ADU

Can it count in the square footage?

October 20, 2020 By Ryan Lundquist 31 Comments

Can you include it in the square footage? I get questions like this almost every week. Is it okay to count an accessory dwelling in the living area? What about a pool house? How about a man cave or she shed? Let’s talk about this.

The straight dope: It’s tempting to lump something else in the backyard into the square footage, but that’s not appropriate per ANSI measuring standards. Basically if you have to walk outside of the house into something else that is not directly accessible to the house, we’re really dealing with something that isn’t considered to be a part of the main house. So we call that something else a studio, casita, accessory unit, pool house, she shed, or whatever. It’s just not the main house, which is why it’s not included within the square footage.

New video: I made a video to talk through some things to watch in the fall market. Enjoy if you wish (or watch here).

An Example: If you have a house at 2,500 sq ft and an accessory unit at 1,200 sq ft, it isn’t a 3,700 sq ft house. No, this is fundamentally a 2,500 sq ft house with something else. Could it be worth the same amount as a 3,700 sq ft house? Maybe. But if we only compare this type of home with other 3,700 sq ft units, we haven’t really proved what a 2,500 sq ft house with a 1,200 sq ft accessory unit is worth. The best comps will be other homes with accessory dwellings, right? Heck, maybe it’s worth even more. But we’ll never know unless we find the right comps to tell the story of value. The quick “comps” are all 3,700 sq ft, but those might not be the best representations of value.

The problem: If a property is priced based on a lumped square footage, what happens when the appraiser gets out there and needs to use smaller-sized comps that are consistent with the actual size of the main house? Is there going to be a difference in value?

The truth: It’s not an easy pill to swallow when the appraiser doesn’t include the extra space in the square footage, but just because it doesn’t count in the square footage doesn’t mean it doesn’t count in the value.

But they’re lumped together in MLS: I know, this happens all the time. A property will be sold with a lumped square footage of the main house and the pool house. We even see this happen at times in Tax Records. Let’s remember a few things: 1) The way a property is marketed doesn’t change what a property is; 2) As a non-lawyer I wonder if there is increased liability for representing a home at a larger size than it is (hopefully there is an asterisk that clarifies what the square footage represents); 3) The appraiser is very likely going to treat the two areas differently instead of lumping them together.

My advice? Instead of quickly pulling larger “comps” right away, try to isolate features such as a pool house, accessory dwelling, or outbuilding to determine what they’re worth in addition to the value of the main house. In other words, what is the main house plus the extra thing in the backyard worth? That’s the math market equation we have to figure out and it can be done by pouring through lots of data. Finding a few examples of homes that have sold with that feature is the ideal so we can try to discover what that feature commanded in terms of value. Sometimes we might even look through years of sales too. Remember we might not use really old sales as comps, but we can certainly use them for research.

Resources:
Q&A on accessory dwellings
Tips for valuing ADUs
Using older sales is sometimes the best option
Can a basement be considered square footage?

Anyway, I hope that was interesting or helpful. Thanks for being here.

Questions: Any stories to share? What follow-up questions or insight do you have? Did I miss anything?

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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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When the best comps are four years old

May 8, 2019 By Ryan Lundquist 11 Comments

Do appraisers have to use comps from the past 90 days? Nope. Of course not, but this idea is still pretty common. The truth is sometimes the best comps are much older. Usually they’re not four years old, but they were in this situation. Let’s talk about it. Anything to add?

Warning: This post is a little longer on purpose.

Some details: The subject is located in Old Folsom and was built less than ten years ago whereas most neighborhood homes were built many decades ago. The subject is about 2500 sq ft with a 572 sq ft Accessory Dwelling Unit (ADU). It had a high-quality of construction and the builder nailed the architecture because it resembled the old world charm found in nearby homes.

My appraisal & the sale: I did an appraisal before the subject was on the market to assist the owner in pricing the property. This home was listed by Gail DeMarco at $899,999 and it sold for $925,000 in only six days of market exposure. It had four offers too. By the way, I appreciate getting permission to share about this property too.

Lack of recent comps: There were no recent similar sales. Zero. Most other areas of Folsom are much newer in age too, so using other neighborhoods wasn’t ideal in my book. This is why I chose to focus on older sales to understand the neighborhood market.

The city vs the neighborhood: I looked up sales to get an idea of what buyers have been paying historically in Old Folsom. Lately there hasn’t been anything above the low $700s, but if I look back in time I can see two outliers in particular. Could those be clues for me?

