Need help regarding Fannie Mae's criteria for an Accessory Unit

[Dublin ohio]

Thanks for your replys so far. I think it is a matter of the interpretion of "privacy" which could be open for many ideas

Which very well might be the issue. I frame it in the context of it being a "dwelling unit". What expectation of privacy do you have in the "dwelling unit" you live in. Would it be acceptable if somebody could walk into your "dwelling unit" any time they want. Even if the door is closed and you could not secure the door. Finished basements are real common in my area. Some have kitchenettes. No stove. But everything else. Fannie says removal of stove does not change the status of an adu. So conversely. Does the fact that you can easily add a stove make it an adu. Almost no one in my market would consider a finished basement and viable adu. Most adus I have seen are typically attached on the first floor or detached ranch style units. Generally for having their parents live with them and usually Mom and Dad can not easily deal with stairs anymore.. So my approach is always how does the market view them and do they bring a premium compared to a finished basement that might not fall under the definition of and adu but functions similarly.

 

[Mejappz]

Which very well might be the issue. I frame it in the context of it being a "dwelling unit". What expectation of privacy do you have in the "dwelling unit" you live in. Would it be acceptable if somebody could walk into your "dwelling unit" any time they want. Even if the door is closed and you could not secure the door. Finished basements are real common in my area. Some have kitchenettes. No stove. But everything else. Fannie says removal of stove does not change the status of an adu. So conversely. Does the fact that you can easily add a stove make it an adu. Almost no one in my market would consider a finished basement and viable adu. Most adus I have seen are typically attached on the first floor or detached ranch style units. Generally for having their parents live with them and usually Mom and Dad can not easily deal with stairs anymore.. So my approach is always how does the market view them and do they bring a premium compared to a finished basement that might not fall under the definition of and adu but functions similarly.

Most houses down here partition a small section of the house. The area will have a bathroom, bedroom, and kitchenette, so 95% of the time, they do not qualify as an ADU as Fannie defines it—the issue is primarily functional. Remove the partitioned wall, and you have access to the “main house.”

The issue is many appraisers treat this differently on the grid. Some will add this area as ‘GLA,’ and others will use a separate line item. The problem with the latter is that it can create a mess within the grid because there is no way to compare the square footage of the small area to other homes. After all, MLS and public records don’t record regions of a house that are partitioned off. At least not here.

 

[J Grant]

Need help regarding Fannie Mae's criteria for an Accessory Unit. Just trying to understand the correct way to classify an in-law suite in basement, in particular the issue of privacy. Any feedback is appreciated.

In the past, houses that have had finished basements which included a full kitchen, full bathroom, and at least one bedroom I have considered to be Accessory Units. Haven't had any pushback from lenders until yesterday when a lender indicated that the classification of finished basement area was "unexpected". It seems to be related to the issue of reasonable expectation of privacy. The lender seems to think that since there is an "open stairway" to the basement then the area should not be considered an ADU. In my opinon the stairway is not open since there is a door at the top of the stairs.

FWIW, There is a door at the top of the stairway that can be locked from inside the primary dwelling, what you typically expect from a house with a basement. Also, the finished basement area does not have separate meters, utilities, postal address, etc. It does have ingress/egress via sliding glass door and double pedestrian doors in the rear that lead to a patio which in turns has access to a path/stairs that connects to the driveway. The finished basement area is legal use per zoning, but cannot be rented out and only family members can occupy it. Also, the county does not consider that an ADU per their definitions.

Should it be classified at an Accessory Unit or just finished basement area? It seems that Fannie Mae and HUD understand that finished basement areas can be Accessory Units, but not sure why I'm getting such strong pushback on this. Maybe different technical interpretations of an Accessory Unit related to privacy? Lending guideline issues? Thanks in advance, James

It sounds more to me like a finished basement that they stuck a kitchen in ( and probably are illegally bootleg renting it out ) , Sometimes there is a grey area in defining a property what it is. the only separate egress to this basement is through the common area backyard . And though there is a door you can look, there is direct access to main dwelling ( typically an ADU has no access into the main dwelling. ) What you describe has more in common with what is called a mother in law suite, or a finished basement they put a kitchen in. fannie will I believe loan on properties with a second kitchen though then they want comps with a second kitchen. It is lender call whether to remove stove in a second kitchen situation and a lender call what qualifies for a loan. We just value the property. A lender's acceptance or rejection of the property is on their end.

 

[J Grant]

Fannie guidelines do not define what a property is. Fannie guidelines explains what type of properties they will lend on .

You as the appraiser define what a property is in a grey area situation, ..what is HBU, what is legal, what is expected in the market, what are the dominant physical characteristics. This lender is correct in questioning it. Idk if the other finished basements you called ADU met the criteria better or those lenders did not really read report or care. But there is always a possibility later for a report to get forensically reviewed.

Imo, the dividing line for ADU classification is 1) zoning, are they legal ( though fannie will lend on an illegal use, HBU analysis cites legal as a criteria ) and 2) no direct access between the main dwelling and the ADU. A door that can be locked from inside still is a direct access.

