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REO Garage conversion - kinda

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Deuce of Spades

Thread Starter
Member
Joined
Nov 7, 2005
Professional Status
Certified Residential Appraiser
State
Florida
Ok, working on an REO that, of course, is partially under construction (3 of the 5 I have done in the past month have been partially under rehab or construction...).

Per the county records, there was no permit pulled. The conversion consists of replacing the garage door with block and french doors (they also started partitioning the garage for 2 rooms (office and family?).
Converted garages are common in the area. However, considering that it is not finished, not sure of code being met and not permitted, would you do the cost to cure to finish it or put it back to a 2-Garage?
 

Flygirl 152

Senior Member
Joined
May 3, 2006
Professional Status
Certified Residential Appraiser
State
California
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.
 

Mike Kennedy

Elite Member
Joined
Sep 28, 2003
Professional Status
Certified Residential Appraiser
State
New York
Illegal or Legally Permissible "as-is" ? County or City Municipality? What does the specific, applicable, Ordinance stipulate as "the cure" options. Does the Assignment require reporting on fannie 1004_05 ? (if so see FANNIE guidelines on illegal use)
 
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Joe Booth

Junior Member
Joined
Oct 16, 2003
Professional Status
Certified Residential Appraiser
State
California
It's the "P" word again.
 

Deuce of Spades

Thread Starter
Member
Joined
Nov 7, 2005
Professional Status
Certified Residential Appraiser
State
Florida
I have contacted the county (not in the city) to see what will be required to reconvert. Per the property appraiser site's pics, the conversion was started sometime in 2006. While it is not unusual to have a converted garage, the value of the garage is equal+- to the value of the additional living space. My bigest concern is the quality of the conversion and if it would meet code, since it was not permitted and therefore not inspected by the county.

I realize that I am not permitting or code enforcement, if it was finished in a workman like manner - I would count it as living space - but I am not sure that is the case - Luckily I have a sale with a similar condition to work with to determine market reaction.
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
Illegal or Legally Permissible "as-is" ? County or City Municipality? What does the specific, applicable, Ordinance stipulate as "the cure" options. Does the Assignment require reporting on fannie 1004_05 ? (if so see FANNIE guidelines on illegal use)
Hi Mike :)

Each and every controlling authority has its own regulations governing what needs to have a permit. The question is not so much is there a permit, per se, but is it allowed by zoning to have a garage conversion and if so, under what condition.

If garage conversions are common place (both with and without permits) and accepted by the market, you can satisfy Fannie's requirement by showing that.

Now the question of rebuild; can a garage conversion be rebuilt if destroyed even though it did not have permits originally? If garage conversions are allowed by zoning, why not?

Next to consider is the likelihood of the controlling authority to issue a permit retroactively for the current garage conversion. If this is a common occurrence, then it should be described as well in the appraisal.

The check boxes on zoning being legal, nonconforming or illegal goes with the next row of check boxes of highest and best use. If garage conversions are allowed (with or without permits) and if the market assigns a premium for the conversion of the garage as oppose to the garage in its unaltered state, you would have to appraise it to its HBU. If the garage conversion proves to be less value than a garage, then you would appraise it to that. If the conversion of the garage is neutral or equal value to a garage, then either can be the HBU.

The waters become muddy and it is no longer a black and white case of having a permit.

OTOH, if the controlling authority is really tough and enforces zoning by causing the conversion to be either put back to a garage or torn down, then you have a case for illegal. You should be able to back that up by showing no conversions without permits in the market have transferred.

Personally, I would not check the box illegal if there was any possibility that the controlling authority would allow it. I would be giving a legal opinion as to the exact nature of the law and the opinion as to what the controlling authority will do.
Can you imagine checking the illegal box on zoning and being sued? :peace:
 

Flygirl 152

Senior Member
Joined
May 3, 2006
Professional Status
Certified Residential Appraiser
State
California
I realize that I am not permitting or code enforcement, if it was finished in a workman like manner - I would count it as living space - but I am not sure that is the case - Luckily I have a sale with a similar condition to work with to determine market reaction.

I would not count the garage conversion in living space. In my comments about the garage, I would state it is NOT included in the GLA of the subject since it is not permitted, or permits are unknown, whatever the case may be. The only way I would consider it in the GLA is if the sq. footage is included in county records, or I saw permits that it is allowable.

I then "offset" the comparables typical two car garages since you have already stated in the conditions of improvement that the cost to cure the conversion is minimal. I always have a converted garage on the market grid as well, and you mentioned you have one, so that's great.
 

Deuce of Spades

Thread Starter
Member
Joined
Nov 7, 2005
Professional Status
Certified Residential Appraiser
State
Florida
Update -
County called back - no permit was issued and technically, they would issue a permit to change it back to a garage or to complete the project (remember it is only partially finished - no flooring or finished walls or air ducts). The conversion is accepted in the market, but I don't find that it brings greater value than the original garage.
Since it is only partially finished and the cost to cure it either way is almost the same, I am going to do my cost to cure based on converting back to a garage. Regardless, I still have to give an 'as is' value and in this market, it will be hit very hard due to the influx of foreclosures and the wide variety of choices in the area that don't need any work at all.

thanks for the input!
 

Richard Carlsen

Elite Member
Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
It's an REO assignment. Figure the cost to cure and any market resistance for functional (unfinished nature).

Remember that this is not for lending consideration so FNMA guidelines do not apply.
 
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