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second unit

How to figure out what an accessory dwelling is worth

October 5, 2016 By Ryan Lundquist 20 Comments

How much is that accessory dwelling worth? How do we really put a value on it? It’s not always easy to figure that out in real estate, so I wanted to share some of the issues I tend to think through as an appraiser when there is an accessory unit on a property. Anything you’d add? I’d love to hear your take.

image-purchased-by-123rf-dot-com-and-used-with-permission-by-sacramento-appraisal-blog-target-value

Things to consider when valuing a property with an accessory dwelling:

1) Comps: How much are other homes with accessory units selling for? This is a fundamental question to ask. Since data is often limited we might have to look through years of neighborhood sales (or competitive neighborhoods) to try to find something that has sold with an accessory dwelling unit (ADU). Even if the sales are older or a bit different in size we can at the least come up with a percentage or price adjustment to try to get a sense of what the market has been willing to pay. Ideally we’d find three model match sales in the past 90 days, but that’s probably not going to happen. Remember, we might not use the really old sales as comps, but we can still use some of the older data to get a sense for how the market has behaved regarding accessory units.

2) ADU Minimum: At a minimum an accessory unit needs to have a bathroom, sleeping area, and kitchen. This means an outbuilding without a bathroom really isn’t an accessory unit. And that Man Cave / She Shed isn’t an accessory dwelling because it’s basically a game room meant for hanging out instead of living.

3) 2nd Unit or Not: Are we dealing with a second unit or an accessory unit? It might sound like I’m splitting hairs to ask this question, but there is actually a difference between a full-fledged second unit and something that would be classified as an “accessory” unit (or “Granny flat”, “Mother-in-Law” unit, or “Guest Quarters”). I wrote a post here to describe the difference. In short, whether something is a full second unit or merely an accessory dwelling could potentially change the way we approach valuing the unit and which comps we choose.

accessory-dwelling-unit-in-sacramento-by-home-appraiser-blog

4) Just a House: How much would the property sell for if it just had a house without an accessory unit? This doesn’t help us put a value on the accessory unit, but in a sense it helps us start gauging value for the neighborhood. This at least gives us a place to begin.

5) Combining Square Footage: Often times an accessory unit’s square footage gets lumped into the main square footage of the house. This happens in MLS and sometimes it happens in Tax Records. So we might read a home is 2000 sq ft when in reality the main home is only 1400 sq ft and the accessory unit is 600 sq ft. In this example we don’t really have a 2000 sq ft house but rather a 1400 sq ft house with an accessory unit. The question becomes, could the subject property sell on par with homes that are 2000 sq ft? Maybe. Maybe not. This is where we have to do research. I will say quite a few properties are priced based on a lumped square footage and then they end up sitting instead of selling. This is not always the case, but it reminds us to be careful about assuming a home with an accessory unit is always going to have the same value as a larger home.

6) Permits: Was the accessory unit permitted? If you are hoping to see more significant value recognized for an accessory dwelling, having permits is a key factor. My friend Gary Kristensen in Portland wrote a post on ADUs and he says, “Provide the appraiser and your lender with documentation that your ADU was legally permitted. Also, list information about rental income, expenses, and detail construction costs (if your unit was recently constructed).” Good advice, Gary.

value-of-an-accessory-unit-by-sacramento-appraisal-blog

7) Rent: Can the accessory unit be legally rented? What is the market rent? This is where we might use the Income Approach to come up with a value (another blog post). Imagine an accessory dwelling has a market rent of $1000 per month. Now imagine an appraiser says the extra unit is worth $10,000. Does that seem reasonable? Doesn’t it seem low right away since the unit would be 100% paid for after 10 months? Or imagine a unit rents for $300 but it’s being given $150,000 in value. Doesn’t that seem excessive based on the low rent? Thus sometimes when we know market rent we can begin to sniff out whether a value adjustment is even approaching reasonable.

8) Square Footage Adjustment: If I’m adjusting $50 per sq ft for extra square footage in my report, would it be reasonable to see that same adjustment for the 600 sq ft accessory dwelling? This is only a question I ask myself. There isn’t a constant where the market will pay the same amount for square footage for the main dwelling and something else (converted basement, converted garage, accessory unit). Part of it depends on quality too. If the extra unit has a quality clearly below the main house, it’s probably not reasonable to see buyers pay the same amount for square footage outside the house. Though if the quality is the same, we might be looking at an adjustment that is similar or the same to that which is given to the house. Again, there is no rule here. This is only a question I ask myself in the background when approaching an accessory unit. I would never automatically give an adjustment like this. Remember, square footage adjustments are NOT based on the entire value of the property divided by the square footage.

9) Cost vs. Value: We all know the cost of something doesn’t necessarily translate to the value, but cost can help us gauge quality. There might be a difference in value for an accessory unit that cost $125,000 compared to $15,000, right? This is basic logic, but let’s not overlook the importance of it.

I hope that was helpful.

Questions: Anything you’d add? Did I miss something? If you work in real estate, how do you come up with the value of an accessory unit? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: accessory dwelling, ADU, appraiser in Sacramento, Home Appraisal, House Appraisal, income property, methodology for appraising, sacramento appraisers, second unit, valuing second structure

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

June 17, 2014 By Ryan Lundquist 41 Comments

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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Filed Under: Appraisal Stuff, Resources Tagged With: accessory dwelling unit, ADU, ADU vs second unit, Appraisal, Appraiser, Duplex, Fannie Mae, highest and best use, house appraisers, HUD, Sacramento, second unit, zoning

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