Highest and Best Use
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Appraisers, I had a recent discussion with a review appraiser, who discussed a ‘situation’ with me. It involved Highest and Best Use (H&BU), and the appraiser’s reluctance to re-do a report so that a loan could be made.
The appraiser had checked the H&BU question box on page 1 of the 1004 form as “NO”, which immediately stops the lending process.
This H&BU topic is sometimes difficult for appraisers due to many variables which need to be analyzed.
The twisted part of this situation (which influenced the appraiser’s H&BU reporting) is the property is in an area where some, not all, surrounding properties have had additional homes placed on single sites – allowed by current zoning code – while others of the surrounding properties have remained 1 dwelling per site. In other words, not all local sites have been ‘re-developed’ to increase density.
The Intended Use of the SFR appraisal was for conventional mortgage lending, using a GSE form 1004, and it was a refinance, not a sale.
That last part is key, as it applies to the current use of the property, and present value. The implication of the refinance is that the borrower is intending to live in the home for some time and is apparently not interested in selling it, or adding another home to the site, even though they could. In other words, the property as currently used and improved, has similar H&BU to other similar properties nearby.
FNMA addresses this in their Selling Guide, section B4-1.3-04, which I have included below. For this quick article, I’ll concentrate on key sentences from it that appraisers should keep in mind:
- The appraiser’s highest and best use analysis of the subject property should consider the property as it is improved.
- If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use.
Note that this instruction does not say “tell us what it could be”, (implied by the ‘NO’ on the form, and discussed there and elsewhere) but rather “report what it is” as long as there are compatible and similar uses nearby.
USPAP you say? The above (and below) procedure is not out of line with our guidebook. It complies with Std 1-2(e)(i) [line number 475], and Std 1-3(a)&(b), [lines 504-516].
Per the reviewer’s comments to me, the lender was “dead in the water” with that report (and still had to pay the appraiser), and up to the point of our conversation, the appraiser stubbornly refused to reconsider the analysis to be consistent with the above process. It would have required a brand new report, because the comps used in the “NO” report had two homes per site, while the subject was just a single home on its site, like other properties nearby.
High level reviewers normally are very experienced and are skilled with the various ‘agency’ guidelines pertaining to specific report Intended Use.
Appraisers would be wise to listen to what is being asked of you when a reviewer engages you, discusses the details, and asks for a change to a report.
Highest and Best Use
Fannie Mae will only purchase or securitize a mortgage that represents the highest and best use of the site as improved. If the current improvements clearly do not represent the highest and best use of the site as an improved site, it must be indicated on the appraisal report.
The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value on the effective date of the appraisal. For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site.
The appraiser’s highest and best use analysis of the subject property should consider the property as it is improved. This treatment recognizes that the existing improvements should continue in use until it is financially feasible to remove the dwelling and build a new one, or to renovate the existing dwelling. If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use.