How do you support the value of an ADU in an area where there are no ADU transactions?

[Yuanyin]

Not sure who will have the time to read this. But hopefully something good can come out it for future readers who are in a pickle.

How do you support the value of an ADU in an area where there are no ADU transactions, yet there are ADU's being built? There is clearly a demand or they wouldn't be popping up. And they are popping up because the new zoning overlay implemented in 2021 allows ADU's in almost any standard lot around here.

The accessory unit is a 450sq ft 1930's built carriage house in the back of a 1890's Victorian home. It's permitted and recognized by the city, if demolished it could be rebuilt. The rent is $1,100 a month. The GRM in this area is about 200 for SFR and townhouses.

I though about applying the income approach. But I can't believe this thing is worth $220k. No one in their right mind would pay that for this. I could build it new for a **** ton less than that. Also these ADU's here aren't all for investors. Many are for family members. So I'm not sure that applying the income approach the way it's used for regular income-producing property is appropriate.

I briefly thought about placing a value via the cost approach, but that doesn't seem reasonable because it's an income-producing property. It does make 13k a year.

I have done quite a few appraisals with accessory dwelling units, and there have always been sales of other similar properties to support any necessary adjustments. But this is in a small township and there really isn't anything like it. At least in 30 miles. And by the time I get to “the big city” it's a completely different market. I'd rather not go to Timbuktu and try and extract out some adjustment in an urban area 40 miles away that's a completely, entirely different market.

NOTE: I'm the owner of the ADU. It's one of my rental properties, and lets say I had to “prove” the value to my wife. Which I do have to do here. Has anyone found any mathematical formula that stands up to scrutiny in this situation? Is anyone strictly using the income approach, cost approach or what?

What are other people doing when they run across ADU's where no ADU transactions are taking place?

 

[Terrel L. Shields]

I could build it new for a **** ton less than that.

Cost related method - estimate the cost, estimate the effective age and apply. If it has a RCN of $150/SF and 50% remaining life, then 450x150x0.5 = contributory value ~$34k. Since it rents $1,100 and indicates $220,000, I would report that and conclude the cost related method is superior but the income suggests there is no functional nor external obsolescence above the indicated contributory value.

You must be in a relatively remote part of Colorado - I remember there were several in Grd. Jct when I worked there and even in the towns of Cortez and Dolores - where I also lived.

 

[J Grant]

Not sure who will have the time to read this. But hopefully something good can come out it for future readers who are in a pickle.

How do you support the value of an ADU in an area where there are no ADU transactions, yet there are ADU's being built? There is clearly a demand or they wouldn't be popping up. And they are popping up because the new zoning overlay implemented in 2021 allows ADU's in almost any standard lot around here.

The accessory unit is a 450sq ft 1930's built carriage house in the back of a 1890's Victorian home. It's permitted and recognized by the city, if demolished it could be rebuilt. The rent is $1,100 a month. The GRM in this area is about 200 for SFR and townhouses.

I though about applying the income approach. But I can't believe this thing is worth $220k. No one in their right mind would pay that for this. I could build it new for a **** ton less than that. Also these ADU's here aren't all for investors. Many are for family members. So I'm not sure that applying the income approach the way it's used for regular income-producing property is appropriate.

I briefly thought about placing a value via the cost approach, but that doesn't seem reasonable because it's an income-producing property. It does make 13k a year.

I have done quite a few appraisals with accessory dwelling units, and there have always been sales of other similar properties to support any necessary adjustments. But this is in a small township and there really isn't anything like it. At least in 30 miles. And by the time I get to “the big city” it's a completely different market. I'd rather not go to Timbuktu and try and extract out some adjustment in an urban area 40 miles away that's a completely, entirely different market.

NOTE: I'm the owner of the ADU. It's one of my rental properties, and lets say I had to “prove” the value to my wife. Which I do have to do here. Has anyone found any mathematical formula that stands up to scrutiny in this situation? Is anyone strictly using the income approach, cost approach or what?

What are other people doing when they run across ADU's where no ADU transactions are taking place?

Principle of substitution cost approach, since the subject ADU is older then a deprecatiated cost - but what is the contributory value over cost, if any? That is harder to find out. Which is why some never bother and stop at a rote cost approach. However, we know the contribution can be less than or more than cost .

Talk to area RE agents, get feedback from them, how much extra are buyers willing to pay for an ADU ? since not everybody rents them out, it's value is not 100% income driven.

Sometimes with no sales of an ADU I look for a similar value outbuilding such as a workshop with garage or such - and going back in time for sales can work too.

 

[sputnam]

You approach it the same ways that you approach any feature when there is little or no sales data. Depreciated cost analysis and/or capitalization of the difference in income. You search farther in time and distance and extract the contribution of an ADU as a percentage.

