Zoning: How it Can Change an Appraiser’s Career


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Zoning: How it Can Change an Appraiser’s Career
by Richard Hagar, SRA

Zoning can determine what an appraiser can and can’t appraise. For instance, if a property is zoned commercially or contains a large multi-family building, then a Certified General appraiser would perform the appraisal. If the property is zoned “SFR” and there are four units or less, then a Certified Residential appraiser can provide the report. What I’m about to describe isn’t in every state, however, it’s spreading and likely headed your way, which is why I’m providing this warning. If certain changes in zoning become law in your state prepare for a massive decrease in the number of properties a residential appraiser can appraise. Now, before I explain the zoning change, please allow me to provide a little history.

Over the past 80 years there has been a series of federal laws, rules, regulations, and common business practices that have classified residential lending into two distinct categories: residential and multi-family. Laws making this separation include, but are not limited to, the Housing Act of 1949, the 1968 creation of the Federal National Mortgage Association (Fannie Mae), laws creating the Housing and Urban Development (HUD) which oversee the Veterans Administration (VA) and Federal Housing Administration (FHA) and the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA). These laws together with common banking practices indicate properties that have or can contain five units, or more are considered “multi-family” or commercial properties.

Definitions quoted in FIRREA:

• Residential real estate transaction means: a real estate-related financial transaction that is secured by a single 1-to-4 family residential property.
• Dwelling: a residential structure that contains one-to-four units, […]
• Commercial real estate transaction means: a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property.

Fannie Mae has a wide latitude when buying loans from lenders if loans involve 1-to-4 unit properties. When a loan involves five or more units (multi-family), they are restricted in the number and amount of these loans they can purchase by law. These loans also require a substantial increase in the down payment amount used to purchase a property (say goodbye to five percent down).

Appraisals were similarly divided by the various government agencies and lenders. Appraising a property with, or capable of supporting, four units or less uses a simplified appraisal process. These properties are more common; loan amounts are lower, and the potential loss to a lender if a loan goes into default is reduced. The information a lender needs prior to funding a loan for a 1-to-4 unit property is reduced to a point where standardized appraisal forms (FNMA Form 1004 or 1025) are used. Fannie Mae and Freddie Mac created and required the use of these standardized forms prior to their purchase of loans from lenders.

Valuing commercial property, including multi-family housing, is more complex. In this market segment there are different types of buyers, larger loan amounts, and more complex loan qualifying standards. Loans on multi-family properties are unlikely to be sold on the secondary market therefore, they create far more risk for lenders. There is no standardized appraisal form for properties with more than four units—they are narratives custom created and often exceeding 100 pages in length. The requirements and level of information for these reports far exceed those used in a typical appraisal form. The depth of information and complexity also necessitates extensive additional training and licensing for appraisers.
Lenders and various government agencies have determined that the separation point between simple and complex properties is when a property has, or can support, five units or more.
Based upon this separation, federal laws mandating the licensing/certification of appraisers also followed this same classification. Generally speaking, Certified Residential appraisers are limited to appraising residential properties of any value with four units or less. In comparison, Certified General appraisers are allowed to appraise buildings with five units or more including commercial, industrial, and agricultural properties. This separation is similar to the classification used all across the United States.

Highest and Best Use
When providing appraisals for market value, the Uniform Standards of Professional Appraisal Practice (USPAP) requires appraisers to perform a highest and best use analysis of the property as if vacant and as improved if there is an existing structure on the property. Determining the legal uses and value of the property as if vacant then determines the contributing use and value of any existing structure on the property. If a property legally, physically, and financially can support up to four units then a Certified Residential appraiser can determine the property’s value. However, if a property is legally capable of supporting five plus residential units, or any other commercial use, then a Certified General appraiser must decide regarding the potential use and value.

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New Washington State Law and the Issue
The state of Washington just passed a new law that requires cities to rezone all single-family areas based on the following:

• Cities with a population between 25,000 and 75,000 must be rezoned to a minimum of four units per residential lot.
• Cities with a population greater than 75,000 must rezone to allow a minimum of six units per lot.

Here’s the problem, once five or more units are “allowed” to be built on a lot the required highest and best use analysis and conclusion must be made by a Certified General appraiser. Washington’s new law will eventually prohibit Residentially Certified appraisers from appraising any home in any city with a population greater than 75,000. Now imagine that you receive an appraisal order for a small home built in 1950 on a 10,000sf lot, and due to the zoning change, the property’s highest and best use is to tear it down and build a five or six-unit building. Boy, isn’t the AMC going to be happy when you tell them that they will have to find a Certified General appraiser to perform the appraisal? Assuming they can find one who isn’t booked out for eight weeks and/or willing to do it for less than $2,000. For firms like mine, it’s going to take additional time to figure out where we can or cannot appraise. Our H&BU analysis will take longer and portions of it will need to be considered before we accept an appraisal assignment. For the past several years, we have been dealing with similar zoning in Portland, Spokane, and Seattle. Now our appraisal fees are much higher so we can perform them right.

Clearly the people who thought up and passed this law didn’t understand appraisals or banking laws.

The Warning
While this new law may seem odd that it could only be created by the wacky people on the “left coast,” I’ve found that the idea is spreading and likely to come to your city, county, or state. For instance, Portland, Oregon has a similar zoning. California, through a series of laws passed over several years, has achieved the same thing and I’m hearing that Phoenix may have similar pending legislation. Even the White House is trying to come up with ways to “reduce housing costs” through changes in zoning. In other words, this wacky “left coast” idea is spreading.

