FHA - Rural Property/ Excess Land - Sacramento

I came across a scenario today. It was a 20 acre parcel zoned AE-20 with mulitple structures on the property. The property is bank owned and has been vacant for about 1 year and it's a rehab. We're looking to do a rehab loan on this property to fix it up post closing. The property is not income producting and we have to make sure the land use is at least 51% used for residential purposes. I copied some of the guidelines for rural properties from the handbook.

A rural area is defined as relating to the country or anything beyond suburban areas. It is not uncommon for a rural area to have residential properties with relatively large sites and one or more outbuildings. The rural area may have mixed-use properties, vacant buildings or agricultural use properties.

There is no limitation on the amount of acreage which may be financed on rural properties if similar comparable sales support the acreage as common for the area. However, excess land is unacceptable for inclusion in value.

Excess Land is defined as the area by which the plot exceeds the area of a readily marketable real estate entity.

This occurs when the subject is considerably larger then typical lots in the neighborhood and the excess is capable of separate use. For example, if the subject property has 10 acres, and the comparables have similar acreage, but are not limited to strictly residential use, then a market has not been demonstrated for residential

property with the same amount of land as the subject. Zoning may be residential/agricultural. The residential use of the property must represent the "highest and best use" of the property.

The appraisal must indicate that the subject property maintains the characteristics of residential property, such as:

• Must be primarily residential;

• Must not be used for agricultural, farm, ranch or commercial use.

• Must be readily accessible by a roadway;

• Outbuildings are of minimal value to the overall property value;

• Must be serviced by adequate utilities.

FHA Credit Policy Manual

Page 109 of 137 Revision 6.14.2007

• Must be available for year-round occupancy.

The underwriter's knowledge of the area and comments provided by the appraiser will determine if the amount of land included in the transaction is typical for the area.