C of O, friend of foe?

Patting myself on the back as I type for thinking of a clever title to talk about certificates of occupancy! Chances are if you've lived in DC for a while and you have friends who are interns, hill staffers, or work at non-profits, you have been in many "english basements." Basically it's an apartment on the lower level of a house. I'm half joking about hill staffers and interns as some are deep dark basement-feeling spaces and some are largely above ground, bright and renovated to the nines (and no less expensive than any other apartment). Of the english basements, very few have a certificate of occupancy. Technically the basement apartment is a rentable in-law suite and the house is still a single family home. If you have a certificate of occupancy for the lower level, the property becomes classified as a two-unit building. These C of O's are rare as many of DC's houses are older and were not built to the specific terms of DC codes with regard to ceiling heights and having two entrance/exits.

I recently encountered a C of O issue with a deal I did and got two interesting takes on the value of a C of O. When I spoke to Ryan Dailey at Prosperity Mortgage, he felt that having a C of O was a huge asset to the owner for resale purposes. When a prospective buyer qualifies for a loan, he/she can use the expected rental income from the lower level as income. So for example, if someone expects a rent to be $1200/month, that helps that buyer qualify for an additional $200,000 of purchase price (assuming rates are such that borrowing $100,000 costs around $600/month). If a home with a C of O on the basement apartment is listed for $600,000, it can be purchased by someone qualified only up to $400,000 which greatly opens up the pool of buyers.

An appraiser I spoke with had a very different take on the value of a C of O. In his opinion, the C of O had absolutely no effect on the market rent of the basement, and therefore little effect on the value of the house. Since there are so many comparable properties with rentable "in law suites" it didn't make much difference to him when appraising a property whether the lower level had the C of O or not. He said the owners are better of without one as they will get taxed at a higher rate for owning a two unit building, so why bother?

At my office meeting this morning I struck up a conversation about this issue with a colleague who has clients purchasing a home in DuPont circle with a lower level apartment with a C of O. They don't particularly care about the C of O, as they plan to convert the home back to a single family and incorporate the lower level into their living space. However, when they went to get their loan, the bank required a higher down payment because they were purchasing a two unit rather than a single family home.

I just thought all of these different perspectives were so interesting and I am still torn as to whether having a C of O is necessary or if I should counsel clients to only shop for houses with "legal" basement rentals. I am curious to see if DC decides to crack down on this issue and start enforcing rules about basement rentals, but I really hope not. Being able to rent out part of a home has made homeownership affordable for many Washingtonians and taking that away might cause another wave of foreclosures which would be awful to see.