Converted Garages in SoCal

[ZZGAMAZZ]

Before anybody agrees on anything (couldn't imagine that happening on the Forum) the dialogue should include FHA stipulations concerning conversions, which per HUD must be defined as living area regardless of the permit status, if the appraiser is willing to comment on the observed 'workmanlike manner' of the work. (It seems like FHA assignment that included inspection of a re-configured property posed an extra measure of liability...)

 

[Lloyd Bonafide]

Before anybody agrees on anything (couldn't imagine that happening on the Forum) the dialogue should include FHA stipulations concerning conversions, which per HUD must be defined as living area regardless of the permit status, if the appraiser is willing to comment on the observed 'workmanlike manner' of the work. (It seems like FHA assignment that included inspection of a re-configured property posed an extra measure of liability...)

I guess it's safe to say that every City and County is different, and we have to consider each situation individually. Personally, I have done lots of appraisals where I counted some unpermitted areas as living area, and plenty of times I have not counted it.

For FHA, no matter what their stated policies have been in the past, and no matter what somebody told us from the HOC, the bottom line is that the individual lender, whether for an FHA or a conventional loan, does not typically want unpermitted areas included as living area today, because they are so fearful of not being able to resell the loan. 3,5, or 10 years ago, it was different.

 

[23Degrees]

Gama -

Following these guidelines you cite (FHA) brings in the third scenario brought up in post 14 that was a response to the example in post 10. To summarize, there are now three scenarios:

Reporting option 1 - Appraise "as is" with estimated cost to cure to return garage area to its original use and to within compliance of local codes.

Reporting option 2 - Appraise "subject to" via CB3 - hypothetical condition is that the converted garage has been restored to its original use and to within compliance of local codes.

Option 3 - Appraise "as is", including the unpermitted garage conversion as living area or as a living area use and value based on market data within the area.

All are potentially compliant but have varying levels of potential liability. Option 3, regardless of whether or not it need be implemented due to FHA guidelines, appears to be dangerous from a liability standpoint.

One city near Palm Springs was threatening to throw an old lady in jail over a garage conversion. http://www.nbclosangeles.com/news/local-beat/Grandma-If-It-Hadnt-Been-for-Them-Id-Be-in-Jail.html

No appraiser was involved here, but in a scenario where someone had just bought into a similar situation, it seems clear the appraiser would have been vulnerable if he had done anything other than option 2 above. If he used reporting option 1 he better have had that cost to cure figure right. If he had used option 3 he had better get ready to be asked to pay for whatever the city ultimately asked for regardless of whether or not FHA was asking for it to be done this way.

A side note on the term "workmanlike manner" - Once one cites that an area is "deemed safe", or was constructed in a "workmanlike" or "professional" manner they might have taken on a large level of responsibility for the area in question. How one can do that at lender request when it is a 99% or higher probability that as an appraiser they have no professional background, authority, or competency to do so is a real question. Even if they were competent or had the background, why go beyond the pre-printed form language or otherwise take on this potentially huge responsibility. The lenders routinely ask for this language with regard to unpermitted areas and it is a clear case of wanting a patsy available in case something goes wrong.

 

[ZZGAMAZZ]

23Degrees: Towards that same end, might exposure to liability be limited by indicating that the appraiser's description of the "workmanlike manner" was based upon the arms/shoulder observation of a layperson, and recommend that the client obtain a professional opinion from a licensed professional familiar with construction techniques and building codes (regardless of whether HUD is involved as an intended user).

The concept of scoping away ones liabiilty is often dubunked on the Forum, and I imagine that a single experience as a defendent would tend to make ones position on this issue much more conservative.

The Forum tends to feel that market reaction supercedes jurisdictional authority, and RalphK opened the window for a hedge position in a jurisdiction where precedent has been established by the reluctance of the prevailing jursidiction to respond to non-permitted areas...however there was a little girl who died from an illicit heating source in a non-permitted garage conversion in Long Beach about 3 years ago, and I shuddered when reading that article to remember all of the reconfigured nightmares I encountered in entry level markets throughout SoCal.

I honestly gave up trying to figure out the condondrum being addressed in this thread, but I think there are 4 or 5 additional, distinct scenarios.

 

[ZZGAMAZZ]

It's been awhile now but I recall a few purchase-related assignments in Pasadena, where the city requires a physical property inspection by the JA prior to a property being leased or sold. Compliance is required before the JA will issue a COO.

Maybe that's an example of inordinate police power, or maybe that's why Pasadena is so beautiful...

 

[MZ818]

I had a discussion with a local reviewer in regards to these garage conversions and FHA. She was saying that FHA does not require permits on these garage conversions, but would like to know the quality of the construction/condition and if it is typical of its market, such as Pacoima, Arleta, Sylmar, etc.. then you can value it based on its current use, but disclose what it is in detail. She also brought up the same point as ZZGAMAZZ, what if there were a fire, due to electrical was not done to code and someone gets hurt or dies? Then what. These are all very good points. I don't believe there is a right or wrong answer to this question, just different clients with different expectations.

