Zoning laws change; where a houses once stood, commercial buildings are moving in and taking over, and zoning is changing from residential commercial. When this happens, a few important questions arise:
Is my home legal?
Can I get a loan on my home?
Can I rebuild my home if destroyed?
A property’s zoning status is classified as legal, legal nonconforming (“grandfathered”) or illegal. Legal compliance means that a property conforms to current code and can be rebuilt if destroyed, and qualifies for a FNMA loan. Legal non-conforming means that at one time the property complied with zoning code but does not currently comply, but the nonconforming use may continue; generally these homes can be rebuilt and qualify for a FNMA loan. Illegal indicates that the property does not conform to the zoning code and must be restored or removed, and cannot be rebuilt if destroyed and do not qualify for a FNMA loan.
In California (and many other states) residential properties are generally protected from any change in zoning law that make the residence illegal, or that prohibit a residence being rebuilt if destroyed. See California State Code 65852 for more information. This means that if your home was in residential zoning but is now in commercial zoning, you may continue to use your home as a residence and you may rebuild your home if it is involuntarily destroyed (in most cases ~ always check with the local agency.)
What about remodelling and illegal uses? Adding an addition to a home without permits does not automatically make the property illegal; being non-permitted is not the same as being an illegal use in the zoning. If the addition would normally be allowed by zoning, the issue of non-permitted areas can often be resolved by working with your building department and obtaining letter of compliance or a permit as long as the addition meets code. However, if the building addition would not be allowed by zoning, the addition will most often need to be removed or significantly modified so that the addition complies with current zoning. A common example is an apartment with kitchen added to a single family home. Sometimes if the kitchen appliances are removed, the addition may remain it it meets code.
On the FNMA Appraisal Form, the appraiser must state if a property is legal, legal non-conforming or illegal. FNMA, FHA and VA will lend on legal and legal non-conforming properties (with conditions.) FNMA will not lend on illegal properties.
In a real estate sale or refinance transaction, the label of “legal non-conforming” versus “illegal” can be the difference between a successful transaction and a transaction that falls through, and there can be great pressure to label an illegal use legal non-conforming. However, there are other solutions that won’t get you in trouble! In my 25 years as an appraiser, I have been involved in several cases as an expert witness where appraisers and realtors have been accused of fraud from misrepresenting the legal status of a home. In more than one case, both the realtor and appraiser were sanctioned by licensing boards and liable for damages.
An appraiser has options when faced with illegal uses. If mitigation of the illegal use can be achieved in a reasonable manner, the appraisal can be completed as if the property was in a legal status, with the conclusion of the appraisal “subject to” the illegal use being mitigated. Most often the appraiser will revisit the home and issue a FNMA 442 Certificate of Completion after the work is complete. Also, the appraiser can stop the appraisal process and complete the process once the illegal use has been mitigated. There is no obligation on the part of the appraiser to treat a property as “once illegal always illegal” and no regulation that prohibits the appraiser from completing the appraisal of the legal use after the illegal use has been mitigated.
Don’t guess as to a properties legal status, and don’t be tempted to “white wash” an illegal use by labelling it as “legal non-conforming.” Check with your local zoning department, bonded contractors, local experienced realtors and appraisers and real estate attornies before you guess!