SFR Illegally Converted To Duplex

[John J. Phillips]

PLEASE don't take this person's advice. She has an opinion about everything, many being unsupported.

If you were appraising a property and there was a converted house to a liquor store would she state "Since liquor store use is not legal, this is still a single-family home"?

Her above statement is ludicrous to be nice. It is currently A DUPLEX and what are you going to do about the Highest and Best Use section of the 1004? I don't want to even think about what she would do in this situation.

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You have to appraiser a property to it's highest and best use, and H&BU says it has to be legally permissible, so therefore H&BU is SFR and it has to be appraised as a SFR. So I guess it would actually be much more complicated if the zoning actually allowed a duplex. The functional issues dictate that it should be comped as a property in need of a total interior renovation, and luckily I have such comps. I'm not at all worried about value or USPAP, more compiling with FNMA. H&BU in the absence of comencing a renovation (i.e. for an as is value) is not very useful assuming the improvements have any contributing value, and I don't think anyone expects the appraiser to take it beyond general property type. I doubt any appraiser anywhere anytime has said on their own the H&BU it to replace all the original windows with replacement windows, or that the improvements should have been built 200 SF larger. Even the selling guide ends the H&BU instructions by saying so long as the improvements add value to the land the appraiser should report the existing improvements as the H&BU. The improvements are not illegal, just the current use of the improvements, and zoning regulations definitely distinguish between structures and uses. I think it is just a question of if it is FNMA eligibility as is, or does owner need to anything to be FNMA eligible, and I think that has to come from the lender.

 

[John J. Phillips]

Its been my experience the "black letter" of the law seldom means anything to government officials, unless there is something in it for them. Duplex, smuplex. As far as the lender is concerned, I would have been very upfront from the inspection forward what it was about. I wouldn't be "completing" unless the lender had acknowledged the issues with the property going forward and I had statements from them that they "understood" what I'd described about the subject and they told me to complete it as it is.

Here's the downside of "completing" and it enters the ether of the AMC. Some appraiser is going to get it as a "review." And if they want to pin your hide against the USPAP wall, they will have more than many reasons to do it. I'm just saying to be very, very careful before you hit 'send.'

Yeah, that is exactly what I did, inspected, reported what I saw and haven't lifted a figure since (except thinking about it a lot). They did get back to me once to say just go ahead, and replied for them to confirm property eligibility before proceeding (which is their job), so waiting for that, but preparing for if they still want to go ahead. Talking about it here on the thread has been a big help though.

 

[Michigan CG]

You have to appraiser a property to it's highest and best use, and H&BU says it has to be legally permissible, so therefore H&BU is SFR and it has to be appraised as a SFR.

You can certainly go with that premise but it IS a duplex currently and you have to check the box on H and B as NO. Do you think a lender who asks you to proceed on the 1004 is going to like that box checked NO? Are you going to complete the report with no professional bids to convert back to a SFR?

Can of worms unless you are getting $1,500 for the report and are willing to upset the lender.

 

[Evincere]

Completing a conventional 1004 assignment of a 1921 1-story 1,500 SF property originally constructed as a SFR. The owner has converted the home to a duplex by constructing a dividing wall down the center of the residence from front to back (left/right duplex), and installing a second font door, both sides also have rear/side exterior doors. They also partitioned the rear of the home to a third separate space (not accessible from the interior of either unit) that has a washer/dryer and two additional beds (so some GLA issues with that). The zoning does not allow duplexes (SFR only). I informed the client thinking the assignment would be cancelled, but they seem to be trying to make it work. My understanding is the owner would be willing to install an interior door connecting the two units (like a hotel suite). The property is owner occupied and I believe both "units" are occupied by related family. Property is C4/Q4. So just trying to wrap my head around this during the busy holiday season to make sure I am thinking this through. It is not really a question of value or quality/condition, as much as legality, property eligibility, proper appraisal form, functional obsolescence and making sure not to misrepresent anything. Any thoughts as to how you would approach this would be greatly appreciated.

How many kitchens

 

[John J. Phillips]

How many kitchens

2

 

[Elliott]

How many electric meters?

 

[John J. Phillips]

You can certainly go with that premise but it IS a duplex currently and you have to check the box on H and B as NO. Do you think a lender who asks you to proceed on the 1004 is going to like that box checked NO? Are you going to complete the report with no professional bids to convert back to a SFR?