The number of appraisals being performed today is half of what it was in 2020. Now, imagine if these numbers were further reduced due to the rezoning of a city or state to a point where residential appraisers are not allowed to provide the appraisal.

Here are the opening words contained in the new law explaining the need for change:

The legislature finds that Washington is facing an unprecedented housing crisis for its current population and a lack of housing choices and is not likely to meet the affordability goals for future populations. In order to meet the goal of 1,000,000 new homes by 2044, and enhance quality of life and environmental protection, innovative housing policies will need to be adopted. Increasing housing options that are more affordable to various income levels is critical to achieving the state’s housing goals…There is a continued need for the development of housing at all income levels, including middle housing that will provide a wider variety of housing options and configurations to allow Washingtonians to live near where they work. Homes developed at higher densities are more affordable by design for Washington residents both in their construction and reduced household energy and transportation costs.

Notice how it starts off with a logical statement and general need, which many of us would agree with…then the details kick in and it’s not pretty. While I agree with the general goal, rezoning all SFR areas to multi-family isn’t the first choice for a solution. How about we try changing the cost of obtaining a building permit or shortening the time it takes to obtain the permit (which is approaching four-plus months in our area)?

Competent appraisers have a better understanding of real estate, banking, and appraisal laws. Zoning is a local issue and shouldn’t be controlled at the state or federal level. If you see something like this being considered in your community or state, please become involved! People who create these laws must learn and understand banking and appraisal laws and their limitations. Ask your local appraisal coalitions to become involved as well. Help educate the people, because doing so might just save your career.
I’m trying to keep you safe…and employed out there.

About the Author
Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over 45 states through OREPEducation.org. The 7-hour online CE course “How to Support and Prove Your Adjustments” shows appraisers proven methods for supporting adjustments.

Learn how to improve the quality of your reports and defend your adjustments! OREP members save on this approved coursework. Sign up today at OREPEducation.org.

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OREP Insurance Services, LLC. Calif. License #0K99465

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Comments (4)

  1. To expound on what Richard has said, and to answer some questions….. USPAP standard 2 cites that when the H&B use analysis is performed a summary of the reasoning and conclusions must be included in the appraisal report. In order to comply with USPAP, an appraiser performing an appraisal on a property zoned to allow for “at least 6 units” (the term used in the bill), the appraiser must perform “commercial property level analysis” in order to “prove” that development or redevelopment of a property to more than 4 units is not the H&BU. In WA and other states, it is illegal for a residentially licensed appraiser to perform commercial property analysis. To be technically accurate, WA does allow for it up to $250k, but that figure is so low it is irrelevant. Federal banking guidelines define commercial lending as anything more than 1-4 unit residential properties. Commercial loans and analysis of 5+unit properties is a completely different analysis than 1-4 dwelling units, so it is not just an easy fix to expand Cert. Residential appraisers ability to appraise to 6 units, it will require training and education outside the residential realm. Also, Expanding residential licenses to more than 4 units will require a change at the federal level, so until that happens, residential appraisers in WA are gonna be outa luck.

    As to the “reasonably probable” argument. Reasonably Probable relies on what exists and what has been done in the past. If a property is zoned SFR and all the properties around it are SFR, then it is reasonably probable that the property’s H&BU is SFR. The problem is that all residential zoning will go from 1 unit per lot to “at least 6 units”…. You cannot point to the properties around the subject and cite that because they are all SFRs the subject’s H&BU is SFR because they were all built when only an SFR was allowed.
    Weekend radio shows are already having discussions about what investors/developers/flippers are going to do when the zoning change occurs and that they are already buying properties today to hold and wait until they can be developed with multiple dwelling units…. Which brings up a question that Richard did not even touch on…. What is the remaining economic life of a property zoned SFR today that will have its zoning changed within 5 years to “at least 6 units”?

    Hope that clarifies some of the questions.

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  2. Great article by Richard and both letter writers above make some valid points. I always read anything put out by Richard. I have taken two of his courses, and again, common sense solutions to every day appraiser problems.

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  3. This would’ve been a decent article if you didn’t dilute it with referring to the entire Western coastline of the United States of America as ‘the wacky left coast.’ How about modify within the appraisal community what Certified Appraisers are qualified to appraise? Increase the range to 6 units. Or, the appraisers that became Certified when it was required to have a college degree, make them a higher level example, Certified II with the ability to appraise more complex properties such as these referenced in the article, so they are not bunched in with the lower qualifications. It was never fair to those that had to meet the higher requirements, and this is an opportunity to right that wrong and make those appraisers (like myself) a higher category of appraisers.

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  4. Richard, I appreciate the importance of the issues you’ve raised re: residential appraisers being able to value/make HBU determinations on single-family properties that have had the underlying land upzoned. However, I don’t believe it’s our role as appraisers to lobby against upzoning. By all means, every individual appraiser should feel free to engage in political activity supporting their preferred land use policies, but our efforts as a profession are more appropriately directed toward revising regulations to fit this new paradigm. The simplest solution would be to allow residential appraisers to make a baseline determination of whether development of 5+ units, where legal, would be reasonably probable as an alternative HBU as improved. In many cases the answer “no” is very clear cut can be reasonably determined by a competent residential appraiser.

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