Site Size vs. Underwriter

[jtmilby]

I need some input for the situation to be described below. I have only been appraising for 3 1/2 years and I hope I have not been doing something wrong for over 3 years. I have been doing this the way I was taught in school and by my supervisior while I was a trainee.

The problem is that a underwriter has called me personally and stated that I have overstated the site size for a particular appraisal. The subject is located in the most prominent subdivision in my area, the homeowner bought two parcels, lot #5 that is .897 Ac. & lot #6 that is 1.00 Ac. He then built a 3100 sq. ft. improvement that is situated on lot #5, lot #6 is vacant. Both lots were bought at the same time, they are on the same deed and have the same map number. I appraised the improvement and made adjustments to comps due to their inferior size or value as compared to the subjects site. The underwriter has instructed me that this is wrong and that I can not use lot #6 in the appraisal due to the fact that the dwelling is not situated on it. He is telling me that the house would need to be sitting on part of #5 & #6 in order to use it, I was always told / taught that if a dwelling was positioned on part half of one lot and half of another that it would not be at its highest and best use due to the remaining amount of the site would be useless for another improvement due to the lack of space.
I need to know if I am wrong in this situation? If so I am going to pray that all of the old appraisals never get reviewed. If I can't use lot #6 in the site value on the URAR form what do I need to do with it. It has to have value. In this area same like lots are selling for $25k and this underwriter is telling me that it is useless because it has no improvement on it.
Any suggestions or proper techniques to use in this situation would be greatly appreciated and if I have been doing this wrong please feel free to "tell me how".
Thanks.

 

[Pamela Crowley (Florida)]

Sounds like you're doing it correctly from what you wrote.

Explain it and value it as "Per Underwriter Instructions, the value of the Lot 6 is excluded which makes this Appraisal and Report completed under as a Hypothetical Situation." Depending upon the relationship you have (or want to have) with this client, consider a small fee for changing the report due to Underwriter instructions after the completion of original appraisal.

 

[airphoto]

jt & Pam,

My two pennies .. do as Pam suggests, but further delete value from the original single-lot figure, as (due to the contribution of a vacant adjacent lot) removal of the value, as well as sale of and use of the adjacent lot, would detract from the amenities of the improved lot ..

Does that make sense? I say that development of the adjacent lot would further remove more than just the vacant lot from the value of your primary parcel ..

 

[Geoff Hatcher]

Does the auditor's office or assessor's office list lot #5 & #6 as one parcel or two?

 

[Jo Ann Meyer Stratton]

It depends on the laws, zoning, regulations in your state, county, city for the subject location. Not only that, a survey might be required to verify the physical location of the home in relationship to the property lines. Legal descriptions on tax bills and/or assignment of assessor's parcel numbers can be indications of probable ownership but are not final determinations.

So, although the owner purchased both legal descriptions on one deed and the assessment office is taxing both on one tax bill, handling the entire area as you described it is one way to approach it.

Per the underwriter's request, several questions arise, can the two legal descriptions be separated legally in your area? If separated for mortgage purposes, what procedures would be required to have the assessment/tax office split the property into two tax bills--and how long would that take for the split go into effect? How can a person be sure that the improvement is 100% situated on only one lot? Is the improvement is so close to the dividing line that if split off to one lot, will the property be in compliance with the applicable zoning or subdivision restrictions? Would a survey by a registered land surveyor be required to verify the improvement's location far enough from property lines to be in compliance with laws/zoning/restrictions?

If all the above questions can be answered in the affirmative you can prepare the appraisal based on the one legal description, subject to the assessment/tax office spliting the parcel for tax purposes, and the second legal description would not be included in the report in any manner or value of any kind.

If the split cannot occur due to legal or or zoning or assessment issues, then the Hypothetical Condition situation would apply (and I would make it very clear in the report that this was a client requirement and might even be in violation of the applicable laws/regulations/restrictions for the subject site).

In my area for example the property owner buys several acres (anywhere from two to forty), has one deed and receives one tax bill for the large acreage. Then they build a house or install a factory built home and only one acre where the improvement is located is to be mortgage with the home. Then they have to have a survey done to identify that one acre, provide a new legal description for that one acre to the lender (and the appraiser) and request the assessor's office to split the parcel for tax purposes so there is a tax bill for the improvement and one acre only. The property owner also has to have the split approved by the city or county and a building permit issued for that one acre only.

