Un-permitted Garage Conversion

[CANative]

Okay. Don't pay attention to anything MK says or writes or copies and pastes. He's always been wrong on this issue and appears to not comprehend the issue.

 

[CANative]

I need to poke my eyes out

 

[hastalavista]

There are obviously two schools of thought on this:
A. Those who contend that anything that isn't permitted constitutes an "illegal" use. This can range from the obvious (hooking up a gas pump in one's front lawn and selling gas) to, I suppose, the absurd (did you change out the clothes dryer without getting the new appliance hook-up permit ? The house is now "illegal" until that is remedied ).

B. Those who contend that there is a difference between something that is allowable and done without permits vs. something that isn't allowable and cannot be permitted.

Each appraiser can decide what school works best for him or her. :new_smile-l:

 

[CANative]

I wouldn't have used the word "school" in that post about thoughts.

 

[PropertyEconomics]

Page 352 "The Appraisal of Real Estate"

"To value a property with illegal improvements in its' "as-is" state, the appraisal must reflect the cost to remedy the illegality i.e. either to remove the illegal improvements or obtain legal permissibility.

Obtaining legal permissibility might include upgrading the improvements so that they conform to building codes and the payment of fees or fines.

If a market exists for the illegal use, the prices paid do not necessarily represent Market Value because Market Value is based on the highest and best use of a property and highest and best use is based on a legal use."

This doesnt fit with your prior post that improvements MUST BE LEGAL in order to be appraised as is. MUST REFLECT THE COST TO REMOVE THE ILLEGALITY .... isnt that cost to cure as a functional item fully disclosed in the report. No EA needed, no HC needed ... its right there in your posting.

Real estate does not HAVE to be developed to its highest and best use.

And real estate that IS NOT developed to its highest and best use can still have a market value. I dont see Highest and Best use ever mentioned in the definition of Market Value.

While it might not fit into the lending world, the lending world does not establish value the market does ... and a property does not HAVE TO be developed to its highest and best use to be appraised "as is".

 

[J Grant]

Appraisers toss around the word illegal far too casually. Imo, the only time illegal affects HBU is at the point where it is truly illegal for zoning to the point where city can come in and force removal or police powers can come in and seize property. Yes, the HBU for many homes would be a drug lab as far as maximally productive, only problem is, DEA can come in and seize the home and arrest the owner (even if they rent it out and had no idea tenants were using it as a drug lab). A property built out to lot line boundaries or used for commercial in residential zoning is illegal to the point where it is visible or a hazard and neighbors would complain and zoning authorities will fine the owner and/or demand removal. Those properties would need the adverse illegal conditions disclosed and affect on market value and HBU discussed.

Anything else, such as lack of permits, shoddy construction, interior improvement such as putting in a second kitchen might not meet lender guidelines, and be a cause for denying a loan ( or curing the defect, subject to).

A lender has 100% right to deny a loan or demand an owner repair in order to fund. However, lender demands and market value as to what market recognizes and will pay are two different elements. Which is why Fannie and FHA recognize, with certain guidelines, that non permitted and even "illegal" property uses, such as garages converted or non permitted additions, as long as they are functional and safe for occupancy, can have value in market and that value can be reflected in report, as long as it is typical for area and appraiser provides comps with same level of non permitted uses to show market acceptance.

 

[23Degrees]

These permit arguments always degrade into the ridiculous. On the URAR and GP forms there are two questions:

HBU yes or no

Zoning compliance: legal, grandfathered, no zoning, illegal

The argument needs to somehow get beyond HBU which should follow Denis' point directly via his example B. To argue against his example B is just silly, end of story.

As for the zoning compliance question, regardless of Fannie's intent, the broad reach of that phrase as well as the use of the terms "legal", "illegal", and "grandfathered" could result in some "gotcha" situations for many appraisers IMO. Maybe I'm over thinking this but to have appraisers signing off on terms like "legal" with regard to what is sometimes an extremely large category such as "zoning compliance" (again regardless of Fannie's intent) seems like it should never have left the gate if any appraiser was involved with preparing these forms.

Here's a question for you guys:

Would changing that question to the following be sufficient for the intent:

The current use is:
permissible under current zoning
not permissible under current zoning (explain_____)

I think it covers the same ground from an appraisal perspective without opening up the appraiser to issues from third parties and maybe even from Fannie herself by avoiding going beyond our scope of practice. But maybe not. I'd be interested in hearing what others think.

 

[CANative]

The "problem" is that most appraisers understand the concept. But MK thinks if permits are required then the improvements are illegal until permits are obtained.

Look at zoning and building codes. The word "Illegal" almost never appears in the code language. And when it does it almost always pertains to people, not buildings.

 

[timd354]

A cost to cure taken as a functional adjustment would render the value "as is" would it not?

Possibly (assuming that the cost to cure equals the value of the functional deficiency, which may or may not be the case), but most of the time when I have seen a cost to cure in an appraisal report in similar situations, the appraisal is completed "subject to" even though the lender requested and needs an appraisal of the property in its "as is" condition.

 

[CANative]

"Cost to cure" used to be a way that an appraiser and their lender client would get one over on Fannie/Freddie.