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in-law quarters

The skinny on accessory dwelling units

June 10, 2020 By Ryan Lundquist 33 Comments

I’ve been getting a ton of questions lately about accessory dwelling units, so I wanted to talk through some of the bigger issues. Skim to questions that sound interesting or take some time to read. Enjoy if you wish.

What is an accessory dwelling unit (ADU)?
There are lots of definitions out there. In short, an ADU is typically a detached or attached dwelling unit meant for independent living, so it includes a sleeping area, bathroom, and cooking area. California, Sacramento County, and other areas may describe ADUs a little differently. 

If a unit doesn’t have a kitchen is it an ADU?
An ADU must have a cooking area. Otherwise we’d call it something else. Personally I’d probably call it a casita, but that’s just me. Anyway, if a builder constructs an “ADU” and it only has a bedroom and bathroom without a kitchen, we just wouldn’t call it an accessory dwelling. 

WEEKLY MARKET UPDATE: By the way, here’s my weekly video market update called Why aren’t home prices dropping? Watch below or here.

Is my pool house an ADU?
Probably not. Remember, if the pool house doesn’t have a kitchen, bathroom, and there is no sleeping area, it clearly doesn’t qualify as an ADU. I think sometimes if we step back and recognize we’re calling something a “pool house” too, that’s probably a clue that it’s something else.

What other words are used to describe an ADU?
There are countless words such as granny flat, casita, in-law quarters, mother-in-law apartment, garage apartment, etc… This could vary from market to market and person to person.

Is it okay to lump the square footage of the accessory unit into the square footage of the main house?
No. This happens all the time in real estate listings, but if you have to step outside the house into something else, it’s really not proper to include that other space in the square footage of the main house per ANSI standards. Think about it logically too. Imagine a 1,600 sq ft home with a 400 sq ft ADU. Is this really a 2,000 sq ft house? Nope. Maybe the market will pay the same price as other 2000 sq ft homes, but that’s beside the point because we’re fundamentally dealing with a smaller home with an ADU rather than one larger home. These are two different things, right? The problem becomes if we only choose 2,000 sq ft comps we haven’t really proved what a 1,600 sq ft home with an ADU is worth.

What if the square footage in a listing includes the ADU?
We see this quite a bit. I get it because the listing is advertising the total size of all structures on the lot. I just hope there is an asterisk or explanation somewhere in the listing that the square footage represents both the house and the accessory unit. This is important for clarity, maybe liability, and it helps appraisers be more informed when choosing comps. In short, just because it’s listed a certain way in MLS doesn’t mean the market or appraisers will recognize all the space as gross living area.

What if Tax Records shows the ADU in the square footage?
That happens. But just because Tax Records shows the property as 2,000 sq ft doesn’t mean that is what is legal or the way the market sees the units. If you want to know what is permitted it’s probably a good idea to rely on the building department (and hopefully they have good records).

It’s an ADU because it looks like one, right?
It’s key to understand what something is. I recall a unit permitted as a residential office even though it looked like a full-fledged second living space. It had a kitchen, bedroom, and bathroom, but the one thing it lacked was a permit to be an ADU and to be rented. This is where permits matter greatly. If it looks like a duck and quacks like a duck…. Well, it’s not always a duck when it comes to being an accessory unit. An owner might say, “This was fully permitted.” But the real question is, “What was it permitted as?”

How do you value a property with an accessory unit?
That’s a big question. I wrote a separate post about that. In short, I would look at it like a puzzle and consider lots of factors including comps, rental income, and lots of other logical points. 

How many accessory units can one property have in California?
On a single family lot you are allowed one ADU unit as well as one JADU (Junior Accessory Unit at 500 sq ft max). Here is an informative piece from CA for Homes. Please check code in your local area of course too.

Is a single family home with an ADU considered a duplex?
No. There is a difference. I wrote about that here. The struggle is how the lending community and appraisers talk about accessory units vs full-fledged two-unit properties isn’t always the same as the way a city or county thinks about these units. There is also a value aspect to consider. Typically each unit in a traditional two-unit property contributes very significantly to the value whereas as an accessory unit is often “accessory” to the value. In other words, an ADU might not sway value as much for a single family home compared to say taking away one of the units in a traditional duplex.

