Fannie requirements for non-permit additions

[PhiloFarnsworth]

I work in a semi-rural market where it is not unusual for a dwelling to have an addition that never shows up as GLA in public data. This is usually due to the work having been done a couple decades and a number of owners ago, the reasons for not having a permit being lost in the fog of time. Because of the slapdash nature of some of the codes and zoning officers, especially 20 or 30 years ago, it is quite possible that a permit was taken out but lost. It is also not unusual for some of these farmer types to DIY it.
The point is that such work, especially older work, is well accepted by the local market. I have seen a good number of sales where such issues come up. When the work is equal in quality to the rest of the dwelling (and 30 years of standing the test of time show it) it has value similar to the rest of it. In the recent past, I have sometimes been told to not include unpermitted area in the GLA but could add in its value elsewhere. It often also meant that all the comps were larger in GLA than the subject.
But apparently Fannie no longer allows this. If one cannot find a permit for an area, not only must it be left out of the GLA, but apparently, it cannot be given value elsewhere. The way to deal with this, according to Fannie, it to provide comps with unpermitted additions. This is almost impossible for the simple reason that there is not an MLS in this market that would ever include that as a marketing tool. There may be MLS's where the GLA given is higher than the assessment data, but this could be due to the very common problem of error in measurement. The examples that I have found have been limited to those I actually appraised and, while rare, do show that there are a significant number of homes sold under such circumstances. Also, the requirement that the examples be comparable makes it almost impossible where just finding a few comps of any kind is an issue.
So, isn't there a conflict here between Fannie requirements and USPAP? If i cannot value a significant part of a dwelling that the market DOES value, how am I to obtain a credible market value? Would Fannie accept a non-comparable sale that sold with unpermitted additions as proof? (I don't see why not if it was in the general market area, although it would be silly to grid it, just mentioning it show be sufficient).

 

[Proactive]

But apparently Fannie no longer allows this. If one cannot find a permit for an area, not only must it be left out of the GLA, but apparently, it cannot be given value elsewhere.

I do very little Fannie work any more so I'm certainly not an expert, but I would be shocked, shocked to find out this were true.

 

[Beurre Noir]

I think you have gotten some bad info from an underwriter. I don't believe fannie has ever said you can not include unpermitted area in GLA or include it in the value.

Kennedy will be along shortly to tell you that unpermitted area = illegal = HBU problem, which is not correct either for a fannie or government loan.

 

[Beurre Noir]

I think this is the only mention of this issue in the selling guide:

2015 Selling Guide
Part B, Origination Through Closing
Subpart B4, Underwriting Property
Chapter B4-1, Appraisal Requirements
Section B4-1.3, Appraisal Report Assessment
B4-1.3-05, Improvements Section of the Appraisal Report (12/16/2014)

Additions without Permits
If the appraiser identifies an addition(s) that does not have the required permit, the appraiser must comment on the quality and appearance of the work and its impact, if any, on the market value of the subject property.

Semi-related and also to preempt the usual argument that unpermitted = illegal = HBU problem, just above that is the section on ADUs that do not comply with zoning, which fannie will accept as long as:

• The lender confirms that the existence will not jeopardize any future property insurance claim that might need to be filed for the property.
• The use conforms to the subject neighborhood and to the market.
• The property is appraised based upon its current use.
• The appraisal must report that the improvements represent a use that does not comply with zoning.
• The appraisal report must demonstrate that the improvements are typical for the market through an analysis of at least three comparable properties that have the same non-compliant zoning use.

 

[Mr Rex]

From the horses mouth: https://www.fanniemae.com/content/FAQ/appraisal-property-report-faqs.pdf

Q26. If the subject property features an unpermitted addition, can the square footage of the unpermitted addition be included in the total gross living area reported on the appraisal report? If the appraiser has identified an addition(s) that does not have the required permit, the appraiser must comment on the quality and appearance of the work and assess the impact, if any, on the market value of the subject.

 

[Mike Kennedy]

Part B, Origination Through Closing
Subpart 4, Underwriting Property
Chapter 1, Appraisal Requirements, Appraisal Report Assessment
April 15, 2014
Printed copies may not be the most current version. For the most current version, go to the online version at
https://www.fanniemae.com/singlefamily/originating-underwriting. 575
Highest and Best Use
Fannie Mae will only purchase or securitize a mortgage that represents the highest and best use of the site as improved. If the current improvements clearly do not represent the highest and best use of the site as an improved site, it must be indicated on the appraisal report. The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value on the effective date of the appraisal.

For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site."

 

[Mike Kennedy]

Part B, Origination Through Closing
Subpart 4, Underwriting Property
Chapter 1, Appraisal Requirements, Appraisal Report Assessment
April 15, 2014
Printed copies

"Physical Deficiencies That Affect Safety, Soundness, or Structural Integrity of the Subject
Property
The appraisal report must identify and describe physical deficiencies that could affect a
property’s safety, soundness, or structural integrity. If the appraiser has identified any of these
deficiencies, the property must be appraised subject to completion of the specific repairs
or alterations. In these instances, the property condition and quality ratings must reflect the
condition and quality of the property based on the hypothetical condition that the repairs or
alterations have been completed.

If the appraiser is not qualified to evaluate the alterations or repairs needed, the appraisal
must identify and describe the deficiencies and the property must be appraised subject to a
satisfactory inspection by a qualified professional. The appraisal may have to be revised based
upon the results of the inspection. If so, the report must indicate the impact, if any, on the final
opinion of value. The lender must review the revised appraisal report to confirm that no physical
deficiencies or conditions that would affect the safety, soundness, or structural integrity of
the property are indicated. A certification of completion is required to confirm the necessary
alterations or repairs have been completed prior to delivery of the loan."

 

[Pam Wyant]

Just because it isn't permitted, doesn't necessarily mean it's illegal. Most of the areas I work do not require permits for additions, unless the property is within town limits. There is no authority to issue a "certificate of completion" in most of these areas. I just wish Fannie and various AMCs would recognize that some of our rural areas just don't operate on the same principles as larger metropolitan areas.

 

[Mike Seward]

Part B, Origination Through Closing
Subpart 4, Underwriting Property
Chapter 1, Appraisal Requirements, Appraisal Report Assessment
April 15, 2014
Printed copies may not be the most current version. For the most current version, go to the online version at
https://www.fanniemae.com/singlefamily/originating-underwriting. 575
Highest and Best Use
Fannie Mae will only purchase or securitize a mortgage that represents the highest and best use of the site as improved. If the current improvements clearly do not represent the highest and best use of the site as an improved site, it must be indicated on the appraisal report. The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value on the effective date of the appraisal.

For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site."

This may be similar to the old "others may rely" discussion from 2005. Does "may" mean giving permission?
The HBU legal requirement could be read as legally permisable use based upon current zoning, as opposed to a building permit issued by the county.

 

[Ms. Janet]

For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site."

Wait a minute! Do you think "they must be legally permitted " means building permits? Is that why we have all these cut and pastes taking up the bandwidth on every "no permit" thread?

Now it makes sense. Not.