Hello,
There is a particular neighborhood in which I appraise that converted garages are common also. The conversions are popular in this area since the families that live in this area typically have their extended families living with them. Although they do not pull permits, the city knows the conversions exist, but do not do anything about them unless someone files a complaint.
It sounds like the neighborhood yours is in is similar to mine. If you were to go back historically and review matched pair analysis, you would see whether those properties historically dictate a higher sale price in the market. In my particular neighborhood, that is the case. In fact, a worker that remodeled my bathroom recently came to me and told me he recently missed 2 payments since his mortgage adjusted, and he was wondering what he should do. It's a long story, but the short of it is that he couldn't refinance and needed to sell his home in a short sale. He asked me to advise him on a list price for his home because he was very worried about being foreclosed on and ruining his credit. He had a nice garage conversion that I knew would bring value in use in the market place. The real estate agent had told him there were 100's of listings and short sales in the neighborhood and the chance of him being foreclosed on is greater than actually selling his house. After doing my research, I advised him on what I thought a competitive list price should be for his house and it was put on the market. The real estate agent was shocked when he got multiple offers in this down market. However I wasn't surprised, because I knew what that conversion meant in this area of market influence.
If I were you, I would call the city and ask if there have been permits issued, and also what is allowed under the current zoning because some cities are now allowing and issuing permits for converted garages. The particular city I have been appraising is in the process of now allowing a converted garage with no permit as long as there is no kitchen. I would then talk about the partial conversion in the report and state what has been done, saying something like; It appears the previous owners were in the process of converting the garage. New french doors have been installed in place of a roll up garage door, and a portion of the garage has been partitioned off. Although the work has been performed in a professional manner, per the city of ------ no permit is on file. However, the appraiser notes that converted garages are typical in the area, and could have value in use to a particular buyer. Therefore since the cost to cure is minimal, no penalty is assigned.
You should also include plenty of picture for REO's. For all my REO appraisals I include a picture of every room, and every item I list on the REO addendum. Typically I send in anywhere from 5-8 pages of photos, and the lenders tell me they love it because the photos illustrate the condition of the property during the time of inspection.
If converted garages are typical for the area, there may be buyers that see the beginning of the conversion and feel they would rather have this house because now they can finish the conversion to suit their own taste. They might choose this REO before another because now the mother-in-law or a renter can have a separate entrance to a bedroom.
I've taken this approach many times in the past, and have the MLS data in the work file to prove these homes bring a higher sale price. I have never been conditioned, questioned or called on it, but always make sure to explain it in the report. Hope this helped.
