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As-is With Extraordinary Assumption Vs Hypothetical Condition

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Cranedog

Freshman Member
Joined
Feb 8, 2015
Professional Status
Certified Residential Appraiser
State
Pennsylvania
I am in need of some clarification on a specific topic so if any of you have experience with this topic I would really like to hear what you have to say.

Scenario

Purchase transaction of a Single family home with a separate detached 4 bedroom 1.1 bath ADU building that is currently not a permitted dwelling unit. It can only be utilized as a storage building at the present time; therefore, the prior appraisal that I completed 6 months ago was valued as a storage building based on this information which was discussed with the Lender/Client and Zoning Officials.

Zoning officer stated that he would approve this ADU as a dwelling unit if the owner obtained a septic permit from the State of Pennsylvania and then as a formality apply for the use permit which he would grant. Parties involved have received a quote of an unknown amount but likely 20,000 to 30,000 for a new septic system for the ADU building alone. They are receiving a conditional CO requiring the septic system install; however, It will not be installed until the spring due to weather conditions. They said they are going to pay the contractor at closing in full and wait until the weather breaks to install. The Lender/Client wants an As-is appraisal with an extraordinary assumption and I am inclined to believe that since the septic system is not in that it needs to be a hypothetical condition or a subject -to appraisal. Does this sound like I can write as-is with an extraoadinary assumption as that is what the Lender is Pushing for.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
You will not find universal agreement on the general question - Can one do an "as is" appraisal with an EA?

I will point out that in every "as is" Fannie Mae appraisal report there is a long list of assumptions connected to the so-called "as is" value.

Having said that, in the scenario you describe it seems like you are being asked to provide a square that is round.
 

Cranedog

Freshman Member
Joined
Feb 8, 2015
Professional Status
Certified Residential Appraiser
State
Pennsylvania
You will not find universal agreement on the general question - Can one do an "as is" appraisal with an EA?

I will point out that in every "as is" Fannie Mae appraisal report there is a long list of assumptions connected to the so-called "as is" value.

Having said that, in the scenario you describe it seems like you are being asked to provide a square that is round.
Are there legal ramifications if I write as-is with EA as this lender will likely portfolio this.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Is this required to be completed on the 1004 form? I'll assume "yes".

You actually have an interesting scenario, and I can see under certain circumstances, how this could be an EA. But those circumstances don't apply to a typical GSE assignment.

So, I say you are correct: for Fannie/Freddie, the as-is condition does not have the sepctic system, etc., etc. The correct way to value the property is as-is with no extraordinary assumptions/hypothetical conditions or, if they want to value it with a permitted ADU and new septic system, then that would be the hypothetical condition, not an extraordinary assumption as of the effective date.

To add a wrinkle to your assignment, you should consider the following:
As-is, there is no ADU. However, apparently there is the potential to create an ADU and the city jurisdictions have told you they would be amenable to permitting it with the installation of the new septic system.
Let's assume the new system costs $30k. To that, I would add a reserve and some EI, so let's say $40k to get it permitted. How much would the legalization of the ADU contribute value to the property? If not more (demonstrably more) than the $40k it takes to get there, then as-is, as finished storage, is what it is worth with that potential (IMO).
However, let's assume it contributes $125k in value. Then, to capture $125k, I have to spend $40k, and earn $85k after recouping my cost. If the potential for ADU conversion adds that much value, then that may be a factor in the as-is valuation.

Again, look at it this way. A house has sold and an ADU was built; however, the septic system requires a $40k cost to get the permit. The permit is a reasonable sure thing. The $40k covers the cost, reserve, and entrepreneurial incentive (EI).
Would a house, in such a condition, sell for more than one without the ADU already built but requiring $40k to complete? If so, there is value in that potential and it would impact the as-is value.

Good luck!
 
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J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
What is the extraordinary assumption you want to make? IS the EA that the existing storage building can be legally permitted to an ADU if owner fulfills septic tank /permits? AKA it is still appraised as is with storage unit but potential for conversion. Please clarify and I can comment after that.
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
Based on information given, imo there should be no EA and can't be an EA in 1004 as is format - that said, ere is a known fact now that with conversion and septic tank the current storage shed could be converted to ADU use. Therefore, the storage bldg has more value now due its potential than it f no possible path existed for it to be a legal ADU.

Therefore Imo the way to appraise this is as is existing storage building, with its value enhanced due to potential conversion in future to an ADU. No EA needed.r
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
Note that the GSE forms specifically prohibit additions or changes to the assumptions (except through use of the checkboxes at the end).

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Michigan CG

Moderator
Staff member
Moderator
Joined
Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
An EA is something that you assume to be true but might not be true. A HC is something you know not to be true but are assuming to be true for the purposes of the report. You can't use an EA because as of the effective date there is no septic. The only way to do this is with a HC and it cannot be AS-IS.

Denis brings up a good discussion in that you can do what he suggests BUT as of the effective date the ADU is not legal without the septic. You could use a HC that the system is approved and that it is a legal ADU, but again, as of the effective date we know this to not be true.
 

Tom4value

Senior Member
Joined
Dec 4, 2016
Professional Status
Certified Residential Appraiser
State
Massachusetts
An EA is something that you assume to be true but might not be true. A HC is something you know not to be true but are assuming to be true for the purposes of the report. You can't use an EA because as of the effective date there is no septic. The only way to do this is with a HC and it cannot be AS-IS.

Denis brings up a good discussion in that you can do what he suggests BUT as of the effective date the ADU is not legal without the septic. You could use a HC that the system is approved and that it is a legal ADU, but again, as of the effective date we know this to not be true.
Stole my thunder! This is exactly what I was going to point out. Therefore, I will just make the observation that the lender is looking for a nice and neat “as-is appraisal that can’t be done. It would be as useless as a one way dead-end Street.
 
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