ADU

Goodbye single family zoning

September 29, 2021 By Ryan Lundquist 91 Comments

Goodbye single family zoning. If you didn’t know, two weeks ago SB9 was signed into law in California, which now allows property owners to build a duplex on any residential lot or subdivide to build up to four units. This is massive news, so let’s talk about it. I’d love to hear your take in the comments.

Some perspective (not arguing for or against):

We need time: This is a huge change, but will it alter what neighborhoods look like? In short, there are some sensational ideas floating around, but we need time to tell. With that said, it seems so far news sources are talking about only modest change. For instance, First Tuesday quotes a study stating at the very most we could see an impact to 410,000 parcels (roughly 5.4% of parcels).

By the way, here is a CalMatters piece that goes into more depth on some of the details of this bill (or read the bill here).

Minneapolis as a case study: In 2019 Minneapolis legalized triplexes to be built on single family lots and Axios points out there was little change. In fact, there were only 70 units added in 2020 (20 brand new units and 50 single family units converted to multi-units). Oregon has also banned single family zoning in most cities, so let’s keep an eye on Oregon too.

Scared of renters: I’ve heard some fear about more renters moving into neighborhoods, but did you know roughly 45% of residents in California are renters? Let’s be cautious about vilifying half the population.

Expensive to pull off: Just because zoning has been modified doesn’t mean we will see a big change in the market. It is still going to be really expensive to build, there is a labor shortage, and land in California is pricey.

Three units were already allowed: Under existing California law home owners have already been allowed to build two other units on site. If you didn’t know, you can build an ADU (accessory dwelling unit) and JADU (junior accessory dwelling unit). This is good to keep in mind as we talk about the end of single family zoning and the idea that new units are now possible because of SB9. All I’m saying is technically more units have already been possible.

Highest and best use: As far as highest and best use in appraisal reports, that’s something appraisers will need to think about as they craft highest and best use statements. Let’s remember highest and best use isn’t just about what is legally possible, but also what is financially feasible and even physically possible. In short, it’s not going to be financially realistic to see multi-units built on every single family lot, so the highest and best use will continue to be the existence of single family homes. Of course we’re going to have to see if SB9 affects some neighborhoods or price ranges more than others. Moreover, it could be difficult to fit a multi-unit property on a postage stamp lot, so it really might not even be physically possible in some cases.

We need more inventory (but not like this): For years we’ve been saying we need more housing inventory, but when SB9 became law so many have said, “It is true we need inventory, but not inventory like this.” I completely get it and I’m not here to argue. Ultimately this new law is likely to expose NIMBYism (not in my backyard) and YIMBYism (yes in my backyard).

Other: What else? What’s on your mind? What did I miss? What are you concerned or excited about?

In closing, this change in zoning is certainly unconventional and even scary to many, but the impact is still to be determined. My advice? Let’s be objective about the issues, listen, embrace facts, and avoid sensationalism.

I hope this was helpful. Thanks for being here.

Questions: What do you think about the end of single family zoning? Is this good or bad? What opportunities and threats will exist as a result of this?

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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 37 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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