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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In some areas, rental of ADU is dependent on zoning as multi fam, unless you declare as income property and utilities are separately metered. Otherwise ADU is not allow an oven for cooking. You might see the pattern in terms of tax revenue, etc.
Thanks Mark. This is where we have to be in tune with the local market. We could easily see different rules in different places. California has been very progressive in recent years to loosen up the rules and how things are here may not reflect everywhere. Regarding the loosening of rules though, this is one small way to attempt to deal with affordability and a housing shortage by making it easier to build extra units. But of course easier doesn’t mean inexpensive…
Challenge two is that the county assessors office will list granny flat properties as a duplex. Which is exactly how they listed ours once we built our unit and it has it’s own address which is never used but could be..
Exactly. Thank you for sharing. So just because it is listed as a duplex doesn’t mean it is one or should be valued that way. Thus when we see a 2,800 sq ft home with a 400 sq ft ADU, it’s really not a traditional duplex where the units are often closer in size. The market in this case would very clearly be buying the main house and of course paying extra for the ADU. There is no mistaking the main house is the main issue though. This is where we have to think beyond Tax Records and know the local market.
Hi Ryan, super job. Okay the other item I would point out is just because the State of CA say it is okay remember that you have to check Zoning and what is allowed. We have some cities down in my neck of the woods that if you convert your garage space and didn’t put in off street parking you are now in violation of city code and can be tagged. So be very careful about what you do and don’t let the headlines from the Internet (even though I know everything on the internet is true) or the newspaper fool you. I can be painful. Be careful out there and to the realtors in this sphere, Please, Please, Please give us something in your MLS that describes what you have done (combining the ADU and main house together) you can market how you like, but for the sake of everyone including your list price make sure you describe what you have done. Thanks to all and Thank you Ryan much appreciate your blog and oh yea thanks for the line, two homes on one lot” like an idiot hadn’t thought of that search phrase. Learned something new and it is only 6:18am good start to my day. Now got to grab my spurs and go do my first or second job before I start my first or second job. Horses need some loving/riding. Enjoy your day.
Thanks Brad. Well said and it’s a good idea to absolutely research requirements. Enjoy those horses. That sounds amazing. I’ve been up early working and I need to go walk the dog (my version of a horse in Sacramento).
Great article. Hopefully we will start seeing more of these units properly labeled. I believe one of the issues our team had was the transfer of information from MLS to other sites such as Zillow, realtor, or Trulia. Our team had a listing with a true ADU. The problem we found was these other sites would only count the square footage towards the square footage on the house. Which, like you mentioned in the article created a the problem of the house appearing bigger than it was. 1,775 square footage versus the actual 1,275. The ADU was 500. How do you get around this?
Thanks Shane. The struggle is real. We’re likely to see more ADUs in the future, so this is a problem that’s going to have to be solved, and my sense is we’ll collectively figure it out over time. I really do understand when an agent will say 1,775 sq ft in a case like this. I won’t die on a hill saying it should be 1,275 only. My big issue is when it’s NOT clear in the property description that the ADU was included. I think I would personally prefer for the property to say 1,275 because that’s more transparent, but the MLS is designed to market properties too, so I get why 1,775 sq ft could be valuable. My beef though is when little to not consideration was given for the realty we don’t have a 1,775 sq ft house at hand.
I don’t have any great solutions for the time being, but I would be open to an ADU field in MLS where square footage was listed. On that note, one issue is many ADUs don’t have a square footage listed either. This makes it more complicated to value too when choosing comps. So maybe a step in the right direction would be having a more deliberate focus to parse the square footage correctly in MLS and having an ADU square footage become very prominent. I wonder if we could have a square footage listed something like 1275 (500) to help show there is something else. Just a thought…
Thanks, Ryan good information. This is one that comes up allot here in the foothills. Check permits and zoning as well as CC&R’s. Do your homework before you buy or getting ready for sale.
Thanks Christine. Wise words. I imagine you have lots of non-permitted stuff in the foothills too.
I’m in the San Gabriel Valley. Things that we take for granted here: You can build an ADU without additional parking requirements, you can build and rent an ADU in an HOA complex. State rules override local rules. So, I’m going to recheck the State rules since it’s a changing environment. I might have to update my own website article. Thanks for the article.
