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:
- 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
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.
The 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.
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).
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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Just be very careful if the second unit has a KITCHEN!
Why is a second kitchen something to be careful of?
Hi Ryan,
Do you have any additional intel on the answer to this question since you asked it 4 years ago?
Hi Wendy. I don’t. I think sometimes we hear things like, “Two kitchens are not allowed.” I would defer to local code on this for the definitive word on what is legal.
This can be a complex and time consuming endeavor to sort out, and it is important to get it right.
The bottom line is you should rely on Ryan Lundquist, who is obviously your Sacramento area expert, to sort this out for you!
Wow, thanks Mike. I think I might need to buy you a coffee some day for such a comment. 🙂 Hey, I just clicked on your website and subscribed to your blog. I’ll look forward to your posts. I see you only have one up for the time being, but it was a good one. I agree about “fast and cheap”. It’s not a good idea to hire an appraiser this way, or anyone in business really. I learned the hard way on an inexpensive bathroom “remodel” once. Never again. 🙂
You bring up an interesting dichotomy. County Departments can be like silos, completely independent of each other. Once while trying to help a seller obtain permits for a second structure on a property, we found that while the Building Dept was unaware of its existence, the Assessor’s office had been aware of it (and adjusted the property valuation because of it) for over a decade. It actually helped the owner document which code was in effect at the time of construction and he was able to get the building permitted retroactively. More and more the real estate industry is involved in point-of-sale permit-updating.
That’s wild Jane. Thank you for the story. This underscores the reality that the Assessor may tax you on what is there in some cases regardless of whether it is officially on the books as legal. It sounds like it worked out well for your client. Congrats!
Mike is Full of ..IT! Most public agencies differentiate between a dwelling unit and accessory building based upon kitchens. i.e.. If it has a Kitchen it is a dwelling unit, if it is abscent a kitchen it is an accessory building. http://www.harriscompanyrec.com
Please play nice Commercial Appraiser. That’s my rule here. Mike could very well be talking about figuring out if it is permitted or legal, right? This is definitely not always a straightforward issue to interpret.
This week I just appraised a property where an owner spent $20,000+ on what was called an “accessory dwelling”, though it didn’t have a kitchen or bathroom, so I basically called it an outbuilding. It was perfect for a home office, and I assigned some value to it, but it definitely did not fit the requirements to be called an accessory dwelling unit.
What kind of loan will cover a two unit property? (2 separate and legal homes on one lot).
Hi Lin. I think this is where you’d want to talk with a loan officer. In terms of financing, I’ve seen two houses on one lot go conventional or FHA though.
My lender tells me 2 dwelling on one property can’t be financed through fha or conventional only one dwelling per property
That’s interesting to hear Cory. I have seen FHA buyers purchase duplexes and fourplexes many times (and conventional too of course). FHA and conventional should be good with 1-4 units on one lot. Anything beyond 4 units is considered commercial property, which wouldn’t work.
Can a home with in law suite (full kitchen, bathroom, bedroom and sepeeate entrance) be considered a second unit? Would it qualify for FHA loan?
Hi Sheena. You called it an “in-law suite”, so it sounds like it’s probably more of an accessory dwelling than anything. Of course it’s possible it could be considered a second unit because a second unit also has a kitchen, bathroom, and bedroom at the least. Though to know fully we have to consider many of the things outlined in this post. Sorry I cannot be more specific in my answer regarding the situation you are thinking of.
FHA does loans for 1-4 unit properties. I see people buy 2+ unit properties all the time while doing an FHA loan. It is no problem either to finance a single family home with an accessory unit. That happens all the time for FHA and conventional financing.
This is an 8 acre farm with a main brick home and also a doublewide trailer and they will not loan with both dwelling on the 8 acre property we had to survey out the doublewide and really plathink it so it had its on address would not show it to be connected to the loan
That’s interesting to hear Cory. I won’t pretend to know the nitty gritty of loan details and why it couldn’t move forward with both dwellings. Part of me wonders if maybe one of the dwellings wasn’t legal somehow (maybe the manufactured was too large or something). Or I wonder if the issue was the farm instead of the number of dwellings. I’d love to hear any loan officers pitch in some thoughts. Thanks for the follow-up.
Very well done article. I will have to read up on any other topics you may have written about.
Keep on Keeping on!
Thanks Daniel aka O.G.
If a home owner rwnts her basement out with con ed included, is it legal? And do you think she has a seperate meter?