The best comp: As I looked back in time I found a neighborhood sale that was ideal as a comp because it was newly constructed, had era charm (higher quality), and it also had an accessory unit. It’s like the heavens opened up and gave me a gift. Yet this sale was from 2015. Doh!! But then again, this property sold twice on the open market and commanded a price premium both times, and that helped show what the market was willing to pay for something unique.

I wondered how this one comp competed with the rest of similar-sized sales in Folsom too, so I made some visuals. This gave me clues into what was competitive in the past during both sales. In other words, which areas of town did this property compete with when it sold in 2006 and 2015?

How much has the market changed? I gauged the increase in value since 2015. The market had increased about $125,000 to $150,000 since this property sold based on the trendline on the graph and other sales, so I gave a huge adjustment up in my report. By the way, if you don’t know how to graph, you can always try to see the market by comparing sales in 2015 vs 2019 or maybe crunching numbers on a CMA. But then again, why not learn to graph?

Okay, this is getting too long, but that was some of my process.

CLOSING THOUGHTS:

1) Be sure to look wide enough: Sometimes we focus so heavily on comps over the past 90 days, but there might not be any. At times we need to look much further in time to get a sense for how a unique property might fit into the market. Whatever we do, let’s just be cautious about imposing such a narrow view that we miss older sales that might be relevant. Usually we might have sales within the past 12 months, but this was a unique case. I’d recommend finding more than one comparable sale too because one data point might not be enough to get a sense of value.

2) Keeping lenders happy: Lenders like things to be neat and often ask appraisers for very recent sales, but in my mind there just wasn’t anything adequate to use that was recent. This would be a really ugly appraisal for a lender, and it’s why I told the owner that the appraiser for the loan was going to have a hard time finding two other similar sales that were more recent. I don’t know what the appraiser did, but part of me hopes at least the appraiser used this one older sale because it was the best (in my mind).

3) Crunching old data but using new sales: It’s possible to use old data to help understand the market and still focus on new comps. So in a case like this you could study much older sales but then choose to focus on much newer ones in an actual appraisal or CMA.

4) The fine print of lenders: Keep in mind lenders do sometimes have requirements for how old comps can be. For instance, FHA wants all sales to be within 12 months. So if a buyer here was using FHA, I could study older sales and even give weight to this older sale in the comments in my report, but I wouldn’t actually use this as a comp in my appraisal.

REAL ESTATE AGENTS: If you happen to be having a conversation with an appraiser about sales you used to price the property (without pressuring the appraiser to meet a certain value of course), I suggest you generally try to focus on more recent data because lenders tend to get fixated on new sales. Yet don’t be afraid to talk through older stuff. Just be sure older sales are truly relevant though. For instance, in the case above it would be okay to share this one comp from 2015 because it was truly the best one. But you hands-down need current stuff too.

I hope that was interesting or helpful.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: Anything else to add? What would have you done in this situation?

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The emerging trend of storage container homes (Q&A)

June 20, 2018 By Ryan Lundquist 15 Comments

Storage container units are all the rage on HGTV, but they’re starting to pop up in real life too. So let’s talk about them. Today I have an interview with James Roberts who handles design and engineering at TAYNR, a container home builder in Sacramento. I hope this will be insightful and interesting. Anything to add? Let’s talk in the comments.

Ryan: What got you into the storage container business?

James: I first became aware of “shipping containers” when I was a Signalman in the US NAVY. Seeing them in different commercial ports was common. After the NAVY I moved to Miami Beach where I met Sujan (Project Manager at TAYNR), and we would see shipping containers on large cargo ships, cruising in and out of the Miami Port all the time. But Denmark was the first container build I ever saw. And then London had container condos and a shopping center. Thailand, Laos, Korea Japan, Mexico, Costa Rica, Brazil all have many small pop-up businesses, single family homes and commercial buildings. During recent visits to China and Hong Kong, I saw new construction sites with 100s of containers modified for worker housing.

Ryan: What type of buildings can you make out of containers?

James: The possibilities are endless. The ISBU (Intermodal Steel Building Unit), the shipping container, is manufactured to carry heavy cargo of all kinds, to be stacked, and withstand extreme weather conditions while being transported across the seas. With that said, they are incredibly strong, and if modified correctly, they can be used for an endless amount of structures. Australia has been using containers for housing and commercial structures for 40+ years. America has recently (+/-10 years) started to use this building method for single family and multi-family homes, commercial store fronts, popup food stations, business marketing structures, etc. The worker housing units would be an excellent source for all means for temporary housing in the US. Emergency, migrant, farm, homeless, camping, etc. The list can go on.

