How do lenders deal with houses with un-permitted additions

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Submitted by gn on March 25, 2009 - 12:20pm

I saw this mentioned on another thread.

If a person wants to obtain a mortgage to buy a house with un-permitted additions. How do lenders handle the mortgage application ? What about houses with potential structural damages ?

HLS, since you're a broker, it would be great if you could chime in.

Submitted by HLS on March 25, 2009 - 11:55pm.

I would say that it depends on the situation, and is hard to define.

An addition may mean that the house cannot get a loan. It may require that inspections be done and it needs to be brought up to code.
It may not be a problem at all, or could be grandfathered in.

A lender will not go look at a property, they rely on the appraisal. If the appraiser isn't aware that addition was un-permitted, I'm not sure if they have any liability. They should realize that something is wrong if the public record and actual size/rooms don't match.

Just because it was done years ago and has changed hands and hasn't been a problem before, doesn't mean that it won't become a problem in the future.

The current owner may not even be aware that a previous owner created this situation.

It could become a total nightmare OR it may not come up. The appraiser is probably the only one that will bring it up.

If someone pays for an inspection, they do not have to share it with the appraiser unless they want to.

An appraiser is not an inspector, the appraiser's job is to establish current value but mention any defects or concerns that they have.

The appraisal industry is changing drastically on May 1st.

Ae there more specifics from the OP ? . HLS

Submitted by urbanrealtor on March 26, 2009 - 12:08am.

I basically am of the same inclination of HLS (which is rare).

Essentially, the appraisal is the only time the bank actually has anybody look at the place.
In my experience, it is best to have a conversation with my preferred appraiser first.

But as Sheldon said, the industry is changing soon.

Therefore, I soon won't have a preferred appraiser much longer.

Submitted by an on March 26, 2009 - 12:33am.

HLS, what's happening on May 1st?

Submitted by drboom on March 26, 2009 - 10:06am.

AN wrote:
HLS, what's happening on May 1st?

The NY Times has a writeup here.

Submitted by nostradamus on March 26, 2009 - 11:26am.

The article indicates the intended changes are to prevent lenders/agents/brokers from using preferred appraisers and to prevent any pressure or influence on the appraiser. Doesn't say anything about the method of appraisal.

Talk about too little too late!

Submitted by HLS on March 26, 2009 - 11:49am.

The real culprits in this economic meltdown are the same fools that are pretending to know how to fix it.

They are children that looted the candy store, sold the candy to their friends, and pocketed the money...
Now they got caught.The store is bankrupt. They want to blame everybody else EXCEPT THEMSELVES for what went wrong.
Blame the landlord, the security company, the manufacturer, but the child bandits are now in charge of investigating the crime. Now they are stealing money to give to their friends who no longer have a source of dirty income or candy.

The change in appraisals is saying that appraisers were responsible for the housing mess. There is only a sliver of truth in that. A dishonest appraiser is still dishonest.

This will ruin the careers and incomes of honest appraisers. If an appraiser has been in business for 10-20 years and has dozens of banks or brokers sending them business, that stops completely on May 1st...

An appraiser with 8 employees recently told me that he is done, and 8 appraisers will be out of work. He will not get enough orders to keep them busy.
In the end, it will harm consumers, financially ruin most appraisers, and only benefit the management companies who have just been handed a govt contract.
Orders sent through management companies will result in apparisaers receiving about 50% less income per job, and fewer jobs.

It might appear to some people that the govt is doing the right thing , it's typical BS spin that foolish America falls for.

Once again the blame is deflected to spare the guilty... HLS

Submitted by gn on March 26, 2009 - 12:29pm.

HLS wrote:
Just because it was done years ago and has changed hands and hasn't been a problem before, doesn't mean that it won't become a problem in the future.

HLS, thank you for your response.

So, any re-sale property can potentially have unpermitted additions ? Do home inspectors typically compare public records with actual floor plans ?

