Zoning and FHA

[Abester]

What does financing have to do with market value?

 

[Abester]

There are tons of non-conforming or grandfathered properties that cannot be rebuilt. I'm quite sure a great many of them have been bought, sold, financed, etc.

 

[RSW]

Let's go back to the OP. He is not asking about the effect on market value. He wants to know about zoning from an FHA standpoint. That is what I am addressing. Here are the references that I know of in the FHA material:

HOC Reference Guide

Zoning

Chapter 1
Appraisal & Property Requirements
Page 1-16

To be eligible for FHA Insurance a property is to be "legal" and free of health and
safety hazards and major structural problems. If the use is not legal, the
property is not eligible for HUD mortgage insurance and remains such
until it becomes legal. A property can be "legal non-conforming". In this case
the non-conformance part is to be reflected in value, if applicable.


Handbook 4150.2

1. Zoning

The appraiser should consider the effect on the value
of appropriate and well-drawn zoning ordinances. Landuse
controls that receive public approval and are
strictly enforced protect residential sites from
adverse influences that diminish the desirability of
sites. This must be noted on the URAR, and its effect
must be quantified in the valuation analysis.


Revised Appendix D, Page D-19

Zoning Compliance

Determine whether the current use is in compliance with the zoning
ordinances. Mark whether it is Legal, Legal Non-Conforming (Grandfathered
Use), No Zoning, or Illegal Use.
If the existing property does not comply with all of the current zoning
regulations (use, lot size, improvement size, off street parking, etc.) but is
accepted by the local zoning authority, enter “Legal Non-Conforming” and
provide a brief explanation.
If the use is not legal, the property is not eligible for FHA mortgage
insurance.

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In my dealings with HUD/FHA and non-conforming zoning I have found they want to know if the dwelling can be re-built if destroyed. This may be a lender specific requirement as there is no reference in the FHA material that I am aware of.

Now, to answer your question about what does financing have to do with market value. It can have a lot to do with market value if financing is not available. This would limit the number of potential buyers. Just look what is going on with our economy right now. Many lenders have put harder requirements on loan approvals, many have stopped lending altogether, and there are less and less buyers everyday. Now, what does financing have to do with market value? That is a dumb question!

 

[Blue1]

According to the fine folks at the planning desk, the property can be re-built as a residential unit, as it was built that way originally. CL means (paraphrasing) that the buildings zoned that way can be used as small comercial entities, but cannot be modified in a major way. Thus a small bungalow can become an insurance office or tarot reader parlor, but not a high-rise office building or parking garage. I would love to hear further advice on 'highest and best use'.

Well it is legally permissible apparently. Survey the area and see what the predominate use is. If, for instance, your subject is a SFR in the middle of SFR's used for commercial purposes it may not be at its HBU. However if your subject is a SFR surrounded by the same SFR uses its HBU may not be for a commercial enterprise.

 

[Abester]

I have found they want to know if the dwelling can be re-built if destroyed. This may be a lender specific requirement as there is no reference in the FHA material that I am aware of.

Underwriting requirements have nothing to do with value. The value conclusion is based on an effective date while the improvements do exist, not whether they COULD exist. If the lender is concerned about recouping its money in the event of destruction, perhaps they could require the appropriate insurance policy.

It can have a lot to do with market value if financing is not available.

Please explain where the phrase, "and financing is available" in the definition of market value.

That is a dumb question!

I ask dumb questions all the time... My house loan does not require me to rebuild my house in the event of destruction, nor has any loan I have ever had - commercial real estate included. So, please excuse me for being so dumb.

 

[The Warrior Monk]

Please explain where the phrase, "and financing is available" in the definition of market value.

Does environmental contamination affect property value?...that's not in the market value definition either.

We're seeing the very effects of financing on market value in the current environment.

 

[The Warrior Monk]

I ask dumb questions all the time... My house loan does not require me to rebuild my house in the event of destruction, nor has any loan I have ever had - commercial real estate included. So, please excuse me for being so dumb.

The rebuild issue simply deals with certain underwriting criteria. I believe many GSE lenders use it. So, in certain market segments, the loan terms might be 70% LTV/7.5% versus 95% LTV/5.25%. Naturally the price paid for former will be less than the latter.

 

[RSW]

Underwriting requirements have nothing to do with value. The value conclusion is based on an effective date while the improvements do exist, not whether they COULD exist. If the lender is concerned about recouping its money in the event of destruction, perhaps they could require the appropriate insurance policy.

Underwriting requirements can have a lot to do with value. There will be less potential buyers if underwriting requirements restricts the number of people that can obtain a loan. It’s called, “SUPPLY AND DEMAND”. Do you need a short lesson in this theory?

Please explain where the phrase, "and financing is available" in the definition of market value.

There are many things that have an effect on value that are not mentioned in the definition of market value. Where should I start?

I ask dumb questions all the time... My house loan does not require me to rebuild my house in the event of destruction, nor has any loan I have ever had - commercial real estate included. So, please excuse me for being so dumb.

How do you know what all of the underwriting requirements are for your loan? The lender may have required it be zoned residential and that the dwelling could be re-built and you did not even know it. Some lenders may think it is a bad business decision to make a loan for a residential property that is in a commercial zoning or some other type of zoning that will not allow the dwelling to be built back as a residential property. I see it all the time and have for many years. It could be that you have just had the luck to work for lenders that don’t think this way. I, my friend, have not!

 

[Mr Rex]

Underwriting requirements have nothing to do with value. The value conclusion is based on an effective date while the improvements do exist, not whether they COULD exist. If the lender is concerned about recouping its money in the event of destruction, perhaps they could require the appropriate insurance policy.


Please explain where the phrase, "and financing is available" in the definition of market value.



I ask dumb questions all the time... My house loan does not require me to rebuild my house in the event of destruction, nor has any loan I have ever had - commercial real estate included. So, please excuse me for being so dumb.

DEFINITION OF MARKET VALUE:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.
​

 

[Abester]

The bottom line, then, based on these posts 16-19, is that the existing inventory of nonconforming or grandfathered properties that CANNOT be rebuilt must be worth less than their otherwise rebuildable counterparts. If that is your conclusion, it is not applicable to the market in which I work because nonconforming or grandfathered properties often sell for MORE than their otherwise conforming counterparts because of their extra square footage, additional unit, special use, etc.

Lack of capital is not the same thing as lack of financing. Banks around here are actively advertising for new loans. If, in the current economy, people were assured of their jobs, I believe the real estate market would quickly recover. When people are unsure, they keep that cash. That is not the same as a lack of financing. Bank financing is never the only financing available. When interest rates were at 18%, people just got creative.

And, because I'm so dumb, I note

Underwriting requirements can have a lot to do with value.

and

How do you know what all of the underwriting requirements are for your loan?

Because the property was worth what it was worth, and the lender didn't say that the value had changed because of their underwriting requirements are. Underwriting requirements only have to do with what they will lend - not what the property is worth.

Do you need a short lesson in this theory?

Where should I start?

The lender may have required it be zoned residential and that the dwelling could be re-built and you did not even know it.

It is immaterial if the bank thought that it COULD be rebuilt because I have no contractual obligation to them other than my loan agreement, which does not require me to rebuild in the event of destruction. No lender can require a rebuild if it is not in the contract.