Ryan: What is the maximum number on stories you can do?

James: They are manufactured to stack on top with the weight bearing on the four corner posts. It is common to see them free-standing 6 boxes high at the port. This is without reinforcement or anything securing them together. You can imagine that with additional engineering and structural support, this could easily be doubled, possibly tripled.

Ryan: Tell me about the accessory unit you built in Oak Park (the blue unit below).

James: Matt and Jamie Leonardo contacted me in late 2016. They bought their Oak Park home a few years before and had worked up some equity. Originally there was a non-permitted home along the back alley way that had to be torn down in order for their loan to be approved. Replacing this structure for a revenue generating dwelling was pretty much in the plan from the beginning. I do not remember where/why they decided to build with a shipping container, but we met, discussed a plan and moved forward. This home will actually be showcased on an upcoming episode of You Live In What, premiering June 29th at 9 pm on Great American Country Network (GAC), an HGTV affiliate.

Ryan: Do units get extra hot on the inside because of the steel exterior?

James: No, our units are meant to perform extremely efficient by design. By nature, corten steel will absorb the heat from the sun. This is a factor that is taken into consideration from the beginning and we have many different ways to address this. For instance, the Oak Park container home is insulated on the inside and has reflective paint on the outside. Also, a weather barrier and facade were installed on the exterior of the container to allow for a 6?+ thermal break. The roof has a 3:12 sloped standing seam roof with 3’6? eves to provide additional shade along with the insulation and weather barrier laid out inside the roofline, and it has 2 mini-split for heating and air.

Ryan: What type of units do you find most clients are asking for these days?

James: Our highest demand for individuals is an ADU (Accessory Dwelling Unit) that can be installed in existing backyards for in-law quarters, guest homes, or as a rental unit to capture additional income. The TAYNR models are designed to be “building blocks” offering both 20′ and 40′ multi-block models. 1, 2 & 3 bedroom units with 1 or 2 baths.

Ryan: How long does it take to install an ADU?

James: Foundations can be installed in 1 day, and installation of the ADU is typically 5-10 business days depending in the model size.

Ryan: Is it fairly easy to get a storage container unit permitted?

James: “Easy” is absolutely not how would describe it. However, because we have our pre-designed models and engineering understood, this does simplify our process.

Ryan: Do you know if there is a limit to how many units can be added in a backyard?

James: Any residential lot in California can have one ADU as long as the property setbacks and design review conditions can be met. So far the only issue I have run into is physical access, which TAYNR now offers an alternative modular product that can usually meet this conflict.

Ryan: Have you found some areas not willing to allow containers because of design restrictions?

James: Usually this is due to the City/County design review. Some areas require the ADU be cohesive with the existing structure. As long as budget allows, this is not an issue because we can design a facade to satisfy this point.

Ryan: So far I’m not aware of any stand-alone single family container units in Sacramento. Have you heard about any yet?

James: There currently is not a stand-alone unit in Sacramento. Stay tuned… we have one in the works.

Ryan: What are the costs like for a storage container accessory unit?

James: Models and pricing are listed on our website (here).

Ryan: Are permit fees any different for containers compared to stick-built homes?

James: No, they are not. Our builds are required to meet the same building codes and are permitted the same as a traditional build.

Ryan: Anything else you want to add?

James: One of the biggest misconceptions is that building with containers is “cheap”. This is not the case. Although there are absolute savings if the build process is followed properly. Meaning, the onsite work should be performed while the ADU is being built in the factory, so the overall start-to-finish construction is significantly reduced, saving you a lot in labor cost.

Ryan: Thanks for doing the interview. You killed it. Everyone, please check out TAYNR’s website. All photos in this post are TAYNR projects (images are property of TAYNR).

CLOSING APPRAISAL THOUGHTS: Container homes are an emerging trend in the market, so it’s important to stay in tune with this phenomenon. I’m excited to hear TAYNR is building a stand-alone home too because that’s not something the market has seen yet. It’s worth noting one of the struggles with stand-alone container homes is the potential of financing hurdles: 1) The unit might not be large enough in size in the eyes of the lender; and 2) A lender might ask an appraiser to use container comps to show the market accepts this type of property. Well, right now there aren’t any comps (yet). But the market is craving alternative products like this, so lenders over time will hopefully adapt to this emerging trend.

Questions: What do you think of container homes? Any insight or stories to share? Loan officers, any tips on financing? I’d love to hear your take.

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ADU

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