Can of worms unless you are getting $1,500 for the report and are willing to upset the lender.

Yes, I originally thought this would be pretty hairy, but the more I think about it, and discussing it hear does really help, I'm not too worried about it (but all these comments are good to make sure I'm not just falsely convincing myself of that). What would not be financially feasible (and therefore not HB&U) would be a shoddy low grade "de-conversion", In other words if they just took down the dividing wall and ripped out the second kitchen and patched things up a bit the property would still be a candidate for an interior renovation (and would probably still have some functional issues). It is all low grade stuff in a neighborhood with an active renovation market, so something like that would be wasted time and money, or not financially feasible in appraiser speak, so not the H&BU. So short of a complete interior renovation, which is not on the table, the only "work" worth doing at this point is anything lender may require to make the property eligible to fund the loan, but that is up to the lender, and any such work would not affect value or marketability. I think it may be different if duplexes were allowed, and if complete good quality renovations were not financially feasibility in this market, but with these are they are I think it makes it a lot easier. It needs to be appraised as a SFR in need of a renovation (and therefore on a single-family form), and there are sufficient comps to value that. So to answer your question I would say it is a SFR with a dividing wall, not a duplex, and the H&BU answer is yes per FNMA guidelines. As the current owner is not commencing a renovation project there is no need for an as if value, but if I were doing an as if value it would be based on sale comps, I would review any proposed budget and costs, but I would still be responsible to estimate a cost to complete on my own which may or may not be the same or similar as the prosed budget, and determine financial feasibility based on my estimated costs, as is, and as if values. But I would never be responsible as an appraiser for obtaining bids. Even in a renovation scenario the appraiser would receive a budget, but not the actual individual contractor bids, and it is not the purpose of this appraisal.

 

[John J. Phillips]

How many electric meters?

1

 

[John J. Phillips]

That's a good point, re GLA not contiguous re an opening in the partition....it is out of our hands as an appraiser what Fannie or UW this will accept. Our end is we don't want to be misleading.

Which leaves us with if it is done "as is", describe what is there, that it would be a low cost cure to install a door or opening in the partition, that for report purposes the GLA sf is considered X total sf since that is what was originally built under roof and Air conditioned/heated area...turn it in and see what happens. If lender or Fannie conditions it on homeowner opening up the area in partition, then it would be up to homeowner at that point to comply and you could do a final inspection.

See if anyone else has a better idea that is all I can think of right now.

Agree

 

[hastalavista]

There is an as-is value for illegal uses and that value is "market value".

Like MichCG points out, the current improvements (duplex) create an illegal use. As-is, that would be my indication in the check box.
The legal use may be an SFR. As-is, it isn't.
The H&BU as-improved has four choices:
1. Remodel (change the use or functionality)
2. Renovate (modernize)
3. Demolish (bring the wrecking ball)
4. Retain as-is

Of the four choices for what the OP describes, the answer would be either #1 (change the use back to a legal use) or #3 (demolish; this would imply that the remodel option is not financially feasible and maximally productive).

The last one I had like this was somewhat similar to the OP's case: My property's legal use was a duplex and the owner converted it to a fourplex which was not a legal use nor would a variance be issued due to the substandard lot size and the historic nature of the building. And, the city would require it to be remodeled back to its original use if someone complained or if they discovered it on their own (no wiggle room here). Further, it was complicated because all four units were rented and the property was subject to rent control ordinances which meant that even though the tenants were in illegal units, they had significant protections and the owner would have to pay relocation costs... another complication was that one of the tenants was a senior citizen... they are entitled to more generous relocation costs.

You'd think that the lender, once I informed them of this, would have cancelled the job. They didn't (for some good reasons; not the least of it was they wanted to document why they wouldn't make the loan and the appraisal would have shown that the property did not meet their property lending standards).

So, I gave them the as-is appraisal.
I checked the "illegal use" box on the form, detailed the H&BU analysis, valued it at it's H&BU as-improved: remodel project to the legal use as a duplex. The value of the property is what it was worth after the remodel less all the costs to get there. The costs include EI. The likely buyer was an investor who would remodel and re-sell.