Non-conforming Duplex vs. MIL.again

[Wendy]

I've searched and read a million duplex threads, but still don't have a clear answer. So let's re-hash this one more time! yea!

Situation:
SFR 1200+/- SF with a 500 SF cottage. Both on same lot. Single APN. Cottage is currently rented. Main house owner occupied. Typical market motivation would be to have owner occupation of the main house w/ a little bonus income from the cottage (legal or illegal - we are a college town). Not a great deal of investor appeal as a duplex (rental of both units) since the cottage is so small. Comps are limited and typically sell as SFR not multi-family.

Current zoning is SFR (no duplex). Subject is grandfathered (built in '30s) and is considered legal non-conforming by city. 70% or greater destruction and it can not be rebuilt with 2 dwelling units.

Rental of the cottage is allowed as long as there is no vacancy greater than 365 days. Vacancy of greater than 365 days would make it illegal to rent and it would become a MIL unit. Some question exists as to if an continuous occupancy permit for the rental is also required. Note: These legal non-conforming rental rules seem to change based on the interpretation of the city officials. I consider them tenuous at best.

Question: Since it's status as a duplex is somewhat shaky, is it mis-leading to report it on a 1025? Likewise, is it misleading to put it on 1004 since there is current income from the cottage?

Personally, I think it falls somewhere between the two.

Client is high quality, non-value pusher who needs a "form" report to comply with internal standards. Talk with them indicates that they would like a SFR w/ MIL and full disclosure of current zoning and income.

My thoughts:
1004 - Current zoning is SFR. Predominate use in area is SFR. Typical buyer would be owner occupied main house. BUT there is income from 2nd unit.

1025 - Current use is SFR w/ income unit. However, this may/could change leaving lender with collateral that is not the same as loaned on.

What say you?

 

[Midwest Guy]

Well,

The 1004 does allow SFR with accessory unit.

I've searched and read a million duplex threads, but still don't have a clear answer. So let's re-hash this one more time! yea!

Situation:
SFR 1200+/- SF with a 500 SF cottage. Both on same lot. Single APN. Cottage is currently rented. Main house owner occupied. Typical market motivation would be to have owner occupation of the main house w/ a little bonus income from the cottage (legal or illegal - we are a college town). Not a great deal of investor appeal as a duplex (rental of both units) since the cottage is so small. Comps are limited and typically sell as SFR not multi-family.

Current zoning is SFR (no duplex). Subject is grandfathered (built in '30s) and is considered legal non-conforming by city. 70% or greater destruction and it can not be rebuilt with 2 dwelling units.

Rental of the cottage is allowed as long as there is no vacancy greater than 365 days. Vacancy of greater than 365 days would make it illegal to rent and it would become a MIL unit. Some question exists as to if an continuous occupancy permit for the rental is also required. Note: These legal non-conforming rental rules seem to change based on the interpretation of the city officials. I consider them tenuous at best.

Question: Since it's status as a duplex is somewhat shaky, is it mis-leading to report it on a 1025? Likewise, is it misleading to put it on 1004 since there is current income from the cottage?

Personally, I think it falls somewhere between the two.

Client is high quality, non-value pusher who needs a "form" report to comply with internal standards. Talk with them indicates that they would like a SFR w/ MIL and full disclosure of current zoning and income.

My thoughts:
1004 - Current zoning is SFR. Predominate use in area is SFR. Typical buyer would be owner occupied main house. BUT there is income from 2nd unit.

1025 - Current use is SFR w/ income unit. However, this may/could change leaving lender with collateral that is not the same as loaned on.

What say you?

 

[Wendy]

Well,

The 1004 does allow SFR with accessory unit.

I'm digging through the fannie stuff right now and may be wrong - but I thought the 1004 w/ accessory was only if the main unit was required to be owner occ. This property has no such restriction. I do know that SFR w/ non-rented accessory is ok.

Like I said, I may be wrong......still checking.

 

[Lee Lansford]

Current zoning is SFR (no duplex). Subject is grandfathered (built in '30s) and is considered legal non-conforming by city. 70% or greater destruction and it can not be rebuilt with 2 dwelling units.

MY RESPONSE:
This is a good start! If you conclude (as I suspect you will), that this property is a 2-unit residential income, it is basic to your analysis (and the credibility of the appraisal) that the sales comparisons have the same (or EXTREMELY similar) zoning status as the Subject. Given sold comparisons with the same zoning status as the Subject, the market has "measured" the risk that the improvements can not be re-built if "70% or greater destruction..." This is not an option for the appraiser...this is basic to good appraisal practice.


Talk with them indicates that they would like a SFR w/ MIL and full disclosure of current zoning and income.

MY RESPONSE:
Who cares what the client "wants" in this situation? Seriously. It matters not.
Appraisers have been disciplined by their state's regulatory agency for "caring" more about what the client "wants" vs. reporting and analyzing what actually is!

My thoughts:
1004 - Current zoning is SFR. Predominate use in area is SFR. Typical buyer would be owner occupied main house. BUT there is income from 2nd unit.

