Appraisal Journal on ADUs: they could be worth more than you think

an old-skool ADU, dawg: a carriage house in Simsbury Center Historical District, photo by Sphilbrick (Creative Commons)

Today the Appraisal Journal publishes a research paper about residential properties with accessory dwelling units (ADUs).  The paper describes an income-based method for appraising properties with ADUs, and concludes that using an income-based approach can give appraisers a valuable counterpoint to results from the frequently used, but often problematic, sales comparison approach. In the case of 14 Portland properties sold from 2006-2011, valuations by income were significantly higher, on average, than actual sales prices, by 7 or 10 percent, depending on the exact formula used.  Here’s the press release, which includes (at least for now) a link to the full report.

These findings aren’t a big surprise to me, since together with Taylor Watkins, I wrote the report. 🙂  But I do have big hopes the paper can contribute to a more rational discussion of ADUs.  So many of the claims surrounding ADUs, both pro and con, are actually assumptions and preconceptions that have been batted around and recycled for nearly three decades.  For example, you can find “current” ideas like ADUs will help aging people stay on their properties, or ADUs will create crowding and decrease property values in papers as old as 1988’s Small Solutions: second units as affordable housing by the San Francisco Development Fund (a fine read if you can find it).

But in all that time the actual evidence assembled has been little more than scattered anecdotes.

Taylor and I decided to approach the issue of appraisal partly because we saw such  assumptions at play in valuations for refinancing.  It wasn’t uncommon — and still isn’t, according to conversations I had at the Build Small | Live Large summit —  for an appraiser to give an ADU a somewhat arbitrary contributory value of, say, $10,000, even when that ADU is generating >$500 or >$1000/month in legitimate rent.  That’s quite a return! Perhaps that means the ADU homeowner/developer is the Wile E. Coyote (Super-Genius!) of real estate investors.

But more likely it means that something is wrong with the appraisal process — perhaps unfamiliarity with the form of housing, or (more likely these days) the demands of institutional partners who seem to assume that every ADU is illegal, or just too complicated to think about.

So we created a rational approach to appraising properties with legal ADUs.  There was no guarantee our method would produce results ADU advocates would like, though in this case they did.  Our work supports the proposition that ADUs create value (in the long term, though perhaps not the short) for the homeowner.  In a boom market for sales but a depressed market for rent, it might have been different.

Now I’m excited about applying the objective approach to other aspects of ADUs and small, environmentally sensitive housing.   You can read my agenda going forward here.  My gut feeling is that a lot of the pro-ADU claims will turn out to be right — but whether they are or not, please, let’s talk about the evidence rather than rehashing the hash.

Just my $0.02!  – Martin John Brown

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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