Richard Garrie is chief appraiser for United States Appraisals, which provides professional appraisal-management
services in all 50 states. Garrie has more than 20 years of
residential-valuation experience. He assists appraisers with
complex assignments, supervises internal review staff, works
with clients and appraisers to mediate appraisal disputes,
and provides internal training and guidance on compliance.
Garrie also is in the foreground of new and emerging
regulatory appraisal guidelines. Reach him at
Is That Property Even Legal?
Appraisals must address zoning and permit regulations to reduce risk
By Richard Garrie
The topic of zoning often brings confusion to everyone involved in the origination pro- cess. Loan originators should be aware of potential problems. Questions often arise
as to whether a property is legal if it does not have the
proper permits, for example. The answer is yes and no.
Before you can answer the question and finish processing that loan, you must understand the difference
between permits and zoning. Zoning is the legal
authority that governs what can be built on a site and
generally sets the rules that govern the potential
improvements that can legally be built on the site.
Permits govern what has been built on the site and
whether it was built in compliance with local zoning
laws and/or in compliance with local, state and federal
codes. These are specific to the improvements already
built on the site.
It is important for mortgage originators to be aware
of these concepts and how they should be handled in
the appraisal process. Understanding the difference is
the key to establishing whether a property is considered legal or not. This can affect whether a loan makes
it through underwriting or not or if it can be sold on
the secondary market.
Can we rebuild it? This question is important to lenders
who will be taking on the risk of a loan on a specific
property. Most mortgages are made today with a
30-year term. The lenders an originator works with
will want to make sure that the improvements they are
taking as collateral will be there at the end of the mort-
gage term. If some disaster occurred and the home was
destroyed, can it be rebuilt to the same footprint that
was previously constructed on the site, including all
This is where the difference between permits and
zoning must be understood. If the improvements that
were on the site did not meet the minimum zoning
requirements, regardless of whether they had the ade-
quate permits at the time, it is possible the borrower
could be restricted from rebuilding to the same foot-
print of the improvements that were originally there,
which can create risk for the lender that could have
been avoided if the zoning had been reported in the
Most often, if a property has the proper permits,
rebuilding will be allowed if the structure is destroyed,
but that is not always the case. There have been times
when rebuilding was not allowed to the prior footprint
because changes to the zoning regulations occurred
over the years, or perhaps the permits were inadvertently issued. In those cases, any new improvements
must adhere to the new zoning requirements.
What about improvements that were built without permits? Can they be legal? The answer is yes.
Remember, legal refers to zoning and whether something meets the zoning requirements. If improvements are built on the site that do not have the proper
permits, but are within the zoning requirements, there
is nothing that can prevent the property from being
rebuilt to the same footprint if destroyed. It will just
require the proper permits to be pulled at that time.
Why appraisals matter
Once you understand the differences between permits and zoning, how do you address potential issues?
Check the appraisal.
Let’s talk about zoning first. There are three differ-
ent designations for zoning in an appraisal: legal, legal
don’t require anything atypical and can be completed
under standard appraisal practice.
When a property is illegal, however, the appraiser
must take into consideration the highest and best use
of the property. If the property is not legal, it can’t be
at its highest and best use, which means the appraiser
cannot place a market value on the property.
Fannie Mae and the Federal Housing Administration
(FHA) will not accept properties with illegal zoning. In
Take a borrower who has built a deck off the side of
the house, for example. If that deck was built beyond
the setback requirements of zoning, the appraisal
would need to be made subject to removal or alteration
of the deck to meet zoning setback requirements.