In a Residential Assignment-Why is the “Present Land Use” such a Big Deal?

This is Diana with ABC-The Appraiser’s Business Companion.  Many times, there are residential Appraisal Reports that quickly report the percentages of Land Use but fail to connect the land use with other steps in the Appraisal Process.

Consider the form most use and the role present land use plays in the reporting of the Appraisal Process.

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Think about the development Standard Rule (SR) 1-3 (a), “STANDARDS RULE 1-3

When necessary for credible assignment results in developing a market value opinion, an appraiser must:

(a) identify and analyze the effect on use and value of existing land use regulations, reasonably probable modifications of such land use regulations, economic supply and demand, the physical adaptability of the real estate, and market area trends; and

Comment: An appraiser must avoid making an unsupported assumption or premise about market area trends, effective age, and remaining life.”

When you consider that development directive you can begin to connect the dots.  The subject is located in a residential neighborhood known as, “____”.  The neighborhood is located within the town, city, community, etc. recognized with the N, S, E. W boundaries.  The existing land use will probably contain more than the residential pocket, it also has feeder or supporting land use which can include a variety of land uses including various types of residential uses (condo, multi-family, 2-4) and supporting commercial properties.  Your narrative can detail the types of commercial improvements.  The various zonings and land use regulations within the boundary of the neighborhood will impact the marketability.  The market area trends are devoted to the residential market where the subject is located and comparable transactions are to be identified.   They are not associated with the entire area of the neighborhood within the defined boundary.

Real estate physical adaptability speaks specifically to a subject property’s Highest and Best Use, it impacts the conformity conclusion which also affects the demand.  The Market Area Trends in this form are relevant to the property type and sphere of influence.  Values are either flat, up or down depending on a number of factors.  Demand, when ratioed with supply of the property type, will impact the projected marketing time.  In many cases these factors will impact competitive edges creating a ripe environment for either a Seller or Buyer Market.

How many varied land regulations are there in the neighborhood? Is there an activity growing in the Commercial land use that may affect the demand for residential property?  Are there regulations pending that could impact the demand for the subject on the effective date of the analysis?  Consider the results of the neighborhood analysis as it relates to other relevant results.  What is the ratio of new construction in the residential land use?  Is there an oversupply of existing houses on the market for sale?  If the answer is “yes” and the subject is “proposed construction” what is the probability of the 30% vacant land being developed for residential neighborhoods when the land use shows 60% single family, 10% 2-4 family, 10% Commercial?  Can you see the interdependent connectors between the Land Use, demand for existing property or demand for new construction?

Present land use sets the stage for the demand for the property type.  The site and improvement analysis are comparisons to the results of the neighborhood analyses.  Highest and Best Use conclusion (after analyzing first as vacant and then as improved) is impacted by the Present land.  Now connect another dot with land use; where do the comparable transactions fit in the competitive circle of the boundaries of the neighborhood?  Do they conform or are they points of dissimilarity within the land use?

How can you support the present land use?  One way is to isolate a capture on an aerial map, overlaying the boundaries.  Visually, the exhibit confirms your estimate of percentages and it also brings to surface potential external influences.  You are the appraiser, you are the one who can study this area and identify whether or not the location of the subject neighborhood, and its present land use, are impacted by external influences.  You control the reaction of your reader by addressing what is seen, what is perceived, what is analyzed and what is concluded.

This is Diana Jacob, and you’ve just had a tip of the week from ABC, the Appraiser’s Business Companion (ABC).