THE MORTGAGE BROTHERS SHOW

Detached Guest Home (Casita) Appraisal Issues

SHOW NOTES

In this episode we cover issues that may arise when you receive an appraisal on your detached guest home, or casita.

Some key takeaways are:

  • The square footage is not added to the main living area of the primary home.
  • The appraiser only gives a line item adjustment for a guest house.
  • It is common to have an adjustment of only $20,000 for a guest house even though it could have cost $100,000 to build.
  • Appraisers need to use comparable sales that have detached guest houses, which is hard to do.
  • Guest houses are hard to compare because they are going to vary greatly in age, quality, and size.

Let’s get into it.

PODCAST HIGHLIGHTS

*The following transcript has been edited for clarity.

Eddie Knoell — I’m Eddie.

Tom Knoell — And I’m Tom.

Eddie — Welcome everyone. This is the Mortgage Brothers Team Podcast. We’re at it again and this week we are talking about guest homes, casitas.

Tom — That’s right. I guess they could be called detached, whatever you want. What are they called? Man caves, woman caves.

Eddie — That’s right. Airbnb caves.

Tom — Airbnb caves, anything that is not attached to the home, we’re going to call it casita today.

Eddie — That’s right. And folks, if you want to receive timely notifications when we actually release our podcast, we release it once a week, usually on Tuesdays. Just please subscribe. If you’re watching this on YouTube, subscribe on YouTube or if you’re watching it from a podcast player, just subscribe to that and you’ll get notifications when we release the podcast.

Okay, so these casitas, these guest homes. I have thought about building a casita. And every single time I think about it, I kind of have to think long and hard and I kind of get discouraged about building one because of the consequences, or potential consequences to the value. I might not get my money back. And that’s what we’re going to talk about.

Tom — Okay. How casitas affect money, maybe not money in your world, but eventually money in your world. But really, we’re talking about value and how casita’s effect the value of your home? This relates mainly to our borrowers that are calling in primarily for refinancing.

Eddie — Correct.

Tom — So there’s a refinancing perspective, a purchasing perspective, and then in your case, there’s a building perspective.

So maybe we just talk about the refinancing perspective first. How casita’s affect our borrowers that are refinancing.

Eddie — Okay. So, if you purchase your home and the casita was already on the lot, the scenario would be, you bought it, someone else already built it. In this case, when you go to get your home appraised, what you’re going to notice is that your casita will not be included in the home square footage.

So let’s say you have a 3000 square foot home and a 1000 square foot casita, you will not see under the total square footage of the home 4,000 square feet. You’re just going to see 3000 and the appraiser will do what we call it a line item adjustment for your guest house or casita.

And what we are noticing, and any folks out there who’ve had casitas and guest homes appraised, you’ll notice a line of adjustment. A lot of times they’re just going to be $20,000, sometimes $15,000, $30,000.

Tom — Yeah, to kind of give you some perspective, we’ve had borrowers with home values of $400,000, $500,000, six, seven, eight and they have casitas, some bigger, some smaller, but they’ll call and they’ll say, “Holy mackerel, why on this line item adjustment did the appraiser give my casita such a low value that I think they forgot. That’s what it is. They totally forgot. It must be a mistake. Got to be a mistake. Can you call them? Or actually, you know, can I call them?”

It’s like, well let’s just slow down here because we come across this every time that there’s a casita involved, which is why we’re having this podcast.

So yes, there is a line item adjustment and the value’s always going to be a much lower than what our borrowers think it is.

Eddie So if the borrower who is trying to refinance their house that already has a casita, if they were to go back and look at their appraisal when they bought the house, they will also notice that there was a line item adjustment.

But we always forget about that, that they bought the home for whatever it was and then they didn’t look at it then. It’s only when you’re disappointed in an appraisal where you really examine it.

Tom — Right. And that’s when you get disappointed. If you’re refinancing for rate and term, you want to get maximum value for your home so that your loan to value is as low as possible so you can get the best pricing. And if you’re off, again, whatever the amount is, it just can sometimes frustrate borrowers.

The situation where borrowers can be even more frustrated is when they go and they build a new home or a new casita like you Ed, you might build that one day. And you have this big plan, I’m going to build it for $80,000 and then I’m going to do a cashout refi. I won’t do it to get all my money out of it, but I do know that the loan to value on cash out refi is limited to 80% so maybe I can get $80,000 out of it.

Eddie — Yeah, it’s going to be hard to build a little casita for really less than $70,000 probably. I would say the average rate is going to be some $70,000 to maybe $120,000 and I’m only going in a borrow, anyone who owns these homes and you’re trying to rebuild, they’re only going to get a $20,000, $25,000 line item adjustment on their appraisal for it.

Tom — So that our borrowers don’t literally think that they’re only getting $20,000 even though our point today is that your value will be lower than you think. You also talked about some of what we call stolen value. It’s not really, that’s not a technical term, but there may be a line item adjustment of 20K 30K, whatever it is, just call it a really low number.

But isn’t the main house getting some benefit for them?

Eddie — The appraiser would say no, but I do think my off the record answer, my gut feeling is that when you purchase a home and you’re looking at a home that’s a 3000 square foot main house and a 1000 square foot casita and you write that contract to that seller for $600,000, let’s just say. When that appraiser gets that contract and they look at the comparable sales. I think that a lot of times with the value on a purchase, the contract price actually influences that appraisal differently than on a refinance. In this sense, we call it stealing value when the appraiser only gives a line item adjustment, but they might kind of beef up the main home, the 3000 square foot home for example, they might beef up that price.

