Definition of Zoning Compliance?

[23Degrees]

I received a call the other day from an appraiser who had received a letter of demand from a borrower who claimed to rely on an appraisal for a purchase a few years ago. Unfortunately when the appraiser changed E&O vendors prior acts were not included and so insurance was not involved. The issue of contention involved a topic some of us used to love arguing (permits) but the purpose of this thread is not to re-argue that dead horse.

The home in question had an unpermitted family room addition and unpermitted garage conversion that left no covered parking. Both were disclosed in the report. Both were valued as unpermitted per the available data from the neighborhood area. Apparently due to recent interactions with the city the methodology and credibility of the values given for these items was under attack as was the "legal" classification of "zoning compliance". Per council the appraiser was advised that defending the valuation of these areas was possible, although with no guarantee of success, but advised to settle due to one small detail - the "legal" box was checked for zoning compliance without any definition of "zoning compliance" given in the report. Per the attorney the appraiser should "probably" have checked "illegal" but might have been able to limit or even eliminate their liability for both areas if language defining "zoning compliance" was included within the report as that term apparently can have wide interpretations depending upon the party involved. At the very least, in their opinion, liability could have been limited or avoided for the unpermitted family room addition despite, per the appraiser, permit requirements being instilled within the actual zoning code and at least one setback being violated but also possibly for the garage despite covered parking requirements in the zoning code.

Although we could save ourselves time by agreeing that "illegal" should have been checked - end of story - My question for the forum:

What language, if any, would be appropriate for defining "zoning compliance" within a URAR that would not infringe on Fannie guidelines and would have protected this appraiser from having to shell out serious dollars despite having checked "legal"? Maybe it would have only been applicable to one of the unpermitted areas in question and not the other. Maybe neither and this attorney has suggested something that is not possible. While the appraiser might still have had to defend their actual valuation of the areas involved, not having this zoning compliance issue in the equation would surely have been helpful and at least avoided the complete roll over that was advised by their attorney.

In any event it seems that having a defendable definition of "zoning compliance" within a report that utilizes these forms is probably worthwhile and I am curious what others think.

 

[CANative]

If zoning ordinances required covered/enclosed parking then the property improvements are not in compliance. e.g. "illegal." The appraiser should have consulted with the client and stopped the appraisal process right there (assuming this was an appraisal for lending uses.)

"Illegal is as illegal does" when it really is illegal.

 

[hastalavista]

CAN makes an argument that differentiates between a legal "use" and permitted/non-permitted modification/alterations, and his argument has swayed me.

In general, a residential use is a legal (permitted by right) use for most of our residential assignments.
So, if the improvement is a functional single-family residence and the zoning allows for such, that use is in compliance with the zoning ordinance.

Alterations may create a conflict. Presumably, if permits were obtained, then no conflict exists. If permits are not obtained, then the conflict may be trivial or significant.
A trivial conflict would be if the alteration was made in compliance with all requirements, and the only thing missing is the permit.
A significant conflict would be if the alternation is not in compliance with all the requirements, then more than just a permit may be required.

If the appraiser states the situation, and then describes how she/he came to the zoning-interpretation (legal...legal/non-conforming...illegal), then I think the appraiser is 99% covered or at least limits the potential liability (as it seems your friend's legal counsel indicates).

There are two parts to the equation here (IMO):
A. Accurately describing what exists, and then
B. Credibly valuing what exists (market value)

I appraise many properties that have non-permitted alterations. I specifically state what my research has found, I explain how I concluded my zoning-characterization, and then I go on to provide my rationale I used in valuing the property as-is. The lender has the ability to require the borrower to do something to the property, or accept the report as-is. But it has been informed as to what exists.
Some of my clients have specific requirements ("if an area is not-permitted, make the report subject-to); in those cases, it is an assignment-requirement and I comply with it.

I appraise older homes that do not meet the current zoning set-back or lot size requirements. A simple call to the planning department will reveal that such structures are typically grandfathered (some jurisdictions consider them to be "legal" as they are specifically exempt in the ordinance, others consider them to be "legal, non-conforming"); I include a comment as to that finding in the report.