 

[23Degrees]

MZ - there is not a specific right or wrong way from a compliance standpoint as you indicate. Unlike the thread in the General Forum where my only concern was compliance for the broad category of unpermitted areas, here my concern was for liability with regard specifically to garage conversions. I still have to go try and look up some case law but based on the limited base of information I have access to it looks pretty likely that full compliance and reasonable protection from liability exposure can be mutually exclusive. Like Lee said, they can sue you for whatever they want but it is disturbing if an FHA guideline like the one you cite strips one of all capability of proceeding in a manner that does not leave ones posterior completely exposed. When you don't use option 2, you better hope that nothing goes wrong. In other words, congratulations - you are now at risk to be the proud owner of any problems that arise with this garage conversion, guidelines or not. I have not run into this situation with an FHA assignment yet but if/when I do I might need to bail.

If the La Quinta example had been a purchase from the prior year and suddenly the new owner must reconvert the garage - in a prior article they had the cost estimated at $10,000 - or face stiff penalties, the fact that an appraiser followed guidelines properly does not get him out of the defendant's chair.

Gama - "Towards that same end, might exposure to liability be limited by indicating that the appraiser's description of the "workmanlike manner" was based upon the arms/shoulder observation of a layperson, and recommend that the client obtain a professional opinion from a licensed professional familiar with construction techniques and building codes (regardless of whether HUD is involved as an intended user)"

- It might, but it might not. I came across a legal definition of "workman like manner" that has been used by at least one attorney.

Here is the link: http://www.lorman.com/newsletter/article.php?article_id=903&newsletter_id=199&category_id=3

Once you cross that line in a professional capacity who knows what might happen. Basically by doing what you noted above you are stating that the work was done in the manner described (workmanlike - professional) - but then stating that you have no idea that it actually was done in the manner described. I am not entirely comfortable being confronted with that paradox in certain situations.

I have tried some reasonable variations of this that would fit into a typical scope in an appraisal assignment such as - "No readily observable cosmetic defects or deferred maintenance" and it still resulted in demands for the appraiser to certify that the work was done in a "workman like or professional manner". There was great unhappiness regarding leaving out those terms and limiting the certification to readily observable and cosmetic - why? I can think of no other reason than that they need a fall guy. If they were really concerned about the construction and wanted to know the true level of code compliance or "workmanlike" standards beyond readily observable and cosmetic they would pay the right professional to take a look at it.

 

[JohnCCarlson]

23Degrees,

I posted several days ago that I have an upcoming litigation where just what you mentioned happened. Buyer bought 4 units, one was an illegal garage conversion. City requires illegal garage conversion to be put back to useable parking; now Buyer has a 3 Unit project and is "upset" to the point appraiser is being sued.

 

[valuequestor]

FNMA Selling Guide

Merry Christmas to all. I have been going round and round with a client on a related 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 permited 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.

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.

 

[23Degrees]

Mr. Carlson - yes I did see your example and found it quite relevant. If you can divulge it, it would be very interesting to know if the appraisal in question cited the non permitted status of the 4th unit within the report or rather just appraised it as a fourplex without any disclosure or notation at all as to that fact.

valuequestor - First off - I think I see a discrepancy in what the client sent you. They state that the property must be appraised to its legal use however the selling guide indicates that the property will be eligible provided that it is appraised based upon its "current" use. It also looks as though the client has thrown verification of insurance issues on you however the selling guide indicates that this is a lender responsibility.

That said here is my take on your situation:

You went "as is" with cost to cure which is a common option it seems. By doing so it could be argued that you've inferred that this situation is not typical for the area or conforming to the market. This might (and I emphasize "might" because of course I don't know all of the facts here) be causing the loan package to have eligibility problems and has resulted in this request. Basically it looks like they might be having difficulties and are calling you out on this issue. They have asked for two things:

1 - Is the conversion typical or atypical for the market. Fannie's selling guide seems to imply that in order for a feature of this sort to be categorized as typical for the market there must be three or more comparable properties available. While it could be argued that this is some pretty strict criteria for determining if a particular feature is typical this is what is printed in the guideline.

2 - Any comparable sales having a conversion feature.

With regard to item 1, if you determine that the unit is atypical based on their criteria you need to be sure of that as you could have backlash if it is later determined that it is not atypical and should not have been declared as such, making the property ineligible. If you find that it actually is typical, some might argue that you were not in compliance with Fannie guidelines as at that point it should have been appraised not "as is" with cost to cure but "as is" with garage conversion in place. That would mean using the market data to extract the market value of the conversion - (lets forget the whole liability thing for a second). For the record, I'm not sure if going the "subject to" route avoids being called to the carpet here as that too seems to infer an atypical situation.

With regard to item 2, they are there or they are not - at the very least, by using the cost to cure option you have opened yourself up for a request to bracket the feature in question.

My own personal take is that I would feel obliged to comply with the request and be sure to review the data carefully. If someone's property is determined to be ineligible based on your appraisal when it actually was eligible, it could come back to bite you. Then again if you are mandated by guidelines to appraise the home based upon its current and "illegal" or unpermitted use you might be leaving yourself open to being bit by a much bigger and meaner dog. The fact that you are being called out on this is somewhat interesting in itself. Keep us posted.