ADUs and What’s in It for You?

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ADUs and What’s In It for You?

by Richard Hagar, SRA

Acronyms on top of acronyms—just wait until you see Fannie Mae and Freddie Mac’s upcoming appraisal form regarding these initials.

ADU/DADU
Accessory Dwelling Unit (ADU), Dethatched Accessory Dwelling Unit (DADU), Mother-in-Law Apartment (MIL), plus a dozen other names and initials—no matter what you call them, they are becoming more commonplace and likely part of the future appraisal assignment. The new proposed “1004” form goes so far as to include a multi-line section with more than twenty questions devoted to describing, measuring, and valuing these accessory units, including a requirement for multiple interior and exterior photographs. And you won’t believe their impact on value and the size of adjustments.

When I first started appraising and ran across an ADU…I may not have given these units much consideration or value—boy, was I wrong. In the past, many counties and cities across the United States of America prohibited ADUs; however, as housing and land values have skyrocketed the need for more lower cost housing units has also increased.  As demand rises, the prohibitions and scarcity of the past fade away. The need to understand these units has become more important to lenders and appraisers.  If you can fully understand, measure, describe, and value a house with an ADU, the more likely you are to earn higher fees…that’s WIIFY (What’s in it For You).

Conflict and Confusion
There’s a lot of confusion regarding ADUs; some cities limit their size to 1,200 square feet, others require a minimum of 200 square feet, but some require their square footage to be no more than 50% of the main house.  Then there’s the cities that require them to be separate from the main house, while others require them to be part of the main house. One city may require additional on-site parking space, while another prohibits additional parking. Some cities require special permits, while the State of California goes as far as to pass a law that if ADU permits aren’t issued within 60 days the units are automatically approved (SB2, SB13, AB881, AB68). Some cities limit a site to only one ADU while others (like Seattle) allot for 2, or (like some areas of California) a lot for 4. The lines between multi-family housing and Single Family Residence (SFR) with an ADU are blurred, putting more pressure on analyzing the highest and best use as if vacant and improved.

Adding more twists to all of this, FHA, VA, FNMA, and FHLMaC have slightly different definitions and requirements.  Two of these agencies require the owner to live on site while FNMA remains indifferent. The City of Seattle allows two ADUs on a property, however, FNMA will not buy a loan if there are two ADUs on the site. When FNMA won’t buy a loan there can be an impact on the property’s value (was that factored into your last appraisal?). VA doesn’t care if an ADU is only accessible from within the main house but, FNMA requires separate access.  Due to all these confusing and conflicting requirements and definitions, I had to create a “Decision Grid” for my office for appraising.

Duplex or SFR with ADU?
The line between a duplex and an SFR with an ADU is blurry, and appraisers must understand the difference and complexity before quoting a fee. Fortunately, the difference is usually based on zoning (except in Seattle, Oregon, and California) which makes it critical for appraisers to research zoning definitions and determine the highest and best use of the land, as if vacant and the property as improved. Appraising a property with an ADU takes more time, is complex and likely precludes licensed appraisers from providing the appraisal (it needs to be completed by a certified appraiser). If there’s a chance your subject property has an ADU, expect to spend, at a minimum, 25% more time on the appraisal and always make sure to check its zoning and legality before you quote a fee.

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ANSI
ANSI and now FNMA, have special requirements on how these units are measured and reported on the 1004 form.  Depending on its location and access, the square footage may be part of the living area, below grade area, or separated in the cost and sales comparison sections. ANSI also has special text that must be included in the appraisal addendum. I bet you’re just thrilled with all of these new considerations. There is no way around the new requirements and complaining won’t help, because nobody is listening. There’s no easy explanation for this, so the best recommendation is to take the Working RE webinar: ANSI 2ish Hours with Hagar. In the webinar we will cover these issues in much greater detail.

Value and Adjustments
You won’t believe how valuable these things are. Way back when, I thought these were a minor contributor to value (requiring a small adjustment). However, after applying proper analysis, using various adjustment methods (matched-pair, regression, etc.) we’ve determined that they can have a major impact on a property’s market value. The contribution to value and the size of the adjustments have blown us away. One study in Portland indicated a contributory value of more than $75,000. In a separate study we completed for a legal case, there was solid evidence that the property’s value was increased by 20-25% or more. What is an ADU worth in your market? Well, that’s up to you to figure out and why we get “paid the big bucks.” I recently reviewed an appraisal of a property that had an ADU; the appraiser clearly undervalued the property by tens of thousands of dollars. The value was off so much that the client had to order a second appraisal and turn the first appraiser into the state appraisal board (due to a USPAP failure likely to impact the value conclusion). Pay attention when appraising these properties; you don’t want this to happen to you.

Solution
Get educated.  Take a class on appraising ADUs, and do it soon!  If you haven’t taken a class regarding the ANSI system…do it now!

When we started appraising properties with ADUs I thought it was just another component, similar to a swimming pool or second garage. However, the more we appraised these properties, it became obvious that these are complex appraisals requiring geographic competency, extensive, highest and best use analysis. Plus, more time measuring, describing, and valuing.  I went so far as to create a special required 7-hour class: How to Handle ADUs and MILs, for everybody working in my appraisal office. The two-part webinar is available on demand via Working RE.

WIIFY – What’s in it For You?
Appraisers can make themselves more valuable by appraising houses with ADUs, something that computers (AVM) and desk appraisals can’t properly handle. By learning about ADUs you will be able to provide superior appraisals with more accurate value conclusions and garner higher fees…that’s WIIFY.

Trying to keep you safe out there.

About the Author
Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over 40 states through OREPEducation.org. The 7-hour online CE course How to Support and Prove Your Adjustments shows appraisers proven methods for supporting adjustments. Learn how to improve the quality of your reports and defend your adjustments! OREP insureds save on this approved coursework. Sign up today at www.OREPEducation.org.

Tips for ADUs
Two-Part Demand Webinar On Demand: How to Handle ADUs, Casitas, and Mother-In-Law Units
Presented by:
Richard Hagar, SRA Accessory Dwelling Units (ADUs) are a new wave starting in the West and moving all across the United States. Like it or not, they are already in most major cities. Valuing these units is complex!

This Two-Part webinar will help appraisers understand when and where ADUs are allowed, the difference between an ADU and a duplex, how and where to place the information on the form (and which forms should be used), and much more!

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Presented by: Richard Hagar, SRA

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Comments (2)

  1. Use the Income Approach (it is going to be rented anyway). Garage apartments, mother-in-law suites, quarters for domestic help, small second houses, etc. Capitalize it. Go to the market & extract a market rent & a GRM !

    - Reply
  2. Yes, ADU’s are here and they’re complicated. I bought one in a city outside the Portland metro area, they’re being built as part of / options in new tracts.
    Traditional city Planning / zoning laws have had to ease up due to demand for higher density/ affordability . It’s helpful for generational families on many levels.

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