Hi Rita. Thanks for reaching out. Being in California I had to google what was meant by “con ed” to be honest. Honestly I’m not a lawyer, so I really cannot say what is legal or not. I did find this link, though it also looks like it is a law firm trying to attract cases. Nonetheless there might be something useful there. https://www.coned.com/en/accounts-billing/how-to-read-your-meter/shared-meters
Hello my name is Justin, this is the only place that I have been able find some clarification to a possible garage conversion into a habitual living area.
My wife is from Southern California and her parents like be to visit own newborn. They would like to come up more often, so my family and I came up with an idea to convert a garage into a habitual living unit. However, the property my parents own is a duplex.
I emailed the planning division and they replied “The zoning of the property is ‘Single-Unit Dwelling’ (R-1). The site is already developed with 2 dwelling units, a 3rd unit cannot be established under this zoning.” Is there a way to convert the garage into a habitual unit? Like an in-law quarter? Or accessory dwelling unit? So that planning would be ok with this?
Thank you
Hi Justin. I think this is going to come down to how the city views an accessory dwelling unit. If they classify the accessory unit as a full-fledged unit, then you may be out of luck. Though if they distinguish between an ADU (accessory dwelling unit) and a full-fledged second unit, then you may be okay to convert the garage. Keep in mind the way appraisers view properties for valuing and the way a city might classify a property can be two different things. I would simply ask if it was possible to do an ADU in the garage and see what they say. Or you may consider asking if it was possible to convert the garage. If they said NO to the ADU, maybe they could still convert the garage with a bathroom and sleeping room, but no kitchen. That wouldn’t be the end of the world as I imagine you might share most meals together inside the house anyway if they reside in the duplex. Or it may be possible to do a kitchenette somehow that would still work under the guidelines of code.
In Chicago and many areas around Chicago, the first question should be, “Is it legal, is it legal non-conforming or is it an illegal use of the property.” Most often when a realtor advertises it as a “Mother in-law unit,” it simply is another way of saying it is illegal. The City of Chicago and many other areas near Chicago, if the City, Village, Town, County or whatever the governing municipality is finds out about it either by a complaint or by the owner applying for some other type of permit, they must disable the kitchen. Usually this means removing all kitchen appliances and stubbing the gas line for stove inside the wall and sealing up the wall. Thus, since they are usually illegal, even if it has market acceptance, Appraisers in our area should not give it any value as an additional living unit, but simply as additional finished common area, which may have a potential to be duplexed into another living unit. If it is a legal living unit, then that means it really should be on a multi family form and not a single family form. If the supposed ADU can be rented and it is legal or legal non conforming, then it’s a multi family property that goes on a 1025/2-4/SRIP form for Appraisers and not the 1004/URAR. In Chicago at least half of these in-law units are illegal, the other half are about equally divided between being legal or legal non-conforming. While I have nothing to back up those numbers from another resource, it’s based on my short 42 years as an Appraiser and my small staff of 10 Appraisers working for me and my 20 years as an Appraisal Instructor. In CA and other areas it may be very different, but that’s how it is here in our market.
Thank you Donald. I appreciate your thoughtful comment and insight. I think that’s a great starting question. What is legal? what does zoning allow? We have to know this. I appraised something recently where zoning did not allow an accessory unit, but that’s the way the property was marketed. Well, it turns out someone is getting sued now because the unit was really only suitable to be a home office rather than a rental. This is where zoning matters greatly.
Things might be different in Chicago of course, but from your comment I wondered if you think there is a difference between a legal accessory dwelling and a legal second unit? In my mind there really is as I attempted to describe in this post. But it sounds like you maybe don’t think there is a difference? The 1004 of course provides a check box for an accessory unit, so it would seem fitting in my mind to put the property on that form. Moreover, the front house is not often rented when there is an accessory unit, so if we put it on a 1025 then I’m not sure how valuable the Income Approach can be if we don’t really have rental data for both units. I find in my area at least it’s doubtful that I’d find comps where the front house is rented as well as the accessory unit. Traditional two-unit homes of course are both rented, but I don’t find that to be the case for a SFR + ADU situation.
I’d love to hear your take. Thanks again for chiming in. I’m fascinated to hear how things work in other parts of the country too.
This is almost my exact situation in Northern California. We own a duplex and a previous owner (30+ years ago) converted the carport into a living room and bathroom. An owner after him added a small kitchen making it a studio. We purchased it this way and have upgraded and remodeled the existing set-up over the last 15 years, only to be told recently by code enforcement that an ADU cannot be added to a property that already has 2 dwellings. The converted carport/living room/studio is still adjoining one of the duplex units with a door and is on the same meters. Can the city insist on classifying it as an ADU? Or can it simply be a home with 2 kitchens?