Now what I just said, the appraiser will probably not agree. The appraiser would probably never say that.

Tom — So that’s very, very interesting from a refinancing perspective. From a purchasing perspective –

Eddie — Yeah. I think we forgot to say that what appraisers are doing. So, how do they value? Where and how do these values come to be?

It’s often from comparable sales.

So appraisers are looking for homes that are similar and have had a recent sale. They’re looking for homes that are similar square footage, similar quality. And if it has a casita, the appraiser’s going to look for other homes with casitas and guest houses.

Now, casitas and guest houses are rare. So, it’s very hard to find an exact comparable.

It’s kind of like dating. When you go out looking for a date, you want to find someone about your age and kind of about what you think and believe. You can’t go on a date with an 80 year old if you’re 30. I guess you can, but that’s what appraisers look at. They look at the time factor and the quality factor. And when you boil down to it, there are a lot of neighborhoods that just don’t have a lot of those comps.

Tom — Absolutely.

Eddie — And some of those casita’s out there are just bad, right? There are some that are hardly habitable versus those that are just as nice as the main level of space.

Tom — Yeah. So that was good. We talked about the valuation. We’re obviously not appraisers, so we’re not speaking from any type of appraisal authority platform here. We’re just kind of giving you a lender’s perspective on what we think borrowers would want to know when it comes to casitas.

Again, with refinances, you’re going to be careful about the loan to value component because it’s going to affect pricing. From a purchase perspective, I think you’ll be happy. You’ll actually like appraisers when it comes to purchasing a casita because the appraisal is probably going to come down a little bit lower than what your purchase price is.

Eddie — Yeah, I mean if the listing agents, if they’re not reasonable with the price, if they’re not careful, they’re going to be selling that home for a higher value than what it will appraise for. And I think the burden’s on the appraiser to go out there and find comparable sales and it will be probably hard for them to find comparable sales. And that’s kind of to your point.

Tom — Yeah. It was kind of two-fold.

You know, also I know that there’s situations where the buyer and I have friends and family that had been involved in this, where they actually have more value that they put onto this casita because it really does serve a utilitarian purpose. It’s going to be an in-laws suite. It’s going to be a Grammy suite. It’s going to be a little kid’s house suite. There’s real value there.

In these cases, it’s worth more than $20,000. So Ms. Appraiser, thank you for giving it a $20,000 or $30,000 line item value. But I’m valuing it for $60,000 and I’m paying it, paying $60,000 for it. I’m not telling the seller that, but in the whole grand scheme of things, and as a result, we’ll be limited to whatever the appraised value is, the lower of the appraised value, or the sales price for coming to the purchase with enough equity, then you’re able to bridge that gap.

But typically, from a purchase perspective, borrowers will be happier than from the refinancing perspective.

Eddie — Yeah. They get a deal. They get the deal on that when they purchase a home with a casita. And you can find a better value.

Tom — Yeah. All right. What else?

Eddie Well, we’re talking about detached guest house, but what if I attach it? What if I take a hall and build a long hallway down the yard to the casita? I’m just going to say probably, the buildings have to be connected and the city’s going to have to see them as a single dwelling.

Tom — So we used to have a concept that is called passing the red face test. That if you were to tell somebody something, as long as your face didn’t get red, then you would pass the test. So if you have an attached building and it’s got an 80 foot long hallway connecting it, that wouldn’t quite pass the red face test, would it? It’d have to be reasonable. So again, we don’t need to get super technical as to lengths here, but obviously it has to feel attached for it to really be attached.

Eddie — That’s right. And just because your guest suite is a couple feet away and you think you can just attach it easily, you would want to talk to the city about that, of course, since it has to be coded. It goes with the coding against the permitting process. But it is possible in a situation where it’s close enough and it makes sense. And I think that’s where you can actually attach it and it flows. If it’s a part of the main living dwelling, then basically the appraiser will treat it as one level.

Tom — Awesome.

Eddie — So, one more thing. This idea that conspiracies are out there when lending, “Why do the banks do this?”, “Why are the appraisers doing this?”

Everyone’s mad at the appraisers usually. Appraisal is a tough business, but there’s no conspiracy to take your value and chop it into tiny pieces and make you feel bad.

Tom — Right. That doesn’t do them any good. As far as they’re concerned, if they were self-serving, they would keep pumping value up so that they would keep getting more and more transactions in our wonderful real estate market. But they’re just trying to do their job.

Eddie — Yeah. They’re looking at those values and they’re doing it and they’re using comparable sales. There’s a reason why they do it. It just doesn’t make sense at face value. I agree with most people who think that a lot of things on the appraisals just don’t make sense. But after you hear appraisers defend their position, it’s kind of like this aha moment like, “Oh, that’s why you do that.”

Tom — Right.

Eddie — And I think this is one of those.

Tom — I think we hit it all.

Eddie — Everyone, subscribe if you want to continue to receive this and have a great week.

Hey guys, thanks for listening to the Mortgage Brothers Show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to tom@AZMortgagebrothers.com or yours truly at eddie@AZMortgagebrothers.com and be sure to ask us for a free quote on your next mortgage. Tom and I will personally work with you and help you through the whole process.

Signature Home Loans, LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisor before engaging in any transaction. Signature Home Loans, NMLS, 1007154. MLS number 210917 and 1618695. Equal housing lender.

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