Thanks Camelia. That’s my understanding based on reading also. The article I linked to above seems to suggest this also. I’m always a bit cautious about talking about the letter of the law as rules are constantly changing. https://www.caforhomes.org/aduupdate
Here is the best summary I’ve seen of the new California laws regarding ADUs. Most interesting point to me is the neither HOAs nor property CC&Rs can reasonably prohibit development of an ADU or JADU. Pretty sure we are going to see HOAs resisting the implementation of this law.
http://www.modative.com/adu-blog/the-12-most-critical-2020-adu-rule-changes-for-california
Thank you Gorden. That’s a good piece. I actually read it as I prepared to write this post. The thing I am still trying to find out is whether CC&Rs can stand in the way of ADUs being rented or not. This article states CC&Rs cannot impede development of ADUs, but what about occupancy? I’m unclear. I think it’s likely logical to think CC&Rs would not have power to speak to occupancy rights, but that’s still an assumption on my part. I want to hear the letter of the law. If anyone knows, speak up. I will keep this point in my post in limbo and then amend it as needed.
One note for any onlookers. The situation where I discussed permits is still quite relevant. I mentioned a structure that was permitted as a residential office instead of living quarters. This really matters and we still have to know what structures have been permitted as. The hope of course is many non-permitted structures can become legit ADUs.
Okay so I will chime in again. This has been a great thread with some good information. Let us also not forget that just because Calif does something doesn’t necessarily mean the secondary market cares. Hence Permits and understanding what is legal and not is important. But what makes me nervous is this notion that C.C. & R’s can be overwritten. I have some concerns over that item and more so I have concerns over deed restrictions that travel with the land. I am not sure the state without challenges under several state statutes may be revising this. I guess if there are any RE attorneys out there with any State Legislature or Eminent Domain experience, would enjoy hearing there take on this. Always entertaining the world of RE.
Thanks Brad. I always appreciate your take.
There are CC&Rs in Sacramento that state that you can’t sell to anyone who isn’t white, and in some cases even require that any person of color can’t use the front door of the residence. Clearly, although those CC&Rs are still in place they are no longer enforceable. So there is already precedent for CC&Rs being overridden when they don’t comply with the law of the land.
It’s incredible when coming across some of the language. What an ugly reminder of the history of racism in real estate.
As always great info Ryan. Thanks for sharing.
Thank you Rick.
Good points Ryan. As cities keep trying to find ways to increase housing affordability near city centers and energy efficiency becomes more important, ADUs will continue to become more popular and common. The City of Portland is considered to be an early adopter of ADU friendly policies and has a high quantity of granny flats, but appraisals remain tricky due to all the variation.
Portland is a “trail blazer” so to speak (sorry). I’m a huge fan of helping to create ADUs. It’s good for property owners to be able to house family and/or earn income on a rental. I think one underlying concern is ADUs being used for Airbnb, but the hope is most will be used for long-term rentals instead. Of course this won’t solve the housing crisis by any stretch, but adding extra units like this is welcome news in my mind.
What are your thoughts when the ADU is part of the main house, either a separate floor or a “wing” off of the main level? My issue is how to deal with the GLA of an entire floor. I currently subtract the GLA off of the main dwelling and add a line item for ADU, which is usually close to the amount of lost GLA cost. Is that a method that you would agree with?
Thanks Hugh. You know, I can imagine this question being posted on an appraiser forum and having vastly different opinions. This is tricky and I don’t know that there is a one-size-fits-all answer either.
In some senses I think we have to back up and use good professional judgement to try to best reflect the market. Thus we might take a different approach depending on the situation. For instance, if I am lucky enough to find a few comps with a similar setup and the inside ADU is included in the square footage in each of the comps, then for me the market becomes the trump card. This is where it would be a no-brainer to include the square footage because the market has done that for me already.
Technically speaking if the ADU is directly accessible to the main house it seems fitting to include it due to ANSI standards because it is clearly within the envelope of the home. But my struggle is including it can really throw off the comps because the subject property on paper now seems way overbuilt for the neighborhood in terms of size. So I get where breaking off the square footage can maybe reflect the market well and/or create a cleaner valuation. Our goal is never clean per se, but I think there is something to that. At least in my opinion.
I think the key is that whatever our methodology that the results are credible. In my mind I can see arguments for both sides here. I probably lean toward including it in the total square footage in a case like this, but at the same time I’ve definitely not done this at times too.
I’d love to hear anyone’s thoughts or ideas. This is new territory and something we’re going to have to think through more in the future.
Thanks Hugh.