Submitted by drboom on March 26, 2009 - 12:29pm.

HLS wrote:

The change in appraisals is saying that appraisers were responsible for the housing mess. There is only a sliver of truth in that. A dishonest appraiser is still dishonest.

Face it, the whole appraisal "industry" is dishonest, else we would never have seen the ridiculous valuations of the recent past. Anyone with an ounce of sense could see that no matter what someone was willing to pay, and no matter what some damnfool bank was willing foist off on the MBS "investors", a 1,000sf 3/1 shack in Da Hood isn't worth almost a half million dollars.

The lenders needed someone to put a fig leaf over their obvious disregard for underwriting standards, and the appraisers were only too happy to oblige.

HLS wrote:
This will ruin the careers and incomes of honest appraisers. If an appraiser has been in business for 10-20 years and has dozens of banks or brokers sending them business, that stops completely on May 1st...

An appraiser with 8 employees recently told me that he is done, and 8 appraisers will be out of work. He will not get enough orders to keep them busy.

It's sad when times change, true. But ask your friend how much responsibility he bears for this mess. How many tumbledown shacks in the barrio did he swear were worth a third of a million bucks? How often did he or his employees have a target number to hit? How many times did he turn a blind eye to obvious structural problems? How many times did he cherry-pick comps to hit his number? If he was in the game during the boom, I'm sure all that and more was going on because no one would have sent him business otherwise.

Now, I'm not saying the upcoming changes will improve matters. But I am saying that the appraisers have been key players in this debacle and they've gone down that road willingly.

Submitted by Eugene on March 26, 2009 - 1:02pm.

gn wrote:

So, any re-sale property can potentially have unpermitted additions ? Do home inspectors typically compare public records with actual floor plans ?

I bought a house recently ( Sheldon did the financing ) ... Tax rolls said 4/2.5, but there were really 4 full bathrooms. The appraisal stated clearly "4 bathrooms", there was no mention that any of them were unpermitted. The issue never came up. All bathrooms look perfectly normal, the appraiser probably did not bother checking the public record.

To this day, I have no idea which bathroom was added and which one was converted from half to full. I've been thinking to visit the county office and try to find old plans of my house ... To my knowledge, neither the inspector nor the appraiser did that.

Submitted by HLS on March 26, 2009 - 1:02pm.

Your anger is justified, but misplaced.
An appraisers job isn't to give their opinion about a shack in da hood, it's to report what the previous fool paid.

An honest appraiser bears NO responsibility in this mess.
The govt allowed this to happen. Sales people were doing their jobs, many of them simply believing that they were doing the right thing.
Clueless sheep who BELIEVED that the rising prices
were valid.

Face it, many people are overpaid for what they do.
Until something like this blows up, people just think that they are "worth" what they are paid.
They are screwing their customers in exchange for a part of the profits.

People who sell cars, paper, equipment, real estate, or anything else are usually trying to sell as much as they can to make their commissions, with no regard of what benefit it is to the buyer.

There is such a thing as adding value to someones life, which is what I attempt to do. Many people are simply stubborn and ignorant and aren't going to change.
Welcome to uneducated America.
Check out this video, it's edited. The UNedited version is available on YOUTUBE... http://www.youtube.com/watch?v=fsDuL4jTkz0

Submitted by drboom on March 26, 2009 - 2:02pm.

HLS wrote:
Your anger is justified, but misplaced.
An appraisers job isn't to give their opinion about a shack in da hood, it's to report what the previous fool paid.

Bzzzt, sorry ... no.

Here's what the FHA has to say in their appraiser's handbook:

D. ECONOMIC TRENDS
The appraiser must give consideration to, and include in the value analysis, the economic trends of a neighborhood and the general area, including:

  • price and wage levels (the purchasing power of community occupants)
  • employment characteristics
  • the current supply and demand for residential dwellings, including projects under construction
  • taxation levels
  • building costs
  • population changes
  • activity of real estate sales market and mortgage
    interest rates

No, the FHA isn't the whole market. But I doubt they are out of step with prevailing (and mostly theoretical) professional standards.

