Non-Permitted Additions

[Brad Ellis]

Cynthia,

I assume you would be saying that highest and best use is the current use? If so, and you do not know if it is legal or not, how would you reconcile that with SR 1-4 that requires you to collect, verify, and analyze such data....?

Brad

 

[Brad Ellis]

Sid,

I am sure glad YOU said that.

I suggested the same thing many months ago- and more than once as this is an issue that has been debated ad naseum in more than one string- only to have the majority jump right down my throat over it.

Brad

 

[Sid Pachter]

SBear: Most of my clients will not lend on a proeprty hainvg a non permitted addition. How else is the lender suppored to know if the appraiser won't dislose this aspect? Liability issue can work both ways, if there is an illegal addtion/conversion that is not disclosed to the lender and if after the loan is made and closed, the local municipality finds out about the adition and makes the owner tear it down and the lender finds out and the property value then is dimininshed, then whose liable? It all comes down to common sense and customer service. I'd prefer the appraiser telling me everything up front!

 

[Smokey Bear]

I never said don't disclose, I said that we're confusing the role of the appraiser (market value) with the lender (will I loan on a non-permitted addition, or more accurately here, one where permit status cannot be verified.

Brad - gee, I didn't know that my H&B use analysis was supposed to be so detailed as to include/exclude features of the structure. If I determine that the H&B use is SFR, I don't get down to the number of bedrooms or verifying that the plans met the permit etc. Was the addition legally permissable? If it was NOT permitted, (records that far back aren't always complete) could it be brought up to code? Many questions to ask, but I never knew that H&B use considers whether you got permits for your addition.

 

[EVAUSA]

FNME stance is that so long as you can prove market demand and acceptance with three good comps with similar additions/conversions, include it as GLA. This also goes for below grade. We just went over this in a recent FNME class

 

[Brad Ellis]

Cynthia,

Brad - gee, I didn't know that my H&B use analysis was supposed to be so detailed as to include/exclude features of the structure. If I determine that the H&B use is SFR, I don't get down to the number of bedrooms or verifying that the plans met the permit etc. Was the addition legally permissable? If it was NOT permitted, (records that far back aren't always complete) could it be brought up to code? Many questions to ask, but I never knew that H&B use considers whether you got permits for your addition.

If the loan goes bad, and the lender is forced to cure code problems that were nown and apparent, tear down unpermitted portions of the improvments, etc. etc. you would not be a happy camper.

I am helping to prepare a case right now specifically on this issue. One of the issues will be highest and best use.

The municipalities have lots of power over structures- not the least of which is to issue retro permits with really big fines, refuse them (and then what do you do- since you are not going to be able to force them to issue a retro permit?), cite the illegal addition or conversion for demolition, etc.

I have one in LA where the borrower illegally converted it into a triplex. The city is willing to allow a duplex but the 3rd unit must be undone. It is zoned SFR. To complicate matters, all units were occupied by illegals and to evict them was not easy (there are actually CA laws that make that difficult) and it was far easier to to pay a ton of key money (yep they got a lawyer) to get them out.

Do you think I will not cite that the appraiser ignored H+B use due to illegal conversions and add on the key money to a claim?

Now, of course, you could cover this all with an EA- but on the forms in which you detail your scope such an EA is not permitted if your scope was a Fannie compliant assignment.

So, yes your analysis should be that detailed. This no different than a home having a granny unit that is illegal. It may add value to the typical buyer but H+B use will not be for it to have one.

I have seen cities go from requiring the decommission and capping of a second kitchen all the way to actually demolishing the entire home.

Brad

 

[George Hatch]

I would make the distinction between "permitted" and "permissible". The former refers to applications, fees, approvals and such. The latter refers to what the zoning jurisdiction effectively allows to happen via enforcement of their rules and regs, or the lack thereof.

In some jurisdiction in my area the two are synonymous, meaning that if a city of county zoning department becomes aware of a violation they will probably require its abatement. In others, they'll basically allow some violations to continue without penalty or enforcement measures even if it's brought to their attention. A lot of jurisdictions take the middle road of allowing violations to be cured after the fact so long as the improvements otherwise meet their development criteria.

For an appraiser, recognizing the difference in their HBU analysis is one of those elements that contribute to geographic competency. Where it gets a little tricky is when an intended user of an appraisal report has appraisal requirements to handle such situations that are at odds with how that market actually works.

Let's say I am appraising a home with a known unpermitted addition, but its located in an area where the zoning jurisdiction is known for not requiring such situations to be abated. Further, the market participants typically accept such additions as having equal utility and contributory value as permitted additions.

From an HBU standpoint, the fact that the addition is effectively allowed to continue can be argued to satisfy the "legally permissible" element; and the market acceptance of the addition contributes to the "financially feasible" element and maybe even the "maximally productive" conclusion.

Thus, the market value (as defined) to the typical buyer and seller could easily wind up as including that addition.

Yet for a mortgage lending assignment wherein one of the intended users has a "no permit-no value" clause in their appraisal requirements we could wind up with an appraisal that satisfies their criteria but doesn't really represent the actual MV of the property. Instead, it represents a modified value opinion that's been influenced by that appraisal policy, which I would call some sort of mortgage value or lender's value.

I've run into lots of situations where a lender's appraisal policies have infringed on the definition of MV upon which my appraisals are supposedly based. They're generally not too fond of it when I stick to the definition and call it straight down the middle. That's another situation that I sometimes address by including a second value opinion based on their criteria, thereby handing the responsibility for making their own decisions back to them.

Regardless, market value is market value, and I certify to being unbiased. We either mean what we say or we don't.

 

[hastalavista]

I did work on a case that involved a lender vs. the appraiser in a non-permitted second-unit situation (and I know we are talking about additions, but I think the same principle applies).

