Must appraisal GLA be based on city records GLA?

[Koya]

Mike: appraisal stated "as is" in the report.
Tim: I am not at all wary, this valuation is in line with sales of similar sized SFH in the neighborhood. The lower floor is not below grade, in fact there's a basement underneath the lower floor. There have been 4 appraisals of this property since I purchased, not one has mentioned "below grade."

This appraisal was based on facts and "reality," if I may use that term.
When using sales of similar sized comperable homes in the neighborhood (~2,164 sq-ft), the data leads to a valuation in this range ($1,350,000; $624/sq-ft). The six comps listed (4 sold, 2 pending) sold for $600-$833 /sq-ft. I would estimate the price is correct to +/- 5% (for whatever my opinion is worth).

If one bases their valuation, as Tosh & Associates did previously, on a 1,045 sq-ft house, and allocates for differences in size at $61/sq-ft on average, one ends up with a valuation which is not based on market reality ($758,000; $350/sq-ft)

I understand ones tendency to give the benefit of the doubt to an appraiser determining value, as opposed to a home owner, but everything points to Tosh & Associates doing an inept job, in this case. Dan Tosh previously mentioned "regression," "market research," etc., in an attempt to add credence to his product, but could not back up anything.

I understand & appreciate the reforms that have gone on in the last few years to insulate this industry from external pressure, to make their product more trustworthy. But there is a problem when garbage can be produced with impunity.

Thanks again to all who contributed to this discussion.
gavin

I see a fundamental problem between your first post and this post. You've been throwing around that $550-750 is the prevailing price per SF in your area and complaining that you only got credit for $50 per SF on the additional SF.

What you're missing, which I'm surprised hasn't been pointed out yet by other appraisers, is that houses don't get valued by $ per SF. That's an output of the appraisal process that's reported because readers seem to expect it, but it is not a particularly important residential valuation indicator to an appraiser, at least not without a lot of caveats and underlying understanding of what it means.

$ per SF is a synthetic aggregate of the land value and contributing value of the improvements. Which means that doubling the SF of GLA should not double your indicated value, because the land contribution remained the same. Let's say your property is zero-lot line but has a rear yard, so your building footprint is 50% of the lot size. You have 3 floors, so your total floor area is 150% of the lot size. If your construction quality is average, say $100 per SF for a 1-story, your 3 story might average $85 per SF because multi-stories are cheaper to build per SF. So a $600 per SF gross value indication is really based on $772.50 per SF of land and $85 per SF of improvement ($ per 2 units of land + $ per 3 units of improvement / 3 = $ per unit of improvement). You can see the land strongly dominates; this is generally true in California metro areas.

Based on your first post, apparently 1550 SF was permitted GLA and 600 SF was unpermitted GLA. The appraised value was $740,000 and the additional space of 600 SF was valued at $50 per SF. BTW this is probably an appropriate valuation for incremental GLA as the extra space should not be valued at full construction cost of $85 per SF, rather the $35 per SF difference times 600 SF means you were allocated $21,000 to bring the improvements up to code and get a permit. Anyway, this results in the 1550 SF permitted GLA being valued at $458 per SF.

A difference of $458 per SF for fully permitted GLA (which is inclusive of land) versus the current valuation of $624 per SF (also inclusive of land) says that there is a huge difference in the comparables used in the two appraisals in terms of their underlying land value (location and size) or in terms of construction quality or both. The land is going to dominate in this comparison, though the construction quality could tilt it further. If I extract the land value from $458 per SF assuming $85 per SF construction, using the previous scenario, I get $560 per SF of land; if I extract the land value from $624, same assumptions, I get $810 per SF of land. Big difference.

No one reading can tell which comps in which appraisal are more similar to your actual property, but the key point is that it is NOT due to giving credit for the unpermitted GLA in one case but not the other. Something else is seriously off, not just the question of whether unpermitted GLA gets full or partial value. Full value for your additional 600 SF of GLA is NOT $600 per SF, it is maybe $85-100 per SF (assuming average quality and depreciation for that kind of property) for the additional construction on a constant amount of land.

You're probably just happy that you're getting the value you want, but be careful, the better appraisal is not necessarily the one that agrees with your biases.

BTW - I've also met Dan in a USPAP class I took and found him knowledgeable.

 

[Webbed Feet]

<....snip....>
4) I generally agree regarding the significance of the CA real estate agent. But the point here is to demonstrate that since the disagreement is so large ($758,000 appraised value vs. $1,150,000 - $1,300,000 agent estimation) as to cast further doubt on the appraised value. A real estate agent will not get any additional business if they list at $1,150,000 and then have to tell the owner they must reduce the price $400,000 in order to sell.
5) I disagree. Price-per-square-foot is of practical value, and varies within normal ranges. Larger properties do see a degradation in value for each additional sq-ft, upgraded kitchens, bathrooms, etc., increase the resultant amount. But all SFH in this neighborhood sold for > $500 per sq-ft, for all sizes. Some 2,500 sq-ft homes sold for > $700 per sq-ft (VERY nice homes, view, beautiful construction). In my case stating that 2 bedrooms and a bathroom are worth $30 per sq-ft, when the general quality is indistinguishable from the "permitted" area, cannot be substantiated.
Thanks to all who read this.
gavin

4) Poppycock

5) Why is anyone here trying to advise you? Obviously, you feel ready to give real estate appraisers continuing education on real estate appraisal.

