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Unpermitted Work/alternations Causing Appraisal Issues

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iloveitaly

Freshman Member
Joined
Dec 16, 2016
Professional Status
General Public
State
Colorado
Hello!

I'm a first time home buyer, and under contract for my first home. It's a single family residence with a garage that has been converted into a studio apartment, and a shed that has been converted into an office.

The garage conversion is not a legal ADU, but it is partially permitted. There are permits for electric, plumbing, and adding a full bath. In addition to the full bath, there's a "kitchen" (sink, stovetop, and fridge; no stove) and washer + dryer hookups. These additions/modifications are not permitted.

There's also a shed on the property that was converted into a office. It's drywalled, insulated, and has a half-bath. There's a permit available from the 80s for adding a shed, but clearly that old shed has been torn town and replaced by this upgraded "office shed".

Also, the back porch has been converted into an addition on the property. There was a permit pulled for the sliding door on the addition, but not the addition itself.

The owner of the home who made all of these modifications was a general contractor, and according to the inspector, did a pretty good job. The issue that I'm running into is the appraiser is giving us a "conditional" appraisal (not sure of the correct term here) for the sale price based on resolving all of the unpermitted work on the property. My agent is claiming that this is very strange, and the appraiser should indicate the value of the property as-is without any modifications. The lender is saying that unpermitted work causes issues per some sort of regulation that's been in place since 2010, and this is not a strange appraisal.

Here is the snippet from the appraiser that is causing issues:

https://dl.dropboxusercontent.com/u/3125772/Mortga...

I'd love some second opinions on the situation and any help the community here can offer! Here are a couple questions I have, although I'm open to any feedback on the general situation.

1. Is unpermitted work very problematic? Is seems like if there's "big" unpermitted work, that can cause appraisal issues, but finishing over a basement is fine. Is that correct?

2. It is sounding like the only resolution path is getting the town to come out and permit all of the work that was done. Is this correct, or is there a way to value the home as-is at a possibly lower value?

3. The town doesn't currently allow additional ADUs. What constitutes an ADU vs a detached room?

Thanks so much!
 

JTip

Elite Member
Joined
Oct 12, 2004
Professional Status
Certified Residential Appraiser
State
Pennsylvania
I don't know the CO market but....

It's a single family residence with a garage that has been converted into a studio apartment, and a shed that has been converted into an office.

Zoning would be a key reference. A residential neighborhood (zoned) may not allow an 'apartment' or 'ADU'. This could be trouble. Again, I don't know CO.


The owner of the home who made all of these modifications was a general contractor, and according to the inspector, did a pretty good job.

LOL. GC's are notorious for doing their 'own thing' around here. It's definitely not a free pass to do what you want.

Hedge your bet and keep looking for another house as this one may have many expensive skeletons in the closet.
 

Artemis Fowl

Senior Member
Joined
Mar 16, 2004
Professional Status
Certified Residential Appraiser
State
Michigan
1. Is unpermitted work very problematic? Is seems like if there's "big" unpermitted work, that can cause appraisal issues, but finishing over a basement is fine. Is that correct?
Sounds like the appraisal was conditioned on a satisfactory inspection/permitting of the highlighted issues. The lender is obviously concerned about any value related issues. Insurable value may also be an issue in these situations. If it burns down due to an unpermitted/inspected improvement...you are going to have a big problem.

2. It is sounding like the only resolution path is getting the town to come out and permit all of the work that was done. Is this correct, or is there a way to value the home as-is at a possibly lower value?
Lender is requiring as-is...not as-if. It's their money they're giving you. As-if is logically possible to do but not likely for the loan type you are requesting at this point.

3. The town doesn't currently allow additional ADUs. What constitutes an ADU vs a detached room?
Contact the zoning or planning or building department and ask them. Good bet that they define it somewhere.

Good advice might be to pass and find something without funky issues. You have the option to get all the inspections done...perhaps negotiate for the seller to deal with it (he built without permits after all) as a contract addendum...gives you an exit strategy. Hopefully your contract was already conditioned on a satisfactory inspection...I'd be slow-roasting my Realtor at this point if not.

Good luck.
 

Rlong

Member
Joined
Jan 31, 2002
Professional Status
Certified General Appraiser
State
Colorado
As inferred above there are two legal / muni code issues. 1) unpermitted construction (building code), 2) zoning (zoning code). If all of this is allowed under that properties zoning district then that issue would go away once the buildibg department approved. (I suspect seller will have to remove kitchen / cooking appliances for most single family zoning)

It is not uncommon for a building department to approve construction after the fact, but it is not easy or just paperwork. Need to prove structural soundness (was porch foundation adaquate for "living area" (footing below frost depth, etc) adaquate electrical service and outlets to code etc etc.

Typically in these situations the seller needs to go through this dance. The GC seller is the correct person to have those conversations with the building department, not you. You dont have the info to answer the building departments question.

Lender does not want to lend on a "illegally constructed" house. No way an appraisal only can fix this for a conventional loan.
 

Rick Stillman

Senior Member
Joined
Jan 19, 2014
Professional Status
Certified Residential Appraiser
State
Colorado
My response is probably too late, but I'll try anyway.

Was this property on Hanover Street?

There can't be more than ONE of this type of property!

I went out to appraise it, and withdrew from the assignment after I completed the inspection. Same story - they wanted it appraised as-is, or as though the changes had not taken place. That's another topic all by itself, so I won't dwell on that.

There were code violations left and right. One of the worst ones was the added on shed being heated by a propane wall heater, with a large propane tank sitting outside, next to the wall.

The property that I inspected, if not the one you describe, was so full of issues that it was not able to be appraised in its present state at all. There were certainly NO comparable properties to even come close to being similar to it.

The family living there was very nice, and I felt bad about not completing the appraisal - but this was the worst of the worst... and I've seen a lot!
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Good time to walk away from a headache
 

iloveitaly

Freshman Member
Joined
Dec 16, 2016
Professional Status
General Public
State
Colorado
Nope! It was actually another property (grant st).

The deal ended up not working out -- walked away, the owner did not want to bring the town out to permit the property. Thanks for the advice!
 

Artemis Fowl

Senior Member
Joined
Mar 16, 2004
Professional Status
Certified Residential Appraiser
State
Michigan
Gratz on avoiding a potential problem.
The advice given is all stuff that SHOULD have been provided by a competent Realtor.
 

Webbed Feet

Elite Member
Joined
Feb 11, 2005
Professional Status
Certified Residential Appraiser
State
Canada
Nope! It was actually another property (grant st).

The deal ended up not working out -- walked away, the owner did not want to bring the town out to permit the property. Thanks for the advice!

Smart move. Too many sellers were supposedly "General Contractors" and too many home inspectors aren't worth the paper cost of the first page of their "home inspection."
 
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