Non-permitted Additions

Other the last few weeks I have noted a common theme in my conversations with appraisers across the nation. This topic seems relatively simply and yet since I have encountered endless questions I thought this post may add something to overall community.

The question boils down to “What is the big #$%^&*@! deal with non-permitted additions?”, for residential lending purposes. Of course this stems from the fact that many residential lenders are pushing back appraisals that have given value consideration to an addition which was non-permitted at the time of construction. This is not a new idea to me, but apparently it is very new to some of my colleagues.

Generally what I am finding is that if the origination appraisal report failed: to properly recognize the addition, discuss the functional utility (or inutility as the case may be), discuss the insurability; discuss the construction methods; and address the marketability, then the lender will push back and ask for the addition not to be included in the appraisal.

While that last thought ruminates for a moment, let’s break it down. There are three basic concerns that a  lender has with regard to additions. 1) Health and Safety; 2) Insurability; and 3) Market acceptance.

When a property is first built most of the time the home was built in accordance with local regulations, building permits were obtained proper inspections were made to ensure the home has met the national building codes that are designed to ensure the longevity of the structure and promote the health and safety of the future occupants; however, when the property has an non-permitted addition the lender has no way of knowing if the proper building codes were followed and the wiring, plumbing, and structural components are then in question. If the occupants of this home were injured due to a structural or mechanical flaw of this home (relating to the non-permitted addition) anyone within the chain of title, after the addition, could be considered complicit because legally the lenders are required to conduct due diligence, which includes  the collateral, prior to funding a loan.

Throughout out the course of time this premise has been tested time and time again in the court systems and when the additional non-permitted work was found to have been completed in a “workmanlike manner” the courts have generally found in the favor of the lenders because the absence of a permit does not change the degree of workmanship. Adherence to building codes is generally implied by a workmanlike manner.

All property that has a mortgage must be insurable to safeguard the financial interests of the lender and the borrower as well. Although this is not the law, it is industry standard that has been expected by Fannie Mae and other secondary mortgage investors. An non-permitted addition that was not completed in a workmanlike manner may not be insurable. Thus the lender  will require that hazard insurance will accept either the original property and the addition, or at least will accept the original property and not add any exemptions due to the presence of an non-permitted addition.

Of course even if the health and safety of the occupants are ensured by proper building methods and the home is insurable, the lender will not be happy unless the home also is readily accepted within this marketplace and could be considered a competing alternative to the surrounding homes. This is because it has become widely known that conformity is an important factor of value and acceptance therefore most lenders would prefer to lend on collateral that conforms to its surrounding neighborhood.

It this is last reason that allows the flexibility in most lender guidelines. The non-permitted addition can be considered as long as 1) the additional has been built in a workmanlike manner, 2) the addition is common for the area, 3) the appraisal report provides market data (i.e. closed sales) to show the market acceptance of similar improvements.

The bottom-line is that when the appraiser has determined that a property has had an addition. The report should address: the quality and functional utility, the conformity and acceptance within the neighborhood (illustrated by market sales when available) and the insurability of the improvements.

As far as insurability is concerned, it is my opinion that the report should contain an extra ordinary assumption that the non-permitted addition will not impede the acceptability or insurability of this property.

See you are around the water cooler!

Uncle Zev


Universal Appraisal Dataset or UAD

I am confident that most of us by now are familiar with the commonly known acronyms that are used in the appraisal industry. There are ASC, BEA, CFR, DESA, EPA, FEMA,  FIRREAFHA, FNMA, FREDDIE, GNMA, HUD,  IMF, JEC, KSC (ok that is actually the Kennedy Space Center – but you try and come up with a relevant K acronym), LOCIS, MSA, NAR, OTS, PHA,  UAD, URAR, VA, and SRIP  to name a few.

But how many of you are familiar with the following list. I take no credit for the majority of these as they have been around longer than the Internet.