 

[jjwest]

I am not familar with San Francisco however I have seen a home destroyed by fire due to shotty work in an unpermitted addition. Fortunately no one was hurt, however when I come across a home with and unperitted addition I see that house burning to the ground in my head and think about what my liability might be if something similar were to happen to the house I am appraising.

 

[Mike Kennedy]

PDF See Bottom Page 4, Top Page 5, and Page 6 Blue Bullet 1 << especially converting unfin.bsmt. to finished rooms - livable area

also suggest reviewing the Paragraphs on Violation "Abatement" and "Assessment of Costs" and definitely reading Pages 7 to 12.

[url]http://www.sfdbi.org/ftp/uploadedfiles/dbi/Key_Information/Code%20Enforcement%20Process.pdf[/URL]

The questions to be answered by the OP after confirmation by the City Building & Zoning Department:

1. Was the Unpermitted Lower level built as Unfinished Basement over an unfinished sub-basement (not uncommon in period homes)?
2. When was the "lower level" finished i.e. prior to purchase by the current owner or subsequently?
3. Per the PDF above, "unpermitted" improvements represented an illegal use requiring compliance with City Occupancy ordinance. Resolution steps are outlined in the PDF above.
4. Is the current owner legally responsible for ensuring compliance and legal use when apparently illegal occupancy of the lower level was established by the prior owner (if that is the case). In most municipalities the answer to this important question is absolutely yes.

 

[Mike Kennedy]

If the property were located in New York where they have permit police like Mike Kennedy, the area would have no value at all.

It could be that the specific lender would only accept value from the appraiser for the permitted area. I don't know.

Kindly refer to the prior City PDF post above. With respect to your incorrect assertion above- considerations:

1. the "unpermitted" apparent living area existed as of the EDA. When it was finished is, at present, unknown.
2. from the discussion so far, such Lower Level finished levels are common in similar style local homes in the subject's neighborhood and sub-market.
3. as such, the market apparently perceives this improvement as above grade GLA ( see OP post re an unfinished basement below the "lower level"). In the absence of posted photos of the "lower level" (front, side and rear views), we are unable to confirm whether any part of the lower level is below grade.
4. Assuming the market perceives the "lower level" as GLA IF a substantial portion of it is above grade - that improvement must have been confirmed as either a legal, a legal-nonconforming, or illegal use as of the Effective Date of Appraisal to develop a credible opinion of the Highest and Best Use which must be legally permissible.
5. IF confirmation research was conducted re the "Permit" and the result was inconclusive, IMO, the property's estimated Market Value opinion should have included the "lower level" in GLA based on an Extraordinary Assumption that a "permit" establishing Legal, or Legal Non-conforming Use existed as of the EDA and subject to requisite Municipal Compliance.
6. IF confirmation research clearly demonstrated a "permit" (or certificate of occupancy to close out a building permit) was required by the City (apparently the case in this instance), and NO "permit" or C.O. for the lower level existed BUT market acceptance for the improvement was unmistakable then, IMO, the Appraised Value should have been developed including the "lower level" in GLA under an appropriate Hypothetical Condition that a BP/CO existed and subject to same.
7. The site, as-improved on the EDA WAS either Legal, Legal Nonconforming, or Illegal.

 

[CANative]

Mike, you're making a fool of yourself. You obviously don't understand the SF market. Particularly the Portrero Hill district.

 

[Mike Kennedy]

Originally Posted by Tim Hicks (Texas)
It could be that the specific lender would only accept value from the appraiser for the permitted area. I don't know.

Should that be a Lender's instruction, or standard requirement, that restriction would represent an Unacceptable Assignment Condition requiring mandatory deletion from the SOW agreement. Should the Lender be unwilling to rescind that unacceptable assignment condition (i.e. to intentionally misrepresent the physical characteristics of a subject's improvement(s), the Appraiser would have no choice but to decline the assignment.

 

[Mike Kennedy]

Mike, you're making a fool of yourself. You obviously don't understand the SF market. Particularly the Portrero Hill district.

Petulance is an unbecoming trait.

Post #95
"Also, the house next door (to the right in this photo) just closed late January for $1,350,000 in a "distress" sale (as described in the appraisal, he had spoken with the listing agent, no MLS, had to sell fast due to purchasing a new house prior to selling). The house is same construction, basic shape & interior quality (2 full floors, 3rd/top floor gabled), city records shows it as 1,285 sq-ft (market reaction to this?), the lower level is not accessible from the main house, is a rental unit."

