Notes from a presentation on appraising ADUs

[Kol Peterson attended Martin Brown and Taylor Watkin’s presentation on appraising ADUs and came away with these notes about how appraisal issues affect homeowners. For Martin’s summary of the event, see here. –editor]

The presence and occupation of non-permitted ADUs in cities throughout the country is the strongest indicator that there is a market demand for ADUs. However, there’s very few permitted ADUs in this country. When comparing the market demand for non-permitted ADUs to the number of actual permitted ADU’s built, it seems likely that there are other reasons why homeowners are not building permitted ADUs.

Why would this be?

Firstly, many municipalities do not allow ADU’s. But, in places where ADU’s are allowed, one would guess that based on the housing demand that these ADU’s are meeting, the development of permitted ADUs would flourish in a free market. However, this also hasn’t been the case. In Portland, where ADUs are allowed, there were only 73 ADU applications in 2010 and of those, only 52 of those 73 applicants have gotten their final permits as of late December, 2011.

Arguably, in places like Portland that already allow ADUs, a primary factor restraining the rapid development of ADUs relates to the formidable capital construction cost for an average, median-income homeowner. Put another way, most homeowners simply haven’t been willing or able to front the capital costs associated with building a permitted ADU. It is also fair to say that there are institutional factors that have prevented people from building ADUs to fill this viable market.

As one example of this, appraisals of homes with permitted ADUs have had a significant impact on the development of ADUs (or lack of development) in at least three significant ways:

1. a homeowner’s ability to get a mortgage to purchase properties that have ADUs
2. a homeowner’s ability to get a construction loan to build an ADU on their property
3. a builder’s motivation to build a property with an ADU for resale purposes

Assessing and attributing values to ADUs has been tricky and murky for real estate appraisers. On Friday, December 16th, researcher (and co-editor of this blog), Martin John Brown, and Portland appraiser, Taylor Watkins, announced the findings of their ADU appraisal study.

Martin opened by sharing an anecdote in which one appraiser attributed $10K of value to his ADU, whereas another appraiser attributed $100K of value. This ten-fold difference in appraised “contributory” value is indicative of how confused appraisers are about how to assess value to permitted ADUs. Furthermore, these assessments were conducted in Portland, where “ADU’s” are a relatively common part of real estate parlance.

Read the executive summary of the research:

The findings of this research point to some written modifications within the body of regulatory language related to ADUs at government-sponsored enterprises, namely, Fannie Mae, Freddie Mac, and HUD. The regulatory language that these institutions use to describe ADU’s, leads to confusion about appraisers’ assessments of ADUs as permit-able structures that can have real market value. This naiveté is due in part to the fact that ADUs are rare and therefor not well understood by appraisers.

Nonetheless, since appraisers have a professional obligation to use official, institutional guidance while performing their duties as assessors, they have been left to their own subjective devices to justify the market worth of properties that have ADUs. Thus, properties with ADUs are not currently appraised at levels commensurate with their actual market worth.

This questionable and subjective ADU appraisal methodology (or lack thereof) eventually leads to:

1. bankers who are unwilling to provide a larger home mortgage for a property with an ADU and thus fewer opportunities for homeowners to buy and sell them
2. bankers who are unwilling to provide an ADU construction loan
3. risk for builders without safe harbor to build ADUs and sell those properties at market rates

In towns that allow accessory dwelling units, it is clear that the daunting capital cost to constructing ADUs (typically $40-150K) is the most common barrier to their construction. Were construction loans more readily accessible for ADU development, more ADUs would be built. More ADU’s would be bought and sold if their income generation value was more broadly understood.

There are several steps that homeowners with permitted ADUs seeking a fair property value assessment can take, to increase chances of receiving a fair market appraisal for the ADU-enriched property.

1) request that the appraiser use all three appraisal methods (sales comparison, income approach, cost approach) and to help inform the ultimate opinion of value of a property.
2) ensure the appraiser knows the legal uses of the ADU if the ADU is permitted (if the ADU is not permitted, appraisers can not legally attach any value to it).
3) request a specific appraisal firm specialized in green appraisals, who may have more experience attributing values to non-traditional home improvements that have long term value (that are not yet industry standard).

For the policy wonks, financiers, real estate professionals, and appraisers who want to understand these significant findings in all of their nitty-gritty detail, here’s the full audio from the Martin and Taylor’s presentation. I broke the presentation into two sections; they’re both about 15 minutes long. Here’s the first section (it’s quiet, so you’ll have to turn up the volume):
https://sites.google.com/site/kolpeterson/home/audio_from_adu_finance/Financing_1.mp3?attredirects=0&d=

and the second section.
https://sites.google.com/site/kolpeterson/home/audio_from_adu_finance/Financing_2.mp3?attredirects=0&d=1

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Jordan Palmieri of Oregon’s Department of Environmental Quality gave opening remarks that covered some broader themes about ADUs. For those who are unfamiliar with the strong economic, environmental, and social merits of ADUs, flip through the slidedeck below and watch this presentation.

About Kol Peterson

Kol is an ADU consultant, advocate and author of Backdoor Revolution: The Definitive Guide to ADU Development. Read more here: AccessoryDwellingStrategies.com and learn about building your own at BuildingAnADU.com. Email at Kol@accessorydwellingstrategies.com

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