 

[Tim Hicks (Texas)]

Go back in time on the MLS to see historical data. Expand your market search to a larger area.

 

[TerryRohrer]

If you have data with ADUs in other market areas, use that to establish a relationship between ADU $/ft² and GLA $/ft². Then apply that relationship to the value of GLA from your subject market area to estimate the contributory value of the subject ADU.

 

[Damienvball]

Not sure who will have the time to read this. But hopefully something good can come out it for future readers who are in a pickle.

How do you support the value of an ADU in an area where there are no ADU transactions, yet there are ADU's being built? There is clearly a demand or they wouldn't be popping up. And they are popping up because the new zoning overlay implemented in 2021 allows ADU's in almost any standard lot around here.

The accessory unit is a 450sq ft 1930's built carriage house in the back of a 1890's Victorian home. It's permitted and recognized by the city, if demolished it could be rebuilt. The rent is $1,100 a month. The GRM in this area is about 200 for SFR and townhouses.

I though about applying the income approach. But I can't believe this thing is worth $220k. No one in their right mind would pay that for this. I could build it new for a **** ton less than that. Also these ADU's here aren't all for investors. Many are for family members. So I'm not sure that applying the income approach the way it's used for regular income-producing property is appropriate.

I briefly thought about placing a value via the cost approach, but that doesn't seem reasonable because it's an income-producing property. It does make 13k a year.

I have done quite a few appraisals with accessory dwelling units, and there have always been sales of other similar properties to support any necessary adjustments. But this is in a small township and there really isn't anything like it. At least in 30 miles. And by the time I get to “the big city” it's a completely different market. I'd rather not go to Timbuktu and try and extract out some adjustment in an urban area 40 miles away that's a completely, entirely different market.

NOTE: I'm the owner of the ADU. It's one of my rental properties, and lets say I had to “prove” the value to my wife. Which I do have to do here. Has anyone found any mathematical formula that stands up to scrutiny in this situation? Is anyone strictly using the income approach, cost approach or what?

What are other people doing when they run across ADU's where no ADU transactions are taking place?

I had that problem once. Lender asked me to extend the search, so I extended the search over 10 miles in a suburban area and found one. That seemed to satisfy them.

 

[TerryRohrer]

The FNMA requirements are a fairly low bar when an ADU is present (and legally permitted by zoning):

"When there is an ADU, the appraisal report must include a description of the ADU and analysis of any effect it has on the value or marketability of the subject property. The appraisal report must demonstrate that the improvements are acceptable for the market. An aged settled sale will qualify as a comparable, and an active listing or under contract sale will qualify as a supplemental exhibit to show marketability."

B4-1.3-05, Improvements Section of the Appraisal Report (09/06/2023)

selling-guide.fanniemae.com

If I don't believe the available sale(s) I have available are comparable to and competitive with the subject, I include one as the last sale in the grid and very clearly indicate it is there to demonstrate the marketability of a property with an ADU, but is not comparable to the subject and is not relied on in developing my opinion of value.

 

[Carnivore]

The FNMA requirements are a fairly low bar when an ADU is present (and legally permitted by zoning):

"When there is an ADU, the appraisal report must include a description of the ADU and analysis of any effect it has on the value or marketability of the subject property. The appraisal report must demonstrate that the improvements are acceptable for the market. An aged settled sale will qualify as a comparable, and an active listing or under contract sale will qualify as a supplemental exhibit to show marketability."

B4-1.3-05, Improvements Section of the Appraisal Report (09/06/2023)

selling-guide.fanniemae.com

If I don't believe the available sale(s) I have available are comparable to and competitive with the subject, I include one as the last sale in the grid and very clearly indicate it is there to demonstrate the marketability of a property with an ADU, but is not comparable to the subject and is not relied on in developing my opinion of value.

The analysis/old comp does not necessarily need to be in the Grid. You could put it in a special addendum and explain the extra line item adjustment. If you want to demonstrate this in a Grid Form you could create that Grid separately and convert that extra grid as a PDF and import it into your report.

 

[Deleted member 142783]

In my opinion

If investors are not making up a major portion of the buyer pool, income approach is not useful (if we are looking for market value, which is the most probable sales price)

Cost approach = garbage


I would say look in competing towns from the same greater market area. Then look for sales in competing market areas/similar towns.

Also, I would do a market survey of agents working with buyers. Have as many conversations as possible with active agents in your market and competing market areas. Don’t use these as comps, but use the data to provide a supportable adjustment

In my experience, good/active agents generally have the “right” answer on what a particular feature is “worth”.

My 2 cents