March, 2012

Accessorydwellings.org

A Guide to Appraising Accessory Dwelling Units (ADU)

ADUs are a unique type of residential development and are rare in most markets. Because they are misunderstood by many real estate professionals, we recommend the following steps be taken when considering financing a property with an ADU.
1. Ensure that the owner and all real estate professionals involved in a transaction (from loan originators to realtors and appraisers) understand the legal uses of the ADU. Can it be rented? Can the main home and the ADU both be rented? Educate the real estate professionals involved in the transaction. o Access the county building services department to verify the legal uses of the ADU. o Provide them with copies of the study Understanding and Appraising Properties with ADUs, which can currently be found on http://accessorydwellings.org/ 2. Based on the information obtained in the education portion of the process, consider the following in the valuation portion of the lending process for the property with the ADU: If the ADU and main home can both be rented, should the property be appraised as a duplex? In considering the entire property as a duplex, the following points should be considered. o Income-producing properties of 2 or more units are generally more valuable than single-family properties. However, the primary valuation considerations are different. Bedroom and bathroom count per unit are generally more significant than age, condition, and style, which are primary considerations in single-family valuations. o Income-producing properties have different loan programs. Generally, the borrower can borrow up to 75% loan-to-value (as opposed to 80% loan-to-value in single family properties), and the interest rate for these loans is usually higher than for single-family properties. o The appraiser can decide how to report the appraisal, whether on a single-family appraisal form or a multi-family appraisal form. This decision will inform to a large degree what approaches to value will be considered as important: sales comparison, income, and cost. In reporting on a multi-family form, usually the income and sales comparison approaches are primary. If both the main home and the ADU are legally rentable, then the appraiser should consider reporting on a multi-family form and applying the income approach. o If there is strong data available for the income approach, it should be considered in the final reconciliation of values for the appraisal of the subject property. Though GSEs like Fannie Mae and Freddie Mac will not accept appraisals that rely on the income approach to value as the only approach to value for a property, they will accept appraisals that develop and consider the income approach to value. Especially with an emerging housing type like ADUs, the income approach can greatly inform the final reconciliation of values through the three approaches. If one of the two units on the site (main home and ADU) cannot be rented, are there reasonable comparable sales available for an appraiser to consider in the valuation of the property? For example, are there properties with guest houses that have sold in the area? It may be necessary to look well beyond the subject's neighborhood for comparable sales and also to go further back in time for sales similar to the subject property with an ADU.

Accessorydwellings.org