I agree with you that in practice appraisers try to find whatever comps will support the desired value, but to just "report what the previous fool paid" is a clear violation of professional standards and ought to result in loss of license.

Submitted by HLS on March 26, 2009 - 2:28pm.

Dr Boom,,, BZZT right back at you.
What do you think that "current supply and demand is" ??

I don't know where you fall into the mix, are you in the mortgage/real estate/appraisal business ?

Reporting what previous transactions were is exactly how valuations are done in both a rising and falling market.

What you call a "clear violation" is them doing their job... BZZZT BZZZT

Submitted by drboom on March 26, 2009 - 2:59pm.

HLS wrote:
Dr Boom,,, BZZT right back at you.
What do you think that "current supply and demand is" ??

Congratulations, you managed to address one out of seven criteria.

HLS wrote:
I don't know where you fall into the mix, are you in the mortgage/real estate/appraisal business ?

I'm a taxpayer, among other things. That gives me a dog in this fight. Further, my judgment appears to be better than most of the industry "experts" since I called this one long before it peaked--and I said why, as anyone with a shred of common sense could have done.

HLS wrote:
Reporting what previous transactions were is exactly how valuations are done in both a rising and falling market.

What you call a "clear violation" is them doing their job... BZZZT BZZZT

No, reread what I wrote in the last sentence. I think I was pretty clear, but if you're having trouble understanding, let me know.

Submitted by gn on March 26, 2009 - 3:56pm.

esmith wrote:
To this day, I have no idea which bathroom was added and which one was converted from half to full. I've been thinking to visit the county office and try to find old plans of my house ... To my knowledge, neither the inspector nor the appraiser did that.

esmith, thanks for sharing your experience. Are you concerned that when you sell that house, it's possible that an appraiser/inspector might bring the issue up & you might have to undo the additions before you can sell ?

SD Realtor, how often do you see real estate transactions where there's a discrepancy between the tax rolls & the actual floor plan ? What's your take on this ?

Submitted by harvey on March 26, 2009 - 3:59pm.

HLS wrote:
This will ruin the careers and incomes of honest appraisers. If an appraiser has been in business for 10-20 years and has dozens of banks or brokers sending them business, that stops completely on May 1st...

I'm don't see how this ruins the careers of the honest appraisers. At the peak of the frenzy, the dishonest appraisers were getting the most referrals, as their willingness to "work with" banks and brokers was what made them more popular.

The real estate professionals who were honest were the ones losing out in the bubble -- their ethics prevented them from participating in the massive number of illegitimate transactions that ultimately did not benefit their clients.

If an appraiser has "dozens of of banks or brokers sending them business," does that mean they are better at appraisals, or better at cronyism? Appraisals should be a commodity -- if some are "better" than others, then something is not right.

I don't see any reason this legislation will impact the total demand for appraisals, so why would the business go away?

Submitted by drboom on March 26, 2009 - 4:18pm.

pri_dk wrote:
Appraisals should be a commodity -- if some are "better" than others, then something is not right.

{ { { Applause } } }

Submitted by Eugene on March 26, 2009 - 4:19pm.

gn wrote:

esmith, thanks for sharing your experience. Are you concerned that when you sell that house, it's possible that an appraiser/inspector might bring the issue up & you might have to undo the additions before you can sell ?

Like I said, I don't know which bathrooms were added, so I wouldn't know what to undo ... if I try to sell and find a buyer, and this buyer wants me to bring the house in accordance with tax rolls, I might be willing to demolish 1.5 bathrooms of his choice.

I checked with the county and they told me that they don't keep building plans for so long. (The house was built in 88)

Submitted by UCGal on March 26, 2009 - 4:50pm.

Continuing the hijack on the appraisal rules...

