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Unpermitted Garage Conversion

Discussion in 'Fannie Mae, Freddie Mac, USPAP' started by valuequestor, Dec 24, 2009.

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  1. valuequestor

    valuequestor Junior Member

    0
    Aug 12, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Merry Christmas to all. I have been going round and round with a client on a garage conversion situation in a Salinas, CA neighborhood. I did the purchase appraisal of this older ranch with a detached 2-Car Garage that had been converted to a 2BR-1BA aux. unit. No permits were provided or known. Salinas wants non permitted work like this removed. They rarely enforce. I appraised this property "as is" and gave a cost to cure figure of $3000 to return the garage back to its intended use. Twice I was asked to provide comparables with a similar illegal use. I've read all of the previous posts on this thread. I don't want to do the additional research to find these "comps" if they even exist. Should I just revise the report to "subject to" the garage being returned to its original use? Is the info printed below accurate form the Selling Guide? It seems to contradict itself. How typical from Fannie. I'm tired of this one and just want to spend xmas with my family. Below is what the client just sent. Thanks for any advice.

    I wanted to send you the information the client has sent to us. It is requirements from the 2009 Fannie Mae selling guide:

    If the accessory apartment represents an illegal use of the property under local zoning law, the following criteria applies: • The property must be appraised in conformity with its legal use, that of a single family property • The property must conform to the subject neighborhood and the market • Comparable sales must include at least three properties that have illegal use of an accessory unit • The value assigned by the appraiser must be based on contributory value of the accessory unit, considering the quality of above grade finish work. In some cases, no value may be assigned • Verification that the existence of the illegal accessory unit will not jeopardize future hazard insurance claims is required • No rental income will be counted from the accessory unit

    I wanted you to be aware of what the client was looking at, when asking for more information in the report. Can you add commentary to explain if the unit is typical or atypical for the area? Can you include any comparable sales with similar units? If there are no sales of similar units, please detail your search criteria/parameters in your commentary.
     
  2. Mike Kennedy

    Mike Kennedy Elite Member

    59
    Sep 28, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    New York
    "I appraised this property "as is" and gave a cost to cure figure of $3000 to return the garage back to its intended use."



    B4-1.4-06, Appraisal Report Review: Subject Property Zoning (04/01/2009)
    Introduction
    This topic contains information on Appraisal Report Review: Subject Property Zoning.
    • Subject Property Zoning
    Permissible Use of Land
    Highest and Best Use <<<<<<<<<<<<<<<<<<<<<

    Subject Property Zoning
    Lenders must ensure that the specific zoning class has been reported in the appraisal, along with a general statement as to what the zoning permits.

    The appraisal must include a statement that the subject property presents a legal, confirming; legal, non-conforming (grandfathered) use; or an illegal use under the zoning regulations; or whether there is no local zoning.

    Permissible Use of Land
    Fannie Mae does not purchase or securitize mortgage loans on properties if the improvements do not constitute a legally permissible use of the land.

    Part B, Origination Through Closing
    Subpart 4, Underwriting Property
    Chapter 1, Appraisal Guidelines, Appraisal Report Assessment
    April 1, 2009
    Printed copies may not be the most current version. For the most current version, go to the online version at
    http://www.efanniemae.com/sf/guides/ssg/. 465

    Certain exceptions to this policy are made provided the property is appraised and underwritten in accordance with the special requirements imposed as a condition to agreeing to make the exception:

    Property Type Loan Eligible for Purchase or Securitization by Fannie Mae?

    A property that is subject to certain landuse regulations, such as coastal tideland or wetland laws that create setback lines or other provisions that prevent the reconstruction or maintenance of the property improvements if they are damaged or destroyed.
    No.

    A property that represents a legal, but nonconforming, use of the land and the appraisal analysis reflects any adverse effect that the non-conforming use has on the value and marketability of the property.
    Yes, if the mortgage is secured by a one- to four-unit property or a unit in a PUD project.

    A property where the improvements from a project that represents a legal, but nonconforming, use of the land only can be rebuilt to current density in the event of partial or full destruction.
    Yes, Fannie Mae will purchase or securitize a condo unit mortgage or co-op share loan, provided the mortgage file includes either a copy of the applicable zoning regulations or a letter from the local zoning authority that authorizes reconstruction to current density.

    A one- or two-unit property that includes an illegal additional unit or accessory apartment (sometimes referred to as a mother-in-law, mother-daughter, or granny unit).
    Yes, provided that:
    • The illegal use conforms to the subject neighborhood and to the market. (SEE# 5 BELOW)
    • The property is appraised based upon its current use.
    • The borrower qualifies for the mortgage without considering any rental income from the illegal unit.
    • The appraisal must report that the improvements represent an illegal use.

