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.
Four things to consider about detached vs. attached:
- 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.
- 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.
- 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?
- 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?
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.
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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What 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.
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).