Can You Appraise Two Abutting Lots and a House in One Appraisal?

This is Diana with ABC-The Appraiser’s Business Companion.  In Urban, Suburban and especially Rural markets it is not uncommon for property owners to buy two abutting lots and to build a residence either on both lots or to build on one and leave the other as vacant.   The question is, how to appraise what appears to be two lots when only one has the dwelling. Are these two assignments, can there be multiple lots in one appraisal?  Where does Excess Land and Surplus Land come into play?

When an existing use involves two or more abutting lots the appraiser should consider why.  The property owner can offer a myriad of reasons.  One reason is the expectation of having a future investment that they can hold and personally manage the asset over the investment period (appraisers know this as a speculative land investment).  The plan is to have future land to sell when owners are ready to recapture their investment with a return on the investment.  Some owner-occupied investors think of their family and want land for them to build on in the future, some don’t want neighbors and will put in a well on the other lot, with a barn and a workshop.

Now the other issue to consider, Highest and Best Use as well as Excess Land.  Often there is misunderstanding when Excess Land is the issue.  To begin with its important to be clear about what constitutes “Excess Land”.  It is a lot whose site area is not needed to serve or support the existing improvement.  The highest and best use of the excess land may or may not be the same as the highest and best use of the improved parcel.  Excess land may have the potential to be sold separately and is valued separately.  That definition isn’t as definitive as appraisers would like.  When you think about it, if we consider this definition from a literal perspective, the size area is limited to the area of hosting the existing improvement.  Using the literal definition, many homesites would have excess land as the parcels necessary to host would be no greater in many cases than townhome parcels or nearly that narrow.  So how does the appraiser decide?

In a market value, appraisal assignment, you go to the market.  The journey of identifying excess land, highest and best use, begins with the market.  In the detached single- family mortgage lending assignments, when the purchase or refinance is of two separate legally described parcels that abut and are being enjoyed as the larger site, there are two knowns, 1) there are two lots, 2) they are being used as one.  If being enjoyed as one site, is the utility of the site being used as “one”?  That question brings to surface whether or not there are improvements on both lots.  Regardless of what is on both sites there is one known that has a sub-known, the condition of the use and of the demand by the buyer is a hypothetical condition.  It’s simply not true that two 1 acre lots, which abut, are actually one.  They are not. The legal division clearly shows the assemblage is not a legal assemblage as it has two distinct legal subdivision entities.  There will generally be two parcel numbers under the one owner’s name as well.  This is why the market research is critical to this analysis.

In the past I’ve mentioned many times the importance of the neighborhood description and the details of the market where the property type lays and where comparable transactions will be studied.  Consider the scenario of the appraisal assignment is of a detached single- family dwelling in a Suburban-Rural location, there are two lots currently owned and being conveyed with the close of the pending sale.  Once the boundaries are drawn there should be a cluster of residential properties similar to the subject that could be analyzed to draw conclusions about the sizes of the lots.  If there are similar size parcels that are combatively like the subject as assembled then Highest and Best Use “as if vacant” would be to legally assemble under one legal description.

This conclusion of Highest and Best Use on assembled parcels is evident when a dwelling sits right in the middle of the assembled lots.  It’s also evident when a house is on one side and the well and septic and barn or workshop is on the other.  Neither site as improved could offer utility to the public demanding one or the other site unless they were prepared to dig a well and septic on the lot with the dwelling and show evidence of the well and septic contribution to the barn and workshop.  In the cases I’ve experienced, when a house is on one lot, well and septic are on the other, the assemblage was always intended to be considered one, it just never made it to the public record.  The surveyor wasn’t called to assemble the lots into one, designating and recording the new legal description of the assembled parcels.

When the details of your market indicate there are parcels of this size with similar use you have that support.  The determination of Excess Land is when the market bears no evidence of the larger size parcel being demanded either by sales or by surrounding land use.  Availability of sales is not the last determinant, it is the surrounding land uses.  Lack of sufficient quantity of sales is out of the appraiser’s control, but researching surrounding land use is 100% within the appraiser’s control.

Can you appraise multiple lots under one assignment?  Yes, but you need to be clear about the hypothetical condition all the way through the appraisal.  This includes a discussion of the assemblage in the highest and best use section of the appraisal report.

This is Diana Jacob and you’ve just had a Tip of the Week from ABC-The Appraiser’s Business Companion.