Why ADUs are hard to study, and confuse nearly everyone

[This is part 2 of a 13-part series on research and policy about ADUs.  For the series intro and table of contents, see here.  For the final part with conclusions, see here.]

Most discussion about ADUs is, well, confused..

Photo by Eric Kilby (Creative Commons)

There are only a few people out there to whom the idea of an ADU is truly simple and straightforward.  These are the people who really need an ADU, for example to house a member of their extended family.  It seems to be a natural, almost biological idea to turn part of one’s home into an independent dwelling.

Once these earnest, young-in-spirit homeowners start talking to other people about actually building their idea, that’s when complications and confusion start setting in.  Real estate agents, lending people, city permits people, and neighborhood activists are all likely to have something authoritative to say about what an ADU will do to their property, or what ADUs could do to the community. All the claims can really make one’s head spin.  But whatever they say, there’s unlikely to be much evidence to support it.  Most statements about ADUs are just re-statements of assumptions about ADUs.

Here’s why any conversation about ADUs tends to go in circles.

Permitted ADUs are quite rare in the United States.   Portland, Oregon, is widely considered to be a leader in ADU development, but currently has about 800 ADUs out of approximately 148,000 properties where they could be permitted–a penetration rate of 0.5%.   (Some places in western Canada have more, but for whatever reason this does not seem to be part of the discussion.)

This rarity has ramifications all across the board.  For anyone professionally involved with real estate and construction, from city inspectors to appraisers to real estate agents, it means that they are simply unfamiliar with the housing form, and may make incorrect assumptions about it. For example, when I studied real estate listings for properties with ADUs several years ago, I realized that some real estate agents assumed any ADU was illegal.

For serious researchers, it means that permitted ADUs are difficult to study — it is hard to get enough properties together in one place to get a decent sample.   That means there have been very few studies with any data — I listed the handful here.

The lack of studies means that most discussion about the effects of ADUs is prospective – it voices benefits or fears that might be realized in the future, not observations about the effects of ADUs that currently exist.  For example, when someone says something like “ADUs will raise [or lower] property values” it is a projection.  It might turn out to be right, but it’s not likely to be based on experience with existing properties.

Illegal units confuse the picture. Unpermitted ADUs appear to be more plentiful than legal ones, especially in areas with high rental demand (such as Boston and the San Francisco Bay area). In some densely occupied East and West Coast communities, illegal ADUs might compose 2% – 10% of housing stock. These ADUs are hard to characterize because they are “off the record,” but certainly some of them are substandard and unsafe.

Is the experience of cities and neighborhoods with illegal ADUs relevant evidence for what permitted ADUs might do?  Given the gulf in quality between the typical legal ADU and the illegal ones I have seen, I have my doubts.  In any case a policy direction to “encourage illegal ADUs” seems unlikely to be part of civic debate.

For a rare form of development, there is a huge abundance of names.  ADUs might also be called “auxillary dwelling units,” “secondary suites”, “mother-in-laws”, “SDUs”, “multigenerational houses,” and dozens of other things. Recently news stories have connected “tiny houses” and ADUs, which is sometimes but not always accurate. This Babel makes sensible communication very difficult.  For example, a seller of real estate might tout an “in-law-unit” while a buyer vainly searches for a “granny flat”.  It would be great if everybody could just settle on one name.

Two units, one owner.  An ADU is, by definition, part of the same property as the main home.   By definition, the ADU can’t be bought or sold separately from the main home. This can create an unusual situation — a 2-unit property on a street that is zoned “single family residential.”

GSE regulations seem to demand extremely creative — dare I say willfully inaccurate? — appraisals.  This is a bit of a geeky detail, but it’s important, so hang with me.  Appraisals are key to lending, and the regulations of national “GSEs” such as Fannie Mae have a big influence on how appraisals are conducted.  To a GSE, that contradiction I spoke of above (a 2-unit dwelling in a neighborhood that is zoned for single-family homes) may not compute. Though the property and its ADU are completely legal by local standards, the institution may have no suitable category within which to place the property .

The lender/agent can resolve this contradiction in various ways, but the usual approach seems to be to lump the property with standard single family residences and to treat the ADU as something that is illegal and/or has minimal value.  They may use some proxy measure (such as the number of electric meters) to give “support” for their single-family classification.  And there may be a suggestion from the GSEs — a very strong one — that the contributory value of the ADU be found to be remarkably low, for example $10,000. In short, the lending program seems to be influencing the appraisal.   This likely suppresses the value of ADUs in real estate transactions.  For details see the full text of this paper.

Finally, the “developers” are homeowners. The typical ADU is not created by a professional real estate developer. Rather, it is created by a homeowner who starts with a conventional single family property and does the work of a developer: contracting with designers and builders, paying for permits, wrangling with plans examiners, and taking on financial risk.  These homeowner-developers also tend to live on the property—even, at least in Portland, when they are not required to.

Meanwhile, many people involved in ADU policies or debate — whether they are city staff or affordable housing activists — seem to base their expectations on the experience and calculation that would be expected from professional developers.  This, I am guessing right now, is a significant misconception.

Now you know why ADUs are so hard to talk about factually: they are a truly unusual form of development.  Besides being rare, their “grassroots” genesis means they might not meet some standard expectations about the real estate business — hopefully, for the better.

This web site, and especially this series of posts, aims to clear the air a bit by presenting actual evidence about ADUs.  I hope you’ll stick with me as I report and expand on the findings from my recent study of Portland ADUs.  See you next week!

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next week: do ADUs actually provide housing?

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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