Washington state has had this rule for a while.

The appraiser she got, was coincidentally, the "preferred" one of her broker... but that was luck. He wasn't out of business, just worked as assigned by the system, rather than for specific banks/brokers/realtors.

Submitted by HLS on March 26, 2009 - 5:05pm.

The information that many of you believe is simply ignorance about appraisers.

My preferred appraiser tells me what a house is worth, I don't tell him. He doesn't have targets to meet or lose my business. If it isn't a purchase, he doesn't know what the loan amount is.
I am one of his best clients and get great service and priority for borrowers.

Any appraisal is the opinion of the appraiser, it isn't an exact science, but should be close when there are model matches.

Business relationships aren't built on cronyism. They are built on service and other factors.

Your income could be threatened in your business if YOUR customer was told that they can no longer do business with you.
You need to go to a third party and they will provide you with what you need by a party of their choosing, and the provider will be getting 50% of what they previously received for doing the exact same work.

Some of you just don't get it. I don't wish that it happens to you. It will ruin the income/careers of many good people who enjoy what they do.

This is bordering on a dictatorship/socialism.
It's going to get worse.... HLS

Submitted by SD Realtor on March 26, 2009 - 5:25pm.

gn I am not sure of the percentage... Off the top of my head I think it is in the 10-20% range. I converted a half bath in one of my rentals to a full bathroom back in 2003 after I bought the home. I did not get the work permitted but I did hire a contractor and had it done professionally for what it is worth. I took pictures while it was being done as well.

Also what I have seen is that even for newer homes that have not been modified there can be discrepancies. For instance there was a home that I saw a few weeks back that had a 2 car garage but the tax roll said 3. Also the number of bedrooms and baths did not match. The issue was that this home had optional floorplans from the builder but the tax roll only used the basic model.

There are other cases that are often overlooked. Buying a home with a pool for instance. Again depending on where you live you may not be able to dig up the permit for a pool. As esmith said counties only keep this information for so long.

It is a personal choice as to how much you want to be concerned over this.

Submitted by svelte on March 26, 2009 - 6:17pm.

The builder recorded our prior home as a 5BR with the county while it was actually only a 4BR. They did the same thing with every frickin house of the same model.

None of us original owners had any problem at all when we sold.

That may not be true if there is a serious square footage discrepancy (something we did not have).

Submitted by harvey on March 26, 2009 - 7:08pm.

HLS wrote:
[...]My preferred appraiser tells me what a house is worth [...]

But any appraiser can do that. So why do you have a preferred appraiser? What is it about him/her that you prefer?

The only possible quality consideration in an appraisal would be turnaround time. Aside from this factor, if two licensed appraisers are available on a given day, one should always choose the one with the lower price. (And I'm guessing that there are plenty of appraisers available these days...)

If one chooses the same appraiser every time regardless of price, the implied promise of repeat business is essentially providing an incentive for the appraiser to come up with the "right" number. (And of course they can figure out what the "right" number is even without anyone telling them.)

The entire trade of appraisal is designed to be consistent and objective. That's why there are standards, and that's why there is licensing. Because of the complexities of real estate, no two appraisals will come out the same, but the system is designed to minimize the differences and remove individual subjectivity. In any case, differences in the outcome should never be influenced by who is paying for the appraisal.

The ideal appraisal process would involve only a set of formulas with no human involved. As the original post in this thread illustrates, this degree of objectivity is not feasible for many real estate appraisals, and there will always be a need for expertly trained appraisers. But for for many homes today there is typically little more involved than a quick observation and a computer program. This efficiency and transparency should be lowering costs for the end consumer, but for some reason, appraisals for tract homes still cost $300+ when they only involve 10 minutes of observation less than 15 minutes of data entry.

Appraisers and many other real estate professionals do not want more transparency and efficiency because they will lose the premium income that they derive from their relationships. However, these relationships only benefit the middlemen, not the end consumer or the economy.

