject property is not my concern... except maybe as a matter of curiosity. If they hired me to be a consultant... then I would certainly include advice on the best course of action.

Again, not for you but to elaborate for the gallery:

I just had one of those. The assignment was to appraise a property in the City of Los Angeles that consisted of a 2500sf storefront in beater condition on an 8000sf parcel fronting W. Adams Blvd, west of USC. The property has C2 commercial zoning which in that town also allows mixed use and 100% multi-family at the high density levels. One dwelling unit/400sf of lot area. Additionally, the frontage on that stretch of road also includes a bonus density overlay due to the proximity to public transportation access, which in this case confers a bonus density of up to 60% over the base density, depending on project design and participation in the affordable housing programs.

The lender and the borrower *thought* that the storefront was the thing, but the value of the land for redevelopment purposes is much higher. When I mentioned the possibility that it might be about the land value that was exactly the first time anyone had ever mentioned it to the property owner. But all the commercial brokers in town would have been able to see it and would have advised him as such anyway in the event of a listing. Most of the SFR brokers wouldn't have known because that's not their thing.

Assuming adequate shape and access, an 8000sf C2 lot starts off being sufficient in size to build 20 units by right under the base density (8000sf lot / 400sf/unit = 20 units). And that's before adding in the potential bonus densities. C2 zoning in L.A. has the same density criteria as their R4 high density multifamily zoning, so the most similar comps for this property will consist of either C2 or R4 zoned parcels with the transit-oriented bonus density overlays. If people can envision what 20 units + subgrade parking would look like on an 50 x 160 parcel with a street at the front and a public alley in the rear, thats what that stretch of road is being redeveloped as.

So that's what I did for this assignment. All of my comparables had the same zoning and been previously improved and most of them still had an existing structure at the time of sale, but THEIR respective development potential was either prominently mentioned in their listings or they were directly marketed for the land value. And I did end up appraising my subject property for it's land value. I also threw in a couple sales of storefronts on much smaller parcels that weren't large enough for that kind of development and their value indicators would have resulted in a value conclusion that was much lower than the land value had I valued the subject as a storefront. I added those not-comparable sales to demonstrate why my HBU outcome turned out that way.

The thing about that outcome is that I didn't end up going in this direction as a matter of discretion or because I'm somehow any more savvy than the next CG appraiser. HBU analysis in a MV appraisal isn't a discretionary option. The definition of market value refers to that informed buyer and seller acting in their own best interests; that means per the most profitable basis which in turn means HBU as understood by buyer and seller and/or their well informed advisors. So if a property with improvements actually is worth more as land (or as conversion to a different use) the appraiser is *required* to go that way regardless of what the borrower or the lender thinks. And the appraiser is incompetent if they don't under such circumstances.