August 17, 2022
What do FHA loan rules say about surplus and/or excess land? It’s not an issue for someone who wants to buy a condo unit, but for those looking for homes in rural areas, excess or surplus land could be an important detail at appraisal time.
FHA loan rules in HUD 4000.1 discuss appraisals where there may be surplus land or excess land involved, and while the section referencing this issue is short, it does give us an idea of what to expect in these cases; a big question addressed in FHA loan rules here is how the excess or surplus land affects the valuation of the property.
What Is The FHA Definition Of Surplus or Excess Land?
HUD 4000.1 states, “Excess Land refers to 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.”
But the terms “excess” and “surplus” are not viewed as being interchangeable. HUD 4000.1 defines surplus land, too. “Surplus Land refers to land that is not currently needed to support the existing improvement but cannot be separated from the Property and sold off.”
Furthermore, surplus Land does not have “an independent highest and best use and may or may not contribute to the value of the improved parcels” according to HUD 4000.1.
FHA Appraisal Rules For Surplus Land and Excess Land
HUD 4000.1 addresses both surplus and excess land, stating:
“The Appraiser must include the highest and best use analysis in the appraisal report to support the Appraiser’s conclusion of the existence of Excess Land. The Appraiser must include Surplus Land in the valuation.”
Additionally, “If the subject of an appraisal contains two or more legally conforming platted lots under one legal description and ownership, and the second vacant lot is capable of being divided and/or developed as a separate parcel where such a division will not result in a non-conformity in zoning regulations for the remaining improved lot, the second vacant lot is Excess Land.”
But the appraiser is also instructed that the value of that second lot “must be excluded from the final value conclusion of the appraisal and the Appraiser must provide a value of only the principal site and improvements under a hypothetical condition”.
There may also be state law and/or lender standards that factor into these procedures. If you are not sure how these rules may apply specifically to your FHA loan, speak to your loan officer.