4 Units Or 5 Units?

[Yellow Fin]

Just got an order yesterday, a fourplex unit.

The county record shows fourplex, but MLS shows five units, all 3bds/1bath/1ktchn. Listing agent says the seller submitted a permit to City for five units in June, 2004. It used to be four units. Listing agent says Selling agent wants to deal as fourplex.???

According to the Building Department, there is no building history of this subject yet except cosmetic/minor repairings. It only shows fourplex. The subject is more than 100 years old.

Scheduled inspection is this coming Monday, but we may have to reject this order.

How do you determine the case like this one?
Could it be five units? or four units with legal unit? or four units with illegal unit?

<Daniel>

 

[hal380]

Hi Dan;

When there is a dispute between fact and wish, read City Records and Realtors, I stay with the City Records. Look at it this way. If you say it is a 5, and value it as a 5, and then the bank owns it and can only sell it as a 4, who do you think they will want to talk to? Hummmmm?

In my market there are many 2 family homes with finished attics, now rented out as a illegal 3rd. My city says 2, so I value it as a 2. Usually not to hurtful to value because I recognize the additional bedrooms, kitchen and bath on the third fl, now associated with the 2nd fl rental unit.

In your case, where is the 5th unit? below grade? If so you have no problem. Above grade? Stay with the legal use. HABU

Regards

Hal

 

[Pamela Crowley (Florida)]

Hold on there!!!!

Which is it in reality? 4 units or 5 units??????

What is actually physically IS, is how it MUST be appraised. Just because the tax records are not yet up to date or someone lied on the building application doesn't make it NOT what it IS. If that were true, a new house doesn't exist because it's not in the tax records yet??? The new screen enclosed pool in the back yard doesn't exist because it's not in the tax records yet???

The LO and selling agent are trying to get you to commit fraud by appraising is as something it isn't!!! Please DON'T do that!!!!!

Also, if it really is 5 units, it needs a Cert. Gen. Appraiser - in most areas of the country.

(Edit: I just had to bold that line.)

 

[Caterina Platt]

What Pam said! Additionally, if it is truly a 5 unit, it throws the loan into commercial category which makes things much more complicated and the LO is probably trying to avoid this.

 

[Otis Key]

Pam - thanks - I was about to input the same thing.

Daniel - I don't know your license status but understand this. The Small Residential Income form (1025) is designated as a 2 to 4 unit appraisal form. If it's a 5-plex, guess what! You now get to step up to the higher, more difficult EP9 appraisal form or a narrative format. In either case, it now becomes more difficult and in most states requires a general certification, or for you to affiliate with a GC to stay in compliance with USPAP.

The other factor that might come into play is this. If you appraise it as a 5-plex and then there is a fire to one of the units, can it legally be rebuilt since it effectively doesn't exist on the books now? You might end up spinning your wheels a lot and doing a whole bunch of work for no pay.

FWIW - associate or decline

 

[hal380]

Good Morning Otis, Pam, and Catrina;

I need a clarification. I agree with the screen porch, patio, finished basement type of examples. But if we are supposed to appraise at HABU, and the current use, 5 fam, is illegal, how do we do that?

OOPS, I just checked the form, and there is an "illegal" box to check.

OK so maybe I answered my own question, but what about HABU? at it's highest and best, it would be that which is legally permissible etc etc = 4 family.

The issue of Res cert or General cert depended upon the ultimate answer to Dan's question and I did not address it because the issue was not decided.

Regards

Hal

 

[Pamela Crowley (Florida)]

The county record shows fourplex, but MLS shows five units, all 3bds/1bath/1ktchn. Listing agent says the seller submitted a permit to City for five units in June, 2004. It used to be four units.

With that, is there really a question as to whether it's a 4 or 5 unit property??? I know MLS info can be really wrong sometimes, but it's listed as a 5 unit and the listing agent admits it's a 5 unit with a 'permit to City for 5 units in June 2004'.

It used to be four units.

If the City hasn't approved it for 5 units, it's illegal right now and must be reported as that. I believe my license level as Cert Res in FL makes it illegal for me to do this appraisal. Even though it's still questionable as to whether it's legal or illegal as a 5 unit property, I wouldn't touch this one at my license level and would refer it to a Cert Gen.

 

[Farm Gal]

Of greater concern is the fact that Daniel is appraising in the SF Bay area, where jurisdictional regulations as to unit size/occupancy can be VERY strictly enforced in one jurisdiction and pretty loosey goosey in the neighboring one.

Daniel, I think you had best focus on three specific areas:

1. What is the physical reality of the units 'as is' on the day of inspection/effective date

2. How does that 'as-is' reality reflect against the LEGAL USE of the property

2. a Is the property legally permissible 'as-is'?

2. a i Can it be legally inhabited as a 5 unit?
2. a ii If modifications are not legal would the city/county require demolition or modification and at what cost?

then and ONLY after these questions are resolved can you ask:

3. How does the market react to the legal/illegal situation present?

3 a Some markets could not care less about legal/illegal they just wanna know does the cash flow!

3 b Some markets will discount for illegal issues to a nominal extent...

~~~~~~~~~~~~

BUT IN ANY CASE you would want to be able to clearly disclose in your report (forget summarizing on this kind of issue - SPELL IT OUT PLAINLY)

so that YOU are not left holding the bag years from now, if when some disaster befalls the lending process or the property itself!

 

[George Hatch]

As if there weren't enough wrinkles in this, I'm going to throw in one more.

The property might actually be worth more as 4 units. Now before you dismiss this idea out of hand, it might pay to actually look at the data.

Here's the thing about small apartment properties in the 5-7 unit range. They are classified as investor driven (aka "commercial") properties rather than properties with some liklihood of owner-occupancy (residential). Compared to 1-4 properties, there aren't that many lending programs out there and most of those programs will not include a 30-year loan term; they'll use a 30-yr amortization but with a 5-year call. LTVs are also - generally - lower. The market reacts to these (around here in SoCal, anyway) with much lower price/unit and price/room indicators, and generally higher GRM/GIM factors.

For this reason there has been a trend to convert 5-unit properties down to 4 units. There's enough of a price differential to make the conversion pay. If this is also the case in your area, you'll need to be very careful about your comps. If you end up appraising it as 4, you should only use other 4-unit properties as comps because the 5-unit price indicators will generally be a lot lower. It would be better to use a 3-unit sale as a comp rather than a 5-unit, although I would recommend you stick to other 4-unit properties if that is at all possible.

If you do it as 5-units, you'd have a little more leeway with your comps, as they would be selling primarily off of the income. So you could easily use sales of 5-8 unit properties as being directly comparable because their value indicators would be in the same ranges. You could not use 4-unit properties, though, because it's just too different a market segment for direct comparison.

Anyways, I don't really know about your market area and the pricing trends in it, but the financing and investment criteria are going to be reasonably similar between your market and mine.

One thing is for sure. Even if it is a 4-unit property, there are enough nuances to the problem to make this a complex appraisal assignment. I hope you have a CG to supervise and sign off on this. The HBU analysis alone is going to require more than the average amount of development. For reports, you'll either use the 1025 if its a 4-unit; or the 71b if its 5-units.

 

[Otis Key]

As if there weren't enough wrinkles in this, I'm going to throw in one more.

Gotta Love it! Gotta Love this profession! Never a dull moment!

:rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: