HBU for Rental Analysis

[J Grant]

Stick with the fundamentals.
One of the fundamentals is value in use vs market value.

Value in use means the value any personal use brings to the owner, including if said use is illegal, non-permitted, not the HBU, etc. Maybe the value in use is monetary, renting out a not permitted or illegal space, Maybe it is having four families living in a one-family house., or renting nightly as an Airbnb, or growing weed in the garage etc.

Then there is market value, which typically assumes a HBU, and one of the four tests of HBU is a legal use. So if it ain't a legally permitted, use it failed the HBU test, -even if people who own it want to game the system or dodge the law, their choice , - unless they apply for a loan.

An owner's illegal or not permitted or grey area personal value in use is not our concern UNTIL THEY APPLY FOR A LOAN. ( and we are engaged to do the appraisal for said loan ) When these folks apply for a loan, then their illegal or grey area value in use gets scrutinized and it either passes a lender's requirement or FHA or Fannie/Freddie -if not, don't count it toward the value for MV

If the appraisal is for a lender as a client / GSE/ FF loan, then the subject gets valued at its legal use and at the HBU . ( though we can analyze any value in use in commentary)

THE END.

 

[jay trotta]

A buliding permit to modify a detached garage into a "Recreation Room" was issued at an unknown point in time since original construction in 1925. I stated my Assumption in the report that the current full kitchen and bathroom would not have been integral to the Recreation Room; and I didn't even ask the Planning Department about occupancy because one can't occupy a Recreation Room.

You did not note any dates regarding the conversion from garage to "Rec. Rm" or to Occupancy, so how can one support either??
I do truly enjoy your thoughts on the Planning Dept non question, "because one can't occupy a Recreation Room" ????

I suppose you could just gather Market Driven, illegal use rentals and thru them in and let the Lender decide. Why not........

 

[ZZGAMAZZ]

You did not note any dates regarding the conversion from garage to "Rec. Rm" or to Occupancy, so how can one support either??
I do truly enjoy your thoughts on the Planning Dept non question, "because one can't occupy a Recreation Room" ????

I suppose you could just gather Market Driven, illegal use rentals and thru them in and let the Lender decide. Why not........

Original conversion permit from garage to Recreation Room isnt dated; a formal deft of Recreation Room isnt available; and no other permits are available. IMO the likelihood that the addition of bath n kitchen is so strong that an A rather an EA is warranted. And that doesn't address the deplorable condition of the exteriors of both wood plant units, or the non-permitted POS 30% addition to rear of main unit ... Listed for sale about 2 weeks at $500K, under contract at full list...which subjectively is an amoral sin, that which objectively might result in a land to total value ratio so high (but not so high that As Vacant would exceed As currently improved) that the lender simply refuses to fund. As an aside, I cant even understand the report that I created because of the complexity...without even trying to embrace the Value distinctions that JG cited.

 

[ZZGAMAZZ]

You did not note any dates regarding the conversion from garage to "Rec. Rm" or to Occupancy, so how can one support either??
I do truly enjoy your thoughts on the Planning Dept non question, "because one can't occupy a Recreation Room" ????

I suppose you could just gather Market Driven, illegal use rentals and thru them in and let the Lender decide. Why not........

You did not note any dates regarding the conversion from garage to "Rec. Rm" or to Occupancy, so how can one support either??
I do truly enjoy your thoughts on the Planning Dept non question, "because one can't occupy a Recreation Room" ????

I suppose you could just gather Market Driven, illegal use rentals and thru them in and let the Lender decide. Why not........

Lease data of market response to unpermitted units? Do I look in the Master World Real Property Database, under L, or I, etc.? {Damn I just remember that the name of the soucebook now is "Primary" rather than "Master "} LOL

 

[J Grant]

Big G, why are you so silent on this post? Does market behavior in response to a residential lease trump the HBU analysis? (Can we overlook the fact that the "legal permissibity" of a property is based upon the assumption that building permits serve a purpose to the public rather than just a way to obtain revenue, e.g., occupant's safety.) I'm trying to embrance the question that GH posed in Post# 18 that might already address this question, and which might answer my OP:

Can the appraisal rental analysis include potential market rent from a unit that first was converted, with permits, into a "Receation Room," presumaby without allowing kithen and bathroom, and that subsequently was converted, presumably witihout permits, into a fulliy-functional guest unit, aka ADU?

This is NOT a HBU question!!

HBU for res lending purpose is existing use/ continue yes or no, which goes back to is land worth more vacant or does improvement contribute enough to it to continue present use.

Assuming improvement contributes, the subject is an existing residential HBU

Any modifications done to a property garage conversions etc is an additional valuation issue, not an HBU issue

The same applies is a portion of it is rented. That is no longer an HBU issue, we've established HBU is an existing residential luse. It might be a value in use, or a MV, which can depend on does your client accept X for the loan value it comes down to down to does your client want to accept the rental of a part of the property that may lack permits, or is not Legal such as a two unit made from a SFR zoned only for single family.