One more thing I wanted to put out there. If the GSE’s have language to say an ADU like this contained within the house should NOT be included in the square footage, then that’s definitive. But from a private appraisal perspective the GSE’s don’t apply, so we don’t have the luxury of resting on a rule like that so to speak. If any appraisers have verbiage from Fannie, Freddie, FHA, VA, etc.. speak up.
From a GSE perspective, new guidance, posted early September, differentiates by noting the expectation of privacy and access solely via primary dwelling. Quote below:
“However, it is not considered an ADU if it can only be accessed through the primary dwelling or the area is open to the primary dwelling with no expectation of privacy.”
Thanks Benjamin. I appreciate the updated commentary. I actually like the emphasis on expectation of privacy.
ANSI guides developed by Realtors and Homebuilders in 1996 are it for guidance. Fannie says do what your peers would do, mine use ANSI. So if not connected by hallway or stairwell, then non GLA.
Thanks Mark. Yeah, if an ADU is not directly accessible to the house, it’s simply not going to be included in the square footage. I’m with you there. Preach. 🙂
Hey Ryan,
Probably good to update this to include the new guidance from FNMA (9/2/2020) – I know this article isn’t specific to GSEs, but I’m sure there’s a good mix for those researching the blog for guidance. The new matrix adds significant clarity.
https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B2-Eligibility/Chapter-B2-3-Property-Eligibility/1032991541/B2-3-04-Special-Property-Eligibility-Considerations-09-02-2020.htm
I’m on the lending side and there’s still a lot of confusion when a finished basement constitutes an ADU. Fannie offers below guidance that helps determine if finished basement w/kitchen qualifies – we typically interpret as meaning, can it be closed off from primary living area.
“However, it is not considered an ADU if it can only be accessed through the primary dwelling or the area is open to the primary dwelling with no expectation of privacy.”
Also, interesting to point out that removing a stove no longer changes ADU classification.
Thanks for maintaining this blog; it’s been a huge resource for many of us in the lending industry when dealing with tough appraisals!
Thank you Benjamin. I appreciate the information assist. Things are always changing, so you’re right it’s critical to stay on top of changes. It’s also important when reading posts to check out the date and consider if there are any new standards. It’s funny to hear the stove comment. I find it silly how in real estate at times a stove is removed and that has sort of changed what something is… Basements are tricky of course and they rarely count as living area (though sometimes they do).
Ryan- Useful post, as always. I am doing my Sac State MBA thesis on financing of ADUs. I am trying to figure out if there is a benchmark for what ADUs add to the value of the property. I get that it will likely not appraise at the value of the construction. But if we are going to encourage lenders to lend more in this space, it would be helpful to have a metric for future anticipated value. Would welcome any lenders or appraisers with thoughts. My paper is due by the end of January 2021. Thanks. Chris csshultz@csus.edu
Thanks so much Chris. This is tricky as there really isn’t a one-size-fits-all answer. After all, an ADU in a higher-rent market could be more valuable than an area with less rental demand. I do see sellers have a frequent expectation of value at cost, but dollar-for-dollar in real estate isn’t always so easy to achieve… I know you alluded to understanding that already. Here is a post I wrote about it in case it’s of interest. Good luck on your paper. If you have any pointed questions you’re welcome to email me too. I really like your topic. https://sacramentoappraisalblog.com/2018/05/02/the-myth-of-dollar-for-dollar-in-real-estate/
What about these NextGen homes where the casita is attached to the main dwelling but separated from the rest of the house by a by a dead bolted, fire-rated door? The casita has a kitchenette , living area, bath , laundry area and full bath as well as its own front door. Does this area get included in the total GLA?
Hi Mark. It’s so hard to speak definitively about something when I have not seen it, so I need to be cautious here. I’ve seen areas like this that are clearly built as part of the house. There tends to be an access point from the interior and then a separate door to the exterior. I wouldn’t have a problem including something like that in the square footage, but there could possibly be situations where I would not include it. I think I would need to see something like this to render an opinion. I wish I could have been more help.
The zoning permits a guest unit and ADU, attached or detached and the zoning description clearly stated the are ancillary to the main dwelling. Even the builder acknowledges “main house” in their marketing materials (see link). Thanks.
https://www.lennar.com/new-homes/nevada/reno/carson-city/eagle-station-at-schulz-ranch/the-shire
Thanks Mark. I think what this is permitted as could be meaningful to me and my professional interpretation. I looked at the link, but I didn’t see anything where they did or did not include the square footage of the space within the total figure of the square footage.