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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Good article Ryan. I think you’re 4 items to consider covers the thought process if you have this scenario. Of course, apples to apples is always better.
Thanks Wendell. I hear you on “apples to apples”. We really have to look closely at the market when appraising duplexes. When it comes to two houses on one lot, there are sometimes very few sales, which complicates “apples to apples”. Still though, there is usually something out there to use for comparison (even older sales).
Tenure of renter also seems to be important when evaluating rents. Long term renters tend to get a discounted rate.
So true Mark. I’m glad you mentioned that. Just because a property is rented does not mean it is rented at market rate. I appraised a duplex two weeks ago, and the rents were $50-75 below the market.
There are only good and great days at the beach!
So true Jeff.
Dude! (surfer speak) Next time you are down this way look me up! I often hike with the dogs along more interesting and private sections of the SoCal beach scene.
Right on Mike. You are the man with private beach connections. We should get together. We have family in SoCal, so we go down quite a bit. I actually grew up there, though I was more inland.
Great post, Ryan! I always get good ideas from you.
Thanks Jana. That’s nice of you to say. Hope you’re doing very well these days!
Great idea on a blog. The problem I run across when appraising multiple detached homes on one lot is that they are usually so different from the typical attached plex. If they are detached, what usually happens in my market is that you have one very large unit and one small unit, one very old and one newer, or one is a manufactured home and one is site built. The nice thing is that if the detached homes are going to be purchased by an investor, the income approach is great at evening things out and making properties comparable . Two properties might be very different, but they might have very similar projected income and expenses making the income approach reasonable when the sales comparison approach might look silly.
Very well stated, Gary. I’m grateful for your comment. Just because there are two units does not mean it will be competitive to another property with two units. There are so many questions we have to ask as appraisers. I think you’re right about The Income Approach helping to even things out and show context.
One thing I look at is the intention of the use of the units. Maybe there is a detached unit that is used as a teen’s or mother in law apartment and it’s just for family use. Also is it separately metered? If it is set up this way then usually the intentions are to rent it out as opposed to using it for the family.
Good questions, Tom. I think this brings into question the issue of whether something is truly a second unit or if it’s an accessory dwelling. There is a difference, and that will certainly impact the value. A second unit is bound to have much more value in my experience. I wrote a post about this a while back in case it’s helpful for any onlookers. https://sacramentoappraisalblog.com/2014/06/17/is-it-a-second-unit-or-an-accessory-dwelling/
Great post as always. The one thing I would have liked to have seen in addition to what you already stated is zoning, although that may be a separate issue. Often we get requests to do a “duplex” appraisal on a property with two detached homes only to find out that it is zoned SFR and is legally only a SFR with guest accessory unit, not a “duplex”. Therefore, not all properties that are two detached homes are equal in the market place.
Thanks Jacob. I appreciate it. This is an excellent point and it’s something we have to always consider as appraisers (or anyone in the real estate community). What is legally allowed? Are we looking at two units or something else? How does the market view the property? Lots of questions to ask. In this blog post I am giving examples of properties that have two legitimate units rather than one single family home plus an accessory dwelling. Your point underscores the reality that a duplex (two units) is really not the same thing as a single family home with an accessory dwelling (not two units, but one unit + ADU). I do not advocate comparing two units with a single family / accessory dwelling. It’s just not the same thing.
I do have a post on duplexes vs. accessory dwellings in case it’s helpful for any onlookers. https://sacramentoappraisalblog.com/2014/06/17/is-it-a-second-unit-or-an-accessory-dwelling/
Thanks again.
Thank you for your post on this issue!
Our property has two houses on one lot. The main house with a second unit or Granny Flat (less than 600 sf) in the back. Each has it’s own address and separate utilities. Water and garbage, however, are not billed separately but I would imagine once we get metered, that could change.
At any rate, when we purchased the property, it was difficult to appraise as there weren’t many comps. Second units at that time weren’t allowed, although this one had been grandfathered in and was legal. I can only imagine the confusion will remain when we eventually sell.