So it is doable, just the proper steps by the appropriate individuals and government office has to be completed. But it isn't just a simple changing a few words in an appraisal report!

 

[xmrdfghap]

What does the legal description on the appraisal order say? Or is it only an address?

 

[larryhaskell]

I believe the underwriter is correct if I understand your situation. The borrower bought two lots & built a house on #5. Lot #6 remains vacant. Lenders usually don't want to encumber the second lot unless there is some compelling reason to do so. One reason to include both lots is if only one lot has frontage on the street and the improvements are on the rear lot. Both lots are included so the lot with the improvements is not land locked. Even this situation can be addressed with a recorded easement across the front lot.

 

[FrankA]

I agree with Larry. Lets ignore the U/W for a minute and consider this. What is the highest and best use of the property? Lot 5 has the highest and best use of it's as is use, holding up the improvements. Lot 6 has the highest and best use of vacant and ready to improve, if it does not, then you are in a very strange market. Why is this important? because you are to appraise the land to it highest and best use, ALWAYS. If you are adding the other legally seperate lot in with the house and the other lot you are appraising the vacant lot at it's value in use, not highest and best use, unless of course you are going to try and tell us that the lot is worth more sitting vacant for assemblage with the adjacent improved property, and that is going to be a tough one to sell.

The underwritier is concerned, and properly so, with what value you have applied to the secondary lot. If you are adding the full value of the second lot as vacant and ready to improve, you are then appraising it at it's highest and best use, but reporting it highest and best use as something else, value in use to the owner of the improved property and thus oversating it's value. More than likely, the value of the vacant lot if it is to be sold along with the other improved lot, is quite a bit less. This is generally called excess land. HUD has some good reading on this, if I am remember correctly, in 4150.2.

In simple terms, if lots in the sub are worth $50k, and your subject Lot 5 with improvements are worth $200k, it is very, very unlikely that Lot 5, and Lot 6, as one unit, are worth $250k. This is what the underwriter is trying to stop.

The correct way to handle this, if the lender will consider the loan on both lots, is to make a hypothetical assumption that they are 1 legal entity with 1 highest and best use, as if I understand you, they are now two sperate legal entities, with 2 seperate hgiest and best uses. Whether the tax assessor has them under 1 parcel or 2, usually has no bearing as they still are usually 2 seperate parcels as defined in the plat that was approaved and filed. This differs from location to location, bu think of it this way, if I sell you my 100 lot subdivision, and record the sale as $$!$! Sudbvision from me to you on one deed, does that me the subdivison is now one parcel that you can only build one house on? I think not. Also, in may states, 2 seperate legal parcels may be combined, if they are adjacent, FOR TAXING PURPOSES, and they will value them as one unit, or may value them as two sperate units, under 1 parcel #. This is no way changes the fact that they are 2 LEGALLY sperate parcels, thus Lot 5, XX Sub, and Lot 6, XX Sub.

Hope this helps and that I have clarified, and not further confused you

 

[wyecoyote]

JT,

I aggree with Frank and Larry on this one. If your original statement 1 is true.

Statement 1:

He then built a 3100 sq. ft. improvement that is situated on lot #5, lot #6 is vacant.

However, then you state the following.

Statement 2:

I was always told / taught that if a dwelling was positioned on part half of one lot and half of another

You have to conflicting statements in your post. So which is it? If your second statement is true and the improvements stradle both lots then by all means you could appraise if highest and best use is as improved. If however, the highest and best use is to have two buildable sites then that is a different animal.

Some good information on this site.

Ryan

 

[Ben Vukicevich SRA]

Jt,

The underwriter is correct, if the improvements are located on one lot and that lot has access to a road. The lots are already subdivided since they have different lot numbers so...since the URAR is a one site form, the vacant lot would be a separate land appraisal and not combined on the URAR. The underwriter is concerned because the secondary market doesn't really like land loans.

Basically, it's the excess land theory that Larry mentioned in his post. If the buyer wants the other lot, it will have to be a cash deal or a non-conforming loan at... maybe a local bank/S&L.

Ben