One or 3 units?

[Conrad]

Just finished an inspection of a property that was supposed to be a SFR. Instead Of a single family home, The guy has converted part of the home into 2 apartments. One is a studio and the other is a 1 bedroom. Neither are on seperate power meters or other utilities. Is this a 3 unit structure or a SFR with additional kitchens? This is in an area the is zoned for both.

 

[Restrain]

If it's zoned for the use, it's conforming, so what you see is what it is. The lender may not like it, but that's not your problem. If it was ordered as an SFR, then I would stop and call the lender. The lender may want to stop and pay a trip charge. Or, you have to raise the fee for a multi-family vs. single family. In any event, I would talk to the client before proceeding further.

 

[KD247]

We get a lot of these.

Here's the way I look at them... Pretend you just inherited the property and you need to sell it.

What yields the highest net profit? Do you market it "as-is", a single-family home with extra kitchens? Or, do you rip out the kitchens and change it back to a conventional single-family home? Or, do you find that the investment value of the rental income stream produces the highest value?

We have several duplexes in our neighborhood that have been converted to single-family homes. If a duplex is worth a hundred thousand more as a single-family home, an income property analysis doesn't really seem to be a complete appraisal. On the other hand, some nearby markets will pay a huge premium for illegal kitchens and illegal garage conversions. We don't have mandatory zoning inspections upon transfer, so these "three-unit single family homes" sell frequently.

Your question is an interesting one, because it not only involves highest-and-best use, but also lender's requirements.

I'm not sure the answer is all that simple and I'm very interested in hearing how others handle this situation.

 

[Larry Lyke]

Step #1 is to let the lender know what you've inspected.

Step #2 is to do what the lender says if it's licit.

Step #3 is to otherwise advise the lender about H&B and inform the lender as to how an appraisal could be fashioned.

 

[Richard Carlsen]

Report what you see, hear, feel, smell, touch, and have found out about the property to your client.

If it is a SF being used as a 3-unit, tell him and let him make the decision. If he wants you to appraise it as a SF, appraise it as a single family with all of the functional depreciation a converted 3-unit would have.

Whatever, you do, don't forget Highest and Best use. And don't forget to tell him in the report exactly what you have observed in the house on the day you were there with the separate meters, renters, etc. That is a problem for the UW's.