HBU not improved...how do you prove this?... Isn't changing HBU a change of use, such as back to vacant, or res to commercial, etc? Overall size seems more a super adequacy or over improvement than HBU issue.
I agree with Lee.
The H&BU may not (and likely isn't) as-improved.
Just a refresher course...
H&BU as-vacant would determine the use. Let's assume that due to the physical and legal constraints to the site(s), the H&BU as-vacant would be townhouse development.
H&BU as-improved determines what to do, given the improvement that exists. This is where Lee's suggestion comes into play.
An improvement can be...
A. Remodeled (change its use; say, from a commercial to a residential use; this is done a lot in urban areas).
B. Renovated (modernized).
C. Bulldozed (the improvement no longer contributes value to the site, and a new improvement should be built), or
D. Left as-is.
Theoretically, the only improvement without depreciation is the so-called "ideal improvement" (much talked about, seldom seen). So almost every property would benefit from some level of renovation or repairs to cure deferred maintenance.
In the real world, we typically do not consider the normal/routine maintenance issues a hard-stop to opining the as-improved H&BU is as-improved. There is some gray.
In the OP's situation, the combined units may be worth more separated, even after the costs + EI. If that is the case, then the H&BU is not "as improved" but is something else. Lee's post outlines what steps are necessary to make that determination.
We see this dynamic played out all day long in many markets.
Fixers are purchased by investors who renovate and then re-sell. The use hasn't changed, but the H&BU as-improved of the "before" (fixer) is to renovate and resell or perhaps to rent. Appraisers who appraise these types of properties should identify that in the H&BU analysis: this is what identifies the likely buyer and drives the comparable selection.
The OP's subject is similar to a "fixer" in that maximal productivity may be achieved by reverting it back to its separate unit configuration. If the OP's subject meets that threshold, then the H&BU is not "as-improved" but as-something-else (I'd call it H&BU is to remodel to revert back to separate units, if that is the case).
The difficulty in these assignments is determining what is a reasonable threshold before the H&BU changes? It isn't as simple as the texts suggest (a function of math). There is some level of uncertainty in the process which the appraiser should be aware of and account for.
Assume the subject, as-is and based on the GLA only, is over-improved. The level of over improvement may be the last 1,000sf. In a development of 1,800sf townhouses, the market may show contributory value for something up to 2,600sf but past that, the contributory value stops:
some argue that it diminishes past the point rather than just ending. That is probably true in a technical sense, but I don't have a problem concluding that past a point, the contributory value is no longer significant: i.e., would someone pay $1 more for the additional 1,000sf? Yes. Is it significant? No.
So if the market recognizes value for a townhouse of 2,600sf, but no contributory value for the next 1,000sf, the market may value the townhouse at $400k.
The value of an 1,800sf townhouse may be $300k.
Mathematically, if the cost (all hard & soft costs which include EI) to remodel the existing improvement back to two 1,800sf units is less than $200k, then the H&BU is not as-improved*.
Realistically, if someone could pencil it out that the costs are $150k to maybe even $175k (remember, that cost already includes their profit-target after all expenses), they'd probably jump on the project.
This is where the appraiser's judgment needs to be applied. The math may make sense, but it isn't compelling enough to motivate the market participants.
If the cost were, say, $75k to renovate, who wouldn't purchase the property at $400k, invest the $75k, make their EP-target (already factored in), and happily realize an additional $125k EP?
Indeed, if the above is the case, I wouldn't call the subject over-improved... because it can be (we assume) reverted back to two-units. It would be over-improved if the reversion cannot take place.
In my development, home sizes range from 1,750sf to 2,700sf; the original developer's models were 1,750sf to 2,250sf. Some of us (myself included) had additions (renovations) to our homes. I'd
guess anything over 3,000sf in my neighborhood is an over-improved because at that price-point, the likely buyer would move on to a superior neighborhood where the typical home-size range is larger.
Past 3,000sf is an over-improvement. But the H&BU as-improved, is "as is". It wouldn't make sense to demo the surplus GLA as the result doesn't make the property more valuable, and the expense involved in the demo results in a net loss.
In the OP's case, if the H&BU is as two-separate units, then the subject, as-is, isn't over-improved. It is actually under-improved.
*the analysis assumes that there are buyers who are capable of taking on the remodeling project; renovation activity in a market (buy, renovate & flip) would suggest there is a market and it is active.
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