The zoning would have allowed for a second unit.
However, the unit that was built was twice as big as what zoning would have allowed.
The property was appraised three times by the same appraiser without comment as to the permissibility of the second unit (indeed, everything about the subject was indicated or implied to be "legal").
We (my firm) discovered the issue when we were appraising the property for pre-foreclosure (Notice of Default). As part of our routine, the appraiser looked up the zoning for the subject and what was allowed re: second units- found the maximum allowable size for the second unit was exceeded by what existed and kicked the assignment up to yours truly.

Fast-forward about a year. Lender is suing appraiser (and E&O). As part of this assignment, I did go down to the county and spoke to the enforcement code officer. As it turns out, this property has been flagged and the property is going to be fined (they do this by attaching an assessment each year to the tax bill) if the new owners do not correct the situation.
I asked the officer if the county would consider having the property torn down? He said it was doubtful only because this unit was originally a barn, and it had been converted to the unit (if it was original construction (no conversion) they would have had it torn down).
I asked how much the fine was? He said (I think this is it) around $14k. I said that wasn't much given the overall value of the house? He said the fine is applied every year until the violation is corrected.

During the REO sale negotiations, two contractors looked at the property and estimated $100k to $150k+ to remedy the situation.
The subject eventually sold for about $700k+ less than it was originally appraised for (I should note that it sold in a declining market- but much of the difference in price was attributed to the illegal (and that's the term the code officer used) addition- the subject's non-conformity negatively impacted its marketability and severely limited the potential buyer pool.
I am not at liberty to discuss the outcome of the case.

IMO, my client wouldn't have had a case if the report had indicated what the status of the addition was and then said how it went about valuing the subject. Even if the report gave it market value, the rationale for that action would have been present and would have allowed my client to evaluate the situation (and they would have rejected the loan because they have a written policy not to make loans on non-permitted additions or 2nd units).

And remember: In my scenario, the data about conformity was easily found by clicking a few times and looking up the zoning ordinance. :new_smile-l:

 

[Flygirl 152]

I did work on a case that involved a lender vs. the appraiser in a non-permitted second-unit situation (and I know we are talking about additions, but I think the same principle applies).

The zoning would have allowed for a second unit.
However, the unit that was built was twice as big as what zoning would have allowed.
The property was appraised three times by the same appraiser without comment as to the permissibility of the second unit (indeed, everything about the subject was indicated or implied to be "legal").
We (my firm) discovered the issue when we were appraising the property for pre-foreclosure (Notice of Default). As part of our routine, the appraiser looked up the zoning for the subject and what was allowed re: second units- found the maximum allowable size for the second unit was exceeded by what existed and kicked the assignment up to yours truly.

Fast-forward about a year. Lender is suing appraiser (and E&O). As part of this assignment, I did go down to the county and spoke to the enforcement code officer. As it turns out, this property has been flagged and the property is going to be fined (they do this by attaching an assessment each year to the tax bill) if the new owners do not correct the situation.
I asked the officer if the county would consider having the property torn down? He said it was doubtful only because this unit was originally a barn, and it had been converted to the unit (if it was original construction (no conversion) they would have had it torn down).
I asked how much the fine was? He said (I think this is it) around $14k. I said that wasn't much given the overall value of the house? He said the fine is applied every year until the violation is corrected.

During the REO sale negotiations, two contractors looked at the property and estimated $100k to $150k+ to remedy the situation.
The subject eventually sold for about $700k+ less than it was originally appraised for (I should note that it sold in a declining market- but much of the difference in price was attributed to the illegal (and that's the term the code officer used) addition- the subject's non-conformity negatively impacted its marketability and severely limited the potential buyer pool.
I am not at liberty to discuss the outcome of the case.

IMO, my client wouldn't have had a case if the report had indicated what the status of the addition was and then said how it went about valuing the subject. Even if the report gave it market value, the rationale for that action would have been present and would have allowed my client to evaluate the situation (and they would have rejected the loan because they have a written policy not to make loans on non-permitted additions or 2nd units).

And remember: In my scenario, the data about conformity was easily found by clicking a few times and looking up the zoning ordinance. :new_smile-l:

Wow Denis! Thanks for sharing that story. I can't imagine not mentioning the other unit; that's insane!

Several years ago I read in one of the periodicals I receive that having the incorrect zoning on a report is one of the most common mistakes made by appraisers. Even before I read the article, I always called the city/county if the zoning is not on county records data because it is part of my job as an appraiser. That proved to be very helpful for a property in Santa Cruz that I was appraising.

When I spoke with the planner and told her that I was doing an appraisal on this particular property, she told me that the subject was "in perpetuity/affordable housing". Per the planner there was only a certain dollar amount the property could be refinanced for, and it could not exceed that amount. The subject was in a very nice newer development with recent sales in the $800k range. I was shocked to find out the subject could only be refinanced for a figure which was in the low $200k's.

This was the first time I had ever run into a property of this nature, and learned a lot in the process. The appraisal was going to a big bank, and they did not tell us that it was an affordable housing home. I thank my lucky stars that I did my due diligence and called the planning department, it certainly paid off.

I just can't imagine not mentioning another unit, and doing so 3 separate occasions! Not good.

 

[ZZGAMAZZ]

Mr. Hatch,

Your comment about the potential distinction between "market" and lender" values is very intersting. Would you be so kind as to indicate whether you have actually conducted an appraisal with different values based upon the different definitions of value; and (as always in my line of questioning it seems) does one or the other require an EC?

I'm asking because a great number of my assignments would benefit from this application although it would require heightened research and analysis; and although IMO it would often be deemed necessary to develop a credible product, the client's involvement in the SOW development in this sceario would be critical, especially because of the unique nature of the result, and the commensurate fee.