Must appraisal GLA be based on city records GLA?

[Mike Kennedy]

That's what I was referring to, your implication that any appraisal coming in exactly at the purchase price could only be a result of coercion or bias. We've thoroughly examined that question in the past and we disagree on the issue of whether concluding exactly at the purchase price is a legitimate type of rounding or whether it implies undue precision.

2. if the 2008 appraisal opinion matched the 2008 contract price of $1,499,999. would you hold the same opinion? :icon_idea:

 

[Flygirl 152]

Including non permitted space as part of the GLA and room count can be a slippery slope, and many lenders do not allow it. I have seen engagement letters that specifically address non permitted space as “no permits, no value”.

Several years ago I met an appraiser at a class a said one of the appraisers that worked for him included a non permitted area as part of the GLA on a refinance appraisal. He stated in the report that it was completed in a professional manner, so he was including it in the GLA and room count of the subject. However, the room did not meet the zoning set back and requirements. It also had some electrical components that were dicey. At some point the neighbors had filed complaints with the city that the addition of the room impeded the enjoyment and use of their parcels and homes, which triggered an investigation. Folks from the planning department went out and decided that the un permitted space had to be remediated. The occupant/owner did nothing because he had quit paying his mortgage quite some time ago. When the bank took possession of the property, they were not very happy, since now they had to demolition the addition and go through repairs to bring the home up to city code before they could liquidate it. It became a huge problem for the appraisal company.

 

[Flygirl 152]

I have had the pleasure of taking a USPAP class taught by Dan Tosh. Very knowledgeable and educated.

 

[CANative]

Including non permitted space as part of the GLA and room count can be a slippery slope, and many lenders do not allow it.

This is the crux of the problem and why I argue about this issue.

 

[KD247]

Including non permitted space as part of the GLA and room count can be a slippery slope... .

I agree with that on many levels. First, because the definition of GLA is also "slippery", making it easy for an appraiser to shoot themselves in the foot. Second, and most important, is that except in some rare cases, it's more straightforward (less misleading) to report the GLA of the entire original building and consider the additional space as a separate amenity, even if it meets most of the definitions of GLA.

For example, in a tract where Model A is 3,400sf and Model B is 3,800sf, it's clearer to describe the subject as a 2,400sf home with a 400sf sunroom addition than it is to call it a 3,800sf house. This technique also allows the additional area to be considered on its merits, separate from the rest of the house. For example, it's not uncommon for an addition to be newer, of different quality, of different design, etc. (Or, in this case to have some cloud over its permit status.) That way, the effect of these characteristics can be analyzed in a way that makes sense to the reader (and, if the client wishes, they can easily take the appraiser's opinion of value and deduct the "value" of the addition.)

...and many lenders do not allow it. I have seen engagement letters that specifically address non permitted space as “no permits, no value”. ...

How do you handle an engagement letter that asks you to deviate from the definition of Market Value without incorporating a Hypothetical Condition or Extraordinary Assumption? If the local market reaction to no permits is insignificant, wouldn't that type of engagement letter be similar to having a lender tell you to double the value of homes that are well maintained? Following the reasoning to an absurd level, how often do appraisers check for permits when a water-heater has been replaced? Should the appraiser "give no value" to the hot water supply?

My point is, an opinion of value should be derived from the market and non-permitted areas should be "given no value" only in cases where the market "gives no value". (Jeez, I hate that term.) The appraiser does have a duty to reasonably report significant items and the client may require specific reporting requirements but only to the extent that they are not misleading and don't violate appraisal standards.

There are many older areas where almost all homes have non-permitted alterations. If an appraiser were to consider all non-permitted work to be a health/safety hazard, that could be considered a form of red-lining. I realize how absurd this all sounds to appraisers who have only worked in areas where properties are never missing permits. But think about how these rules should apply to areas where most properties are missing permits. An "unknown permits" status is different than "lacking permits" and that's different than "lacking necessary permits". If you can come up with a better way to handle the situation, I'm all ears.

 

[KD247]

2. if the 2008 appraisal opinion matched the 2008 contract price of $1,499,999. would you hold the same opinion? :icon_idea:

If you're asking me whether I think it's suspect for an appraisal to exactly match the sales price, I'd say no, but it's a more complicated question than it might appear.

Assuming that we both agree that "we aren't that good" and that in a high-value neighborhood with widely varying property types and an (I'm going to make up some numbers) e.g. a 40% wide range of sales prices, no appraiser is going to claim that their "accuracy" is better than say 25% in either direction. So, assuming that the best either you or I or the next guy could do is to come up with a value range of somewhere around $1,100,000-$1,600,000, if holding a contract for $1,499,999 what single point dollar amount do we conclude to? Does the final opinion of value communicate more than a number to the reader? I think it does. Should we consider the practical implications of our appraisal? I think we should, even though there are also reasonable arguments suggesting that we shouldn't.

