Appraising Properties with

ADUs

Appraising Properties with Accessory Dwelling Units

There have always been properties with “mother-in-law apartments” also known as Accessory Living Units (ALUs) or
Accessory Dwelling Units (ADUs). Many communities faced with housing shortages are now promoting Accessory
Dwelling Units (ADUs) so appraisers are likely to be seeing more assignments that include some kind of ADU to include
in the valuation process.

The following article is based on our experience with dual living arrangements and is meant to add to the ADU
discussions already underway. Please feel free to comment.

Michael N. Read
State Certified General Appraiser

DEFINITIONS

Dual Living
Is a term that seems to cover parallel usage of residential property by related or non-related parties.

Duplex
A duplex is most often built as two separate living units with a common party wall and mirror image units on either side..

However, some duplexes are made by modifying existing single family homes to create two separate living units possibly
with different floor plans. When the owner lives in one unit and the other unit is occupied by a tenant or family member this qualifies as a Dual Living arrangement. Comparable sales for duplexes are easily searched for in the MLS 2-4 family units section.

Accessory (Auxiliary) Living Unit (ALU)
These go by several names such as “mother-in-law apartment,” “granny flat,” “studio apartment.” They can be located in
a basement, up in an attic over the main living area or even over an attached garage or by garage conversion. They have a separate entry, kitchen and bath facilities though not necessarily a separate bedroom. The quality of the ALU can be equal to, superior or inferior to the main living unit.

Accessory (Auxiliary) Dwelling Unit (ADU)
These are separately constructed dwellings that can also be called “mother-in-law” apartments or “guest houses’ or in the more expensive residences a “gatekeepers house.” Local communities determine where ADUs can be built and regulate
style, size, access and parking facilities. The quality of the ADU can be equal to, superior or inferior to the main living unit. The appraiser should determine if the ADU is a legal addition to the residence before proceeding with any valuation.

Residences with Acreage and Outbuildings
In our service area of Marion and Polk counties of Oregon we encounter many properties with a wide variety of
outbuildings that range in size from a small shed to a horse riding arena. Often there are dual living arrangements which can include a second residence, converted barn/shop or a manufactured home. The appraiser has to determine which of the following valuation methods best suits the ALU/ADU situation based on quality and condition. Some assignments may need a hybrid approach to the valuation which is a Sales Comparison indicated value modified by adjustments created by a cost or income analysis of the ADU.

VALUATION
The three approaches to valuation (Sales Comparison, Replacement Cost and Income Capitalization) still apply but it is
important to identify the type, quality and condition of the accessory unit before embarking on any valuation approach.

Sales Comparison Approach
As of this writing there are too few sales of homes with ADUs in the MLS to extract useful comparative data. That will
likely improve over time as more units are created and efforts to add to the data get underway.
Often the MLS or Zillow add the GLA, #Beds/#Baths of the accessory unit to the GLA, #Beds/#Baths of the main
dwelling and note them as a beneficial appointment. The ALU can then be valued integral with the main dwelling. This
method allows the subject with an integral ALU to be compared directly with larger GLA homes without an ALU. Any
differences in quality can be handled using an adjustment. This method is not valid when the subject has a separate ADU
because the two dwellings with combined GLAs are not comparable to one larger home.
The loss of functionality (loss of privacy) of the main dwelling due to the presence of the ALU is more likely to occur
with an ALU than with the separately constructed ADU, although not completely. This will be hard to determine due to
the great variety of dual living situations. Buyers of homes with an ALU/ADU will show their preferences. Some buyers
may ignore the ALU/ADU with the intent to convert it back into the main living area.

Replacement Cost Approach
ALU/ADUs can be valued by individual replacement cost approaches being mindful of any quality differences between
the main house and the accessory unit. There will be no site value since the site belongs to the main dwelling. The percent of depreciation may also be different based on age and condition. There is not much room on the URAR form for a
separate cost approach calculation so it can be included within the comments section above and added to the total later
with a detailed explanation.

Income Capitalization Approach
If the ADU is rentable (occupied or vacant) the income approach can be useful using market rent and a local Gross Rent
Multiplier. Rental data can be found using some MLSs, Craigslist or Zillow.

MLS Searches
As a member of WVMLS we start our ALU/ADU search using Secondary Features – Dual Living/Yes/Must Have – then
restrict the time frame (back 1 year) and select the market area (Salem) and see the Count at 82. The search data can then be refined for proximity, site size and other pertinent factors.