SFR Illegally Converted To Duplex

[hastalavista]

I think you are half-right.

Since duplex use is not legal, this is still a single family home.

This is the "wrong" part. The improvement is not a SFR. It is a duplex. Ergo, if not allowed, it is an illegal use.

Two ways to do it: Subject to conversion back to a single family (remover partition, second kitchen if there is one etc)

Or do appraisal " as is", factoring in negative appeal of a chopped up house and could include a cost to restore back to original use as a single family interior floorplan, which would inlcude a cost to cure (clients usually want to see a cost to cure estimate even for an "as is" appraisal...the adjustment for funct obs of the chopped up floor plan with a partition down the middle might be more than cost to cure.

This is the "right" part, but I think the description of what needs to be done is too simplified.
H&BU, as-improved, is supposed to address two things:
A. What should be done with the existing improvement?
and
B. Who is going to do it?
Most owner-users (in my markets) are not going to purchase an illegal-use property that requires a remodel to change the improvement to make it legal on the scale that the OP's problem suggests.
In my markets, this is a prime opportunity for an investor (Where's DTB?). As such, the EI discount is going to be a significant factor (along with selling costs after the job is through, etc.).

Sounds like the biggest challenge would be comps needing work or having odd configuratiron if done "as is"

Actually, this is the easiest part of it. If the H&BU is to remodel to a conforming duplex, then the comps to look at are conforming duplexes. The hard part is calculate the costs and EI.
In a remodel, one wouldn't want to change the illegal use improvement to a legal use improvement and keep functional inadequacies if they can be cured (as in financially feasible to do so; if incurable, so be it).

Good luck....these assignments are a PITA

I agree with this.

 

[John J. Phillips]

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.

Thanks. Yours was much more complicated then mine.

 

[Evincere]

Completing a conventional 1004 assignment of a 1921 1-story 1,500 SF property originally constructed as a SFR. .

Built in 1921. I don't know the neighborhood obviously, whether this home is a standalone 95 year old oddball or whether the neighborhood is comprised of vintage homes that when built were basically considered to be dysfunctional by todays standards - ie built-in bedroom closets. Do you know whether there is the possibility of anything "grandfathered" ie. legally permissible guest/in law quarters?

 

[John J. Phillips]

Built in 1921. I don't know the neighborhood obviously, whether this home is a standalone 95 year old oddball or whether the neighborhood is comprised of vintage homes that when built were basically considered to be dysfunctional by todays standards - ie built-in bedroom closets. Do you know whether there is the possibility of anything "grandfathered" ie. legally permissible guest/in law quarters?

It is typical of the neighborhood. The neighborhood is in the revitalization stage with strong demand for renovated vintage homes. The homes in the most disrepair get renovated first, but as the cycle progresses home in more average condition begin to become renovation candidates as well. So this home would appeal to an investor looking for the next renovation project.

 

[J Grant]

Sounds like the OP handled it as I would have. Addressing the below:

D-"This is the "wrong" part. The improvement is not a SFR. It is a duplex. Ergo, if not allowed, it is an illegal use."

Putting a wall down the middle of a SFR does not make it into a duplex for appraisal purposes, when the zoning is SFR only. We agree duplex is an illegal use, but , the subject is NOT a duplex. It's a SFR, with a partition down the middle and a second kitchen put in (a SFR with functional obsolescence).

As a value in use, the owner is using it as a duplex to maximize rental stream. But we are not opining value in use. We are opining market value. We agree market value for an appraisal has to be HBU. And since a duplex is illegal per zoning, the HBU can only be a SFR. The wall down the middle and extra kitchen is a functional obs issue since a SFR buyer would tear it out and repair..

We are in agreement on the remainder it appear!.

 

[Michigan CG]

..............

 

[Webbed Feet]

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.

<....snip....>

Whoever taught you that? Please kindly quote the lines in USPAP that says an appraiser must appraise real estate to its highest and best use? Next, your fooling yourself thinking that you can pull this one off while using the "As Is" checkbox of the 1004 the way I've read you plan it. I seriously recommend you consult your appraisal board.