The last correspondence was that we may need to remove the kitchen. What is the definition of kitchen? Can they make us remove cabinets and countertops? Sink? Or can we have a “wet bar” with no heating elements? We just put the granite countertops in and would hate to have to rip the whole thing out. I am just wondering if there is an “angle” I can take with the city to minimize the destruction. We do rent out the area seperately. To my knowledge there is nothing illegal about renting out a portion of the home.
Hi Mimi. Sorry to hear about your situation. I wish I had something definitive here for you, but everything you are wondering about is going to come down to the fine print of local code and code enforcement’s policies. If I were you I would feel similar in not wanting to rip out cabinets and counters. That seems silly. I think this comes down to what is legal vs what is not, and I just don’t have much to offer here without knowing the nitty gritty of your local code. If code enforcement has already flagged you, I suppose you can ask them questions as such.
Thanks for the reply. Unfortunately we have been “tagged” as you say. At this point the city has just said things like “likely need to remove the kitchen”, and not presented us with options….like just removing the stovetop, or that we are allowed X feet of cabinets/counters. These are all things I am finding by googling and things I wouldn’t have thought to ask about. The bummer is that initial communication sounded like they were going to work with us since this is how it was when we purchased the place 15 yrs ago and then they did a 180. So stressful.
They hold the power right now. I would definitely just work with them and ask what is needed here. Can you cap the gas line to the stove? What if anything can you do so you can keep the cabinets and counters in place for the sake of storage? One would hope they would allow you to remove the hood, stove, and anything that would make this area suitable for cooking. If you are tagged already, maybe consider calling them to talk about the options. Part of this might come down to whether this is a legal rental or not too. I wish there was an easy answer, but I’m afraid you’re at their mercy.
Hi, I just tried to refinance my single family home and was told it would NOT go through do to the fact I have an Inlaw unit above the garage coupled with a finished basement which my son still lives in. The value of the house really has nothing to do with these two units. I certainly don’t see the units bringing down the value. So why turned down for having that extra kitchen in the basement. I would be happy to tear it out if allowed the loan to go through, but to no avail, rejected before the appraisal phase, said he was saving me the appraisal cost. I’m confused, its all family living here???
Hi Tina. I’m sorry to hear that. I think I would recommend asking the lender or loan officer a few questions:
1) Why will this not work? And do you have specific guidelines in writing you can show me? I say in writing because sometimes people quote so-called market truth or standards without really having anything to back that up. Moreover, if it won’t work, why would this person not give you a remedy to make it work?
2) How can this be made to work? If the stove is a problem for the loan in one of the spaces, can you simply remove that? Or do you have to cap the gas line also? Or is it required to remove all cabinets?
3) You might also consider talking with a few loan officers about this situation. That way you know if you are getting good advice or not. Keep in mind some lenders have their own in-house standards, so it’s entirely possible that not all lenders will view this the same way.
Remember that zoning is the trump card here when it comes to the appraisal. What does zoning allow? Is this a legal use per city / county code? That’s something the appraiser will have to ask and answer. If it is illegal and the appraiser discloses that, it’s something a lender might not like. Any documentation you have to verify legality could be helpful to speed up the process (if it is legal).
Let me know if you have any further thoughts. Hope that helps a little anyway… Sorry I’m answering your question with more questions, but that’s sort of the best thing to do I think.
The State believes that we need more affordable housing and has identified ADU’s as a good source. All zoning ordinances have been challanged, and nullified until brought into line with the State, regarding limitations on ADU’s. Each entity is to re-define their ADU sections, and to remove impediments to allowing more to be built, ie. parking requirements. One interpretation is that the ability to rent both units, the main home and the ADU is within the requirements. This is where it gets sticky for Appraisers, if both are rentable, the HBU must now consider whether the Subject is a SFR with an ADU or a 2-4 unit property. The Buyers are largely two different Buyers, predominantly an Investor, or an Owner who will occupy. Most zoning that allowed ADUs specified that one needed to be Owner Occupied, SFR versus Multi-Family Zoning.
Changes for ADU laws/zoning ordinances in CA that went into effect on 01/01/2020, All the answers on new changes are found in this document:
https://www.hcd.ca.gov/community-development/housing-element/docs/ADU_TA_Memo_Final_01-10-20.pdf
The section I was referring to is :
Eliminates owner-occupancy requirements by local agencies (Section (a)(6) &
(e)(1)) until January 1, 2025
With this, every home with an ADU can be considered a 2-4 Unit property as the Owner Occupied requirement has been removed, regardless of the SFR or Multi Family Zoning.
Please tell me I’m wrong and have missed some fine print, I want to be wrong!!!