ARTOR = Appraiser Really Tired of Rebuttals

BAFV = Best and Final Value

BISS = Because I Said So

CREATURE = Certified Real Estate Appraiser Turmoil Under Rebuttal Episode

FFLOP = Forum for Licensed Objective Professionals

FNMA = Florida National Mortgage Association (inside joke)

FOLO = Freaked Out Loan Officer (some times misspelled, by switching the L with the last O)

FROG = Finished Room Over Garage

FU = Functional Utility

For New Appraisers  – – IMHO = In my humble opinion

For Used Appraisers – – IMNSHO = In my not so humble opinion

Language used by the client – – RUSH = Really Unusual Sh*tty House

Language used by the client – – SUPER RUSH = A particular value needs to be reached

MC Addendum = Market Confusion Addendum

TROUSE = (Trailer house with stick-built addition)

Enjoy – – I know there are several others.. but it is late.

See you around the water cooler!

Uncle Zev

Rotten Apples

When I was quite young my father taught me a principal that I would now like to present to my readers. “What is the value of a rotten apple?”, he would ask. The puzzlement of my lurid imagination would often take the conversation way off track. But through his patient, instructive way he would gently push and pull me back on track to properly evaluate the question.

If you consider for a moment that a rotten apple attracts bugs or worms then perhaps you could account for the possibility of selling these critters as bait; however, this certainly can not be the answer. There is a certain oder to the rotting fruit that will also detract from its appeal.

It cannot be eaten or sold, the colorants may be useful in the making of dyes, but certainly not to the extent of other more vibrant fruits. “So what is the value of a rotten apple?” I would finally ask.

The answer of course is that to wrong person, a person without the ability to look into the future, a person without basic understanding, or a person who lacks time and patience, this fruit is worthless.

However, to someone who understands the nature of fruit, who has forethought and the ability to see beyond the now, a rotten apple can be worth quite a bit. The fruit itself is useless, but it has seeds. Its seeds can be cultivated and grown into a successful orchard and over time this worth can far exceed even the most ambitious expectations for an experienced investor.

So what does this have to do with real estate appraisal? Perhaps nothing, or perhaps it helps us to understand that even the most useless property has value as long as we take the time to understand the nature of the property, its location, and its potential highest and best use which, with the proper diligence, can recognize value for future generations.

Of course this may be more applicable to real estate investors, than real estate appraisers; however, in this economy I believe it is time for appraisers to put their knowledge to work and begin to plan for their futures by purchasing and managing properties for themselves. Of course and of course, I am in no way suggesting an appraiser buy something that he has appraised. This would be completely unethical and someone who does this should go to jail.

What I am suggesting is that appraisers pay attention while they conduct research, and target properties that are good investments. Put to use the knowledge that each of us has acquired and begin to profit from our skills instead of only telling others what something is worth.

This is my two cents for today! Now go and find a few “rotten apples“!  With the right management and care, who knows what kinds of  “orchards” your future generations can enjoy.

See you around the water cooler!!

Uncle Zev

Opportunities Abound

It was in the wake of financial devastation that real estate appraisal was born. We are of course talking about “Black Monday 1929”.  This crash, which led to a 12-year Great Depression, brought about the recognition by world financial markets for the basic need of a better system that would mandate the use of objective professionals acting impartially and representing the interests of the general public.  “So what?”, you may be asking at this point. This is history, and we all have heard this bed time story time and time again.

The majority of people who are reading this post, already know the punch line. It is from history that we can learn the most important lessons. It is often mistakes that provide a long-lasting lesson, one that become indelible upon our very being. The problem is that the memory is short. Within a few short generations of success and prosperity those people who brought about the great recoveries and financial booms were quickly forgotten, but more importantly the guiding principles of integrity and honest deals have been replaced with greed and corruption.

Ok, so where do we go from here? The problems have been analyzed and rehashed to death. Residential investors and wholesalers are all running to buy properties, fix them up and sell them. But many new investors are running into the same old problems that is the money supply is all but frozen in red tape and fear. Consumers cannot purchase these renovated houses because they can not get a loan. The investors who are on short financing terms themselves generally either lose money or just break even.

