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2 Flat Or Illegal 3 Flat?!?

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Steven Spychalski

Junior Member
Joined
Jan 14, 2003
Professional Status
Certified Residential Appraiser
State
Illinois
Hello:

I am appraising a small residential income property in Chicago, and have a question regarding legal conversions. In this market, multi unit properties are often converted from Single family homes into two unit properties, and 2 unit properties into three units, etc with and without going through the proper channels.

I have an assignment to appraise a 2.5 story property that was purchsed 8 months ago as a 2 unit building (1 simplex, and owner's unit duplexed). Since then, the new owners have converted it to a 3 unit building by sectioning off the top level and adding a kitchen. (They added a front entrace for the new unit as well, so anyone from the street can tell it is a 3 unit building!)

The property is completely rented at market rates, and has more value as a 3 unit building. My only problem is that these conversions often happen "illegally". Properties in this market are even marketed as a "legal two flat, and Illegal 3 flat" right in the MLS!. The county records are still taxing the proprty as a 2 unit building, but county records are usually very slow to catch up. The owner told me the conversion was legal, but was not 100% sure.

Would there be any wrong with completeing the assinment treating this as a 3 unit complex? On the flip side, would it be wrong to treat this as a 2 unit building with a lower value?

I have begun the assignment treating the subject as it is, a 3 flat, but would appreciate any guidance!!!!

Thank you!

Steve
 

Tim The Enchanter

Elite Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
He's "not sure" if he got the proper permits to convert to 3 units? :twisted: I'd bet not.

Unless he can provide proof it's legal I would treat it as 2 units, with assumption the conversion is illegal / unpermitted, and with disclosure as to what's actually there of course.

In general "no permit = no value". :redface:
We get a lot of this here too. Additions and garage conversions, unpermitted. Arggh.
 

Patrick Egger

Sophomore Member
Joined
May 29, 2003
Professional Status
Certified General Appraiser
State
Nevada
Steve ...

At question is not the just legality, but rather the outcome upon discovery. If the city knew of the illegal unit what would be the consequence? Would they make him remove it or just get a permit?

In this case, you have an extra ordinary assumption that the unit is legal. Appraise as such and make the report subject to verification that the improvements are legal. This way underwriting and the owner will have to resolve the issue.

Before you complete the report, call the client and advise them of the situation and how you intend to use the EO and get their approval.
 

Pat Butler

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Illinois
It depends on your definition of market value. If your definition includes valuing the property at its HBU then its use must be legal. But if your definition does not include that, then it's possible that the market may actually pay more for an illegal usage due to the anticipation of the future income (however 'iffy' that income may be.)

I took an AI class on this exact topic and that was pretty much how they handled it. In any event, contact your client to see what their thoughts are insofar as their instruction to you regarding an illegal use.
 

Steven Spychalski

Junior Member
Joined
Jan 14, 2003
Professional Status
Certified Residential Appraiser
State
Illinois
Thank you all for the input:

I did a little more digging and found the zoning accpts 3 unit buildings, so the only wild card is if the owner had the proper permits and approvals. I discussed the issue with the client and will complete the assignment as a three unit building with verbiage in the addendum stating thet the appraiser assumes all permits were applied for and recieved proior to construction, etc, etc.

Thanks again for all the useful info!

Steve
 

Patrick Egger

Sophomore Member
Joined
May 29, 2003
Professional Status
Certified General Appraiser
State
Nevada
Steve ...

suggest that you include any extra ordinary assumptions not only in the addenda but also in the letter of transmittsal, final recon, etc ... so there's not mistake by anyone using the report as to what you're basing the VO on.

Patrick
 
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