Tim McCarthy, SRA, ASA, IFA recently had a Q&A exchange with the Freddie Mac policy team regarding how to:
QUESTION: When would you include below grade improvements in the GBA on 2-4 family properties? I was unable to find a definition from Freddie Mac, but Fannie Mae defines GBA as follows...
The Gross Building Area…
ANSWER: Freddie Mac does not have a Guide definition for Gross Building Area. However, we do require the appraisal to include a Sketch that indicates the GBA for a 2-4 unit property (5601.10(a)(ii). Fannie Mae’s reference above indicates that Gross Building Area includes all finished areas, above and below grade. Basements would be included in the calculation when the appraiser determines that the finish (that is heated and/or cooled), the access, and utility are similar to the above grade areas of the building. We’ve included a few references that speak to how gross building area is identified and calculated below. (SEE NOTES). These mirror Fannie’s guidance.
QUESTION: Would there ever be an instance where a finished basement should not be counted in the GBA? The line items in the Sales Comparison Approach adjustment grid are setup to include the finished basement area in the GBA. However, you still have to identify that finished area either as a unit in the unit grid section or a finished basement under the Basement Finished line, if it is only a room(s) but not a unit. Would you agree?
ANSWER: Yes, that is an acceptable reporting approach that the form accommodates. When basement area is finished as an independent unit, that area should be included in the GBA and be attributed to that unit. When the finish is of similar materials and quality to the remainder of the dwelling, but not configured as an independent living unit, that finished area is included in GBA, and is reported on the basement line on grid.
QUESTION: What if the unit is illegal and we can find comparables with similar illegal use? Would we still include the illegal unit in the GBA?
ANSWER: A 2-4 unit property with an accessory unit is not considered eligible regardless of the availability of comparable sales. To be an eligible property, Freddie Mac requires 2-4 unit properties to conform to the jurisdiction’s zoning and land use requirements (5601.12(d)(i)(A)(II)). An exception is afforded for a 1-unit property with an accessory unit that does not comply with zoning. However, when the property is a 2-4 unit, it must conform to zoning. See NOTES below for GBA guidance.
QUESTION: What is the current number of comparables, with similar illegal use, Freddie requires an appraiser to provide? I believe it used to be three comparables, but has since been changed to two comparables. I think the same holds true for an ADU that zoning doesn’t support on single family.
ANSWER: As noted above, 2-4 with an illegal unit or accessory unit is not eligible regardless whether there are available comparable sales. Our Guide 5601.12(e)(v)(A) and (B) details comparable sale requirements for a 1-unit dwelling whether conforming or non-conforming with zoning. When conforming we require the appraisal to demonstrate the accessory unit is a marketable configuration and to support any contributory value provided by market data. There is not a comparable sale minimum in this case. However, when the 1-unit property with an accessory unit is not compliant with zoning, to be eligible, we require the appraisal to present 2 comparables that are also non-compliant with zoning.
QUESTION: There are countless numbers of multi-unit properties throughout the country with illegal units and/or ADU’s. If these are common in the market would they be eligible for sale to Freddie Mac?
ANSWER: No, a 2 or 3 unit with an illegal additional unit that is not compliant with zoning would not be eligible and, as noted earlier, a 2-4 unit with an accessory unit is not eligible for sale to Freddie.
QUESTION: Will you lend on a 4 unit with a legal 5th unit in the basement? This can create a problem for Certified Residential Appraisers if their state law limits their license to appraiser 1-4 family properties only.
ANSWER: Freddie Mac caps residential appraisals at 4-units. A 5-unit property would not be an assignment a residential certified appraiser could accept if the mortgage is to be sold to Freddie Mac.
QUESTION: I was always under the belief that when you check the Highest and Best Use box as illegal, it means game over. But that wouldn’t necessarily be true with illegal ADU’s because Freddie will lend on illegal use if we can comp it out with similar illegal use properties.
ANSWER: Again, a 2-4 unit property with an accessory unit is not considered eligible regardless the availability of comparable sales. However, a one-unit property with an accessory unit that does not comply with zoning may be eligible if the appraisal demonstrates the configuration is marketable by presenting at least two comparables with an ADU that also does not comply with zoning (Guide 5601.12(e)(v)(B)). This situation may present a challenge when completing the Highest and Best use analysis.
QUESTION: What constitutes deconverting a kitchen in an ADU or illegal unit on a 2-4 family? FNMA says that removal of the stove does not make it a deconversion. There doesn’t appear to be much direction from Fannie/Freddie regarding deconversions.
ANSWER: We cannot provide blanket instructions on how to make a “Subject To” appraisal that would result in property eligibility. Does painting over the stripes on a zebra make it a horse? No! The appraiser must look at the components that qualify the area as an additional unit or ADU. Is the finished area still independent? How is it configured? Is the configuration accepted by the market? Is there contributory or negative value impact to the area and/or the configuration? These factors drive the appraiser’s analysis.
Here is something you can share: Fannie Mae recently provided very useful and insightful guidance on this topic. Currently. Freddie Mac does not have a position on decommissioning a kitchen.
TJ NOTE: Freddie’s answer to this question makes perfect sense. Most municipalities have their own zoning and building codes regarding deconversion and restoration to achieve compliance. The appraisal industry has adopted a “pull the stove and cap the gas line” approach to this problem, but that doesn’t always assure the improvements would then be considered legal by the local authorities. BEST PRACTICE: Reach out to the local zoning and building departments to determine what they would require to deconvert an illegal unit or ADU.
I’d like to thank the Freddie Mac Policy Team for taking the time to help address and bring clarity to some of the more complicated property eligibility issues appraisers struggle with when they appraise a property with illegal units or ADUs.
Gross Building Area References
HUD: j. Gross Building Area (GBA) FHA 4000.1
The GBA is the total finished area (including common areas – hallways, interior stairways, etc.) of the improvements, above and below grade, based upon exterior measurements. Use the same method for calculating the GBA of comparable sales and rentals.
Measure Externally for GBA
Exterior measurements of a two-to-four family building are used to calculate the Gross Building Area. The interior must be finished to count in the calculation. The main difference between GLA and GBA is that below-grade living space is included in the GBA. Interior stairways, hallways, storage rooms and laundry rooms are part of the GBA. If the building has an exterior stairway, it is not included in the footage measurement.
Basement Not Included
Any space that is partially or fully below the land-line is considered below grade when calculating GLA of a property. If a multi-family building has living space below-grade, that footage is included in the Gross Building Area but not the Gross Living Area. A finished basement in a single-family home isn’t counted in the GLA but is given a value in an appraisal by comparing other homes with finished or unfinished basements. https://safe.menlosecurity.com/https://homeguides.sfgate.com/difference-between-gross-living-area-gross-building-area-45225.html
The major difference between single-family GLA and GBA in a multi-family is what is actually used as living space (or rented out GLA) and how big the building is (or GBA).