[Apologies for hijacking the thread.]

Submitted by drboom on March 26, 2009 - 7:11pm.

(more hijacking, sorry. FWIW, it seems that the appraiser isn't supposed to include the unpermitted additions in the appraisal, but their duties beyond that seem to vary.)

HLS wrote:
The information that many of you believe is simply ignorance about appraisers.

My preferred appraiser tells me what a house is worth, I don't tell him. He doesn't have targets to meet or lose my business.

So far, so good.

Quote:
If it isn't a purchase, he doesn't know what the loan amount is.

I hope this is a typo or misstatement. If not, why should an appraiser know anything about the loan amount? If you can't see the obvious problem here, then I don't know what to tell you.

Quote:
I am one of his best clients and get great service and priority for borrowers.

I don't understand this one, either. Why should the appraiser care about "priority for borrowers"? He's there to give a professional, unbiased opinion of what the property is worth.

Quote:
Any appraisal is the opinion of the appraiser, it isn't an exact science, but should be close when there are model matches.

Yeah, those "opinions" really worked out well for buyers in the 2002-2007 period, didn't they? The fat origination fees were pretty sweet for the lenders and brokers, though.

Quote:
Business relationships aren't built on cronyism. They are built on service and other factors.

One of those "other factors" has been a complete disregard for industry standards. Same thing happened in loan origination with underwriting, so it's not like they were the only ones.

Quote:
Your income could be threatened in your business if YOUR customer was told that they can no longer do business with you.
You need to go to a third party and they will provide you with what you need by a party of their choosing, and the provider will be getting 50% of what they previously received for doing the exact same work.

If you've been around a while, you know that the late '80s brought a lot of changes to the appraisal business as a result of abuses related to the S&L bust. Professional appraisers mostly stuck it out and changed with the times. There's no reason to believe this will be any different.

Quote:
Some of you just don't get it. I don't wish that it happens to you. It will ruin the income/careers of many good people who enjoy what they do.

I've been there, and it seems like no fun at the time. The good news is that there's a whole wide world of things to do for a living, and without some kind of kick it's likely you'll never try anything else.

Quote:
This is bordering on a dictatorship/socialism.
It's going to get worse.... HLS

Yes, "it" is getting worse ... but not because the appraisal industry is yet again getting some restrictions placed on it because of its widespread failure to do its job ethically.

Submitted by saronne on January 10, 2011 - 11:08pm.

And that's exactly what happened. Of course, it gets worse for sellers or those who are trying to refinance, in that most of the appraisers who are out there now are newbies and many times, incompetent; most of the good ones can't make a living and have had to change professions.

I am going through a reverse mortgage process. The appraiser who had only received certification3 months earlier, valued my new, permitted enclosed patio as just that- and not as additional living space (which is appropriate)- it is same level, fully-insulated with energy-star windows and door, and has a built-in energy star heater a/c (but forced air heating as the primary source. As a result it brought down the appraised value (if correctly averaged) over $85k- $100k+ too little, and that's pretty hefty considering the distressed comps were going for around $300k).

She also left out that I am on the back end of a cul-de-sac with a 12 200 sq ft flat lot, that I had the built-in a/c (but mentions a small window a/c in kitchen), and that my brand-new roof is 40 yr, "3D" (no, you won't need glasses to view it). She concentrated on "glitz"- cosmetic upgrades, while giving me virtually no credit for brand-new 100% waterproof, commercial-grade golden-oak flooring (Manning ICore 2- no longer available), newer 200amp 240v elec panel (our tract has 100amp), newly remodeled bath with dual-flush commode, new Marmoleum (not vinyl), new professionally-painted 0 voc paint inside, new outside paint as well, and brand-new outgoing main line.

I have a gorgeous shiny-black cooktop and oven, but not good enough because not stainless steel, and beautiful wood countetops weren't granite, have 2-vehicle RV access (no credit), and a Yorkie named Frazzle.

