Affordable Housing Laws in Washington State, City of Spokane Pose Appraisal Challenges
Washington Gov. Jay Inslee on May 8 signed HB 1110, known as the Middle Housing Bill, which requires cities that are subject to the state’s Growth Management Act to allow multiple units of “middle housing” on any lot zoned for residential use.
Middle housing is defined as buildings that are compatible with single-family homes and that contain two or more attached, stacked, or clustered homes, including townhouses, stacked flats, courtyard apartments, cottage housing and multifamily properties with up to six units.
Appraisers need to familiarize themselves with provisions of the law that require cities with a population between 25,000 and 75,000 to have at least two units per lot and four units per lot when a property is within a quarter mile of a major transit stop or if at least one unit is designated as affordable housing. Cities with a population over 75,000 must allow at least four units per lot and at least six when within a quarter mile walking distance of a major transit stop or when at least two units are designated as affordable housing.
Cities with a population below 25,000 that are adjacent to certain urban growth areas must allow at least two units per lot.
Related, the city of Spokane on Nov. 20 passed an ordinance that removes all density limitations for “middle housing” on lots less than two acres. However, based upon extensive feedback from the appraisers and lenders about the impact of the unlimited density, on December 14 the Spokane City Council adopted an interim modification to the ordinance limit the number of allowed units in areas zoned R1 and R2 to no more than 4 single-family dwelling units per lot. This interim modification should resolve any lending and appraisal related issues. The modification will be in effect until such time as the Department of Licensing and/or the state legislature provide some additional clarity on a residential appraiser’s scope of work.
Residential appraisers face a challenge when working on properties for which the permitted use is for something other than one to four single-family residential units. According to the Washington State Certified Real Estate Appraiser Act, state-licensed and state-certified residential appraisers are only permitted to appraise residential properties zoned for or comprising up to four single-family units. However, an appraiser’s analysis of the permitted use for many properties affected by the state law or city ordinance could indicate that the highest and best use is for something other than one to four single-family units. In such cases, the assignment would fall outside the scope of practice for a residential appraiser and it would need to be completed by or with the assistance of a state-certified general appraiser. This complexity could lead to a delay in completing appraisals and higher appraisal fees.
Additionally, property owners seeking to purchase or refinance a mortgage loan for a single-family residence could face difficulties because traditional residential financing applies only to properties with one to four single-family units. Anything more is considered a multifamily transaction and subject to different underwriting and appraisal standards.
The Fannie Mae Selling Guide states, “Fannie will only purchase or securitize a mortgage that represents the highest and best use of the site as improved,” and explains that, “Fannie Mae purchases or securitizes first-lien mortgages that are secured by residential properties when the dwelling consists of one to four units.” For many properties, the highest and best use may no longer be for single-family residential. Additionally, if a property were to be redeveloped with something other than one to four single-family units, the loan would be ineligible for sale to Fannie Mae. Similar requirements apply to transactions involving Freddie Mac, the Federal Housing Administration, the U.S. Department of Veterans Affairs and all federally regulated financial institutions.
The Appraisal Institute is part of a broad group of stakeholders that are working with state and local policymakers to ensure that traditional means of residential financing remain available and that residential appraisers can continue to accept assignment for the appraisal of affected properties. AI is also monitoring developments in other states and local jurisdictions to ensure that efforts to increase the availability of affordable housing do not adversely affect the work of residential appraisers.