    The appraisal report must demonstrate that the improvements are TYPICAL for the market through an analysis of at least three comparable properties that have the same illegal use.
    • The lender ensures that the existence of the illegal additional unit will not jeopardize any future hazard insurance claim that might need to be filed for the property.

    A three- to four-unit property that includes an illegal accessory apartment.
    No.

    Highest and Best Use
    If the current improvements clearly do not represent the highest and best use of the site as an improved site, the appraiser must so indicate on the appraisal report. Fannie Mae will not purchase or securitize a mortgage that does not represent the highest and best use of the site.
     
    Last edited: Dec 24, 2009
  3. CANative

    CANative Elite Member

    122
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I don't understand why this issue raises my blood pressure more than any other issue that appears on the forum.

    Who said it was an illegal use? The Salinas Municpal Code (which contains the Zoning ordinances) defines this type of structure as:


    If they have a description then there must be some instances where it constitutes a legal use of the land. I imagine they are trying to conform to CA's Second Unit laws.

    What's probably going on is that this type of use needs a variance (an administrative permit) and since it is a garage conversion and there is probably a requirement for covered or enclosed parking the property is in a legal limbo status without building another garage.

    You may need to do some more research instead of taking what seems to be the easy way out. It might cause you some liability if the owner rips out the second unit to get a loan only to find out all he really needed was a $75 permit.

    Digging a little deeper it appears that under most of the residential ordinances, a second dwelling is a permitted use.
     
    Last edited: Mar 5, 2012
  4. CANative

    CANative Elite Member

    122
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    http://library2.municode.com/default-test/home.htm?infobase=16597&doc_action=whatsnew


     
  5. 23Degrees

    23Degrees Senior Member

    6
    Jan 31, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Good point Mr. Boyd - many threads I've perused have had posts that make it very clear that it is important to distinguish between an "illegal use" and a "non permitted use" or a use or improvement that has not been permitted by the JA for that specific property. Many of these granny units or garage conversions are a legal use for the zoning but the specific units in question have not undergone the permit process and have dubious code compliance. Yes, it might be a question of a $75 permit fee but it could also be a complete gutting with re-plumbing, rewiring, and re-framing to get the thing up to code.

    Reading the guidelines from the Fannie selling guide it could be viewed as understandable that some readers interpret things differently. This particular point is under a section titled Permissible Use of Land and further sub-sectioned under Property Type. When they state within the guideline "illegal additional unit" was it their intent to include those additional units that would be allowed under the zoning but have not been given proper permits by the JA and presumably not given proper inspection by building department personnel? The qualifiers given for when said property with "illegal additional unit" can be loaned upon proceed to refer to said unit as an "illegal use". Is there any significance to the jumping to that term, or the seemingly interchangeable way in which these two terms are presented.

    Hypothetical - R1 zone that allows for additional "granny unit". The "use" is a permissible one for that zoning. Subject has a granny unit that was built by Uncle Jethro, had no permit applications, no inspection by the city, and no permits were issued by the JA. It is a permissible use of the land according to the zoning, however the specific structure did not undergo proper process.

    Under Fannie Guidelines are there those that would consider this an "illegal use" and would therefore be basing the term "illegal" on its permit status, not on whether or not the actual use is a permissible one for the zoning?

    Under Fannie Guidelines are there those that would not consider this an "illegal use" as the actual use itself is a permissible one regardless of whether or not the specific structure built by Uncle Jethro has been permitted?
     
  6. Mike Kennedy

    Mike Kennedy Elite Member

    59
    Sep 28, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    New York
    Sec. 9-5.100. Authority of building official.
    The building official of the city of Salinas is hereby designated to administer, implement and enforce this Article I and all codes and standards adopted and set forth herein.

    (Ord. No. 2478 (NCS), § 8.)

    <A id=TOC.2 name=TOC.2>
    Sec. 9-5.105. Enforcement and penalties.
    (a) Any person who violates a provision of this article or who fails to comply with any of the requirements set forth herein or in any of the codes adopted in this article or who shall erect, install, alter, repair or do work in violation of the approved construction documents or directive of the building official, or of a permit or certificate issued under this article, shall be guilty of a misdemeanor, punishable by a fine or not more than one thousand dollars or by imprisonment not exceeding thirty days, or both such fine and imprisonment. Each day that a violation continues after due notice has been served shall be deemed a separate offense. Alternatively, and in the discretion of the city attorney, any such violation may be prosecuted administratively pursuant to the city's administrative remedies ordinance or pursuant to any other remedy available under the law or in equity.

    (b) The application of the above penalty shall not be held to prevent the enforced removal of prohibited conditions.

