Non-Permitted Additions

[Lobo Fan]

I had an interesting experience yesterday. First a little background. I did a refi appraisal for a home in Sandoval county. The base house was about 2000 square feet, with a 600 square foot addition to the rear. I am usually pretty careful about what I include in the GLA. In this case the addition appeared to be of better construction than the original.

I checked with the county. They can only look up building permits by the date issued. House was 25 years old, the addition was about the same. I could not determine the descade let alone the month and year.

I included the area in the GLA with a note explaining that the permit status could not be verified, but the work appeared to be of similar condition to the main house.

This turns into a big UW thing. Per the lender FNMA will not loan on non-permitted additions. First I heard of this. So I ended up backing the addition out of the GLA, and giving it some value.

Now for the recent part. I get an assignment from the same lender to look at a house in Rio Rancho. Based upon the e-mail address, the borrower is a big hitter with the lender. He knows the difference between a 2055 and a 1004. He sends me an appraisal done in 2005 in order to give me a head start (and a target I suspect). The old appraisal indicates a converted garage. I call the city and they can only check records back to 1999. No record of a permit of course. I go back to the guy and explain that I will need to see a permit to count the garage conversion in the GLA. Has a meltdown and cancels the appointment.

The question I have is if FNMA is really cracking down on non-permitted additions or if I was just dealing with a nervous UW? I run into non-permitted work all the time.

 

[SANDY]

Run into this all the time here-we always check with zoning authority to see if permitted-also have to check if addition is legal non conforming which can be a sensitive issue with code enforcement. To protect the interests of the owner we do not identify the specific property.

point is-don't forget to see if addition may be legal-non conforming especially if the addition was done some time back.

 

[Sid Pachter]

Most lenders will not accept a property as loan collateral with a non permitted addition. As an in house reviewer for a due diligence company, I find that +/-50% of the appriaser's will go the extra mile to try an ascertain if an addition was permitted. In situations where an addition is identified but no permit information is provided, I as a reviwer make the phone call. As a former field appraiser and lender staff appraiser I also verified permits for an addition/garage conversion etc.

As a reviewer reading an appraisal report where the appraiser verifies the building permit and provides the permit # or the name and phone number of the persron providing the data, this disclosure helps to increase the creditability of the appraisal report. Unlike one appraiser who said bascicaly he/she doesn't verifiy permits due to the low fees involved paid to by AMC so basically why do additional work. This person has the wrong attitude and is not the type of appraiser my clients need to have a realtionsip with. Myself and my clients have issues with appriasers not verifiying the use of permits and stating the addition was completed in a "workmanlike manner" and then inserting a disclaimer that appraiser's are not experts in terms of home construction. There also seems to be concern over a liability issue for fear of lender retribution if the wrong information is provided. I have not seen in my 15 years in this business where a lender has sued an appraiser for incorrectly reporting the presence of a permit.

In some situations if a permit is needed but cannot be found, then the appriaser should contact the client for direction. However I have seen where this has occurred, the appriaser noted the addtion, inclduded it in the GLA, mentioned that verification of permits was attempeted but no permit was found-areas records only dated back 40 years (for example) and the addition may be older. Then it is up to the lender/underwriter to make the call.

Appraiser's are the eyes and ears of the lender/client, appriaser's are professionals, consequently in my humble opinion, verifying the use of permits for additions/conversions/renovations is part of the SOW.

 

[Mike Kennedy]

Ditto Sid.

 

[Sally Glassberg]

non permitted additions are a big deal, one of my major client always have me make the appraisal subjec to verification of permits for the addition if I cannot find the information from online public records.

 

[ZZGAMAZZ]

Sid:

Regarding your comment that "it is up to the underwriter to make the call."

This scenario confuses me. Because the comp selection and the adjustments to a large extent are based upon whether an addition is or isn't incorporated into the GLA, or as a granny, etc., etc., etc., the appraisal report is completed before the underwriter has an opportunity to make that decision.

How does one proceed without knowing in advance how underwriting will react to your treatment of the addition that is either non-permitted, or with permits of unknown origin.

