8/2/2019 Guide to Appraising ADUs

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March, 2012 Accessorydwellings.org

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 loanoriginators 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 onhttp://accessorydwellings.org/

2. Based on the information obtained in the education portion of the process, consider the followingin 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 aduplex? 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 thansingle-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 borrowercan 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-familyappraisal 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 thefinal reconciliation of values for the appraisal of the subject property. Though GSEs like

Fannie Mae and Freddie Mac will not accept appraisals that relyon the income

approach to value as the only approach to value for a property, they will accept

appraisals that develop and considerthe income approach to value. Especially with anemerging 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 therereasonable 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.

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