 

[shrubberyvaluation]

It sounds more to me like a finished basement that they stuck a kitchen in ( and probably are illegally bootleg renting it out ) , Sometimes there is a grey area in defining a property what it is. the only separate egress to this basement is through the common area backyard . And though there is a door you can look, there is direct access to main dwelling ( typically an ADU has no access into the main dwelling. ) What you describe has more in common with what is called a mother in law suite, or a finished basement they put a kitchen in. fannie will I believe loan on properties with a second kitchen though then they want comps with a second kitchen. It is lender call whether to remove stove in a second kitchen situation and a lender call what qualifies for a loan. We just value the property. A lender's acceptance or rejection of the property is on their end.

I agree there is a grey line. In a county where detached ADUs are not allowed a homeowner converted a garage into a place with a living area, full bath, kitchen, and 2 seperate areas with privacy. I asked the county zoning if they consider it an ADU and I was told it depends on what the owners are using it for, not how it is configured. They said detached finished areas are allowed (Im thinking they don't want people sleeping in them). I don't believe there were permits. Go figure that one out....

 

[shrubberyvaluation]

Fannie guidelines do not define what a property is. Fannie guidelines explains what type of properties they will lend on .

You as the appraiser define what a property is in a grey area situation, ..what is HBU, what is legal, what is expected in the market, what are the dominant physical characteristics. This lender is correct in questioning it. Idk if the other finished basements you called ADU met the criteria better or those lenders did not really read report or care. But there is always a possibility later for a report to get forensically reviewed.

Imo, the dividing line for ADU classification is 1) zoning, are they legal ( though fannie will lend on an illegal use, HBU analysis cites legal as a criteria ) and 2) no direct access between the main dwelling and the ADU. A door that can be locked from inside still is a direct access.

It is always murky to me, I have seen areas where basement ADU's are not uncommon but it is not allowed by zoning. HBU would say it is not legal so having an ADU is not the highest and best use, but if enforcement is minimal to non-existent what do you do? Your opinion of market value might not be in line with what a typical buyer will pay if they don't care about the highest and best use where an ADU is not allowed.

 

[J Grant]

It is always murky to me, I have seen areas where basement ADU's are not uncommon but it is not allowed by zoning. HBU would say it is not legal so having an ADU is not the highest and best use, but if enforcement is minimal to non-existent what do you do? Your opinion of market value might not be in line with what a typical buyer will pay if they don't care about the highest and best use where an ADU is not allowed.

aha that is where the art of valuation comes in....The bootleg uses and semi legal or illegal uses of properties is called a value in use. It can not be HBU because one of the tests of HBU is legal. However, when a number of property owners purchase based in part on their plans of value in use ( counting on lax or no enforcement ), that aspect gets baked into the prices.

Value in use cites the $ value may be the same as, or higher than, or lower than market value.

 

[jay trotta]

Need help regarding Fannie Mae's criteria for an Accessory Unit. Just trying to understand the correct way to classify an in-law suite in basement, in particular the issue of privacy. Any feedback is appreciated.

In the past, houses that have had finished basements which included a full kitchen, full bathroom, and at least one bedroom I have considered to be Accessory Units. Haven't had any pushback from lenders until yesterday when a lender indicated that the classification of finished basement area was "unexpected". It seems to be related to the issue of reasonable expectation of privacy. The lender seems to think that since there is an "open stairway" to the basement then the area should not be considered an ADU. In my opinon the stairway is not open since there is a door at the top of the stairs.

FWIW, There is a door at the top of the stairway that can be locked from inside the primary dwelling, what you typically expect from a house with a basement. Also, the finished basement area does not have separate meters, utilities, postal address, etc. It does have ingress/egress via sliding glass door and double pedestrian doors in the rear that lead to a patio which in turns has access to a path/stairs that connects to the driveway. The finished basement area is legal use per zoning, but cannot be rented out and only family members can occupy it. Also, the county does not consider that an ADU per their definitions.

Should it be classified at an Accessory Unit or just finished basement area? It seems that Fannie Mae and HUD understand that finished basement areas can be Accessory Units, but not sure why I'm getting such strong pushback on this. Maybe different technical interpretations of an Accessory Unit related to privacy? Lending guideline issues? Thanks in advance, James

IMO; 1st highlight should meet local zoning (Health & Safety) the award goes to "Family Members Only" - per local zoning & use. Does their ADU definition refer to the "family use only" and non-rentable ?
This may be the deifference for the Lender (rentability) in their interpretation of ADU ? That may be the cause for the question ?

 

[james stephens]

Thanks for the replies. Would just like to point out that per the Fannie Mae Selling Guide, the ADU can be accessed from the primary dwelling. Also, finished basement area appears to be a typical example of an ADU, assuming it meets the other critera for an ADU. See page 267 of the Guide for details. Below is from Fannie Mae.

The ADU may, but is not required to, include access to the primary dwelling. However, it is not considered
an ADU if it can only be accessed through the primary dwelling or the area is open to the
primary dwelling with no expectation of privacy.

Examples of ADUs include, (but are not limited to):
• a living area over a garage,
• a living area in a basement,
• a small addition to the primary dwelling, or
• a manufactured home (legally classified as real property).

 

[shrubberyvaluation]

aha that is where the art of valuation comes in....The bootleg uses and semi legal or illegal uses of properties is called a value in use. It can not be HBU because one of the tests of HBU is legal. However, when a number of property owners purchase based in part on their plans of value in use ( counting on lax or no enforcement ), that aspect gets baked into the prices.

Value in use cites the $ value may be the same as, or higher than, or lower than market value.

Right but for Fannie they want HBU always I thought, so why compare it to 3 others with illegal ADUs if you are not valuing for in use.