Accessory Dwelling Units (ADUs) have gained popularity as a smart solution to the housing affordability crisis. With property owners in cities, suburbs, and even rural areas recognizing the value of ADUs, real estate appraisers need to stay updated on several key considerations when appraising these unique properties. This blog will guide you through the essential considerations of the ADU’s characteristics in an ADU appraisal, helping you deliver credible appraisals.
Summary
Appraising ADUs requires a nuanced understanding of market characteristics, legal frameworks, and property specifics. By staying informed and considering all relevant factors, you can deliver credible valuations. ADUs represent a growing segment of the housing market, and your expertise as an appraiser is crucial in reflecting their true value.
Market characteristics and appeal of ADUs
ADUs are not unique to urban locations and are becoming a crucial part of the housing market. While they’re gaining popularity in different areas, let’s look at the reasoning behind why.
Urban areas
In densely populated cities, where housing costs are high and space is limited, ADUs provide an opportunity for homeowners to generate rental income or accommodate multi-generational living. ADUs maximize existing space, making them an attractive option for those with limited room to expand.
Suburban areas
With the growing need for housing flexibility, suburban homeowners are turning to ADUs to house elderly parents, adult children, or to earn supplemental rental income. ADUs offer privacy and independence while addressing evolving family dynamics.
Rural Areas
In rural settings, ADUs can house farmworkers or caretakers, enhancing convenience and productivity. They are also ideal for short-term rentals, especially in areas popular for seasonal recreational activities like hunting, fishing, or snowmobiling.
Understanding the legal landscape
The legal framework surrounding ADUs is continually evolving. Many jurisdictions are updating regulations to encourage ADU development by simplifying the permitting process and reducing restrictions.
As an appraiser, staying informed about local laws is crucial. Changes in regulations can significantly impact property values. For instance, areas that reduce minimum lot sizes or relax parking requirements increase the likelihood of a property having an ADU. Appraisers must keep an eye on legislative trends to stay abreast of the potential use of an ADU.
Monitoring financial incentives
Financial incentives can influence the value and marketability of ADUs. More local governments are providing grants, tax incentives, or low-interest loans to promote ADU construction. Be aware of these incentives and any attached restrictions, as they can affect the overall appeal and value of the property with an ADU.
Types and characteristics of ADUs
Understanding the different types is essential for reliable ADU appraisals. Below are the main categories:
Attached ADUs
These are connected to the main dwelling, either sharing a wall or being part of the existing floor plan. They are often more affordable to construct compared to detached units.
Detached ADUs
Standalone structures separate from the main house, usually located in the backyard or above a detached garage. They offer more privacy and design flexibility but can be more complex and costly to build. The permitting process can also be more complex due to the separate structure, involving more hurdles. Detached units also occupy more yard space, which is a significant consideration for smaller lots.
Internal Conversions
Converting existing spaces like basements or attics into ADUs is a cost-effective way to add living space. These units must meet building codes and safety regulations, especially regarding emergency egress, ceiling height, insulation, and having access separate from the primary dwelling.
Key Factors in ADU Appraisal
During an ADU appraisal, it’s important to consider the following factors:
Property data and features
- Square Footage: Is it a tiny home or a larger ADU? This can impact marketability, rental income potential, and is valued similar to how we value the primary residential dwelling.
- Amenities: Functional and adequate kitchens, modernized bathrooms, a private patio, energy efficient features, and independent utility hookups may increase appeal.
- Construction Quality: What is the design, layout, quality grade of materials and finishes of the ADU? Some markets may also prioritize the use of sustainable materials.
- Location: Proximity to amenities, employment, and recreational opportunities can affect value.
- Rental Income Potential: Analyze the local rental market to estimate potential income, which may enhance the property’s market value.
Navigate the Eligibility Requirements
For mortgage lending purposes, ensure you are familiar with the eligibility criteria set forth by entities like Fannie Mae and Freddie Mac. These criteria ensure ADUs meet standards for quality, safety, and compliance, which are necessary to secure financing.
Identify the Potential Buyer Types
Different buyers have varied interests, and it’s important to factor this in during an ADU appraisal:
- Owner-Users purchase properties to build their own home with an ADU, often using it for extended family members or rental income.
- Speculative Developers buy land to rapidly build communities with model homes and ADUs, targeting fast-growing areas with high housing demand.
Highest and Best Use Analysis
When evaluating the feasibility of adding an ADU, consider zoning regulations and the property’s physical layout. Recent zoning reforms have made ADUs permissible in more single-family zones, increasing their potential value. However, a thorough highest and best use analysis is essential to support these conclusions.
Detailed Zoning Analysis
Avoid oversimplifying zoning classifications and codes. A detailed analysis should include ADU size restrictions, owner occupancy requirements, permit needs, and construction timelines. This helps provide a clear and comprehensive valuation.
Be mindful of overlays or special districts within a jurisdiction that could impact ADU development. Historic preservation overlays, environmental protection zones, or urban growth boundaries can impose additional restrictions on ADU construction. These overlays may influence design, materials, and even the ability to add an ADU, requiring careful consideration when valuing properties with these units.
Misclassifying ADUs as duplexes
With the rise of accessory dwelling units (ADUs) due to updated zoning laws, you may face the challenge of distinguishing between legally permitted ADUs and illegal duplexes or multifamily buildings. This confusion can stem from lenders who assume that having two living spaces on a property automatically means it’s a duplex. Additionally, listing agents may use ambiguous or conflicting terms when marketing these properties.
As an appraiser, your responsibility is to accurately identify and classify these units based on the current zoning codes and highest and best use test criteria to guide your classification.
Understanding new flexibilities
Recognizing the complexities surrounding ADUs, Fannie Mae and other entities have introduced new flexibilities in how comparable sales are selected. Additionally, they now allow for the inclusion of existing ADUs that may not have been legally permitted under certain conditions.
In 2023, the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) made a significant policy change. They now permit lenders to consider income from ADUs when assessing mortgage qualifications. This was not allowed previously. This policy shift is aimed at increasing homeownership opportunities and helping families build intergenerational wealth.
By understanding and utilizing these new flexibilities, you can provide more credible conclusions regarding the ADU’s marketability and appeal.
Take the next step with ADU appraisals in an upcoming McKissock
To keep you up-to-date on ADU regulations and trends and help you hone your skills to provide better ADU appraisals, we’re developing a new appraisal CE course on appraising residential properties with an ADU. Subscribe to our newsletter to get alerts on new courses plus discounts, deals, and the latest industry information!
