To Permit or Not to Permit
Excluding additions which may require permit issued by an agency of government…
OK, it isn’t Shakespeare, but, it is something of interest — and concern — to licensed appraisers in Illinois. The concern begins with an appraiser accepting an unusual assignment condition.
An AMC, acting on behalf of a lender is demanding that appraisers exclude from the Gross Living Area areas of the subject residence, additions to the original construction unless it is proven that the additions were legally permitted.
We must understand that what is asked of the appraiser is not couched in terms of a guideline; this is a requirement of the appraisal assignment with the clear implication that it’s my way or the highway. Though this demand is specific to GLA, similar demands have been made regarding decks, basement finish and whatever else may require a permit issued by an agency of government.
Actual Scenario: The subject has an addition to the original construction. The appraiser is required to ask the occupant or conduct research to determine and disclose whether or not the addition was completed with a permit. If the occupant attests that either there was no permit or has no knowledge of such a permit, the appraiser is to explain this in the appraisal and is not to include the addition in the GLA.
Primary Issue: The market gives (or doesn’t give) value to a property feature. The competent appraiser considers what is, and what is not, significant in the development of a credible opinion of market value. In many communities, an addition (i.e., this could be bedrooms in what once was the unfinished attic) to GLA is not closely monitored by the local governmental agency and the market has virtually no awareness of whether or not an addition was completed via a permit process.
There are other instances where noncompliance with the permit process may result in a minor cost for correction. In both of these situations, properties are regularly bought and sold and the question of the permit is a non-issue. If the appraiser were to exclude an addition from GLA where the market recognizes the addition as GLA, would the resulting opinion of value be market value?
The short and easy answer is—no.
Finally, there are jurisdictions where the question of whether or not an addition was legally permitted is a matter of great significance and something for the appraiser to carefully consider and analyze. But, even here, no matter where the appraiser’s analysis might lead, the demand from the AMC remains an unacceptable assignment condition.
The demand is inappropriate in that it interferes with the appraiser’s development of the appraisal and, therefore, adherence to USPAP (and Illinois License Law).
In all instances, it is the appraiser who researches and analyzes the market. The appraiser has the responsibility of developing and communicating a credible appraisal in compliance with professional standards. The appraiser cannot allow an unacceptable assignment condition to interfere with the development of a credible appraisal.
Also, let’s review the very first line of the URAR’s Statement of Assumptions and Limiting Conditions:
The appraiser will not be responsible for matters of a legal nature that affect either the property being appraised or the title to it, except for information that he or she became aware of during the research involved in performing this appraisal.
It doesn’t say may not. It clearly states will not.
Given that the appraisal is to be made as is and the appraisal may be headed to the secondary market, the question is, how can the appraiser communicate an as is opinion of market value when certain elements of the property are excluded?
If you answered that the appraiser can’t do that, you are correct. Given the intended use of the appraisal, an appraisal of a physical segment (or, rather, the exclusion of a physical segment) is not appropriate. Similarly, employing a hypothetical condition is not an appropriate option.
In addition to the overall inappropriateness of the demand by the AMC of the appraiser, the AMC must also consider a provision of Illinois’ AMC Law:
Sec. 160 (a)…Appraisal management companies shall not interfere with adherence to the Uniform Standards of Professional Appraisal Practice or the Real Estate Appraiser Act of 2002 or a subsequent Act by individuals licensed under the respective Acts.
In summary, the AMC’s demand of the appraiser is an interference with the appraiser’s compliance with professional standards.
In other words, both the offer and the acceptance are unacceptable.
By Lee Lansford – Illinois Appraiser Newsletters – Volume 4, Issue 3