Fannie and Freddie are very lenient now they want to loan on pretty much any POS out there, FHA following to, approve illegal or non-permitted this and that ( as long as you provide a comp or 2 with the same illegal use or not permitted in the SCA), no inspection, no title insurance etc etc How much of that lenience extends to a property rental income idk

T .

 

[J Grant]

value in use/potential for illegal rental return is baked into prices so use the SCA Idk why a rental analysis needs to be done

 

[George Hatch]

MV is about the actions and expectations of the market participants. Not the actions of the lenders.

I already suggested one potential solutions - look for sales of properties with unpermitted additions or occupancy that were disclosed in their listings, and do a paired sales analysis to isolate the effect on the pricing of that situation. Then import that adjustment in for use with your direct comparables. That's a solution that nobody will be able to argue. You're not ignoring the apparently no-permit occupancy but neither are you attempting to pass it off as being the same as a with-permit occupancy.

"I looked for the situation and this is what I found."

 

[J Grant]

MV is about the actions and expectations of the market participants. Not the actions of the lenders.

I already suggested one potential solutions - look for sales of properties with unpermitted additions or occupancy that were disclosed in their listings, and do a paired sales analysis to isolate the effect on the pricing of that situation. Then import that adjustment in for use with your direct comparables. That's a solution that nobody will be able to argue. You're not ignoring the apparently no-permit occupancy but neither are you attempting to pass it off as being the same as a with-permit occupancy.

"I looked for the situation and this is what I found."

MV is not determined by lenders (though if they won't lend on certain types of property, it can affect the value of those properties )

However, MV used as the basis for the appraisal for those lenders has to be at the HBU, correct? Regardless of the actions of the market participants. Lenders are allowed to set their own rules of what they will or will not accept. This is why value in use is not used, the MV is used for the appraisal

HOWEVER, the potential for value in use is baked into sale prices. So appraisers can recognize that and comment on that. A property can have both MV and value in use and they can intersect. However, most appraisals for loans ask for the market value.

Imo, where people get lost is they forget that when it comes to illegal uses or not permitted conversions etc, just about any similar property offers the potential for it. Then it is just up to the induvial owner do they want to take a chance with it or not.

A SFR area is zoned SFR, no 2 unit rentals are allowed. However, some owners have converted their garages into a rental unit. Well, since many houses have garages, any one of them purchased can get the garage converted, usually at a reasonable cost into a rental unit, .So assuming a buyer is well informed, why would they pay so much more for a garage that is already converted and rented, when they can buy any house with a garage and convert it themselves to get the rental income?

Same thing with Airbnb - why would a buyer who is well informed pay more for a condo being used for Airbnb when they could buy an identical condo and tomorrow rent it out themselves as air bnb? This brings up the fallacy of people saying to analyze Airbnb as if it is a hotel. It's not a freaking hotel, and it is not now a commercial property, it is a condo that if sold will compete with other condos and any one of them can be Airbnb if the owner decides to list it as such on the Airbnb site.

 

[ZZGAMAZZ]

Stick with the fundamentals.
One of the fundamentals is value in use vs market value.

Value in use means the value any personal use brings to the owner, including if said use is illegal, non-permitted, not the HBU, etc. Maybe the value in use is monetary, renting out a not permitted or illegal space, Maybe it is having four families living in a one-family house., or renting nightly as an Airbnb, or growing weed in the garage etc.

Then there is market value, which typically assumes a HBU, and one of the four tests of HBU is a legal use. So if it ain't a legally permitted, use it failed the HBU test, -even if people who own it want to game the system or dodge the law, their choice , - unless they apply for a loan.

An owner's illegal or not permitted or grey area personal value in use is not our concern UNTIL THEY APPLY FOR A LOAN. ( and we are engaged to do the appraisal for said loan ) When these folks apply for a loan, then their illegal or grey area value in use gets scrutinized and it either passes a lender's requirement or FHA or Fannie/Freddie -if not, don't count it toward the value for MV

If the appraisal is for a lender as a client / GSE/ FF loan, then the subject gets valued at its legal use and at the HBU . ( though we can analyze any value in use in commentary)

THE END.

J.G.,
Re Posts 25, 26, 28: This question is not rhetorical: If Value in Use is such a critical fundamental concept, is it possible that I'm the only appraiser among thousands who isn't familiar with it? Never doubting you, but if your perspective is accurate (along with GH's reminder about the difference between "permissible" and "permitted") the question posed in the original post has been answered (I think).

 

[J Grant]

J.G.,
Re Posts 25, 26, 28: This question is not rhetorical: If Value in Use is such a critical fundamental concept, is it possible that I'm the only appraiser among thousands who isn't familiar with it? Never doubting you, but if your perspective is accurate (along with GH's reminder about the difference between "permissible" and "permitted") the question posed in the original post has been answered (I think).

Value In Use Appraisal, Addressed | Elliott & Company Appraisers

Value in use appraisal differs from a market value appraisal in that it does not consider highest and best use, and follows the dynamic of Overholtzer case law.

www.elliottco.com

Type in a value in use vs market value appraisals in the search engine (or a version of that phrase ) and information about it comes up. A good one is the above article link.