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Duplex

Are first-time buyers targeting 2-4 unit properties?

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There’s no inventory. It’s just incredibly sparse out there. So are buyers starting to look more to 2-4 unit properties since they are struggling to get into contract with single family homes? Well, maybe so. Let me share some visuals. If you’re not local, what’s happening in your market?

FIVE THINGS TO KNOW ABOUT THE 2-4 UNIT MARKET

1) First-time buyers are pulling the trigger: Last year more first-time buyers purchased two to four units compared to previous years in the Sacramento region. Both FHA and VA loans have seen an uptick and are essentially at their highest level in recent years. Keep in mind FHA has actually been declining as a loan type in the single family market, so it’s interesting to see this uptick among multi-units. We need more time to fully understand this trend, but this could very well be an example of buyers looking to other types of properties since the single family market is struggling so heavily with few listings to purchase. 

2) Prices have increased: Here is a look at the annual median price over 18 years. The trend for multi-units follows the single family market closely as there was a huge increase, a bubble burst, and we’re now in our tenth year of price growth (with the current nominal price having surpassed 2005 prices).

3) Volume isn’t what it used to be: Just like the single family market, we’re seeing fewer sales today from the previous market height between 2003 to 2005. Moreover, last year there were 10.9% fewer multi-unit sales in the region. When the pandemic started investors pumped the brakes, but the second half of the year was much stronger. 

4) Types of financing: Here is a deeper look at the type of financing involved in two to four unit sales. In recent years conventional has been dominant and cash has been declining. This is the same trend we’re seeing in the single family market because it’s just so cheap to borrow money. Look at FHA and VA though showing an uptick overall, which is telling of a growing appetite among many first-time buyers for multi-units.

5) X-factors to consider: One thing to consider while pulling comps these days is whether tenants are paying full rent in light of an eviction moratorium in place in California. The reality is some investors may expect a price discount in light of rent not being paid. Also, it’s important to keep watching to see any effects of rent control since we’ve now had one year of rent control under our belts.

I hope that was interesting or helpful.

Questions: What are you hearing from first-time buyers? What are you seeing in the 2-4 unit market? I’d love to hear your take.

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Is it okay to compare two detached units with two attached units?

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Is it okay to compare two detached units with two attached units? Or in other words, can we compare a traditional attached duplex with 2 detached houses on one lot? I find sometimes the answer is YES, but other times NO. Let’s consider a few ideas together. I’d love to hear your take in the comments below.

attached duplex vs detached duplex - sacramento appraisal blog

Four things to consider about detached vs. attached:

  1. Two  Units: This sounds basic, but let’s remember an attached duplex (sometimes called a “duet” in other parts of the country) is two units, which is the same number of units as two houses on one lot. This naturally helps us lump both types of properties into a similar pile, though we still have to ask a few questions when it comes to value.
  2. Difference in Rent: One of the questions I ask is whether the attached units and detached units are commanding the same rent (assuming the locations are equal). This could be a clue whether there is a value difference or not. If all units are attracting the same rent and the lot cannot be split, we could be looking at properties with a similar value. On the other hand, if the detached units are commanding higher rents, that might be a clue of a value premium. Of course the only way to discover a value difference is to study the market (this is one reason why there is no such thing as a quick “comp check”). As an example, I recall a “fourplex” where there were four detached tiny single family homes on one lot in Sacramento. While the owner’s property was special, the lot could not be split and the rents were exactly the same as other traditional attached fourplexes. Moreover, the property sold previously on the open market and did not command a price premium during its previous sale, which also helped show there was no value premium for being detached.
  3. Lot Split: One of the big issues to consider when making comparisons is whether the lot can be split. If there are two detached homes on one lot, an investor might purchase the property to split the lot and sell the individual properties. I saw this happen recently in Midtown where there were two houses on one lot that were side-by-side on the street. The owner purchased these units a few years ago as a duplex (technically that’s what it is since we are talking about two units), but after the lot was split the owner sold off one unit and kept one for himself. In many cases it’s common to see one house in front and the other in back, so a lot split might not be possible with that set-up (or maybe it is possible, but awkward). However, if the possibility of a lot split exists, it could be worth something in the market, right?
  4. The Buyer Pool: There are some duplexes that are best for investors because they simply look and feel like rentals. It’s hard to describe this without sounding pompous, but you probably know what I’m talking about. On the other hand, some multi-unit properties might attract more owner occupant buyers than investors. When this happens, the units might actually command a price premium because of the larger pool of buyers. This underscores the importance of considering who the potential buyer might be and researching the market. What have buyers actually paid for similar properties in the past? What are current listings doing?