    (Ord. No. 2478 (NCS), § 8.)

    a violation is an actionable offense as it violates a local LAW (ordinance)

    Illegal is as Illegal Does


     
  7. SANDY

    SANDY Senior Member

    0
    May 17, 2007
    Professional Status:
    Appraiser Trainee
    State:
    Florida
    How about you call the appropriate zoning official to get a written determination and then proceed. Anything that would be subject to more than one clear and concise interpretation would require an Ea.
     
  8. CANative

    CANative Elite Member

    122
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    The unlawful act of a person does not mean that the product of that act are also illegal.

    If someone broke into a pharmacy and stole a container of methacodone and then sold it to kids in the nearby high school that would be illegal, a violation of law and a low life thing to do. The pills would still be a legal drug.

    This type of appraisal problem cannot be solved with specific advise on the internet because it is a very local issue and there are many local and site specific factors.
     
  9. Webbed Feet

    Webbed Feet Elite Member

    20
    Feb 11, 2005
    Professional Status:
    Certified Residential Appraiser
    Try doing your SOW due diligence!

    Ok, hold up right here. You knew for a fact you had an illegal use of the land taking place in that two SFR units were not allowed. You did not use, nor did you so much as want to look for, comparable sales with similar illegal second units. So you had no market data at all to represent the "As Is" conclusion that you came to? The "As Is" would be the market value including the contributory value to the market of the illegal second unit. I hope you do understand that what you stated above completely makes it sound like you have failed to do your job, sounds as if you failed to comply with the SOW Rule, and hence also failed to comply with the Ethics Rule and the Competency Rule if so.

    Directly because you do not know the answer to your above question, is why I think you may have violated the SOW Rule, and hence the other two. A situation like you describe would REQUIRE proper communication with the client PRIOR to signing and delivering any real estate appraisal report to them!

    The issues here are all caused by a combination of your failing to apply the SOW Rule in understanding and developing the SOW for your client's "Intended Use." This is why you've just managed to possibly violate USPAP all over the place. Understanding your client's intended use was ultimately a resale of the loan to the GSE Fannie Mae, and bothering to stay abreast of Fannie requirements in such situations, the proper renegociation of the SOW with the client would have demanded either being able to provide a minimum of three market sales of not remediated similar illegal uses (for warm ups), the very "Subject To" conditions you now think of, or your withdrawal from the assignment due to unacceptable assignment conditions. Because you proceeded with a SOW that was NOT credible for the client's intended use. It happens to be your job to understand that and prevent it, if the client and their AMC (agent) likes it or not.

    This stuff is USPAP 101 ..........
     
    Last edited: Dec 28, 2009
  10. Webbed Feet

    Webbed Feet Elite Member

    20
    Feb 11, 2005
    Professional Status:
    Certified Residential Appraiser
    What should have happened.

    Now we'll get to what you should do.

    If you don't want to do your job, then withdraw and don't bother charging for doing what did not meet our duties under the USPAP SOW Rule. If you now cannot work this out with the client, blame it on yourself for not having worked out a SOW that would be credible for the client's intended use BEFORE you signed a report! ......

    What does USPAP, the SOW Rule say you should do? Why don't you try reading all of that in USPAP again. Because what you now must do is either come to an agreement to provide a real estate appraisal based upon a credible SOW for this client, versus the intended use, or withdraw.

    The information seems to be exactly what is in the Selling Guide. NO, it is NOT conflicting at all. What I bolded and underlined for you means to NOT go appraising the subject as if it is a two unit income property that is legally zoned for multifamily. Notice no rental income for the illegal unit may be counted? So there is no contradiction at all. IF the subject is market acceptable with an illegal second unit, your SOW would have demanded including the act of proving that by providing a minimum of three similar illegally improved comparable sales. IF you were unable to do so, then yes, that would mean any "As Is" SOW for this intended use was probably not possible at all and would have to be declined by you expressly due to the GSE requirement.

    So, unless the client was going to agree in writing to alter their intended use (and to take reporting off the 03/05 Fannie forms in my opinion), everyone involved with this mortgage transaction had a bunch of choices to make, and that included the borrower. But before that, much of the decision tree also focused around the hazard insurance issue, as well as the illegal unit probably not being allowed to be rebuilt if destroyed. In most of these cases, IF the client will not alter the intended use, IF the borrower will not or cannot provide evidence the second unit is legal with signed occupancy certificates + permit safety inspections signed off by the J.A., and the appraiser cannot prove market acceptability with comparable sales, the assignment is stalemated... It has to be canceled as no SOW credible for the intended use can be supplied.

    Typically, the appraiser requiring in writing the client can get past the hazard insurance issue or the providing information the second unit cannot be rebuilt if destroyed (and lovely things like the electrical, septic, etc. to the second unit is all illegal as well, causing the main unit to have illegal aspects as well... always find that kind of crap don't you know?) kills these types of assignments very nicely.
     
    Last edited: Dec 28, 2009
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