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

[J Grant]

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.

The best reason to make the extra effort such as extending a search is to satisfy ourselves - not to satisfy the lender. By ourselves, I mean the support for X in the service of the appraisal credibility.

 

[Tawfik Ahdab]

The OP wrote:

“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. “

I can propose an answer once you tell me what the typical site to value ratio is for single family residences in that neighborhood. Please let me know.

 

[Terrel L. Shields]

income approach is not useful

The rents and vacancy will tell you if 'demand' exists for rentals - important info really

Cost approach = garbage

Wrong. In the absence of sales, you can go back in time, sure, but how valid is that if you were going back 10 years? Not. And further afield??? Is a small town problem served well by a big city sale? Prolly not. Colorado is a big state and lots of small towns. How relevant is "sales" info from say, Colorado Springs, to a town like Walsh and Kit Carson out on the plains, or even Fountain or Woodland Park?

So whether or not which approach to make an ADJUSTMENT is most applicable - extracted from a single sale (weak), far distant in time and space (even weaker); or, using an income based report (again any single data point is weak); or, when you can get reasonable COST data and make a reasonable estimate of EFFECTIVE AGE and in the absence of much other data, I'd say the cost related method (WHICH IS NOT THE COST APPROACH) works as well as anything else and it is DEFENSIBLE.

If better data are available use it. But until we know what town the OP is having trouble finding data from, it's hard to say which approach will provide the best and most reasonable contributory value.

 

[Carnivore]

You do what you have to do in the absence of other data or aged other data aka sale

The depreciated cost is the value of an asset after its useful life is complete, reduced over time through depreciation. The depreciated cost method always allows for accounting records to show an asset at its current value as the value of the asset is constantly reduced by calculating the depreciation cost.

 

[Gerry Sauceda]

Wouldn't an extreme lack of ADU's in the market indicate a fail for acceptability of that feature? Going to distant markets or significantly back in time to find an ADU really doesn't support the market reaction to such a feature in the subject market in my opinion. And if you do find an ADU in a different market, is it the same quality, size, zoning conforming, etc.? Usually not.
How do you account for the many variables that arise with the comp. I will usually go back 2 years, and if I find nothing, the best supportable value in my opinion is a big goose egg.

 

[Fernando]

Each property is unique and might have to use creative ways in determining ADU contribution to value.
Face with dilemma, you researched all possibilities related to your ADU issue and choose best procedure in dealing with it given your limited data.

 

[J Grant]

Wouldn't an extreme lack of ADU's in the market indicate a fail for acceptability of that feature? Going to distant markets or significantly back in time to find an ADU really doesn't support the market reaction to such a feature in the subject market in my opinion. And if you do find an ADU in a different market, is it the same quality, size, zoning conforming, etc.? Usually not.
How do you account for the many variables that arise with the comp. I will usually go back 2 years, and if I find nothing, the best supportable value in my opinion is a big goose egg.

/The OP stated in his post he sees a lot of ADU's being built in the area and a zoning change allows them - I agree with your comment wrt if an amenity is popular in an area, we expect to see at least a few sales of them. But that looks to be changing wrt newer zoning change allows them and there building of ADu's seen, which shows area demand (below from his post)

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.

 

[Mark K]

I will usually go back 2 years, and if I find nothing, the best supportable value in my opinion is a big goose egg.

I can't believe there are still appraisers that will attribute a $0 amount to an amenity because they can't find a comp.

 

[Elliott]

How? You can take a class and get a feeling for how other appraisers view them. When they started popping up, a Portland appraiser developed a regression analysis and was teaching seminars. But ADUs are like Solar System, some people seem to think they are worth more than other people think.

Appraisal Institute:

 

[J Grant]

Separating the value contribution of an ADU out even when there are comps is difficult - all we can do is provide the best support available.

Consider that an ADU can also be used for other flexible uses such as a home office or even storage space. I've seen some filled with boxes . Which means other out buildings that serve a purpose can be used to extract a value contribution. Talk to area RE agents, ask them if buyers like an ADU or how have their listings with ADU's fared etc.

Sometimes with no strong sales support a combo of support can compensate - use them all -the depreciated cost approach, income stream (if applicable ) , RE agent surveys, and whatever sales or listings are out there to be had. Mention what is happening in the area - zoning changes or builder trends -