Richard, thank you for the insight. I think this is something we’re going to have to struggle with. I don’t know if there is one black and white answer here. Even before the laws changed we’ve had gray area where the appraiser has to interpret what a property is based on zoning and even the market’s perception. So despite the new law, I wouldn’t call a 3,000 sq ft home with a 280 sq ft ADU a duplex. The county might, but I don’t think the market will. So no matter what there is an element of interpretation where appraisers are going to need to employ professional judgment. But this is an evolving thing and I think we must think very critically over your points.
I’m applying for a reverse mortgage and 2months in Im told “HUD” is seeing my office space in the basement as an ADU and doesn’t fall within the guidelines.
I can’t find these “guidelines” on reverse mortgages- can you help point me in the right direction?
Thank you!
Sorry for the late reply here. I’ve had some health issues and I’ve been away from my desk. I’m just finally starting to get back (not even fully back yet). I hope you’ve found your answer. What I would recommend is downloading HUD’s 4000.1 manual at this link and maybe looking through it to find the appraisal section and any portion of ADUs. https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1
Yet before anything I would ask what about the basement or ADU does not specifically meet guidelines? HUD can absolutely guarantee a loan with an ADU. After all, it’s possible to get an FHA loan on a 4-unit property (as long as the owner lives in one of the units). So having an additional ADU is not a deal-killer. I just wonder what it is about your particular situation that doesn’t meet guidelines. Maybe the appraiser who came out to your property has some insight?
This is a super helpful post, thank you for writing it. Finding myself in a similar situation with our refi appraisal here in Los Angeles.
We have a property with two units in a neighborhood where most of the other homes are SFRs with detached garages in the back (40×130 lots). Our house is really no different – front is 3b/2ba, 1,250 SF, there’s a pool in the back yard, and beyond that is the second unit/single-car garage. Second unit is 1b/1ba and about 450 SF.
The county assessor categorizes the use as 0201 – Duplex or two-unit with a pool, however the current zoning is R1 which only allows SFRs and ADUs. The homes were built in the 1920s so the second unit is likely “legal non-conforming.” Back unit is rented out, and we live in the front (owner-occupy). There have been quite a few sale comps in the last 12 months of SFRs + ADUs, and our home would certainly be marketed as such or at least popular with those same buyers since it wouldn’t likely cash flow very well and because of the attractiveness of the SFR we live in and the pool.
My question is as an appraiser, would you comp this to SFR+ADUs or to other true “two-unit” properties? There are very few two unit income property comps, and the ones that do exist are either also on R1 lots, or have WAY more bedrooms and bathrooms. Any recommendations on how to clarify with the lender/appraiser to ensure it gets the highest appraisal value? There’s a pretty big value spread between the SFR+ADUs and true duplexes ($200-$400k).
Thanks!
Hi Brendan. I think you’re highlighting exactly an issue that comes up. A single family house with a small ADU tends to have a more diminished value compared to two full-fledged larger units on one lot. This may not always be the case of course as there is no one universal rule in real estate that’s going to apply everywhere at once, but for now I find it generally true in many cases.
I cannot answer your question definitively because it comes down to the way the market views this unit and what it actually is. From what you are describing it sounds like a smaller ADU though, and if that’s the case then the best comparison sounds like the same thing rather than something different. I typically do not compare a SFR with an ADU with other classic two-unit properties because I find the two-unit properties are a different product. An attached duplex,for instance, just feels like a straight-up rental rather than a house with a pool (and an ADU) that lots of owner occupants are going to target. Moreover, sometimes two houses on one lot feels like a different animal too because both houses are about the same size compared to yours that is very lopsided with one unit being nearly 3X as large as the other. So in an ideal world it’s best to find other SFR + ADU situations for comparison. I would honestly look at everything though to understand the market. And that’s the key. If I look at everything and notice a huge difference in classic duplex properties compared to SFR + ADUs, then the value answer is clear. Maybe the SFR + ADU is a different product and it really competes at a different level.
Lastly, I guess at times the hope for an owner is that the appraiser uses the higher “comps” even if they aren’t comps. I completely get that. Sometimes during a refinance the appraisal might not make much sense, but the value works in the favor of the owner.
Best wishes to you.
Thanks! Appreciate the quick response. And should have clarified that the SFR+ADUs are going for substantial premiums to the two-unit properties, likely due to the fact most 2-unit properties have a least one occupied unit, and LA has rent control so ability to increase rents is limited as is the potential return given the low in-place rent.
Got it. So it’s really the reverse of what I said. This is where the appraiser has to weigh the market and understand the dynamics at hand. The correct comps can make all the difference.