ADU adjustments - contributory value and/or rental income

[DA4]

Hello,

My search for ADU in the forums resulted in zero threads. If someone knows a thread that exists and discusses the methodologies to determine the adjustment for an ADU, please share.

There are more ADUs in my market than cities and counties know about due to the limited housing inventory and increasing mortgage rates. My subject does NOT have an ADU, but 3 possible comps and 1 listing do have ADUs. The city defines and ADU has either a finished basement with a full kitchen with or without exterior egress OR a detached building with living, kitchen and bedroom at a minimum.

Thoughts on how to determine ADU value?

Thanks!

 

[alebrewer]

Paired sales analysis?

 

[J Grant]

Hello,

My search for ADU in the forums resulted in zero threads. If someone knows a thread that exists and discusses the methodologies to determine the adjustment for an ADU, please share.

There are more ADUs in my market than cities and counties know about due to the limited housing inventory and increasing mortgage rates. My subject does NOT have an ADU, but 3 possible comps and 1 listing do have ADUs. The city defines and ADU has either a finished basement with a full kitchen with or without exterior egress OR a detached building with living, kitchen and bedroom at a minimum.

Thoughts on how to determine ADU value?

Thanks!

Why are you choosing and using so many comps with an ADU , when your subject does not have an ADU?

What about choosing comps that do not have an ADU ? They would be more similar to the subject and not require the adjustment.
Sometimes we have to use a comp or two with an ADU for a non ADU subject but this sounds excessive.

Compare on grid some sales of houses that have an ADU with similar houses that do not have an ADU - them the paired sales per post 2 to extract the adjustment

 

[CGinMN]

Developing an adjustment for an ADU is no different than any other feature. Depending on the availability of data the best method is market extraction through paired sales. From there you can refine/validate the adjustment to see if it's at all related to the potential rental income and/or depreciated cost. If the subject doesn't have a good configuration for an ADU setup, then I would avoid analyzing sales with ADU.

 

[DA4]

Thanks for the response. Please let me clarift: I won't use all possible comps with ADUs, I just need one with GLA greater than my subject. I have two comps with lower GLA than subject without ADUs.

The marketing area is small and few comps for subject. Any comp that brackets upper end of GLA (+25%) have the ADUs. Including 2-story & multi-levels results in many GLA greater than +25% where GLA $/sqft isn't accurate. I considered paired sales analysis, but wanted to see if there are other methodologies/approaches I wasn't aware of and should consider.

 

[DA4]

Developing an adjustment for an ADU is no different than any other feature. Depending on the availability of data the best method is market extraction through paired sales. From there you can refine/validate the adjustment to see if it's at all related to the potential rental income and/or depreciated cost. If the subject doesn't have a good configuration for an ADU setup, then I would avoid analyzing sales with ADU.

Thanks for your response. I have not done much with income or 1-4 unit multi-family properties. Where would learn more about potential rental income and/or depreciated cost?

 

[J Grant]

Thanks for your response. I have not done much with income or 1-4 unit multi-family properties. Where would learn more about potential rental income and/or depreciated cost?

Not all ADU's are rented and in some areas almost none are. Even if they are rented, for SF properties the relevant adjustment is what the market pays for them regardless of potential income stream.

 

[CGinMN]

I agree that your primary method should be some type of market extraction using paired sales. It sounds like you have enough data in the market to do this.

As to cost- and income-based analyses, it depends on what you already know. Knowledge of these topics is fundamental to valuation. So, if all you know is what you learned in Basic Appraisal Procedures 3-5 years ago, then you might need to find someone locally who is willing to help you. If you understand the fundamentals, you can find books, take specialized classes from the Appraisal Institute, and read old posts from the forum to expand your knowledge. Other ways to learn are by observing the market, interviewing others with specialized knowledge, and reading as many appraisal reports as you can find, including commercial reports which often deal with more complex issues. There is a book called Appraising The Tough Ones by Frank Harrison that talks about creative ways to value complex residential properties and it explores a lot of different techniques.

 

[J Grant]

Thanks for the response. Please let me clarift: I won't use all possible comps with ADUs, I just need one with GLA greater than my subject. I have two comps with lower GLA than subject without ADUs.

The marketing area is small and few comps for subject. Any comp that brackets upper end of GLA (+25%) have the ADUs. Including 2-story & multi-levels results in many GLA greater than +25% where GLA $/sqft isn't accurate. I considered paired sales analysis, but wanted to see if there are other methodologies/approaches I wasn't aware of and should consider.

What does this mean - are you adding the ADU to the main house for larger SF?

I would try to expand the market area if possible and find a larger sf house without an ADU -

 

[Airstream]

It depends upon how much GLA difference there is. If it is 50 to 100sf difference, then i wouldn’t sweat it. You are better off using a good comp without an ADU then to bracket the GLA of the subject with a house that has an ADU (IMHO). The reason I say that is because ADU’s can be quite different. I just think it would be easier to explain a GLA adjustment than an ADU adjustment. Going out further would also help (if possible).