duplex comparison by sacramento appraisal blog

Conclusion: In short, it is technically okay to compare two attached units with two detached units, but for reasons listed above we ought to be cautious to be sure we are making an “apples to apples” comparison. What I mean is we need to give strong weight to the properties that are most similar and let the market speak to us instead of our assumptions.

surfer on my cup - photo by ryan lundquist

By the way, I just got back from visiting family this weekend in Southern California. I snapped this shot at Sunset Beach. It’s called “Surfer on my Cup.”  🙂

Questions: Any stories, insight, or ideas to share? Did I miss anything?

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Why no value adjustment is sometimes the best adjustment

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It has to add value, right? It’s tempting in real estate to make upward adjustments in our valuations whenever we see a feature that is remotely positive. Our thinking is that buyers have to be willing to pay something for that special feature, so we should give it a little value boost. But sometimes making no adjustment is the best thing to do. Let’s look at three quick examples.

no value adjustment given - sacramento appraisal blog

Three examples where no adjustment could be the best move:

  1. Duplex with Large Lot Size: We get used to giving value premiums for larger lot sizes for single family homes, but a larger lot size for a duplex is often not a positive gain for the property. Assuming the lot cannot be built on or divided, the extra space really costs more for the owner to manage, and that can actually diminish cash flow for the property. Imagine a duplex on 0.75 acres, while every other similar duplex is on a postage stamp lot. If there is no difference in the rent between all the duplexes, and the larger lot is not useful for building, there probably isn’t a value premium for that extra lot size. In fact, the larger lot may be a nuisance because of the cost of extra landscaping maintenance or even illegal dumping.
  2. Location Across from a Park: It’s always worth more to be located across from a park, right? Not necessarily. While a park location might feel like an asset, if it’s also located on a busy street, the negative of the busy location might balance out any positive gain for the park location. Or if a park is known for loitering or criminal activity, it might not be desirable at all to live across the street from it. This is why it is telling to hear home owners talk about their park location. At times they love it and wouldn’t trade it for the world, but other times it’s a clear negative. Of course market value is not just about one owner’s perception, but the entire market. How would most buyers respond to the location? This is where we have to look at neighborhood sales over time to see if there is any price difference between park sales and non-park sales.
  3. Condo with a View of a Lake: Imagine a condo with a view of a lake. We would all assume the lake view is worth more than a non-lake view, but what do the neighborhood sales and listings tell us? Is there any price difference at all? If the vast bulk of properties in the condo development are all rentals, and there is no difference in the rental value for the lake view vs. the non-lake view, then the lake view is not an asset. This real life scenario came from a conversation with a mentor recently.

The Point: Sometimes it’s tempting to give a positive value adjustment because we feel there simply has to be one. But there actually might not be one. Maybe the market doesn’t behave the way we think it should, or maybe the market in one subdivision trends differently than a nearby subdivision. This underscores the need to watch neighborhood sales and listings closely to try to let the data speak to us rather than let our assumptions trump the data.

Marketing to Millennials Event: Locals, I wanted to invite you to an event I’m moderating at the Sacramento Association of Realtors on May 6 at 12pm. It’s called Marketing to Millennials, and it’s all about how to connect with Millennials in your real estate business. This generation too often gets a bad wrap from so many sources, but how can you connect with them and serve them best in business? There will be a guest speaker and four panelists. Make sure to say “hi” if you can make it. Read more here (pdf) or sign up here.

Question: What other examples can you think of where a positive value adjustment wasn’t needed (even though it seemed like one should be given)?

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How do you know if it’s a second unit or an accessory dwelling unit?

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Is it a second unit or an accessory dwelling? How do you know the difference? If the post office gives the second structure an address, that makes it a second unit, right? Or if the dwellings are separately metered, it must mean there are two units. Let’s talk through some distinctions below, and then discuss a bit of a “monkey wrench” since there is an added subjective layer when making this call.

accessory dwelling unit in sacramento - by home appraiser blog

Accessory Dwelling:

  • Not recognized by city or county as a second unit (sometimes it is though)
  • The market does NOT consider it a second unit
  • Probably does not contribute as much to value
  • Inferior to the main unit in size and location (maybe quality too)
  • Has kitchen, bathroom and sleeping area
  • May or may not be separately metered
  • May or may not have a separate address
  • May or may not be attached to the main house

