Single Family or Commercial Office?

[Terrel L. Shields]

What's worth more: The law office configuration or the SFR configuration?

It probably isn't going to matter. It is probably legal to use for same and the price is likely to be the same even if restricted to SFR only. The question is does the lender want to make a commercial loan. My cousin bought just such a house recently. One large room is an office, the rest is his home. It was zoned Residential - Office and the only restriction is that he cannot place a sign with anything on it but his name...but can put CPA after it. For several blocks most homes have similar restrictions. His neighbor is John Doe, M. D. and Joe Doe, D. D. S.
You need to know how the lender intends to market the loan, so ask him. Tell him it can be used as an office and will probably be used as an office, so will his lenders accept that? Fannie probably will not accept it. But if some Mort. Broker, they will simply ask you to not disclose it has a commercial use intended. And that is unacceptable. There is no reason so long as similar comps are available with that zoning or restriction that a CR cannot appraise this. Its a house, period. But its USE as something else is the issue which is controled by the guidelines of the ultimate lender.

 

[BRCJR]

H&BU

Is the highest and best use residential? If it is currently used as an office and there are others located in the neighborhood utilized as office? It appears to me that it went through an interm use and is now at the H&BU. Are there any vacant properties that are still marketed as residential or are they (if some exist) being marketed as commerical? What is the zoning? What are the conditions of the conditional use permit? Is there adaquate parking for an office (on-site or off)? etc.ect.
H&BU is a difficult decision sometimes and depends on some external facts I believe.

 

[xm72mhd]

It probably isn't going to matter. It is probably legal to use for same and the price (value) is likely to be the same even if restricted to SFR only. The question is does the lender want to make a commercial loan. Which of course begs the question of risk analysis.

All hail the professor. Very perceptive insight and useful pragamatic comment Mr. Shields. I suspect you are absolutely correct given the description. Talk about end running the theoretical complete analysis of the H&BU. Doesn't make any difference what you use it for, the market value here is the same.

 

[hastalavista]

You need to know how the lender intends to market the loan, so ask him. Tell him it can be used as an office and will probably be used as an office, so will his lenders accept that? Fannie probably will not accept it. But if some Mort. Broker, they will simply ask you to not disclose it has a commercial use intended. And that is unacceptable. There is no reason so long as similar comps are available with that zoning or restriction that a CR cannot appraise this. Its a house, period. But its USE as something else is the issue which is controled by the guidelines of the ultimate lender.

Terrel-

You lost me here.
The subject was built as a house, and is now being used for a non-residential purpose that is also allowed. I understand someone can purchase it and live in it (turn it back into its residential use).
But if the market values the property higher for a non-residential use vs. a residential use, then how can I, a residential appraiser, complete the appraisal (even if I have 5-similar non-residential properties) and value it at the highest and best use (non-residential professional office)?
I can appraise it to its residential use, which would not be H&B under my "givens". And, it probably wouldn't qualify for a typical mortgage transaction (not my problem) and I for sure wouldn't want to do it on a Fannie/Freddie form. I'm not even sure that's an accurate "as is" appraisal?

I suppose there may be some interest rate advantage, depending on the difference in values, in having the property valued as a residential property even if its HBU is other; definitely a non-Fannie/non-most-secondary-market loan.

 

[Terrel L. Shields]

older homes that are being used as professional law offices

Home is office is home. take the desks out and put the beds in...has the configuration of the house changed? I doubt it. Either it is a home as I described which has a room used as an office, or it is a used as an office without modification. If you turn your house into an office, each bedroom being an office, the living room a reception area, and the kitchen a break room.....what wall did you knock out? What I am reading in the original post is that it is a DWELLING...USED as an office...not an OFFICE used as a dwelling. And I read it is legal to do so. But as a SFR or mixed use SFR, its value is going to be the same.

