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Help! Duplex vs. Triplex, possible USPAP violation

Discussion in 'Fannie Mae, Freddie Mac, USPAP' started by cnjourdan, Jan 7, 2009.

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  1. cnjourdan

    cnjourdan Sophomore Member

    0
    Mar 4, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    Louisiana
    Have question about an appraisal I recently did.
    I was engaged to perform an appraisal on a small residential income property.
    In process of discussing the job with client it was revealed that the subject is a duplex with an attached mother in law suite. The mother in law suite is not metered seperately and all utilies are connected to the ground floor unit. It is typical for our market that the number of meter determines the number of units. Furthermore the zoning for the area does not allow for Tr-plexes. Upon review of the facts and after speaking with other appraiser in the area, I advised my client the subject was duplex and should be appraised as such.

    The underwriter reviewing the report has stated that the report needs to be redone as a tri-plex since there are three units. He actually stated in the e-mail "it is what it is". I thought that was pretty amusing as that is what we normally have to tell the underwriters.:rof:

    I replied with there are only two metered units and the subject is a duplex and zoning does not allow for tri-plexes.

    According to my client this has been passed up the ladder for review by upper management with lender.

    If the lender requires the report to re-done as tri-plex would this not be misleading as the units are not on seperate meters and zoning does not allow for tr-plex. This would create multiple USPAP violations 1. false and misleading report 2. not producing a credible result, to start with.m2:

    If this is not a USPAP violation then the report would have to completed under a "Hypothetical Condition" as it would contrary to what exsists, correct?

    As of right now I waiting on a reply from the underwriter and have advised my client that I do not believe the subject can be appraised as a duplex.

    Any comments or advise on how handle this situation will be greatly appreciated.

    Thanks in advance for your help.:flowers:
     
  2. ghrousseau

    ghrousseau Member

    0
    May 5, 2006
    Professional Status:
    Licensed Appraiser
    State:
    Virginia
    In those cases I usually fax them the certificate of occupancy which is for two units. I tell them you are asking me to appraise and illegal use. I don't do that, sorry. I also, because of my lending background, tell them to explain why they can not get the loan done as two units vs three units? It is usually because they need the income from the illegal unit to qualify or because they want the higher conforming loan limit on three units. If it is really legally two units I would personally keep it as two.
     
  3. incognito

    incognito Senior Member

    0
    Jul 14, 2005
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    Remember, you MUST appraise the property at it's highest and best use. It would be a violation of USPAP to do otherwise (unless, of course, you are invoking an HA or EA). Although a triplex may be most profitable, it is not legally permissible, and you simply can not do it. It is most likely an illegal, non conforming use in the eyes of the county or city, could not be insured or rebuilt, and lots of other things as well. Hang your hat on the HBU requirement and tell them no. :)
     
  4. Parker

    Parker Sophomore Member

    0
    Nov 3, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Boy, are you guys wrong!

    Just disclose the facts and report how the market accepts the property or does not accept the property!

    In my market, it is common to find property zoned single family with 'non-permitted' second units. These properties sell. These properties collect rent. Just report the facts.

    Show similar sales of SFR’s with non-permitted improvements. It’s easy to show the market difference for permitted vs. non-permitted. The act of reporting what the market is doing with these properties is in no way misleading, provided you disclose the facts and report what the market is actually doing.
    :peace:
     
  5. Carnivore

    Carnivore Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    North Carolina
    Parker,


    I dont think reporting is his problem. He has a client problem. These nitwits probably have a current loan made on a structure that was MOST LIKELY REPORTED ON A PRIOR APPRAISAL as a legal tri-plex, or something it was not or is not.

    Now its looks like they have something entirely different in this new appraisal and it will cause problems for this nitwit client when they try and pawn off this onto a NO LONGER unsuspecting wholesale lender or Wall street portfolio.

    Chickens are coming home to roost.
     
    Last edited: Jan 9, 2009
  6. Mike Kennedy

    Mike Kennedy Elite Member

    38
    Sep 28, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    New York
    http://www.allregs.com/efnma/index....fnma/selling/part-xi/xi-ch-4/xi-404/xi-404.01

    We will not purchase or securitize a mortgage secured by a three-family to four-family property that includes an illegal accessory apartment.