Second Unit:

  • Recognized by city or county as a second unit
  • The market recognizes it as a second unit
  • Likely contributes more substantially to value
  • Zoning allows two units
  • It is probably separately metered
  • Most likely has a separate address
  • May or may not be inferior in size and location to the other unit
  • May or may not be attached to to the main unit

two houses on one lot - by home appraiser blog

The Short Answer: A second unit and an accessory dwelling might look like the same thing to a casual observer, but what matters most in determining whether a structure is a second unit or accessory dwelling is what zoning allows and whether the market perceives the structure as a second unit or not. The post office might have a separate address for an accessory dwelling, but that does not make it a legal and legitimate second unit. The utility company might have two meters on site also, but even that does not mean there are two units. The key comes down to the property being legal as two units in the eyes of the city or county, recognized by the market as a second unit, and even how the dwelling contributes to value.

Fannie Mae language on second unitsThe Monkey Wrench: Part of determining whether something is an accessory dwelling or second unit comes down to its contributory value, and the appraiser is really going to have to give this some thought. For instance, some counties might legally consider any secondary structure as a second unit despite its size or how much value it really adds. But just because a city or county declares something is a second unit does not mean it should be appraised as a duplex (2 houses on 1 lot is considered a duplex). For instance, imagine Placer County considers a property with a 4500 sq ft house and a 300 sq ft detached studio as a duplex. But are these really two units? Don’t you think the added value would be fairly minor for the 300 sq ft studio? A property like this should probably be appraised as a single family residence with an accessory dwelling instead of two separate units (a duplex). While there may be two units technically in the eyes of the county, the 300 sq ft studio is hands-down really seen as an accessory dwelling by the market. In fact, some buyers wouldn’t hardly care about the small accessory dwelling because they are purchasing the property for the main house instead of whether there there is a 300 sq ft studio or not. Imagine a different scenario where there are two houses on one lot, but one is a complete tear-down. If one unit is beyond repair, it’s probably best for this property to be appraised as a single family residence because that’s how the market would see the property (instead of as a duplex). This is where a subjective element comes into play because appraisers have to consider how much value a secondary structure adds, and how the market sees that structure.

HUD logoWhat FHA says about Accessory Dwellings: An accessory dwelling unit (ADU) is defined as a habitable living unit added to, created within, or detached from a primary single-family dwelling and contained on one lot. ADU’s are commonly understood to be a separate additional living unit, including kitchen, sleeping, and bathroom facilities. ADU’s are subordinate in size, location, and appearance to the primary home and may or may not have separate means of ingress or egress. An attached unit contained within a single-family home, also known as a “mother-in-law apartment,” or a “garage apartment” that may or may not be attached to the primary residence are the most common types of accessory dwelling unit. An accessory dwelling unit sometimes involves the renovation of a garage, basement, or a small addition to a primary residence. The determination of whether or not an ADU is a second dwelling unit is to be made by the appraiser and indicated in the site analysis section of the report where zoning, highest and best use, and legal use are addressed. The fact that an ADU is rented or generates income should not categorically result in a determination that the property contains two dwelling units.

fannie mae What Fannie Mae says about Accessory Dwellings: An accessory dwelling unit is typically an additional living area independent of the primary dwelling unit, and includes a fully functioning kitchen and bathroom. Some examples may include a living area over a garage and basement units. Whether a property is 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 utilities, a unique postal address, and whether the unit is rented. The appraiser is required to provide a description of the accessory unit, and analyze any effect it has on the value or marketability of the subject property (Page 583 of Fannie Mae Seller’s Guide).

Why does this matter? If there are two units, the appraiser will be comparing your two units with other two-unit properties. If you have a house with an accessory dwelling, the appraiser will be comparing your house with other homes with accessory dwellings. Keep in mind an accessory dwelling unit is NOT considered square footage if it is separate from the main living area, so it won’t be included in the total square footage of the main house (though it can still add to the value).

NOTE on Local Requirements: There may be additional local code requirements for accessory dwelling units in terms of allowable size, parking spaces, setback, height, etc… There is not a once size fits all rule here for every state, so be sure to know your area. For instance, Sacramento County requires a 10 ft setback for accessory dwellings, one parking space for each bedroom, and a size no more than 1200 sq ft.

Questions: Any stories or insight to share? Do you think it makes a difference whether a property has a second unit or an accessory dwelling unit?

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