<...snip....>

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.

The statement in the selling guide is being taken out of context here. Legal, illegal or just done without permits and being accidentally completely designed to be a duplex, it's a duplex as of the effective date. To appraise it as if it is not reporting on a 1004, is invoking a hypothetical condition if you say you are or not. More, the likelihood that the current configuration violates local fire code is probably very high. Not only that, but what I have read of your proposed idea of using interior tear downs for comparable screams that then you are saying this property, in its current configuration, has no remaining economic life. I tend to think the intended use and your ideas for a scope of work are totally incompatible.

 

[J Grant]

http://www.appraisalinstitute.org/assets/1/29/common-errors-issues_4-14-15.pdf

Above addresses HBU. The expectation, and peer practice , is that for market value purposes, properties are appraised to their HBU ( as improved or as vacant )

Value in use , or Use Value, is not the same as market value. Appraisers don't tell people what to do with their properties. An owner can use a property in a manner illegal to zoning, or make non permitted changes to a property, and use it that way for years. But, if that property appraised for market value purpose, the appraiser will appraise it for HBU, which may be different than what owner is using it for.

HBU has to be legally permissible. An owner using a SFR as a duplex when zoning only allows SFR is an illegal use. . Therefore, even though the owner put in a partition down the middle and a second kitchen, the only legal permissible use remains SFR. Thus for correct HBU analysis, it is appraised for legal use ( as a SFR with functional obsolescence, (the obsolesce being the wall down the middle / 2nd kitchen.) .Fannie does allow a second kitchens in a SFR with explanation but most SF homes have one kitchen so in most cases a 2nd kitchen is a super adequacy .

Alll that is needed to bring this dwelling into legal zoning compliance is removal of wall and kitchen, a relatively low cost cure.

If the subject dwelling was designed as a SFR and zoning allows only SFR use, and all that distinguishes this subject from its neighbors it that inside it has a wall down the middle and a second kitchen, both of which can be removed, the analysis is a low cost to cure brings it back to market accepted interior floorplans of similar homes (resolves the funct obs issue..)

 

[Michigan CG]

http://www.appraisalinstitute.org/assets/1/29/common-errors-issues_4-14-15.pdf

Above addresses HBU. The expectation, and peer practice , is that for market value purposes, properties are appraised to their HBU ( as improved or as vacant )

Value in use , or Use Value, is not the same as market value. Appraisers don't tell people what to do with their properties. An owner can use a property in a manner illegal to zoning, or make non permitted changes to a property, and use it that way for years. But, if that property appraised for market value purpose, the appraiser will appraise it for HBU, which may be different than what owner is using it for.

HBU has to be legally permissible. An owner using a SFR as a duplex when zoning only allows SFR is an illegal use. . Therefore, even though the owner put in a partition down the middle and a second kitchen, the only legal permissible use remains SFR. Thus for correct HBU analysis, it is appraised for legal use ( as a SFR with functional obsolescence, (the obsolesce being the wall down the middle / 2nd kitchen.) .Fannie does allow a second kitchens in a SFR with explanation but most SF homes have one kitchen so in most cases a 2nd kitchen is a super adequacy .

Alll that is needed to bring this dwelling into legal zoning compliance is removal of wall and kitchen, a relatively low cost cure.

If the subject dwelling was designed as a SFR and zoning allows only SFR use, and all that distinguishes this subject from its neighbors it that inside it has a wall down the middle and a second kitchen, both of which can be removed, the analysis is a low cost to cure brings it back to market accepted interior floorplans of similar homes (resolves the funct obs issue..)

All of your posts in this thread ignore:

1. Intended Use
2. Intended User
3. Scope of Work.

 

[J Grant]

??
It is assumed those are addressed, and for the topic at least from what I surmise, intended use is lending purpose . Scope of work is always what is needed for credible results. The intended users are indetified in the assignment. I did not see where the subject of this topic was about that, intended use, intended user and scope of work is assumed to be addressed, the OP had a specific question and situation asked