Blog #94: “Oh, Please! Not Another Highest and Best Use Question?!”

QUESTION: When it comes to the highest and best use of an existing single-family residence, how in the world do I go about proving it is financially feasible? Its already built, so what difference does it make about the feasibility of its construction as if new!? Is not highest and best use a jaywalking-thing, when state appraisal boards should be going after bank robbers!? This all seems kind of silly to me!

You’re right! It is silly to worry about the financial feasibility of new house when the subject improvements are already up and seasoned. And the reason such an analysis is silly is because that not what financial feasibility means in the context of an already-existing house.

Since the house (and other vertical and horizontal improvements) already exist, financial feasibility of construction is not the issue. It can’t be since the house has already been built. Therefore, by elimination, the only aspect of value to which it can refer is razing the current improvements, and then developing the now-vacant site (hypothetically vacant, that is) to its highest and best use.

To analyze the improvements’ highest and best use as improved, (1) assume someone were to purchase the property for more-or-less what you think it’s worth. Then, (2) add to this whatever it would cost to raze the house including the horizontal and vertical improvements (I.e., take the property back to the vacant site). N, (3) recreate the house on paper (i.e., the cost approach). However, this will not be the house that you just tore down. Rather, it will be whatever costs are involved (including an entrepreneurial profit or incentive) to improve the site to its highest and best use. You now (4) total these costs. If the total in (4) is greater than in (1), then it is financially infeasibleto tear the house down and start all over again (and chances are, yes, the total of (4) will be higher than (1)).

Given the financial infeasibility of razing the improvements and then starting all over again, then the highest and best use of the property as improved is in its present improvements. It is the above analysis that supports this conclusion.

So, when the 1004 form asks if the present improvements are the site’s highest and best use as improved, it merely assumes you have gone thru the analyses (1) thru (4) (above) to answer the question. Note that if you indicate the present improvements are indeed the site’s highest and best use as improved, and the above analyses are not in your workfile then since, by your positive statement of fact, you implied you went thru those analyses, but then you really did not, that is misrepresentation, a a serious violation of USPAP 2-1(b), thus a serious violation of the ETHICS RULE, thus a serious violation of the COMPETENCY RULE. .

Such a positive statement is also a violation of SR2-3, the Certification Standard Rule. In it, an appraiser certifies that “…each statement of fact in this report is true and correct”. If you certify you went thru the highest and best use analyses necessary to make the above statement, when, indeed, you did not, you have certified to a lie via that positive, but untrue, statement.

Certifying to a lie about highest and best use also calls into question the validity of the comparable sales. The reason for this is the definition itself of a comparable sale. Per all sorts of sources, a sale is not a comparable sale unless the appraiser can support out of the market it has the same highest and best use as the subject. Therefore, to use sale-A as a comparable implies you have done its highest and best use analyses to support your claim it is a comparable sale. To use sale-A as a comparable is a statement of fact (that fact is that you can support your conclusion to use it as a comparable sale via demonstration of its highest and best use analyses in your workfile) is a statement of fact. That statement of fact is that it is truly a comparable sale and that you have verified it as such as per SR1-4.

To certify to a fact, when you are not sure it is both true and correct, is a violation of the ETHICS RULE, specifically the part that that avows “…[a]n appraiser must not use of communicate a report or assignment results known by the appraiser to be misleading…”. If you certify to something, yet you know it’s not true and correct, then that report is misleading.

The take-away here is that a property’s highest and best use may seem obvious (and likely is). But the issue is that when you say “…the subject’s highest and best use is its present use…”, but you have not done the analyses that support that statement, you’ve mislead the client. Really, is that what you want to do? By making sure you have the proper analyses in your workfile supporting statements of fact (such as the H&BU statement), you help to guarantee the state has no reason to doubt your conclusions, your professionalism, and your integrity. You also help to guarantee that your clients get better service from you, the appraiser, than they can get from an AVM or an evaluation.

When your clients know they will get better service, more credible service, and more reliable service from you than from some printout, they’ll call you first and they’ll call you more often. That’s what you want, right?

And, just so you’ll know, issues of highest and best use are one of the central areas for which states being charges against appraisers. Here is a question to answer: “How is it possible to state the H&BU of a site as if vacant in to build the house that’s on the site, when the value indication via the Cost approach comes in higher than the value indication via the Sales Comparison approach”? Here’s another one. Why do almost all SFR appraisal report with a cost approach fail to include an entrepreneurial incentive or profit? Please do not say that’s built into the cost figures, because it is NOT. Only the market can bestow such a reward. It is not a fixed cost of construction. But, frankly, that is the subject of anoter musing by Tim Andersen (i.e., me), the Appraiser’s Advocate.

If you have any questions, I’m available for consultation. Contact me at tim@theappraisersadvocate.com. It will be a pleasure to hear from you!