The presence of an additional living unit can complicate the appraisal process. It may make it difficult for you, the appraiser, to know how to classify the subject property. How do you know whether you’re dealing with an accessory dwelling unit (ADU) or a second unit? Use this guide to help you identify a single-family with ADU vs. two-family property.
ADU meaning and types
What does ADU mean?
ADU stands for accessory dwelling unit. An ADU is an additional living area located on the property of a primary single-family residence. The ancillary unit may be created within, added to, or detached from the primary structure.
Per Fannie Mae, the ADU must provide for living, sleeping, cooking, and bathroom facilities and must be on the same parcel as the primary one-unit dwelling. An ADU typically does not have its own postal address or utilities meter.
Types of ADUs
Depending on its location relative to the primary dwelling unit, an ADU can be classified as an interior, attached, or detached ADU.
Many interior ADUs are created through a conversion of the attached garage, basement, or attic space into a separate living unit.
An attached ADU is an additional living unit added to the main residence, typically to the side or rear of the primary residential structure or finished living space added to the top of an attached garage—think of Fonzie’s apartment on the sitcom, Happy Days.
Detached ADUs are free-standing structures or are attached to another structure that is separate from the primary structure, such as a detached garage, a breezeway, a manufactured home, or an outbuilding. A detached ADU may be called a guest cottage, guest house, garden suite, carriage house, casita, sidekick, or various other terminologies depending on the geographical area.
What is a two-family property?
Fannie Mae defines a two-family property as a property that consists of a structure that provides living space (dwelling units) for two families, although ownership of the structure is evidenced by a single deed.
Like an ADU, the second living unit can be an interior, detached, or attached unit to the primary structure. The second unit may be apartment-style, a separate structure, a basement unit, a garage or attic conversion, or numerous other possible configurations and designs. Occupancy of the two dwelling units can fluctuate between owner-occupied, tenant-occupied, or a combination of both.
How to tell if it’s a single-family with ADU vs. two-family property
According to the Fannie Mae Selling Guide (as of October 2021), “Whether a property is defined as a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utility meter(s), a unique postal address, and whether the unit can be legally rented. The appraiser must determine compliance with this definition as part of the analysis in the Highest and Best Use section of the appraisal.”
As part of the highest and best use analysis, the following factors may help you determine if it is a single-family with ADU or a two-family property.
It’s more likely to be a two-family property vs. single-family with ADU if:
- The unit has its own separate mailing address
- The unit has its own separate utilities and meter
- The unit has more than two bedrooms
- The attached or interior additional dwelling unit has its own private entrance and has no access to the primary dwelling’s living areas
- A two-family dwelling is legal under the current zoning
- Zoning allows the unit to be rented
- The additional dwelling unit is currently and legally used as a rental unit
- The property generates additional revenues or income from its occupants in addition to unit rental income, such as additional rent for parking, car storage, or coin laundry
- The property has been marketed in the past as a two-family
- The main dwelling and additional unit(s) are mostly conforming to the neighborhood as a two-family
- The predominant use for similarly configured properties in the market area is two-family
It’s more likely to be a single-family with ADU vs. two-family property if:
- The unit was an attic, basement, or garage conversion for the purpose of providing additional living space to a family member
- The detached unit is built to characteristically mimic the primary structure’s architectural style and design
- The detached unit is subordinate in size to the primary dwelling
- The accessory unit does not have its own separate utilities
- Zoning requires the primary structure to be occupied by the property owner as a permanent and principal residence
- The main dwelling and additional unit(s) are mostly conforming to the neighborhood as a single-family with ADU
- The predominate use for similarly configured properties in the market area is single-family with ADU
Dive deeper into ADU meaning, appraising rental properties, and more
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Like this article? Check out “Appraising Small Income Properties” next.
Editor’s Note: This post was originally published on April 30, 2019 and updated in September 2023.