 

[hastalavista]

Sid:

Regarding your comment that "it is up to the underwriter to make the call."

This scenario confuses me. Because the comp selection and the adjustments to a large extent are based upon whether an addition is or isn't incorporated into the GLA, or as a granny, etc., etc., etc., the appraisal report is completed before the underwriter has an opportunity to make that decision.

How does one proceed without knowing in advance how underwriting will react to your treatment of the addition that is either non-permitted, or with permits of unknown origin.

ZZ-

I will share with you my experience based on my own review work and working with lenders/underwriters:

The appraiser needs to use his or her best judgment on how to proceed. IMO, the most important thing to do in the report (concerning additions as we are discussing) is to disclose what is known, what is unknown, what was done to research the issue, what decision the appraiser made (include it or not include it as GLA) and then provide the rationale for that decision.
Once this is done, then the appraiser goes forward and analyzes the property. When it gets to the reviewer (me :new_smile-l or the UW, we can decide if we agree or disagree with the process and rationale.
I've agreed with reports before and they haven't fit the lender's guidelines. The report's quality is judged acceptable/good, but the loan is rejected because the property doesn't meet the lender's property qualifications requirements. In such a case, the appraisal report did exactly what it was supposed to do.

Where I and my client run into issues is when the report does not provide sufficient comment and explain its rationale at how it got from start to finish. When an improvement is indicated as having 2,500sf in the report, but public records (which is always a starting point) states 1,600sf, and there is no comment as to how the improvement went from 1,600 to 2,500, that is going to create an issue. Even if the appraiser has no clue as to why there is a difference, the report should discuss the difference, explain what is known, what is unknown, and then communicate what process it used to select the appropriate GLA for comparison. Unfortunately, many reports don't provide much (if any) comment.

If the report adequately communicates the problem it is solving and how it went about solving it, assuming the report was done competently, any disagreement isn't about quality. Its simply a lender preference, minimum standard or property qualification requirement, a risk assessment, or a difference of opinion. In other words, it is a UW call.

That's my observation. :new_smile-l:

(Hope I didn't take away from Sid's post and he may disagree with me 100%! )

 

[Wendy]

I've added another story to why I scope out permits.

I was recently looking at a REO property to buy for myself. It had a 300sf+/- addition to the master that had severe cracking at the join. The addition was about 8 years old and would not have been noticeable if not for the crack. Any of us would have never even suspected it was an addition.

I checked with the permitting authority for the city and found that the addition was not fully permitted. Three permits had been pulled, but none were ever completed.

Had this been a report, I would have said it was un-permitted and all the usual attendant problems would have ensued.

Here's the kicker: I get a call about a week and a half later from the records department from the city. Well, golly, turns out the thing was fully permitted and every thing was signed off good and proper. It was just poor construction - but that's another story.

Can you imagine if the HO had found out the same thing after your erroneous report had derailed their refinance or sale? Sure it's not your fault, but that is not going to stop a ****ed off HO.

WE ARE NOT THE PERMIT POLICE. Nor are we contractors, title agents, bug inspectors, morality enforcers, etc. The list is endless.

We already have enough liability, why do so many insist on accepting more?

 

[Sid Pachter]

Thanks Denis for your comments which are on target. Again its all about being thorough. As far as being "permit police", I believe this attitude is just wrong. If one takes the time to make the call and do the reasearch and fully disclose who provided the information and their contact phone number, that should releive the liability issue as the data is coming from an informed/expert source, the local building department. Just because Weny's example highlighted an error in an isolated event doesn't mean that permit verification should not be attempted.

 

[Smokey Bear]

Huh? It's not your job to make the property fit lending guidelines, it's to appraise to market value. How does the market react to the addition? If they would pay more for it, and treat as if it was part of the GLA, why would you treat it differently because you are unable to verify permits? (Which is different from knowing for sure it's unpermitted). We're not the permit police, the addition was of the same quality as the rest of the house, presumably met all the other requirements for GLA. I wouldn't change it, myself, let the bank make the lending decisions, and you determine market value.