Zoning Compliance = Illegal Use

[G-man]

I'm currently working on a report for a 5 acre property in a suburban area of Toledo. The parcel is zoned Rural Residential, which allows single family use. The parcel has a 1,400 s.f., 1972 built Cape COD with 3 BR & 2 Baths, as well as a 2002 built structure that has a 1,900 s.f., 2 BR's & 1 Bath living unit on the 2nd floor, which is above a large shop/garage area, basically an outbuilding with an apartment. So, there are two living units on one parcel. A call to the zoning office reveals this is not allowed, as there can be only one living unit per parcel under this zoning classification.
So, the questions are, what to do with the additional living 2nd floor unit in the outbuilding. Since it is an illegal use, would it have no value as a living unit? Cost to cure for removal of the living area? Is the highest & best use it's current use?
Maybe I'll get lucky and the client will just cancel it when I explain what they have.
Thanks.

 

[hastalavista]

Is this for a GSE-compliant assignment? If so, Fannie will not loan on a property that is not legal as-improved. You should call your client and get instructions.

They could ask for a subject-to based on an HC that the illegal use is addressed (by removing the illegal unit, I presume).

If not for a GSE loan and they want an as-is appraisal, post back and we'll take it from there.

Good luck!

 

[George Hatch]

If the structure itself is permitted/permissible but one or more aspects of the buildout of the 2nd floor isn't then a cost to cure would be really minimal.

 

[CANative]

Is this for a GSE-compliant assignment? If so, Fannie will not loan on a property that is not legal as-improved. You should call your client and get instructions.

They could ask for a subject-to based on an HC that the illegal use is addressed (by removing the illegal unit, I presume).

If not for a GSE loan and they want an as-is appraisal, post back and we'll take it from there.

Good luck!

Accessory Units
Fannie Mae will purchase a one-unit property with an accessory dwelling unit. An accessory dwelling unit is typically an additional living area independent of the primary dwelling unit, and includes a fully functioning kitchen and bathroom. Some examples may include a living area over a garage and basement units. Whether a property is a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utilities, a unique postal address, and whether the unit is rented. The appraiser is required to provide a description of the accessory unit, and analyze any effect it has on the value or marketability of the subject property.

If the property contains an accessory unit, the property is eligible under the following conditions:

• The property is one-unit.
  
  
• The appraisal report demonstrates that the improvements are typical for the market through an analysis of at least one comparable property with the same use.
  
  
• The borrower qualifies for the mortgage without considering any rental income from the accessory unit. (See B3-3.1-08, Rental Income, for further information, and B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements, for an exception for HomeReady mortgage loans.)

If it is determined that the property contains an accessory dwelling unit that does not comply with zoning, the property is eligible under the following additional conditions:

• The lender confirms that the existence will not jeopardize any future property insurance claim that might need to be filed for the property.
  
  
• The use conforms to the subject neighborhood and to the market.
  
  
• The property is appraised based upon its current use.
  
  
• The appraisal must report that the improvements represent a use that does not comply with zoning.
  
  
• The appraisal report must demonstrate that the improvements are typical for the market through an analysis of at least three comparable properties that have the same non-compliant zoning use.

(See B4-1.3-04, Site Section of the Appraisal Report, for subject property zoning information.)

 

[G-man]

Accessory Units
Fannie Mae will purchase a one-unit property with an accessory dwelling unit. An accessory dwelling unit is typically an additional living area independent of the primary dwelling unit, and includes a fully functioning kitchen and bathroom. Some examples may include a living area over a garage and basement units. Whether a property is a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utilities, a unique postal address, and whether the unit is rented. The appraiser is required to provide a description of the accessory unit, and analyze any effect it has on the value or marketability of the subject property.

If the property contains an accessory unit, the property is eligible under the following conditions:

• The property is one-unit.
  
  
• The appraisal report demonstrates that the improvements are typical for the market through an analysis of at least one comparable property with the same use.
  
  
• The borrower qualifies for the mortgage without considering any rental income from the accessory unit. (See B3-3.1-08, Rental Income, for further information, and B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements, for an exception for HomeReady mortgage loans.)

If it is determined that the property contains an accessory dwelling unit that does not comply with zoning, the property is eligible under the following additional conditions:

• The lender confirms that the existence will not jeopardize any future property insurance claim that might need to be filed for the property.
  
  
• The use conforms to the subject neighborhood and to the market.
  
  
• The property is appraised based upon its current use.
  
  
• The appraisal must report that the improvements represent a use that does not comply with zoning.
  
  
• The appraisal report must demonstrate that the improvements are typical for the market through an analysis of at least three comparable properties that have the same non-compliant zoning use.

(See B4-1.3-04, Site Section of the Appraisal Report, for subject property zoning information.)

Yeah, that last bit, finding three comps that have the same non-compliant use, would be difficult to impossible. I have a few comparable sales with accessory units, apartments over outbuildings, etc., but none which have a similar non-compliant zoning issue. And, as the additional unit is a non-permitted use, it could not be rebuilt if destroyed/damaged.

 

[Michigan CG]

Are you working on the Ohio side or the Michigan side? I have a couple sales of houses with accessory units on the Michigan side of the border.

 

[hastalavista]

Greg-

I agree with what you posted and I stand corrected if the 2nd unit is an accessory unit. Here's an issue from my perspective, however:

The parcel has a 1,400 s.f., 1972 built Cape COD with 3 BR & 2 Baths, as well as a 2002 built structure that has a 1,900 s.f., 2 BR's & 1 Bath living unit on the 2nd floor

Is a 1,900sf 2br/1ba living unit to be an accessory to a 1,400sf 3br/2ba living unit?

 

[CANative]

Greg-

I agree with what you posted and I stand corrected if the 2nd unit is an accessory unit. Here's an issue from my perspective, however:

Is a 1,900sf 2br/1ba living unit to be an accessory to a 1,400sf 3br/2ba living unit?

How about vice versa then? In any case, there are two living units where zoning only allows for one. With five acres and a very large outbuilding I can't see it as an income property. That only leaves one options... ADU.

I'm not sure if GSE intended use/intended user plays into this because it is what it is and should be appraised as the market sees it. It's then the clients problem. Of course if the OP has three sales of acreage properties with two units, one of which is illegal, then that's needs to happen. It makes sense anyway (best comps).

 

[Sid Holderly]

More accessory units of various types exist than you realize, but generally must be gleaned out of the MLS by Comment work searches. Many in this area were legal when built and are grandfathered. In this area grandfathered properties can be rebuilt if destroyed if no more than 50% of assessed value of improvements is effected. If more, a variance or special exception may be allowed if the use does no change. Reading the zoning ordinance gives a lot more latitude or restriction than office personnel often quote. If it is rented to a non-family member the downward spiral has more peril. If it is a family member it is more palatable as an accessory unit.

 

[G-man]

Are you working on the Ohio side or the Michigan side? I have a couple sales of houses with accessory units on the Michigan side of the border.

Ohio, "Suburban area of Toledo". I have sales of homes with accessory units, although really nothing like this. This is for PNC, and I'm waiting to see if they want to go ahead with the loan. Of course, this has to go through AMC channels, and who knows how long that will take.