How do you find comps?
This gets a little tricky because in MLS these units are often called a range of things. Personally I search the property description field and I’ll see what comes up when I type in words like granny flat, accessory unit, ADU, second unit, in-law quarters, etc… Sometimes I even search for two homes on one lot because these units are sometimes listed that way. However, in a map search in MLS you can go to the “other structures” field and then select “guesthouse.” That’s what I did in the image below and look how many properties came up when looking at the past five years of sales. Granted, some of these pins aren’t truly accessory dwellings because they’re a pool house, bonus outbuilding, she-shed, etc.., but this is a great start nonetheless.

What about CC&Rs and rent?
In some areas an accessory unit might not be able to be rented per CC&Rs. If California law has recently superseded this, someone can let me know (people have been emailing me to say California law has, but I haven’t seen anything definitive yet to show these units can be rented (I will update this portion of the post when I hear more)). Otherwise I’ve encountered scenarios where a neighborhood’s CC&Rs will mandate a guesthouse can only be occupied by family members and is not allowed as a rental. I’m not a lawyer, so I cannot speak to any legal issues. I’m just saying before advertising a structure’s rental income in a listing or appraisal, be sure you know the structure can be rented. This might affect value, right?

What do you think about an ADU assessed at the cost of the unit?
I see this happen quite a bit. This isn’t a knock at any Assessor of course. It’s possible that buyers would pay the full cost to build in the resale market, but very often the market doesn’t pay dollar for dollar. In short, if you feel the assessed figure is too high you’re going to need to find out the process to dispute the assessment and show market support for your value opinion. Keep in mind I’m talking about a brand new accessory unit because when it is built you’ll get a supplemental assessment in the mail. As always, if there is nothing to argue, don’t argue. If you do feel value is off though, then be diplomatic and support your opinion with data. Or hire a local appraiser to illuminate market data (the appraiser cannot be an advocate for you though).

I hope this was interesting or helpful. Thanks for being here.

Questions: What else do you wonder about ADUs? Or if you work in real estate, what do you get asked? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: accessory dwelling unit, ADU, ADU or second unit, appraisal of ADU, choosing comps, granny flat, how to, in-law quarters, include ADU as square footage, questions and answers, Sacramento ADUs, second unit in backyard, secondary dwelling unit, Square footage

When using older sales is the best option

July 20, 2017 By Ryan Lundquist 15 Comments

Let’s talk about choosing comps. I want to share an example of what I did not long ago when there were no recent sales for a unique model in a tract subdivision. Anything to add? I’d love to hear your take.

The situation: The subject property is a larger single story home with a casita. In this case the builder built only a handful of homes with a casita, so comps would be limited. If you aren’t familiar with a casita, it’s a term used to refer to an extra housing unit or detached area. I find it’s often interchanged with “in-law unit” or “accessory dwelling”, but we have to remember an accessory dwelling unit (ADU) actually needs a sleeping area, bathroom, and kitchen to be an ADU. In this case the “casita” only has a bedroom and bathroom, so while it’s tempting to call it an accessory dwelling, it’s really not because there isn’t a kitchen.

The problem: There are zero recent casita sales, so it’s not easy to readily understand what the market is willing to pay for one of these units. What do we compare the casita unit with in today’s market? How do we adjust for it?

What I did: In an ideal world I would’ve had a nearby neighborhood with casita sales, but I didn’t find anything, so I chose to study the neighborhood market by researching three casita sales in the neighborhood over the past ten years. As long as the data was good, I would use research from sales in the past to help me value a property today.

Immediately I noticed the casita sales were clearly commanding a price premium. I thought that this might be the case, but it was still good to confirm instead of assume. Keep in mind if you don’t know how to graph, that’s okay. You can see the same thing when pulling a CMA or printing out sales. Here is a tutorial though in case you want to learn to make a graph like this.

The next thing I did was to research how the casita units compared with other specific models at the time of their sale. Being that most casita homes were somewhere around 2500 sq ft (without the casita), I wanted to see how these units competed with other homes that were around that size. The beauty of having three older sales was I could find what the price adjustment was in each of those situations compared to other specific models. This would prove valuable since I had three recent 2500 sq ft sales without a casita, and I would need to make a value adjustment for the casita in today’s market.

