A research and action agenda for Accessory Dwelling Units and their advocates

I spent a lot of 2011 learning about Accessory Dwelling Units (also known as in-law units, granny flats, backyard cottages, etc).  Beat that in terms of geekiness!  (Okay, I bow to anyone involved in Viking re-enactment societies.)

Now that my project on methods to appraise properties with ADUs is done and off to the journal for review, I wanted to follow up with a few thoughts on where to go next.  Should proponents of sensible housing (such as ADUs) work most on activism, or research?

photo by Pete Boyd (Creative Commons)

If one accepts all the potential benefits of ADUs as real, then the most productive thing for an advocate of space-efficient housing to do is be an activist — for example, to lobby the big GSEs for policy changes related to appraisals and loans, or to work for the creation of ADU-specific financing programs.

On the other hand, the big demographic changes coming in the next few decades mean policies and trends starting now are a really big deal for the environment.  In one way or another, millions of housing units for 1 or 2 persons are going to be created.  So as great as my personal experience with ADUs has been, I still think it is worth looking into the verity of claims about ADUs, and finding ways to estimate their environmental impact.  Should ADUs be just one of a number of strategies for providing those millions of units, or are they so superior that they should be pushed as the most important strategy?  If you have thoughts about the following agenda, or anything to add to it, I’d like to hear it.

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A research and action agenda for ADUs

Accessory dwellings, also known as backyard cottages, granny flats, and ADUs, have been stuck in “good idea” limbo for 30 years.

While planners and social advocates have long promoted these small independent living units on the grounds of otherwise standard single family homes, very few permitted ADUs have been developed, even in municipalities that encourage them. In Portland, Oregon, widely considered a leader in the ADU movement, only 0.3% of properties where ADUs are allowed by zoning actually have them.¹

Why have ADUs remained more of an idea than a reality? My recent work on appraisal methods for properties featuring ADUs², supported by The Appraisers Research Foundation, suggests several possible reasons that I believe merit followup. I believe that with the right mix of research and action, accessory dwellings can start to realize their true potential.

Problem: Basic facts about ADUs and their developers are still unclear.

Solution: On a local or regional basis, conduct simple surveys of existing ADU owners.

The standard discourse about ADUs goes like this: Advocates, for example planners and activists for the aging, list the many potential benefits of this form of micro-development. ADUs promise to provide infill housing that increases density without changing neighborhood characteristics, foster multigenerational living and aging in place, and provide homeowners with a legitimate source of rent income, all in a package with a low environmental footprint. Meanwhile, when opposition to ADUs exists, it is on the basis that ADUs might reduce “single family feel,” parking availability, and property values.

The problem with this discourse, for ADU advocates and opponents alike, is that these benefits and fears are largely hypothetical. So few permitted ADUs have existed it has been difficult to study their effects.

But now, with the uptick of legal ADUs in places like Santa Cruz, Portland, and Seattle, this situation can change. A simple survey of existing ADU owners, asking questions such as “Why was this ADU developed?” “How many people live there now?” “How large is it?” “How much rent is charged?” and so on, would provide an invaluable baseline of information usable by practically everyone considering this type of development. For example homeowners will be interested in construction cost; environmental advocates will be interested in building size; and planners will be interested in household size.

Perhaps the most important subjects for such a survey are the homeowners and ADU occupants themselves. Though ADUs are often presented as an answer to civic and societal needs, it is individual homeowners, rather than professional developers, who are currently expected to create these housing units. Homeowners take on the risks and rewards of the development work.

Those homeowners must have a strong motivation to go through the process, and when policies fail to match with homeowner characteristics, ADU programs will be unproductive. For example early ADU programs in California were addressed to the elderly³, because the elderly could clearly benefit from ADUs. But followup showed that very few elderly people were willing to take on to the job of development. The most likely developers of ADUs were middle-aged, though elderly people might be present as occupants.⁴

Though there exists a smattering of interesting research results like these, such work predates the housing bubble and crash and the current uptick in ADU development in west coast cities. A fresh characterization of successfully developed ADUs and their homeowner-developers would allow governments to target their efforts, and homeowners and lenders to size up projects, more intelligently.

Problem: The financing and appraisal system does not recognize rental income.

Solution: Lobby lenders for income-based appraisal and underwriting.

