Functional Obsolescence

[Zsa Zsa]

I have a subject that is zoned as a legal single family in a single family neighborhood. The second floor is accessed through the exterior only. When appraising it, I stated in the report that it was functionally obsolescent and made an adjustment in the cost approach as I was taught to do in a situation like this. The bank is asking me why I did not make a "functional utility" adjustment on the grid. Before completing the report, I did research this situation and everything I read confirmed to make the adjustment in the cost approach (again, as I was taught to do). I am now being questioned why I completed the report the way I did (why I didn't make an adjustment in the grid) and am in need of guidance. I have been in contact with the town. The zoning inspector and tax assessor have recently been to the subject and feel it is a legal single family in spite of the exterior access to the second floor. It is not considered an accessory unit and needs to go before the board to be considered a legal 2 family with no guarantee of being approved. This is a very unusual property. Please advise.

 

[gregb]

Are you considering the the second floor as part of GLA?

 

[Zsa Zsa]

Are you considering the the second floor as part of GLA?

Yes. The town considers it part of the GLA.

 

[Joe Flacco]

If the comps in the sales comparison approach are regular houses with both levels connected from the interior, then it probably does require adjustment for functional obsolescence in the sales comparison approach.

 

[Terrel L. Shields]

It does not meet the Fannie Mae or FHA test of being GLA if only accessible from the outside. I agree it is "functional obsolescence" but what do the comps look like? If they have similar features, then they are equally obsolete and no adjustment is required on the Functional Utility grid. IF they are not, then quantifying that condition relates finding another house with that condition vs one without and measuring the difference. What the city says or does has little more to do with it than a rodeo clown has to do with the department of agriculture. Don't let these city "what ifs" fool you. You have to satisfy the underwriters, not the city. The fact the secondary market players want you to dissect this as GLA or not, has little to do with how the city will treat it. So it is an issue of functionality, but not of legal zoning (HBU) - you have a choice, mention and say it has no market impact, or segregate it out as non-GLA and find comps similarly impacted to determine an adjustment - if warranted. Good luck. It isn't always easy to find similar comps.

 

[Zsa Zsa]

Yes. The town considers it part of the GLA.

If the comps in the sales comparison approach are regular houses with both levels connected from the interior, then it probably does require adjustment for functional obsolescence in the sales comparison approach.

I've been an appraiser for over 10 years and have never run into a situation like this. At the risk of sounding incompetent, how do I do that when there are no other similar properties in the area?

 

[Rlong]

Yes, functional obsolescence should be addressed in all prepared approaches. You need to deal with is somewhat consistently between approaches.

Bob in co

 

[Joe Flacco]

I've been an appraiser for over 10 years and have never run into a situation like this. At the risk of sounding incompetent, how do I do that when there are no other similar properties in the area?

Maybe the method you used to measure the depreciation in the cost approach is good.

 

[Terrel L. Shields]

how do I do that when there are no other similar properties in the area?

I've been in business for 30 years and still see something new on occasion. I would say, "I found no market evidence to make an adjustment for the condition and therefore, considered the obsolescence in my final reconciliation but made no adjustment in the sales approach." And I would be looking at the lower end of the reconciled prices of the comp for a value. Alternatively, you make a cost related adjustment across the board...and UWs hate that.

 

[Michigan CG]

You have a two-family property as-is.
You cannot pretend it is what it is not.
Have you looked at the zoning regulations and confirmed that the two-family is not allowed?
I assume this is for financing; is it a purchase?
If the current layout is not allowed (not legal) then you would need to make a substantial adjustment for functional obsolescence.