Refinancing an ADU – a mortgage broker’s perspective

As a mortgage broker in the Portland area for almost 8 years, I’ve learned “the harder I work, the luckier I get” is really true. In this instance hard work & a little bit of luck combined to culminate in the best possible execution of this tricky proposition.

When I met Kol prior to doing the Purchase money financing in 2010 for his home in NE Portland, I knew it was going to be a fun ride. He had a tremendous amount of vision for the property & I was happy to run scenario after scenario to see where everything penciled out & to make sure the investment would pay off. I always ran everything conservatively, just to be sure, and now he is enjoying the fruits of all that labor….in such a short period of time, relatively.

In 2010 he wanted to conserve as much capital as possible so he could stay liquid for the initial build of the ADU & use his cash reserves for construction costs. So, we utilized the low down payment/low interest rate FHA loan for the purchase money loan. Yes, we had Mortgage Insurance (MI), but at the time, the MI rates were fairly low, so they still penciled out over the Conventional MI at the same Loan To Value (LTV).

Down the road we knew we would be refinancing the property at some point, but given the softening of the market over the last 3 years, we just weren’t sure when that would be. That was ok because Kol could always just wait the 5 year MI retention period, have the property appraised, have the MI removed if it appraised at 78% LTV & still be at an incredible 4% interest rate, without refinancing.

When Kol approached me in January of 2012, interested in looking at the numbers for refinancing I have to admit I was slightly pessimistic about it just on the valuation of the property alone. I knew it would be tight & it would all come down to the appraisal. But it would so be worth it if we could attain that magic number of value for 80% LTV & conventional financing with no MI because he would save 3 years of MI payments (roughly $7K).

The fact was Kol had put some around $100K (give or take depending on owner labor, etc) to the property & had purchased it for $325K in 2010. During that period of time, however, the market in NE Portland in some areas has seen 5-10% decline in value. If we could even maximize the dollar for dollar cost of the construction (which wasn’t a sure thing) at $425K & conservatively say there was 5% decline in value for each of those two years, that put us at $382,500. We needed $398,750 to make it work & pay all of Kol’s costs to close. We were banking on the income use valuation of the Accessory Dwelling Unit (ADU) & the document Taylor Watkins & Martin John Brown authored, which gives higher relative value to an ADU because of it’s income generation potential. Kol’s project certainly is a sterling example of that potential, so we were hopeful.

I ran some initial figures by a few realtors, an appraiser & through a few search engines & I still knew it would be close. I told Kol I was willing to put in the work to get the appraisal in at value if he was willing to risk the cost of the appraisal. He was, so off we went & we never looked back.

At Green Mortgage Northwest, my branch manager Dakota Gale, LEED certified professional, has trained a few appraisers about valuations of green & eco-sensitive properties. This transaction was a perfect test bed for the green appraisal valuation system Dakota has set up. Here’s what we CAN do for green properties at Green Mortgage Northwest:

• We can’t request a specific appraiser. We CAN request a “green-educated” appraiser, which I’ve added to the roster (there are ~5 of them, including Taylor Watkins)
• We can also request that the appraiser calls Taylor Watkins to get the latest information on the valuation of ADU’s as a way to correctly influence the appraisal. We can also request that the appraiser reviews the report that Taylor put together (how in-depth they go, we can’t influence…)
• No guarantees whatsoever on this, and the borrower may be out the cost of his appraisal at the end of the day.

So that’s what I did. When I ordered the appraisal, I specifically requested a green educated appraiser. I also attached a few guides (see below) for the appraiser’s convenience & some back history on the project. I also let the appraiser know that we could finance the property as a duplex or as a Single Family Residence (SFR) w/ADU, whichever yielded highest & best use of the property/value. Here’s the guidance related to appraising properties with permitted ADUs:

• The guide references this post entitled “Appraising properties with accessory dwelling units: a preview of new methods and findings“.

• Lastly, the appraisers should know that this is a legal, permitted, habitable, accessory dwelling as defined by the City of Portland Bureau of Development Services. Here is a link to Portland maps site showing that ADU has a certificate of occupancy.

From an Underwriting standpoint, the guidance I received from my Underwriting team prior to submission of the file was spot on. I was advised they would look at it as an ADU or in-law unit & it must be legally constructed and zoned. Further, in these cases the appraiser needs to make the case for why they did what they did.

And he did.

Because we were able to narrow our pool of appraisers to those with “green education” we received a fair & accurate appraisal which was acceptable to underwriting guidelines & flew through the approval process.

The property appraised at value because the appraiser used the income approach as well as identifying it for what it actually is: a Single Family Residence (SFR) with an Accessory Dwelling Unit (ADU). NOT a Duplex. Not only did this save Kol money on his closing costs (multifamily financing is a bit more expensive), but it also gave a larger pool of comparables to choose from.

This refinance took both skill and luck.

Brilliant. We closed this transaction today & I’m thrilled that all our hard work paid off. More importantly, it will continue to pay off for the foreseeable future! His savings in the short & long term is immense & this is really why I truly love what I do & continue to do it through all the market challenges we face everyday.

Win!

(editor’s note: to read more about this same refinance from the homeowner’s perspective, see Kol’s post on this topic)

About Heather McGarry

Mortgage Advisor for Green Mortgage NW, a rental property owner & wife to a builder of ADU's. To reach me for financing check out http://greenmortgagenw.com/heather/

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