Highest and best use after the present-use rule One Dallas house, two answers

Fannie Mae issued Selling Guide Announcement SEL-2026-08 on September 2, 2026 and reissued it on September 23. The reissue moved a rental income date from November 1 to December 1 and left the highest and best use change as issued. SEL-2026-08 ↗ For reports completed on UAD 3.6, the highest and best use of the property as improved, or as proposed, must be a residential use, and it no longer has to be the present use. Reports on the legacy forms stay under the old rule.

The policy sits in the UAD 3.6 Policy Supplement. It also replaces the “residential in nature” standard: the property must be a primarily residential one- to four-unit property, and any non-residential use must be subordinate. Policy Supplement ↗

Under the legacy guide, an existing use counted as the highest and best use when comparable sales showed the improvements were typical and the value as improved exceeded the value of the vacant site. B4-1.3-04 ↗ A house worth less than its lot failed that test, and the loan could not be sold to Fannie Mae. On a UAD 3.6 report the same answer moves the analysis into the commentary field, where the appraiser states the residential highest and best use and the support for it.

The four tests run in a fixed order: legally permissible, physically possible, financially feasible and maximally productive. McKissock ↗ The UAD 3.6 URAR applies them to the present use, one Yes or No field each. Two questions follow: whether the highest and best use as improved, or as proposed per plans and specifications, is the present use, and whether the highest and best use is residential. A Highest and Best Use Commentary field holds the explanation. HBU Playbook ↗

Fannie Mae’s FAQ, dated September 8, sets the order of work. The appraiser determines the present use first, from the property’s physical design and function, and occupant behavior alone does not set it (Q1 to Q4). Any No on the four tests forces a No on the present-use question (Q13). When the highest and best use is residential and differs from the present use, the commentary states it with supporting rationale (Q16). HBU FAQ ↗

The Playbook works through ten scenarios with an answer for each test. Scenario 8, a livable one-unit house on a lot upzoned to six units, is the closest published case to a Dallas teardown: Fannie Mae marks financially feasible and maximally productive No when redevelopment beats the present use, and the loan stays eligible with one-unit comparables zoned for up to six units and similarly positioned for redevelopment. Scenario 10 says subdivision potential “does not, by itself, change the highest and best use.” HBU Playbook ↗

Three FAQ answers bear directly on older houses. An obsolete improvement can still be the highest and best use if it adds positive market value (Q7). Fannie Mae values the existing or proposed improvements and “does not require the property owner to modify or redevelop,” while an as-if-vacant analysis can still matter for site value, obsolescence and comparable selection (Q9). Comparables must share the subject’s highest and best use and similar legal characteristics (Q11). The FAQ does not address teardowns, land value above improved value, or the probability of a rezoning. HBU FAQ ↗

The subject is a composite with a fictional address: a 1,450 square foot one-story brick house built in 1946, in C4 condition, on a 7,500 square foot lot with a detached one-car garage, zoned R-7.5(A). We assume it sits outside any planned development, conservation district, neighborhood stabilization overlay, historic overlay, demolition delay overlay or ADU overlay, with no recorded deed restrictions beyond the plat. Each assumption is a lookup in the City’s Map Hub and the county records. Dallas zoning resources ↗

We place the same structure in two submarkets. In Market A, the East Dallas core, the value as improved is $425,000, $293 per square foot. In Market B, the Lakewood edge, it is $650,000, $448 per square foot. Lakewood’s conservation district expansion passed in February 2025, so in Market B the overlay check is required before anything else. CandysDirt ↗ Every value, price, cost and probability in this case is a modeling assumption to be replaced with closed sales and contractor bids.

A residual land analysis starts from what a new house would sell for and subtracts everything it takes to build and sell it, including the developer’s profit. What is left is what a builder could pay for the lot. The contribution of the existing house is its value as improved less that land value; at or below zero, the house adds nothing over the lot and the present use fails the maximally productive test. Under the Playbook’s convention it fails financially feasible too.

Both markets use the same cost structure: a $35,000 site and foundation premium for expansive clay, $22,000 for demolition and abatement, $10,000 for the tree permit and mitigation, soft costs at 10% of hard cost, financing at 6%, selling costs at 5% and a 15% developer profit on sales.

Market A. The land value as vacant is about $254,376, $33.92 per land square foot. Asking prices for single-family lots in Old East Dallas run $24 to $36 per land square foot, or $180,000 to $270,000 for 7,500 square feet; those are asks, and closed sales would still be needed. Homes.com ↗ The house contributes $170,624 over its lot, the present use passes all four tests, and the report answers Yes throughout. The loan is eligible at both GSEs.

Market B. The same new house sells for $650 per square foot, and the residual land value is $668,156, above the $650,000 value as improved. The house contributes −$18,156. The highest and best use as vacant is a new single-family house, and the highest and best use as improved is demolition and redevelopment with a new single-family house. In a teardown market the comparable sales for the house as it stands are themselves land purchases, so the improved value and the land value converge.

A use that needs a rezoning carries its cost, its delay and the chance it fails. The model charges $45,000 and 9 months for D(A) and $60,000 and 12 months for MF-1(A), raises the developer profit to 18% of sales, discounts the delay at 10% a year, and assumes a failed rezoning falls back to the new house after the same delay with the rezoning cost spent.

At full approval the Market B duplex is worth $671,300 as land against $668,156 for the new house. Nine months of delay bring it to $624,989, and the approval odds to $593,836. Even with approval certain, the duplex falls behind the by-right house once the rezoning takes more than about 18 days. The single-family price premium per square foot absorbs the extra unit, so upzoning does not change the highest and best use here. The fourplex loses in both markets in every case, even with the single-stair code path and no parking requirement for multifamily of up to 20 units.

The present use is legally permissible and physically possible. It fails financially feasible and maximally productive, so the present-use question is No, and the highest and best use is residential. Under FAQ Q23 and the Playbook matrix, the property remains eligible with Fannie Mae on UAD 3.6 if it meets every other requirement. HBU Playbook ↗

One point needs confirmation. The Playbook’s Scenarios 2, 4 and 8 mark both financially feasible and maximally productive No when another use wins, and this case follows that pattern. Whether Fannie Mae expects a teardown to be marked No on financially feasible, or only on maximally productive, is not stated in the published documents we reviewed.

The as-if-vacant analysis carries more weight than it used to. Fannie Mae’s March 2024 Appraiser Update called the as-if-vacant highest and best use “immaterial.” Appraiser Update ↗ The 2026 FAQ names site value, obsolescence and comparable selection as reasons it can matter, and in Market B it decides the answer.