Hi Erin. Thanks for sharing your experience. I think you’re right about the confusion continuing. It will be key for you to bring as much clarity as possible about the units before you sell. That will likely help you. Honestly, without research it is sometimes not clear to real estate professionals whether an additional unit is an accessory dwelling unit or a secondary unit. The distinction can make a huge difference in both describing the property and valuing it (and there are many factors involved in making this call). I know I have mentioned this link twice in the comment thread already since conversation has gravitated that way, but in case you get this comment via email and did not see the previous link, I figured this might help provide some context. https://sacramentoappraisalblog.com/2014/06/17/is-it-a-second-unit-or-an-accessory-dwelling/
Thanks again.
thanks for the link, Ryan! Very informative! I have bookmarked it for future reference.
Love the post Ryan, I sure could’ve used it a couple of months ago!
I had to comp a property with two houses on it and couldn’t find any Apples to Apples comparisons… it was in a sea of other multi families but apartment buildings and attached duplexes.
I was lost and didn’t know how to do it so I took a wild guess!
I think I guessed way to low and it may have been the reason I lost the deal!
Thanks for the insight as always!!
“Surfer on my Cup” is hilarious! ;))
Thanks Bev. It really can be tricky to value properties like this. In some areas there are so few 2 homes on 1 lot also, and that complicates the process. I would recommend for anyone to go back in time if there are no recent sales. At the end of the day we have to find some “apples” in our “apples to apples” comp search since the standard attached duplexes might not be the best fit. Of course the traditional duplexes might be a perfect comparison, but we don’t know until we start finding some other similar sales (2 homes on 1 lot) to glean context. This is where history can help us. If comps are sparse, I have no problem looking over the past few years of data to hopefully find something that is similar (I can also look in a competitive market too). The only thing is if my sales are too old, I have to realize the market may have changed since the previous sales. For instance, duplexes were selling at inflated levels in 2005 compared with the rest of the single family market, but in today’s market duplexes are at a more reasonable price level. It’s a different market today since investors are tending to bet on rent rather than appreciation like they were ten years ago. So if I look back in time and see a duplex that commanded a huge price premium in 2005 compared with everything else in the neighborhood, that huge premium really might not exist in today’s market.
That was long, but your comment inspired my fingers to type. 🙂
Hope you’re well. Good luck on all the deals that come your way this week.
Thanks Ryan, you taught me a lot! I think I’ll do a much better analysis the next time the opportunity presents itself, thanks again! 😉
Great conversation. SRIPs are a specialty in my opinion. A lot of great insights in the previous comments and in your post. 2-4’s require more analysis of the market and the property history. You really can’t grab three comps and go with it. Each market is different. Buyer motivations can be different.
I remember back in 2004-2005 when two unit properties in Santa Barbara became an alternative to SURs and were purchased in partnerships by two parties intending to occupy the units. Throw out GRMs as they made no sense at all back then. The typical buyer was an owner occupant. But that market was atypical in the overall scheme of things.
Who is the probable buyer? Owner occupant intending to occupy one unit and renting out the other? Or is it strictly an investor. What does the rental history of the property look like relative to other rentals. Zoning? Legal? Legal non-conforming? Potential for lot split? Potential for condominiumization ( I think I just made up a word)? Potential to add additional units? Are contract rents low or high relative to the market? There are many, many things to consider when doing SRIPs.
Great comment, Tom. So many questions to ask. I like how you said you really can’t grab three comps and be on your way. It’s interesting to hear about your market in 2004 to 2005. I know in my area during that time, investors were buying 2-4 unit properties only to sell them 6-12 months later at higher levels. They were betting on market appreciation, so they were paying ridiculously high prices that didn’t make sense for the rents in many cases. But now the market is not so inflated in that regard. Rent matters much more these days, and investors aren’t tending to pay ridiculous prices if the properties don’t pencil out (though they still do overpay at times). When graphing single family trends, I’ve noticed the single family market tends to have “recovered” to a higher value point than the 2-4 unit market in my area because the market dynamics today for 2-4 residential income properties are simply different than the market dynamics 10 years ago.
Agreed Ryan. In the early 2000’s investors were looking at reversions and buying for appreciation. All financed 2-4 deals had negative cash flows. Reversion was where the money was. Now fundamentals are key. Cash deals generating higher annual returns than can be had in other investment arenas.
Well said Tom. Thank you.