it probably wouldn't qualify for a typical mortgage transaction

maybe...but are you saying the type loan will impact the value?
The LOAN must be conforming to the lender's standards. Most banks will not lend on a situation like this as a fixed rate secondary market loan, but rather will lend on it as a commercial loan and a commercial rate... especially if the person is not living there. Fannie mae will accept a loan on Mixed use property [which is exactly what this is] and paraphrasing Fannie mae
-The property must be single family dwelling that the owner occupies
- Use is legal and permissible use under local zoning laws
-The borrower must be both owner and operator of the business
- Must be primarily residential in nature
-Market value must be primarily a function of its residential characteristics
This is a complex mixed use RESIDENTIAL property, not a commercial property but if the OWNER does not OCCUPY the structure, fannie does not want it. Go back to your lender and ask how he wants it appraised.
It is nonsense to think that an unmodified SFR dwelling has a "different" value if a portion of the house is used as an office that otherwise does because its highest and best use is the same as the comps if the comps have similar zoning and if you are using comps from the same neighborhood that is also likely.
In the case of my cousin, there are about 30 sq. blocks near downtown that are similarly zoned and some are office-homes, some are used solely for office, and some are used solely for SFR, but they all have the same zoning and the same HBU....hence are in the same 'market'.

 

[hastalavista]

But as a SFR or mixed use SFR, its value is going to be the same.

OK, I see where the difference of opinion is; I do not assume that the house is unmodified (more than just moving out the furniture); but the original post doesn't say if it is or isn't modified, so I really don't know.

it probably wouldn't qualify for a typical mortgage transaction

maybe...but are you saying the type loan will impact the value?

No, I am saying the use may impact on the value.

I just had a similar case in a review; SFR with an attached addition. Zoned residential, but had a special variance to operate as a business; this was a beauty shop. The location was facing a very busy street- major arterial blvd in an urban area with traffic and freeway off-ramp visibility. The SFR was functional, and the addition (which was attached and accessed via the street or home) was where the business was being run. Everything with permits, and the ability to run the business transfers with the property. As a SFR, this was perhaps one of the worst locations in the immediate area. As a beauty shop, it made perfect sense.
This was for a purchase, and the sale price could not be justified based on the residential utility alone. The sales price made great sense when one considered the value of the location in terms of a reaction-site business. And, to return the property to full SFR use, maybe a day taking out the beauty shop furniture, chairs, etc. and another day turning it into a big rec. room.

So, in my situation,

as a SFR or mixed use SFR, its value is going to be the same.

was definitely not the case; and I'm not convinced that there is a huge difference between my situation and the poster's.


And, for whatever else its worth, in California, the state regulatory agency has said that it does not consider a Certified Residential appraiser qualified to appraise mixed-use properties- I don't know if that is the same for the poster's state.

 

[hastalavista]

-Market value must be primarily a function of its residential characteristics.

And, this is the unknown and the whole question behind the post.

 

[Terrel L. Shields]

I would argue that in your beauty shop example there is a Business Enterprise Value in addition to the Residential value for selling a Beauty shop, and/or just as likely, the HBU of the site is commercial but there was an old house being used as mixed property. What would the property bring if the beauty shop was vacated? I suggest that the properties HBU as if vacant is commercial, but as is is mixed use. And gets to the heart of Fannies' caveat about its function being residential. And the answer would imho depend upon who the likely buyer would be. In my cousin's case the likely buyer will live there but run his business out of a room or two. It is a common use and the area is lightly traveled but close to the actual old 'downtown' area. A lot of lawyers, CPAs, and other professionals live there. Just as I live in the country and run my business out of the office I have in my detached garage. Zoning is not an issue. And I actually built the additional space when I built the garage with the intention of using it as an office. But a buyer might use it as a guest room or storage or whatever. On the other hand, a local Realtor has a small office that was a house 50 years ago. He bought the building and used it as an office and did not change the configuration in or out. When he divorced, he lived there for a while. But it is now office space again. It looks like a house with a sign in front, and like you describe, it is on a busy road. It brought more than I think it would have had it been simply an old house in town because the HBU as if vacant is much higher and frankly, its at a point where its a tear down.. ie- the lot is as valuable as the lot plus building. I don't think Fannie would accept that Realtor house for a loan but they would accept my cousin's. As for my place? It is on 80 acres but I have 5 acres surveyed out, there are no agricultural buildings on the 5 acres, and there are quite a few small residential tracts in the area. I think it too would pass with flying colors...and in fact I have a fixed rate loan on the place.

 

[MNRural]

The quick and easy answer is that its a commercial property and you cant do it on a FNMA form unless you want to violate USPAP (misleading) and be unethical.