MY RESPONSE:
Predominant use in the neighborhood may be SFR, but such does not indicate H&B Use of the Subject.

1025 - Current use is SFR w/ income unit. However, this may/could change leaving lender with collateral that is not the same as loaned on.
MY RESPONSE: SEE my initial response above!

What say you?

You have to reach a conclusion as the H&B Use of the property. Now, some purists will tell you--and it is possible--that the H&B Use COULD be either as a SFR w/guest house OR as a 2-family.
From what I'm "hearing" you say, the Subject is a 2-unit residential income property. In both ("1004" and "1025") immediately above, you keep going back to the 2nd unit and the "income".

 

[Tater Salad]

From FNMA seller's guide:

•Uniform Residential Appraisal Report (Form 1004), for one-family properties and units in planned unit developments (including those that have an illegal second unit or accessory apartment that we will consider as acceptable security) that secure either first or second mortgages.Form 1004 also may be used for two-family properties, if each of the units is occupied by one of the co-borrowers as his or her principal residence or if the value of the legal second unit is relatively insignificant in relation to the total value of the property (as might be the case for a basement unit or a unit over a garage). In addition, appraisals for units in condominium projects that consist solely of detached dwellings may be documented on Form 1004, if the appraiser includes an adequate description of the project and information about the owners' association fees and the quality of the project maintenance.

I think that the above blue makes it ok to use the 1004 with a rented accessory unit/apartment, since you state that the cottage is so small that it wouldn't typically be viewed in your market as a 2-unit. I would definitely utilize the income approach, and state what you believe to be the case about the non-conforming zoning and rebuild. I would only compare it to other comps that have the same zoning/inability to rebuild if over 70% destroyed, eliminating the need to isolate the market reaction to the possibility of losing the additional unit.

 

[Wendy]

Carole,
Thank you for that text - that is the part I remembered (but couldn't actually remember ) and was looking for.

"......or if the value of the legal second unit is relatively insignificant in relation to the total value of the property (as might be the case for a basement unit or a unit over a garage)....."

I'll have to check the numbers, but I think that this will end up being the case.

 

[Wendy]

You have to reach a conclusion as the H&B Use of the property. Now, some purists will tell you--and it is possible--that the H&B Use COULD be either as a SFR w/guest house OR as a 2-family.
From what I'm "hearing" you say, the Subject is a 2-unit residential income property. In both ("1004" and "1025") immediately above, you keep going back to the 2nd unit and the "income".

I do not think the H&B use is as a two unit rental. Most of these type of properties are owner occupied for the main residence.

The "cottages" end up used in a variety of ways - personally I'd kill to have one as an office. Not every purchaser of said properties wants a rental tenant in the back. Nor do these small units generate significant income.

Edit to add (I did not see you comments in the quote):

-No brainer that I will be using comps w/ similar zoning. Mama didn't raise a fool.

- Listening to client wants are a part of good business practice. Good appraisal practice is giving the right product for their needs, which will be done. Nobody is trying to hide anything here - for once this is a well-informed and ethical client.

- You are right that it could possibly end up as a 2 fam income. I have not completed my research yet, although it is pointing in the opposite direction.

I appreciate you providing your insights - it does help to have the thoughts of others.

 

[Lee Lansford]

I do not think the H&B use is as a two unit rental. Most of these type of properties are owner occupied for the main residence.

The "cottages" end up used in a variety of ways - personally I'd kill to have one as an office. Not every purchaser of said properties wants a rental tenant in the back. Nor do these small units generate significant income.

Edit to add (I did not see you comments in the quote):

-No brainer that I will be using comps w/ similar zoning. Mama didn't raise a fool.

- Listening to client wants are a part of good business practice. Good appraisal practice is giving the right product for their needs, which will be done. Nobody is trying to hide anything here - for once this is a well-informed and ethical client.

- You are right that it could possibly end up as a 2 fam income. I have not completed my research yet, although it is pointing in the opposite direction.

I appreciate you providing your insights - it does help to have the thoughts of others.

Wendy, the fact that properties such as the Subject typically have one unit owner-occupied should not be a part of your decision-making process. There are many communities in the Chicago area (including Chicago) where it is very typical for one unit to be owner-occupied.

I continue to "hear" your words regarding what the client "wants" (SFR); the client wouldn't happen to be a mortgage broker, would it?
Well, if the client wants an appraisal ONLY if the Subject is a SFR with an accessory unit, you can conduct a staged assignment where the first step is the decision-making as to what the Subject is.

I am not (want to emphasize that!) at all attempting to make a blanket assertion, but, in more instances than not from my experience, the 2-unit property has more value in the market than the SFR with an accessory that can not be legally rented.

As it is, you know that the Subject is a legal nonconforming 2-unit; your analysis would have to indicate that it is worth MORE as a SFR with an accessory unit to appraise it other than as a 2-unit property.

Be careful...be very careful...and, good luck!