This is not solving the problem or improving the marketplace, this only adds fuel to a roaring fire of marketplace destruction. Enter the experienced investors. Easily 1000 years BC (before cell phones), successful investors have pretty much been following the same guiding principles and have therefore made profits and will continue to make profits. For those of us who are in tuned to these principles the turbulence of the marketplace creates opportunities to increase our net worth. “Ok so how do I get in on this gravy train?”, “What are these closely guard secrets of wealth?”.

#1 – Stop trying to be so damned smart. – The marketplace is a relatively simple function of buyers and sellers. Understanding the motivations and desires of each market participant and placing yourself in a position to fulfill these needs or wants is key to success. Ok, “what?!” The economy right now has a plethora of available real estate therefore many buyers would say it is a buyers market and for those who have cash – they would be right. But for the rest of the world, who wish to finance a property; the marketplace is not so simple. Therefore an experienced investor will buy properties based upon the knowledge that they will be holding this property for quite some time. Therefore, the purchase price must reflect the value of the property assuming an extended holding time and assuming the market rent will support the debt service of this property.

#2 – No one can spend themselves rich, or borrow themselves rich. – If you wish to acquire wealth in this world, you have to make more than you spend. You have to borrow less than you make, or have create a system of repayment that will carry the weight of the investment. In other words, if you purchase a property will a very high loan to value then your chances of holding that property are diminished 100 times, or more. Any unexpected expense or vacancy can cause the house of cards to collapse. To invest for the long term is the key in this economy, look for those properties that can be purchased for pennies on the dollar, be willing to hold them, and maintain them and you will create a solid base for your net worth.

#3 – Be honest and deal fairly. People who try to always have the upper hand and beat their opponent in business may find a level of success in the short run, but to create a good name is while following the first two rules is to create generational wealth.

– as a caveat, this information or advice has been given to you freely – therefore the old adage “You can expect to get what you pay for” applies. But also remember that while the price is what you pay for something, the value is what you get.

See you around the water cooler.

Rehab Properties

Recently I had conversations with a relatively new real estate investor who was mystified at how an appraiser could derive a market value for a property that had been gutted.

The conversation led me to realize there may be several people, including appraisers who could be misled into believing an appraisal of such a property should be the “value as repaired” minus the cost to repair.

The reality is of course, that cost to repair does play an important part of the process, but the appraiser must also take into account the market reaction to the property, the holding time, the narrow market segment and specialty nature of the prospective purchasers.

When an appraisal is made of a home that is in pristine condition the base of prospective purchasers is open to normal market participants that are interested in the school district, distance to employment, and the like.

But when a property is in need to rehab, the typical prospective purchaser is an investor who is considering holding time, required expertise need to complete the repairs, and any market stigma attached to the needed repairs (e.g. fire damage, or extensive settlement).

Therefore the cost to repair, the holding time and stigma must be taken into consideration when a rehab property is appraised. The absolute best way to reflect the market reaction to such a property is to find sales of other properties that required rehab, track the purchase price, the price of repair, and holding time, marketing time and final sales price (upon completion of the repairs).

Unfortunately, from having reviewed literally 1,000’s of REO Rehab appraisals, I can tell you very few appraisals actually show this type of research or analysis. A few appraisals will present other REO sales and try to address similar (as is) condition. But few actually address the process or the motivations of the prospective purchasers.

Conditional Property Conditions??

Recently I was requested to alter the property description in an appraisal report to show that the property was in average condition. “After all the unfinished drywall, lack of flooring, and stained carpets were all cosmetic and did not affect the structural integrity of this $190,000 home”. How many of us have had these conversations?

Remember the condition ratings in an appraisal is a rating, not a description. In other words average condition does not mean that the property does or does not have need or repair. It does mean that the subject’s condition is typical of its market area. In the case of my subject property above the “typical” property for this sub-market had been cosmetically updated and or renovated. The trend was towards being in good overall condition. Thus an average property would have been updated. The subject being less than what was typical was presented as in fair condition.

Of course the appraiser’s responsibility does not end with simply rating the condition as it relates to its immediate marketplace, the appraiser is mandated to present a report that is not misleading thus the appraisal report must also detail the degree of maintenance, or lack thereof, that was noted as of the date of inspection.