Zoning issues & use of property.

[Lee SW IL]

I completed an appraisal inspection on a large older two story with some cost to cure issues. The home has a 2nd kitchen on the 2nd level, could be used as a two family. Property is zoned B-1, General Business. Property is located in a small town one block off Main Street. Property around the subject is mostly single family homes, with a doctors office across the street.

I advised the client of this issue, they put on hold, and now want me to answer before I complete the report, what is the Highest and Best Use of the property.

Im a little embaressed to ask this question, but I only appraise residential, with a few mulit family properties, 95%+ is single family, almost always zoned single family or no zoning. But, to advise the client the Highest and Best use, is an appraisal, Correct?

Home next to the subject is pretty similar to the subject property and is currenlty for sale as a home, with commercial potential noted in the listing. In my opinion price is comparable as a home.

 

[Dee Dee]

Give the county a call and find out what would happen if this house were to burn to the ground. Would it have to be replaced as a commercial building, or could it be rebuilt as a single-family residence? Therein may lie the answer as to wether or not the lender is willing to go forward on the loan. If the home MUST be replaced with commercial building then that would be the highest and best, most likely the ONLY use that it could be mortgaged as.

 

[Lee SW IL]

Per city zoning officer, property can be used as residential, single family residence, mulit family residence, or business.

No special permits required.

 

[Ray Ohler]

you are appraising subject to a "hypothetical condition". However, you need to do a somewhat "in depth" H&B Use study in the appraisal and support your findings. Fee should be commensurate with the work needed. If you do mostly residential forms you may want to get some help with it. Just my two cents.

 

[Restrain]

You have two separate issues. One is "highest and best use as vacant" the other as "highest and best use as improved". While the property may be useable as business if vacant, there may be more than sufficient existing structures and vacant land so that there would not be any demand for the subject to be developed for business use. You state that the subject is surrounded by homes. It may well be that even though a business use is allowable, the highest and best use is residential. Look at the neighborhood, building mix, and trends in the area. Then stop and ask youself what you would do with the property. That will probably be your highest and best use.

 

[George Hatch]

To expand on RStrahan's post above a bit, your assignment is to appraise the property under its highest and best use as improved. This question might sound intimidating but it basically comes down to one of three options. The property is either worth more:

As it sits (either with or without repairs)
Converted to another use (like an SFR or office)
As a vacant lot (less the costs to get it that way)

In most cases it will be the first option. This, under the theory that the existing improvements will continue to be the highest and best use until such time as the underlying land value exceeds the value of the current use.

Your big question is going to be whether the city/county will allow the 2nd unit to remain as such. If so, that is probably your highest and best use, unless the market is strong enough for SFRs to warrant conversion back to its original use. As Dee Dee mentioned, if the existing use is a legal non-conforming use, as this may be, you should find out whether the city will allow it to be rebuilt if partially or completely destroyed. A lender isn't going to want to put a long term loan on improvements and a use that might not make it to the end of the loan.

That's why we're here, to perform these types of analyses. An AVM could never do this. The value, even if correct, is not the only relevant issue on this appraisal.

By the way, if you aren't confortable with going through this type of analysis then get some local help or else decline the assignment. This would qualify as a complex assignment under FIRREA, so you shouldn't even do it alone unless you are at least a Certified Residential Appraiser. You will need some local data on site sales and non-residential sales to help you in your analysis, and a commercial appraiser familiar with the area can fill you in pretty quickly on the market conditions for the different uses.

Good luck and let us know what happens.

George Hatch

 

[Austin]

Based on the information you gave, it sounds like the highest and best use is speculative future commercial conversion with an interim use as single family residential. What would it rent for as a single-family residence, as if converted to two family, and what would it rent for as a commercial office? At what rate is conversion to commercial taking place?The value in prospective uses less conversion cost that yields the highest number is the highest and best use. A good indication of speculative value is to take the sale next door and she how much above average they are asking. There are four tests in a highest and best use analysis and it seems that you have enough information to answer three of them.

 

[Lee SW IL]

Thank you all for your time in replying to my post.

After careful evaluation of this project, I advised they client that I was not comfortable in completing this assignment, since I do not do many multi family residences and no commerical. The few multi family appraisals I have done, were typical duplexes, with decent comps available. I spent almost 3 times as more than a standard appraisal, for a little higher fee than normal.

I think there could be a chance, maybe just a slight chance, that the property could best be used as commerical, or other use than current use, as the property has some cost to cure.

Thanks again for you time in posting.
Lee :wink: