Typically, everyone is under the impression that more is better when it comes to the size of their lot, and for the most part it is. However, when it comes to getting financing, whether for a sale or refinance, then that’s a different story, especially if it’s FHA.
When doing an FHA appraisal for homes situated on acreage, and sometimes conventional, they want to know if the site has excess or surplus land. The definitions below are from The Dictionary of Real Estate Appraisal (5th Addition)
Land that 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.
Land that is not currently needed to support the existing improvement but cannot be separated from the property and sold off. Surplus land does not have an independent highest and best use and may or may not contribute value to the improved parcel.
FHA’s Definition of Excess Land:
Excess land is defined as that which is larger than what is typical in the neighborhood AND capable of a separate use. Generally, the excess portion can be subdivided and marketed as an individual parcel. However, in small communities and outlying areas, appraisers must use different criteria because the market may accept a wide variance in lot sizes. If the plot contains excess land, the appraiser should describe it but not value it. In this instance, the appraisal is based upon a hypothetical condition. A legal description of the portion being appraised is required. The lender will require that the excess land be excluded from the mortgage security.
How to determine the difference:
Here is a list of things I look for when appraising homes situated on acreage, although this could pertain to homes situated within a subdivision that is on an atypical site (larger than the rest).
- Can the site be subdivided?
- If the site could be subdivided is it feasible.
- Is the entire site needed to support the improvement(s); an example might be a 5 acre site that has 2-3 acres of wetland and the remaining land is needed to support the house and out buildings.
- Would the highest and best use be better if subdivided?
If the appraiser determines that there is excess land, then the appraiser is required to describe the land, but not value it. The pictures above illustrate an example of an appraisal I did recently. The house was situated on a 10 acre site, and zoning only required 4 acres, so it could be divided into two lots. There really was no good argument as to why the properties site couldn’t be subdivided. So in this example the house would be appraised with 4 acres and no value given to the other six acres. This what is known as a hypothetical condition.
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