    USPAP SR1-2

    (e) identify the characteristics of the property that are relevant to the type and definition of value
    and intended use of the appraisal, ​
    including:
    (i) its location and physical, legal, and economic attributes;
    ((iv) any known easements, restrictions, encumbrances, leases, reservations, covenants,
    contracts, declarations, special assessments, ordinances, or other items of a similar
    nature;
     
    Last edited: Jan 9, 2009
  7. incognito

    incognito Senior Member

    0
    Jul 14, 2005
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    Hmmmmm.

    I think Mike and Carnivore have shown who is wrong, but I'll add a little:

    Parker, are you saying that YOU would appraise a duplex with an illegal third unit, and give it value based on using 3 comparables of identical (illegal) properties?

    Perhaps you are a little confused, mixing up value in use and market value. Market value MUST be a legally permissible use. Period. You can not give value to an illegal use, it is a violation of USPAP. Just because some nut paid more for a similar property means nothing. Frankly, where I live, the municipality will make you remove an illegal use, and fine you for having had it, EVEN IF you just bought it!

    Remember the definition of an arms length transaction and market value imply a "knowledgeable buyer", and these buyers are clearly not knowledgeable enough to realize that they paid for something that could very easily be taken away...
     
  8. PropertyEconomics

    PropertyEconomics Elite Member

    0
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    Based upon zoning .. I honestly think appraising the property as a duplex is misleading. There is an illegal unit and highest and best use would dictate disclosure of this fact. Analysis would show it is illegal and thus not the highest and best use of the property.
    A cost to cure for removal of the third unit may well be appropriate in this assignment. No one is going to be happy in this instance, but as the underwriter said .. it is what it is.
     
  9. Parker

    Parker Sophomore Member

    0
    Nov 3, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Incognito,

    Yes, I would appraise a duplex with an illegal third unit!

    Does that mean I have done anything unethical? No, not unless I report it as a legal unit. No, not unless I attribute more value than the market bears. No, no, and no! and for a thousand other reasons, the act of performing the appraisal is not unethical!

    When and if I find myself with an appraisal problem of an under-utilized property (in terms of its zoning), or a property with ‘non-permitted’ improvements, then I have a more difficult appraisal problem.

    The appraisal is more difficult because it requires more time exploring and defining the highest and best use. Per Standard Rule 1-3(b) I must “develop an opinion of the highest and best use of the real estate”.

    In the end, I still have to report an opinion of market value as of the effective date of valuation. What kind of value I report is up to the needs of the client. There are several options, most common are: as is, subject to, and hypothetical.

    Oh, one final comment. Where in the definition of Market Value do you find these quotes of yours? “market value MUST be a legally permissible use” or “you MUST appraise the property at its highest and best use”.

    Perhaps a little more time spend re-reading the definition of Market Value might improve your page U-11 ranking.
    :peace:
     
  10. JSmith43

    JSmith43 Elite Member

    10
    May 5, 2003
    Professional Status:
    Certified General Appraiser
    State:
    California
    Let me add a bit of LO/UW perspective:

    An UW has to rate the property as a 2 unit property or a 3 unit property so that it is underwritten for the proper investment pool. There are pricing differences and LTV/CLTV differences and often DTI ratio differences for 2 unit vs 3 unit properties.

    UW's tend to think in terms of worst case scenario when underwriting, because they really get yelled at if the entity they are working for has to repurchase the loan or indemnify it upon post closing review by the end investor finding the property to properly be labeled a 2 unit vs a 3 unit.

    Full disclosure of the facts for the UW is the best you can do, IMO. The facts would include what is legally permissible (2 unit) and what the MV is for such a property with 2 legal unit and one bandit unit.

    The bandit unit is sometimes combined with the closest unit and rented to one party by those owners that want to stay within good graces of the local authorities. But, an owner can always decide to put on a mask and take on the risk of renting the third unit separately. The option to do so may or may not be valued by market participants. It probably varies with the intensity of enforcement by the local authorities and the willingness of new owners to take the risk.
     
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