 

[Mike Kennedy]

Post 105, especially #7 remains valid and unanswered by the OP
http://appraisersforum.com/showpost.php?p=2338973&postcount=105

 

[gavin]

I see a fundamental problem between your first post and this post. You've been throwing around that $550-750 is the prevailing price per SF in your area and complaining that you only got credit for $50 per SF on the additional SF.

What you're missing, which I'm surprised hasn't been pointed out yet by other appraisers, is that houses don't get valued by $ per SF. That's an output of the appraisal process that's reported because readers seem to expect it, but it is not a particularly important residential valuation indicator to an appraiser, at least not without a lot of caveats and underlying understanding of what it means.

$ per SF is a synthetic aggregate of the land value and contributing value of the improvements. Which means that doubling the SF of GLA should not double your indicated value, because the land contribution remained the same. Let's say your property is zero-lot line but has a rear yard, so your building footprint is 50% of the lot size. You have 3 floors, so your total floor area is 150% of the lot size. If your construction quality is average, say $100 per SF for a 1-story, your 3 story might average $85 per SF because multi-stories are cheaper to build per SF. So a $600 per SF gross value indication is really based on $772.50 per SF of land and $85 per SF of improvement ($ per 2 units of land + $ per 3 units of improvement / 3 = $ per unit of improvement). You can see the land strongly dominates; this is generally true in California metro areas.

Based on your first post, apparently 1550 SF was permitted GLA and 600 SF was unpermitted GLA. The appraised value was $740,000 and the additional space of 600 SF was valued at $50 per SF. BTW this is probably an appropriate valuation for incremental GLA as the extra space should not be valued at full construction cost of $85 per SF, rather the $35 per SF difference times 600 SF means you were allocated $21,000 to bring the improvements up to code and get a permit. Anyway, this results in the 1550 SF permitted GLA being valued at $458 per SF.

A difference of $458 per SF for fully permitted GLA (which is inclusive of land) versus the current valuation of $624 per SF (also inclusive of land) says that there is a huge difference in the comparables used in the two appraisals in terms of their underlying land value (location and size) or in terms of construction quality or both. The land is going to dominate in this comparison, though the construction quality could tilt it further. If I extract the land value from $458 per SF assuming $85 per SF construction, using the previous scenario, I get $560 per SF of land; if I extract the land value from $624, same assumptions, I get $810 per SF of land. Big difference.

No one reading can tell which comps in which appraisal are more similar to your actual property, but the key point is that it is NOT due to giving credit for the unpermitted GLA in one case but not the other. Something else is seriously off, not just the question of whether unpermitted GLA gets full or partial value. Full value for your additional 600 SF of GLA is NOT $600 per SF, it is maybe $85-100 per SF (assuming average quality and depreciation for that kind of property) for the additional construction on a constant amount of land.

You're probably just happy that you're getting the value you want, but be careful, the better appraisal is not necessarily the one that agrees with your biases.

BTW - I've also met Dan in a USPAP class I took and found him knowledgeable.

Hello Koya,
While that analysis may be valid in some locations, where there are plenty of vacant lots where one could build or could easily expand a 1,000 SF home into a 2,000 SF home, the data doesn't seem to support that idea in this situation. Certainly the "land" is a fixed value, unchanging w/ larger & smaller homes, and affects the $/SF of a sale, but it doesn't appear to be significant enough of an effect.
Smaller homes (~1,000 SF) in this neighborhood of similar quality, generally sell for >$700 SF; larger homes (~2,000 SF) sell for > $600 SF (i may be a bit off in the #s, but generally correct). Comparing the two fictional homes listed above, the additional SF would be valued at $500 SF for the 2nd 1,000, and $700 SF for the first 1,000. Very different for $85.

Using the logic of just allocating construction cost to compensate for home size difference, one could appraise a 2,100 SF house against a 1,000 SF house and add the $85 (or so) per SF. But you would have to be sure the market data supports that argument. And it doesn't.

That is why appraisals use comps of similar size, whenever possible. The error associated with assumptions is reduced.

"Something else is seriously off here," you write. The "something" has been known going back to the beginning of this thread: Tosh & Associates appraised a 2,150 SF house using a "primary" comp of just 1,000 SF. Everything stems from that, and the errors from assumptions are amplified.

I think many readers here are trying to figure out what "mistake" I am making; the appraiser is a professional in this field, and the property owner in all likelihood is wrong. But as I've mentioned before, this is the 4th appraisal of this property I've been involved with (purchase-2008, refi-2011, TOSH, latest). The other 3 compared my property with similarly sized sold properties, and the valuation was basically "correct" (in my opinion; not grossly different compared to similar sales).

How many appraisers out there would determine valuation of a 2,100 SF house using a 1,000 SF house as primary comperable? There were similar sized homes that could have been used, but weren't.
gavin