Different appraisers will have different approaches in how they conclude their final opinion and I can't even say that I use the same approach every time. Some might routinely go for the extreme top, extreme bottom, or exact middle of the range. Others might follow their intuition either high or low but then round to the nearest $100k. Some might think in terms of sending a message by coming in "slightly below sales price", "exactly at sales price", or slightly above sales price.

If my comments indicated that, in this neighborhood, property types were diverse and value ranges were very wide and highly volatile, there's a possibility that I might want to make the point that I did heavily weight the current contract in making my final decision and I might end up at $1,499,999 exactly, thinking that offering an opinion at $1,500,000 might imply that I came up with that precise opinion independently of the contract and that it's just a coincidence the two numbers are so close.

Anyway, yes, I can see how a reasonable appraisal might conclude at $1,499,999 and I can also imagine how an entirely unreasonable appraisal might conclude at $1,499,999. So, bottom line is that I wouldn't rely upon the appraisal amount as the sole piece of evidence as to whether the appraisal or the purchase price was reasonable.

If another appraiser's opinion of value for this property was something like, $1,547,000 or $1,280,000 then I would have concerns about them relying too heavily on one piece of sales data or claiming an unreasonable degree of accuracy.

 

[Flygirl 152]

How do you handle an engagement letter that asks you to deviate from the definition of Market Value without incorporating a Hypothetical Condition or Extraordinary Assumption? If the local market reaction to no permits is insignificant, wouldn't that type of engagement letter be similar to having a lender tell you to double the value of homes that are well maintained? Following the reasoning to an absurd level, how often do appraisers check for permits when a water-heater has been replaced? Should the appraiser "give no value" to the hot water supply?

My point is, an opinion of value should be derived from the market and non-permitted areas should be "given no value" only in cases where the market "gives no value". (Jeez, I hate that term.) The appraiser does have a duty to reasonably report significant items and the client may require specific reporting requirements but only to the extent that they are not misleading and don't violate appraisal standards.

There are many older areas where almost all homes have non-permitted alterations. If an appraiser were to consider all non-permitted work to be a health/safety hazard, that could be considered a form of red-lining. I realize how absurd this all sounds to appraisers who have only worked in areas where properties are never missing permits. But think about how these rules should apply to areas where most properties are missing permits. An "unknown permits" status is different than "lacking permits" and that's different than "lacking necessary permits". If you can come up with a better way to handle the situation, I'm all ears.

The engagement letters that I have seen that state no value should be given to non permitted areas are NOT talking about water heaters...they are referring to structural additions.

I don't make the rules, and can not speak from the lenders perspective. I am only sharing what some direct lenders have included in their engagment letters.

 

[CANative]

The engagement letters that I have seen that state no value should be given to non permitted areas are NOT talking about water heaters...they are referring to structural additions.

I don't make the rules, and can not speak from the lenders perspective. I am only sharing what some direct lenders have included in their engagment letters.

if the market has a positive reaction to unpermitted or even illegal improvements but the client tells the appraiser to "not give value" while still asking for Market Value then that conflict represents an unacceptable assignment condition.

There's no contrary argument to this.

 

[Mike Kennedy]

To respond to a couple of other items:
Area of San Francisco: Potrero Hill

http://www.sfgate.com/neighborhoods/sf/potrerohill/

 

[23Degrees]

Great example Flygirl. While the appraiser in this case created problems for himself by including the area as part of GLA, how much less screwed would he have been if he separated the area out, opined market value for the unpermitted space, and proceeded "as is" - with the zoning compliance box checked legal. Putting the building code/zoning code crossover issue aside, this property was found to violate zoning via setback requirements and the appraiser checked it "legal" despite the vast discrepancy from public records.

But let's be clear, measuring set backs and confirming that the water heater was put in with a permit is not our job. But once we have a readily observable discrepancy that would inarguably be classified as being part of the "research" that took place during the course of the inspection - we leave the protection of statement 1. If you show up and the house is 2000 sf vs records of 1200 sf and you proceed "as is" with "legal" checked - you might be fine, you might not be fine - but you own that call. And KD - there is no comparison to that situation and not checking if the water heater had a permit or if every electrical outlet was installed with a permit - There is no question that under the normal course of business or following a reasonable SOW the protection from statement 1 will apply if it turns out that Uncle Leo installed the water heater without a permit 3 years ago. That protection falls at some point and the examples we have been discussing with regard to unpermitted space is over the line and well into "fail" territory.

When these situations occur and protection under statement 1 is dubious, the options are to be very confident of your call with regard to zoning compliance and be very confident of your opinion of the value of the unpermitted construction in question - or insist on proceeding "subject to".

And everyone is right of course that an engagement letter that demands an automatic "no value" classification be applied to unpermitted construction is an unacceptable engagement.