Further, in my appraisal, I add this following statement (a Big Thanks to Rich Heyn):

The Intended User of this appraisal report is the Lender/Client. The Intended Use is to evaluate the property that is the subject of this appraisal for a mortgage finance transaction, subject to the stated Scope of Work, purpose of the appraisal, reporting requirements of this appraisal report form, and Definition of Market Value. No additional Intended Users are identified by the appraiser.
Note: This report contains sufficient information to enable the Lender/Client to understand the report. Any other party receiving a copy of this report for any reason is not an intended user; nor does receiving a copy of this report result in an appraiser-client relationship. Use of this report by any other party(ies) is not intended by the appraiser. The "UAD definition of terms" section included in the addendum is for the client's use and is not intended as an effort by the appraiser to communicate results to non-intended users.

I'm somewhat confident that the above would eliminate my judgment risk if a borrower (non-intended user) tried to sue me because he/she relied upon a mortgage-finance loan to make a purchase decision.
I say "judgment risk" as in = being sued and losing.
Nothing will stop litigation risk (being sued, with or without merit) if a borrower is so inclined. Hopefully, that risk will be eliminated by a summary judgment against the borrower.
:new_smile-l:

 

[mark hurlock]

What language, if any, would be appropriate for defining "zoning compliance" within a URAR that would not infringe on Fannie guidelines and would have protected this appraiser from having to shell out serious dollars despite having checked "legal"? .

Report subject to inspection by a zoning inspector. LOL

 

[CANative]

Report subject to inspection by a zoning inspector.

Nope. The property, on the date of value, was illegal (it needed a garage.)

 

[mark hurlock]

Nope. The property, on the date of value, was illegal (it needed a garage.)

OK, I fixed it. "LOL"

 

[Ronald Hauser]

I do not do appraisals on unpermitted additions because the addition is against local laws. I wished more appraisers would look at it the same and force every addition to be permitted. Instead most appraisers take on the extra burden and liability because of the homeowners decision to not get it permitted. I do not even care if the addition was done by a previous owner, the homeowner needs to get it permitted to make the property legal again or some other appraiser can take on the extra liability.

 

[CANative]

I do not do appraisals on unpermitted additions because the addition is against local laws. I wished more appraisers would look at it the same and force every addition to be permitted. Instead most appraisers take on the extra burden and liability because of the homeowners decision to not get it permitted. I do not even care if the addition was done by a previous owner, the homeowner needs to get it permitted to make the property legal again or some other appraiser can take on the extra liability.

Well, Mike Kennedy will certainly agree with this.

As far as appraisers are concerned...

:new_popcornsmiley:

 

[hastalavista]

I do not do appraisals on unpermitted additions because the addition is against local laws. I wished more appraisers would look at it the same and force every addition to be permitted. Instead most appraisers take on the extra burden and liability because of the homeowners decision to not get it permitted. I do not even care if the addition was done by a previous owner, the homeowner needs to get it permitted to make the property legal again or some other appraiser can take on the extra liability.

Sorry, Ron, I just don't see where it is my (the appraiser's) responsibility to require anything to be done to an improvement/property.

Now, as I already posted, I'm fine with this:

Some of my clients have specific requirements ("if an area is not-permitted, make the report subject-to); in those cases, it is an assignment-requirement and I comply with it.

If the lender wants to require something to be done because otherwise they won't make the loan, that's their business.
If the borrower wants the loan, they can make the decision to heed the lender's requirement or go somewhere else.

What I do think is 100% my responsibility is to do sufficient research and make sufficient disclosure as to how I made my zoning-characterization (legal, illegal, etc.) in the report so my client and intended users can understand my rationale and either agree or disagree with my conclusions.


All I'm hired to do is to:
A. Accurately and factual describe what exists so the lender understands the important characteristics of the property it is considering to use as collateral for a loan made to the borrower,
B. Provide a credible opinion of market value,
C. Complete and communicate the above consistent with the USPAP, SOW, and the engagement-agreement and assignment requirements.

 

[Ronald Hauser]

I do not understand how appraisers are/can be considered the bad guy for not wanting to do an appraisal on an illegal property just because the homeowner does not want to get permits. I am not a USPAP guy, never have been but do and know enough to keep my *** out of a sling; however, I do believe that there is something in USPAP about the property being legal.