Though evidence about successful ADU developers is fragmentary, one theme comes through strongly: the most common motivation for developing an ADU is economic. Homeowners who develop ADUs are not often wealthy. They want the extra income available from renting out one of the two units on their improved property, but generally do not have $50,000-$150,000 cash available for ADU construction.

They must borrow for ADU construction, which is difficult. Though many existing ADUs were financed with home equity lines of credit or cash-out refinancings, these methods are often unworkable now. Between higher lending standards and the current drop in appraised values, many would-be ADU developers do not have enough equity to refinance.

In concept, the future income from a developed ADU should change the value of their property, and could be a form of security for a loan. My recent research with Taylor Watkins addressed this very subject. When the property’s value is viewed from an income-investing perspective, an ADU can add substantially to the value of the property.⁵ But despite its widespread use in professional investing, the income-investing approach to appraisal is not recognized in single-family-neighborhood settings by national loan repurchasers such as Freddie Mac, who set de facto standards for most home lending.⁶

ADU advocates might free up this logjam by finding ways that income can be used as security for a construction loan. On a local level, they might lobby portfolio lenders to allow the use of the income perspective in appraisals and lending decisions. On a national level, they might ask the same of national mortgage repurchasers such as Freddie Mac.

More ambitiously, ADU advocates may wish to create an publicly or privately funded lending program specifically devoted to ADU construction which uses income as security. One model is provided by New Avenue Homes, a private contractor and developer in Berkeley, California. As described to me by Kevin Casey, New Avenue’s founder, New Avenue agrees on a construction price with the homeowner, creates the ADU for little money down, and then becomes, in effect, a second mortgage holder on the property, with an express interest in any rent generated from the property. New Avenue plans to stay involved with the property long term and often act as landlord, receiving rent payments, applying them to the loan, and sending any surplus back to the homeowner.

It is a bold and creative solution that could be copied in other markets. However, it demands an organization willing to be involved long term, or at least until more traditional methods of financing can step in and take over.

Problem: The demographic demand for and development potential of ADUs have not been matched.

Solution: On a local or regional basis, conduct research that compares demographic need to development opportunities.

One reason for the intense interest in ADUs among groups like the AARP is their clear relevance to housing an aging American populace. The US Census projects that between 2010 and 2030, the number of Americans 65 years and older will grow from 40 to 72 million, and from 13% to 19% of the population. There could be a need for millions of new housing units suited to one or two persons, moderately priced, and at least somewhat accessible. Meanwhile, the great majority of older persons prefer to stay in their homes and communities as they age.

In this context, ADUs seem like a slam dunk. Aging persons might move into reasonably sized and accessible homes on familiar grounds, without losing their current community connections. No new land supply is needed, since ADUs are developed on existing single family properties.

But beyond this basic argument, communities have not investigated the capability of ADUs to meet the upcoming need. Governments could test the true potential for ADUs with a line of research that estimates demographic need, and then pursues how many new ADUs might reasonably be created on existing single-family properties. An extension of the same work might estimate the environmental footprint associated with that many new ADUs, in contrast to an equal number of more traditional developments.

For example, the Metro (Portland, Oregon) regional government projects that by 2030, the area within the regional urban growth boundary will need an additional 27,400-104,900 housing units. Many of these will be for 1 and 2 person households. Though there are more than 148,000 single family properties in the area on which ADUs would be allowed, by zoning, clearly not all of them are strong candidates. A study identifying the nature and number of the most promising properties for ADU conversion would go a long way to evaluating whether ADUs should be a major focus of future development, or just another tool in the housing toolbox.

SUMMARY OF RECOMMENDATIONS

1. ADUs are little-understood and occasionally controversial because basic facts about them are still unclear. Therefore, conduct simple local or regional surveys of ADU owners and tenants to provide an essential baseline of fact for planners, homeowner-developers, and lenders.

2. Financing is currently a major barrier to ADU development, largely because ADU rental income is not recognized by the lending system. Therefore, lobby lenders and loan repurchasers such as Freddie Mac to recognize income-based appraisals for properties with ADUs. More ambitious, create a lending program that uses ADU rental income as a direct source of security for an ADU construction loan.

3. ADUs seem to have gigantic potential to address the increasing aging population and their needs for small and accessible dwellings, but the exact potential is unquantified. Therefore, on a local or regional basis, estimate future demographic needs for 1- to 2-person housing units and compare them to the number of properties best suited for ADU development.

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About Martin John Brown

Martin John Brown is a researcher and consultant on environment and housing. Find out more at http://martinjohnbrown.net.

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