The addition had the same flooring with vertical blinds as well. The a/c in addition actually cools almost my entire house (largest in tract, and with addition is now over 1220 sq ft).

I rebutted, with full info- but didn't know at the time that my living space was "official"; MetLife went along with appraiser's NON- response (NOTHING answered except my stating that another comp selling for much more was not used, while 4 distressed properties were.

MetLife should be completely avoided, believe me; broker told me they gave one of her clients a ZERO value- (she wound up going elsewhere and got client $350k). She said she'd never seen MetLIfe honor a rebuttal, no matter how strong the case. The appraiser didn't call the listing agent re the house I'd wanted evaluated- she just drove by and pasted the blurb on the MLS.She claimed that house was .62 miles from mine where she had used only those .50 in her appraisal- even though she knew this was in the SAME tract, built SAME year and was SAME model as the REO comp she'd used. When I stated that that house was less than a block from a freeway, she countered that it was not an issue, because the house was (all of) 6 houses from the wall that separates the block from the freeway! She stated that this house was "far superior" to mine- but since she hadn't talked to the listing agent, she had been unaware that the upgrades were mainly cheap and cosmetic, that when the bedrooms were reduced to two (so tiny that it was felt necessary to turn 2 into one narrow, long one, the occupant decided they needed another bedroom and virtually eliminated the livingroom by adding a wall that produced a 7' x 10' "bedroom"-without a window! Since now the livingroom was reduced to being a small dining area, they were using an all-acrylic sunroom as the livingroom (NO glass,, no wall area, no insulation). In actuality, my house would bring would bring far more.

She didn't bother to contact any of the listing agents to confirm what I'd said about the respective comps; had she, she would have found out that the one she had given me only $40k more for in credit ("22k adjustment") had been GUTTED- no cabinet, appliances- nothing- and the backyard after 20' went down a very steep slope maybe 25' to the street behind it.

Another comp backed up to a wash- its almost 16k sq ft lot (which included the wash, itself, and the bank on the opposite side) had only about 6k' worth of usable land; my 12,200 sq ft flat lot instead of appreciating- was devalued by $7000!

There is a lot more- but running out of steam, here.

You can imagine how "concerned" the appraisal management company will be- it's Experian- fat lot of angst it would cost them to lose this tiny brokerage. They don't exactly have a sterling reputation for their choices in appraisers.

Whereas good appraisals made a difference to appraisers before the new rules- not anymore. The ethical, experienced ones have pretty-much disappeared. Nobody seemed to look at the negative consequences this inane law might bring.

I hear new changes are planned, but nothing firm, and from what I have gleaned, they will do little to make things better.

I know there were a lot of excellent, ethical appraisers out there- now the ones left are for the most part doing more than their share to ruin the market. The banks aren't much of a help, for sure. Those appraisers who have tried to give a decent amount credit have all-too-often been shot down- required to re-think what they believe is fair- and then had to bring the appraisal way down. The FHA underwriter at the bank can override the appraiser and make the amount lower, but from what I understand, they cannot go higher or they will lose the FHA insurance.

BTW, the appraiser's company is BizApps, located in West Hills, SFV ; Leticia Lopez is "it". No supervisor, no real recourse. I am going to file a complaint with the licensing bureau; she ignored my points and did not compensate for a single one of her errors.

Wheee...

Submitted by bearishgurl on January 10, 2011 - 11:28pm.

delete - didn't realize it was an old thread.

Submitted by UCGal on January 11, 2011 - 10:03am.

saronne wrote:

I have a gorgeous shiny-black cooktop and oven, but not good enough because not stainless steel, and beautiful wood countetops weren't granite, have 2-vehicle RV access (no credit), and a Yorkie named Frazzle.

Yes - but would the Yorkie convey? If not, it doesn't add value to the house. ;)

Submitted by faterikcartman on January 13, 2011 - 12:14am.

del

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