Subject to vs. illegal use?

[MostlyLurk]

[One of two things is going on here: I'm failing to see the forest for the trees and the answer is staring me in the face, or this really is the first time I've ever run across anything like this. If this question has been answered already, I must have just stuctured the search query wrong.]

I inspected a vacant property which, while clearly originally a single family residence, had last been used as a duplex, with no connection remaining between the two halves of the house. IN discussing this with the client, they requested that I develop it subject to repairs/alterations: conversion back to a single family residence.

All of this is fine. The thing that's confusing me is: Because it's a subject-to appraisal developed under the hypothetical condition that it's no longer being used as a duplex, does this mean that I report Legality, H&BU, etc. as though it were a SFR? In other words, although (via the city) I know that currently the property is an illegal use, I still check "Legal" and "Yes H&BU"? Or does the fact that I'm setting up a hypothetical condition that everything's perfectly normal not alter the "as is" portion of Highest and Best Use/Zoning?

I guess I just think of HCs as an imaginary world I'm creating, in which case the obvious answer is to do zoning and H&BU in that world. But the "as improved" part of the H&BU section is tripping me up.

Sorry if that was rambling; I'm starting to get a little punchy and just want to get past this.

 

[hastalavista]

[One of two things is going on here: I'm failing to see the forest for the trees and the answer is staring me in the face, or this really is the first time I've ever run across anything like this. If this question has been answered already, I must have just stuctured the search query wrong.]

I inspected a vacant property which, while clearly originally a single family residence, had last been used as a duplex, with no connection remaining between the two halves of the house. IN discussing this with the client, they requested that I develop it subject to repairs/alterations: conversion back to a single family residence.

All of this is fine. The thing that's confusing me is: Because it's a subject-to appraisal developed under the hypothetical condition that it's no longer being used as a duplex, does this mean that I report Legality, H&BU, etc. as though it were a SFR? In other words, although (via the city) I know that currently the property is an illegal use, I still check "Legal" and "Yes H&BU"? Or does the fact that I'm setting up a hypothetical condition that everything's perfectly normal not alter the "as is" portion of Highest and Best Use/Zoning?

I guess I just think of HCs as an imaginary world I'm creating, in which case the obvious answer is to do zoning and H&BU in that world. But the "as improved" part of the H&BU section is tripping me up.

Sorry if that was rambling; I'm starting to get a little punchy and just want to get past this.

Brandon-

This is a good question and I don't think it has been discussed in a while. And, I don't think there is a definitive answer to your question. It does, however, reflect a shortcoming of form-reporting.

Personally, I think you could do it either way on the check-boxes. But here's what I'd do regardless of what was on page one:
In my addendum, the first section would be titled "Hypothetical Conditions Used In This Report" (never mind that you may also include them in the final reconciliation- I want the reader to see this first thing!).
In it, I will explain what I did and how it related to what is indicated on the form.
In your specific, I would use it to explain why I indicated what I did on page one. If I checked "illegal", I would explain that the as-is use is illegal and my value is dependent on a HC that the subject has been converted to legal SFR use. If I checked the other way, then I'd explain that current as-is use is illegal, but the check-box reflects my HC that the subject has been converted to legal use (you get the picture).

So, regardless which method I used, I'd have detailed explanation in the addendum alerting the reader how my report is presented given its Hypothetical Conditions.


Good Luck!

 

[Mike Kennedy]

Brandon Thornburg:

"last been used as a duplex, with no connection remaining between the two halves of the house. IN discussing this with the client, they requested that I develop it subject to repairs/alterations: conversion back to a single family residence.

All of this is fine. The thing that's confusing me is: Because it's a subject-to appraisal developed under the hypothetical condition that it's no longer being used as a duplex, does this mean that I report Legality, H&BU, etc. as though it were a SFR?"
Yes.

In other words, although (via the city) I know that currently the property is an illegal use, I still check "Legal" and "Yes H&BU"?
Yes.

Or does the fact that I'm setting up a hypothetical condition that everything's perfectly normal not alter the "as is" portion of Highest and Best Use/Zoning?
No.

