Understanding and Appraising properties with ADUs Martin John Brown and Taylor Watkins

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Funder and event sponsors

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The big context for ADU development is demographics Click icon to add picture

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Americans households are getting older and smaller

They want to age in place, but are its challenging. Need for millions of new 1-2 Click icon to add picture person dwellings in next decades.

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ADUs seem like the perfect solution Click icon to add picture

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ADUs sound great to their advocates

Low Infill

environmental impact development, increases density Size = Green Development and economic impact informal support networks legit rental housing (for community) legit rental income (for owner) home values say some 5/5/12

Small

Social

Supports Provides Provides

Increased

ADUs sound horrible to a few opponents

Crowding Loss

of single family feel landlords in property value

Absentee Decline

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Most of this argument is hypothetical

All

these claims are hopes & fears

Very Very In

few of these notions have actually been tested few legal ADUs exist, so the subject is hard to study Portland, 0.3% market penetration

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What is going on in reality instead of in argument?

Stealth

apartments. Illegal ADUs.

Click icon to add picture

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There are hundreds of thousands of unpermitted ADUs

Unsafe,

Click iconbasements to add picture Mostly in

Nearly

unhealthy, mostly in east and west coast cities all rented out, because they are meeting real needs.

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Illegal units suggest money is the key issue in ADU development

With They The

ADUs, the developers are homeowners need strong motivation

most common motivation is money

There

may be social benefits, but they are secondary

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Money is key for buyers & developers of ADUs. But real estate industry isnt set up to help. Click icon to add picture

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GSE policies are at the root of much confusion Click icon to add picture

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GSEs policies create very strong suggestions on how ADUs should be perceived
Message: Message: Message:

ADU likely to be illegal ADU Of only incidental value

Otherwise they need to go into another lending program of legal ADU with real value is

Scenario

ignored

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As a consequence valuation is completely detached from reality Click icon to add picture

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What is the true value of an ADU?

The

GSEs want it to be zero. advocates want it to be a lot.

ADU

Residential Legal

appraisers have a hard time telling because of lack of comparable sales. ADUs are too rare.

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Our project:
Create Use

an alternative method of appraising properties with ADUs this method to appraise a selection of Portland properties with permitted ADUs that have already sold. We found 14. our valuations with actual sales prices.

Compare

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Two different perspectives on value

Sales

comparison uses market prices perspective uses productivity in terms

Income

of rent

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Sales comparison & income methods have different bases Click icon to add picture

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To create an Income-based valuation formula for properties with ADUs

Recognize Write

that SFRs with ADUs are very similar to duplexes out an income-based formula for a duplex it to account for the fact that the dwellings are closely associated

Modify

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The duplex formula

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The correction for close association

We 1)

came up with two different ways of approaching this. Land-based correction: corrects the GRM for the ADU based on the lack of land associated with the ADU. (A 35% reduction) Rent-based correction: corrects the rents of the units based on observed behaviors of landlords and tenants in real ADUs. (A 10% reduction on each unit)
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2)

Two different formulas to choose from: corrections for land and proximity

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Valuation Results Click icon to add picture

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Summary of Findings
An

income approach yielded valuations significantly higher than actual sales prices, by 7.2% or 9.8% on average, depending on the formula used. contributed 25% or 34%, on average, of each propertys appraised value. Valuation by income can increase appraiser insight as ADUs become common.

ADUs

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So what does all this mean? Implications depend on your role. Click icon to add picture

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For those with short term needs

Not

much has changed.

Buying

or selling a loan or a property in the short term? Market prices may be a better guide for contractors: We found that ADUs contributed roughly 30% of each propertys value. So adding an ADU = an instant 42% increase in market value? Sorry, not in the short term?
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Claims

Opportunity for those with long-term views

Homeowners

while

planning to stay in place for a

Investors Lenders All

to the above

could find higher valuations justified with the right properties

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People who want to encourage ADUs

Should Should

lobby Fannie Mae, Freddie Mac, and HUD to reform ADU policies recognize the economic motive behind ADU development (resist restrictions on legal renting) explore creation of ADU-specific financing, where rental income rather than equity is the security support research into testing ADU benefits
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Should

Should

For those wondering how important ADUs really are to the world
Basic

research will help

To

begin to test all the claimed benefits of ADUs: start with a systematic survey of owners and tenants. get a sense of their environmental potential: Start with an inventory of convertible properties in a well-chosen city or region. Follow up environmental footprint.
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To

ADUs are such a simple idea, why are they so hard to realize? Click icon to add picture

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Many Thanks

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