In the March 2024 Fannie Mae Appraiser Update, the Fannie Mae collateral policy team spoke to hot appraisal topics such as zoning changes and highest and best use (HBU).

In the matter of rezoning and HBU, municipalities across the United States are revisiting existing density for residential areas that historically have allowed only one dwelling unit per site. They aim to increase housing supply in markets experiencing shortages by enacting zoning changes to increase the number of allowable units, according to Fannie Mae.

In some cases, the new zoning would allow more than four units on a single lot, which has created concerns for residential appraisers as to whether the rezoned property meets eligibility requirements for conventional lending.

“Another concern is whether the residential appraisal certificate or license allows the appraiser to appraise the property,” the Fannie Mae collateral policy team states. “These concerns are actually not new; many jurisdictions in the United States have long had permissive zoning (or in some cases, no zoning) allowing for more than four units. Appraisers in such locations have established practices that others in newly impacted areas can emulate. Importantly, both of these concerns may be resolved through the appraiser’s HBU.

“First, it is very important for appraisers to understand in the context of Fannie Mae policy that the property eligibility determination and the appraisal scope of work are based on the HBU as improved,” Fannie added. “This is spelled out in Selling Guide B2-3-01, General Property Eligibility. The question of HBU as if vacant is immaterial which simplifies the problem for appraisers.

Fannie Mae’s Selling Guide B4-1.3-04, Site Section of the appraisal report requires appraisers to apply the standard four tests to determine the HBU as improved of the subject property.

For improvements to represent the HBU of a site, they must meet all of the following criteria: legally permitted, financially feasible, physically possible, and must provide more profit than any other use of the site would generate.

Further, Fannie Mae provides guidance on how to treat scenarios where other potential usages exist 

“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,” Fannie Mae stated.

“Again, this should simplify the problem for the appraiser. For example, if a single-family residential improvement is less than the maximum number of units allowed by zoning (e.g., R-3, three residential units) but still legal, it may still be the HBU as improved so long as the comparable sales indicate that the property is typical and compatible with the neighborhood and that the property value exceeds the vacant site value.” 

In cases like this, the appraiser would check the “Yes” box under HBU in the 1004 form. Fannie Mae strongly recommends that appraisers explain their HBU analysis in the report in addition to checking the box. Second appraisers should consult their state board or legal counsel about whether the residential appraisal certificate or license allows the appraiser to appraise the property.

That said, HBU is only a prelude to or a part of an appraisal assignment. Appraisers typically are not limited in performing HBU by their license level. Thus, an appraiser may be able to perform HBU analysis to determine whether or not the property can be appraised under their license level.

When HBU as improved demonstrates that usage is four units or less, it should provide clarity and peace of mind to the residential appraiser. Hopefully, this quick overview will help appraisers navigate any recent or pending zoning changes in the market areas they serve.

“We strongly recommend that appraisers explain their HBU analysis in the report in addition to checking the box,” Fannie Mae wrote. “Regarding comparable sales, an appraiser recently asked us how to calculate the age of a comparable property – should they use the effective date of the appraisal or the sale date of the comp?”

While Fannie Mae does not currently have an explicit policy for how to calculate the age, the general principle in regard to comparables is to describe them as of the date they went under contract. Things that happen later (such as aging of the property due to additional passage of time) is immaterial for comparison purposes.

So, the best choice is to use the date of contract for the comparable and then subtract the date it was built. If the date of contract is not available, the close date is the next best option, Fannie said.

Of course, the exact date that construction was completed is often unknown, particularly for older homes, so it makes sense to use the year built which is more commonly available.