SOW comments addendum: if complying with clients' request above (bold) would result in a credible OV, cite SOW criteria and opinion, steps taken to determine HBU (including Legally Permissible), etc.

Page One (URAR) - Cite SFR, HBU SFRm and Legal as HC and OV is predicated on restoring Zoning Compliant, Legally Permissible, Transferrable, Use (as if zoning compliance had already been restored as of the EDA).

Zoning Compliance: See Comments Addendum

Detailed description of exact improvements that existed as of the EDA. Cite Source of Zoning, and Zoning/Use Regulations applicable. Cite Illegal Use, Site HC, Estimated Cost to Cure.

Reconciliation: re-state SOW, HC, and Final Value Opinion "subject to restoring Property to Zoning Compliance".

 

[Restrain]

Good previous responses. If you look at Fannie's guidelines, if the unit use is illegal but acceptable (which is not uncommon), you would have to use other illegal properties in the valuation. In this instance, both you and the client have recognized that, at some point in time, the home was converted illegally to a duplex. Conversion can be relatively inexpensive (opening access between units, removal of the second kitchen).

Just set forth in BOLD that this appraisal is made, at the direction of the client, on the basis of the subject being converted back to a SFR as a HC. All adjustments would include the costs, etc.

 

[Ross (CO)]

What is that physical barrier in the interior of the structure which created the divide between the current two living areas under that same roof ? What standard home design is this property ? Would one easily recognize this as a duplex from a street-viewing of the structure ? Are there other duplexes within the immediate streets near the subject and the owner here made this change so as to "keep up with the Jones's" ? What separate ingress/egress was also created for the other (second) living unit ?

Who is (what type of client is) the Intended User of your report ? What is the Intended Use of the report ? May we assume......that you have been asked to use a new-form URAR to report the value opinion and results of your work ? Would any sort of narrative format also be acceptable to this client ?

You might consider placing a bold line of text across the top of the cover page which also states to any reader that a......Hypothetical Condition Used for This Report. Something like that, just so that it is clear to all.

 

[Marcia Langley]

I agree 100% with Denis but offer food for thought.

From a purely USPAP point of view I might be inclined to think that the prominent and clear HC statement would indicate that the current use should be reported as if the HC were complete.

However, using the GSE form in today's market I might worry that a mechanical 'quality check' based only on a computer check of which boxes were checked might allow the report to slip through. That fear, of course, is mitigated by the fact that the HC 'box' will also be checked.

Then, thinking forward to the probability that the client will order a completion report, if the legal box had been checked, then the completion report would be all that's left to do. What are the odds that, if the illegal box were checked, the client would want a corrected report as well as the completion report?

Just musing out loud ...

 

[Mike Garrett RAA]

Your client is asking you to appraise the property "as if it was single family residential". You can do that; however, the loan package might not be sale-able into the secondary market. Also, you as an appraiser, might not be qualified to determine the cost of the renovations necessary to return it to single family status.

 

[Marcia Langley]

Mike,

If the 'as if' HC were used it would be salable to the secondary market once the conditions of the HC were completed and cleared by the UW.

When an HC is used it is not necessary for the appraiser to price out the cost of the repairs.

 

[Couch Potato]

For a logical answer, I would say treat that check box just as you would for the most common hypothetical condition, new construction. The report is done pretending something else actually exists on the property. For the purposes of your report, there is a SFR on the property. Everything about your report should read as though there is a SFR on the property, except for your explanation of the hypothetical condition and where you check the box making the report subject to the conversion actually taking place.

 

[MostlyLurk]

Thanks for the great replies

A couple of clarification questions:

<bold>Just set forth in BOLD that this appraisal is made, at the direction of the client, on the basis of the subject being converted back to a SFR as a HC. All adjustments would include the costs, etc.</bold>

If I'm basing the value on the subject having already been converted as an HC, the adjustments won't need to be made, would they?

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Also, given the HC then being as described - removal of barrier between the ersatz "units" and removal of kitchen - I would then leave the second kitchen off the sketch, right? Just as in Couch Potato's new construction, I would place all the rooms where they will be eventually...do I then state specifically how the sketch differs from current reality on the addendum? Which is to say, is stating it enough without creating a schematic?