Portland Area Real Estate Appraisal Discussion

I received a call recently from a Portland area real estate agent asking how a basement kitchen, installed by the homeowner without going through the usual building permit process, will affect the appraisal of her pending sale.  Basement kitchens are typical around Portland, are attractive to many homebuyers, and often are not “permitted.”  Issues with unpermitted areas are complicated, are much more of an issue now than in the past, and can come down to the discretion of the lender or the appraiser.  However, remember that the appraiser is just reporting the facts to the lender and analyzing the marketability of those facts.  The lender is concerned with liability of an unsafe improvement and the value of the collateral.  Here are five factors to remember with regard to a basement kitchen.

1. A basement kitchen that is not permitted could be a hazard due to fire or ventilation and therefor a liability to the lender.  This is usually only a factor when there is a freestanding or built-in stove or oven.  Basement kitchen sinks and refrigerators typically are not seen by lenders as risky.  If a range or oven is identified as not permitted or unsafe, the lender will typically condition it to be brought up to code (or outright removal) prior to funding of the loan.  The appraiser will usually be asked to return and certify that the work is completed.

    

2. The appraiser is not an expert in building code.  However, the appraiser should understand local building codes enough to recognize visible issues, should research codes with the appropriate authorities, and should communicate results to the client.  Basement kitchens usually require electrical, mechanical, or plumbing permits that are in excess of the normal building permit to finish a basement.  Asking the right questions is important.

    

3. It is not the appraiser’s responsibility to report code violations to authorities.  Appraisers have a strict ethical responsibility of confidentiality.  When querying local building officials (rather than saying, “This property has a basement kitchen”), the appraiser might ask, “What permits would be necessary to install a kitchen in the basement of the subject?”

    

4. The appraiser should take plenty of pictures.  A simple appraiser photograph might put a nervous lender at rest because the photo shows that there is no stove or range.

    

5. Most lenders or appraisal management companies have specific instructions for an appraiser to follow when dealing with unpermitted areas or basement kitchens.  An appraiser should alert the client about issues like a basement kitchen prior to delivery of the appraisal, to make sure that lender protocol is followed.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

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Thanks for reading,

Gary F. Kristensen

This is a great topic and glad that you brought it to the industry's attention. I know many appraisers report these additional kitchens inaccurately due to the complications that they bring to the Lenders. Please share any more info that you have regarding this topic Thanks

Thank you Jon for following. If I learn more about dealing with basement kitchens, I will share it here.

Home owners really ought to get permits. It's a much easier process when getting a loan. Some lenders won't lend on something like this. I wonder what the cost would be to get it permitted. If this is a common thing in your market, I suppose you would have some sales for comparison to show what it is worth. I've not seen a kitchen in a basement, though I did appraise a house with all bedrooms and the only full bathroom in the basement before. :)

Thank you for the comment Ryan. I forget that basements are not typical in your area. Yes, I agree that owners should get a permit when possible. That will save trouble later. Often when there is no permit it is because obtaining a permit might be difficult. It is easy to find comparable sales that have a basement kitchen, but it can be difficult to find out if those comparable sales were permitted or not. Also, there is often little measurable difference in sales price between a home with a basement kitchen and without. The best source of information is calling and talking to the agents. If you find one agent that admits the basement kitchen was not permitted, then you can ask the agent what kind of problems it caused for the lender at closing and if the buyer had any hesitation because of it.

Great points Gary, number 3 especially. I worked with an appraiser in the past that accidentally informed the city about an improvement in a clients basement. While it was not the appraisers fault the homeowner blamed the appraiser for making their property taxes go up.

Thank you Tom for your comment. Great story. I would not want to be that appraiser.

I don't know about other areas of the country but here in Southern California the zoning codes are pretty strict. Basements here are rare but generally a second kitchen (food preparation area with a stove) is a zoning code violation. I call the lender and say there is a second kitchen and it does not meet the local zoning code. Therefore I will have to mark the zoning box "illegal". They usually won't make the loan if the box is checked "illegal". The lender will usually say make the report subject to removal of the stove, sometimes they will just cancel the order, and once in a while they will say they want the appraisal "as is".

Thank you Sid for the comment. You highlight an important point and that is to communicate with the lender about the basement kitchen and its implications.

Gary...this is a great report. Basement kitchens can be difficult to understand for homeowners. Especially when it comes to adding permits. When asked, I tell homeowners to get permits because it helps eliminate any potential questions for them in the future.

Very good points, in Chicago we see this all the time. For some lenders it's not a big issue; however, there is one I work with that requires verification it was properly permitted. This essentially kills their loan as many of them are not permitted.

Thank you Jonathan and John for your comments. It would not be fun to have an unpermitted basement kitchen kill a home sale.

Great article Gary. Basement kitchens are fairly common in my market however, as John stated, it's not a problem with a lot of lenders. I entirely agree though that homeowners should definitely get a permit when installing a basement kitchen. It is important for everyone to know that it has been done legally and done correctly. Better safe than sorry.

Thank you Tim for the comment. Permits just make the appraiser's job a little easier, even on something like a stove or no stove in a basement kitchen where the appraisal value difference might be very small.

Basement kitchen is somehow different and we must consider these factors for installation.