I won’t say exactly what my adjustment was, though maybe I will in the comments.

The big point: Sometimes we have to look back in time to understand how value works. Don’t be afraid to pour through many years of sales to help establish context. Spend time answering the question, “How does a property like this fit into the market?” We can do this by scouring years of sales in the immediate neighborhood, but we might also look to the surrounding market too for competitive locations. Of course just because we research sales that are many years old does not mean we will use them in a current valuation (or a listing presentation for agents). I really don’t have a problem with using older sales when appropriate because we can always make an adjustment depending on how the market has changed over time. But let’s remember FHA wants appraisers to use comps within 12 months, so I probably couldn’t get away with using a sale from three years ago in a lender appraisal. However, I could pull in research from the past to help support the value for what the casita is worth.

I hope this was helpful or interesting.

Questions: Anything else to add? Did I miss something? When have you used older sales to help see the context of value? I’d love to hear your take.

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Filed Under: Appraisal Stuff Tagged With: accessory dwelling unit, ADU, casita, home appraisals, House Appraisal, in-law quarters, Natomas Neighborhood, Sacramento Real Estate Appraiser, tips for valuing a home with a casita, tract builder, trend graphs

Can a detached structure be included as part of a home’s square footage?

April 12, 2013 By Ryan Lundquist 60 Comments

I talked with a home owner recently who felt like the appraiser undervalued his home since the detached in-law quarters wasn’t included in the square footage in the appraisal. The owner figured the extra 400 square feet would’ve made a huge difference in value. Was the owner right?

Can a detached unit be considered square footage? To be considered as gross living area (square footage), the area needs to be connected to the house and accessible through the house. If you have to go outside the main living area to enter a separate structure, it is really not proper to include as part of the living space of the house according to ANSI standards (“ANSI” stands for “American National Standards Institute”). This means an appraiser should not lump a detached studio, detached in-law unit quarters or other detached areas with the square footage of the main house. On the other hand, if it is attached and accessible through the house, then it can be potentially be counted.

what can be considered square footage - by Sacramento Appraisal Blog

Real Life Example: I appraised a property a while back that was listed at about 4000 square feet in MLS, but it was actually closer to 3000 once I measured it. The problem was that the Listing Agent included the loft above the detached garage and an enclosed patio as GLA, when both should not have been considered as such. The loft was detached from the house by 50 feet or so, and the enclosed patio had no heat source. It was probably disappointing to the agent and seller that the house was much smaller than advertised, but I was still able to assign value to the loft and patio – just not as living area. Ironically, the square footage figure that the Listing Agent used came from a previous appraiser who included the loft and patio as living area. Doh!!

Image-purchased-at-123rf-dot-com-and-used-with-permission-14688774_s-smallerHow do buyers see the property? The real question when dealing with detached in-law quarters or any accessory dwelling is how the market sees the structure – and how much buyers are willing to pay for it. In most cases buyers probably prefer to have all the “living area” under one roof. For instance, just yesterday I was asked for advice on whether a home owner should convert an outbuilding to a 1 bed/1 bath studio in the rear yard. The owner essentially wondered if adding a 1/1 studio would make her 2/1 house comparable to 3/2 houses in the neighborhood. How would buyers view this situation? It all depends on the neighborhood and specific market of course, but I would venture to say that generally buyers would look at the house as a 2/1 that has a studio (as opposed to seeing this house as a regular 3/2). The studio could likely contribute to value, but it probably wouldn’t cause buyers to put the house on the same playing field as a normal 3/2 home.

But Public Records Says My House is Larger: It’s worth noting that official records might very well include a detached structure in the overall square footage. Keep in mind this does not mean the appraiser will see it the same way. The county or Assessor could be wrong after all.

Any thoughts or stories to share?

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Filed Under: Appraisal Stuff, Resources Tagged With: accessory dwelling, appraisers Sacraemento, can bonus room be square footage, can detached unit be square footage, detached garage with loft, Home Appraiser, House Appraiser, in-law quarters, what is considered square footage, what is GLA, what is square footage, will appraiser include detached unit in square footage

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