Rental Income for an ADU

[TruJa]

I'm working on a conventional refinance for a home with an (illegal/unpermitted) ADU. The primary home has a lease for ~$2400, and the ADU has a lease for ~$850. It is an unpermitted "ADU". It is also not legal in the sense that local code requires some form of owner occupancy for an ADU to qualify as an ADU. I'm not concerned about how to handle an illegal ADU in the sales comparison approach. I'm more interested in the Income Approach requirements for Fannie. In the selling guide Chapter B2-3-04 indicates that, "A borrower must qualify for the mortgage without considering any rental income from the ADU." Rental comps with an ADU are not comparable because almost any that I can find are short-term rentals with "projected" monthly rental income instead of comparable long term rentals.

I guess my question is, how to handle this appropriately on a 1007? Should I exclude the rental income for the illegal ADU? If the market value per HBU must be a legal use, and the only legal use for this as an ADU would be if one of these units is occupied by an owner, then by definition the market value could only accept rental income from one of these units? I was up late last night reviewing a bad report, so maybe I'm just looking for an easy way to handle this.... but I want to be right too.

 

[glenn walker]

I would note it but not include it unless your doing it as 2 Units- LOL

 

[Dublin ohio]

I'm working on a conventional refinance for a home with an (illegal/unpermitted) ADU. The primary home has a lease for ~$2400, and the ADU has a lease for ~$850. It is an unpermitted "ADU". It is also not legal in the sense that local code requires some form of owner occupancy for an ADU to qualify as an ADU. I'm not concerned about how to handle an illegal ADU in the sales comparison approach. I'm more interested in the Income Approach requirements for Fannie. In the selling guide Chapter B2-3-04 indicates that, "A borrower must qualify for the mortgage without considering any rental income from the ADU." Rental comps with an ADU are not comparable because almost any that I can find are short-term rentals with "projected" monthly rental income instead of comparable long term rentals.

I guess my question is, how to handle this appropriately on a 1007? Should I exclude the rental income for the illegal ADU? If the market value per HBU must be a legal use, and the only legal use for this as an ADU would be if one of these units is occupied by an owner, then by definition the market value could only accept rental income from one of these units? I was up late last night reviewing a bad report, so maybe I'm just looking for an easy way to handle this.... but I want to be right too.

I assume by "unpermitted". You mean it does not have building permits. If so, how stringent are the local requirements. Do they enforce the laws concerning lack of building permits? You say that the ADU has to be owner occupied in some "form". The other question is. Regardless of the ADU having to be "owner" occupied. Can rent be charged?

 

[TruJa]

I assume by "unpermitted". You mean it does not have building permits. If so, how stringent are the local requirements. Do they enforce the laws concerning lack of building permits? You say that the ADU has to be owner occupied in some "form". The other question is. Regardless of the ADU having to be "owner" occupied. Can rent be charged?

Well rent IS being charged. I'm not sure what the potential insurance or liability complications are which any party to this could be subject to. If the renter throws a fit, could he get his rent back?.... I don't know. It may not be a securable source of income if pressed, but its working right now despite being illegal.

 

[OSU Beavers]

Is the ADU attached to the main house?

 

[TruJa]

Is the ADU attached to the main house?

No - it's a detached garage on county records. The local municipality (Boise) typically doesn't enforce violations unless there is a complaint or a problem. It is finished in a professional and workmanlike manner, but I can't say if the building department would let it fly as-is or not if they tried to permit it as-is.

 

[Dublin ohio]

Well rent IS being charged. I'm not sure what the potential insurance or liability complications are which any party to this could be subject to. If the renter throws a fit, could he get his rent back?.... I don't know. It may not be a securable source of income if pressed, but its working right now despite being illegal.

I realize that rent is being charged. My question is per local regulations can it be rented. I only ask because various markets in my area do not allow the ADU to be rented per regulations.

 

[TruJa]

I realize that rent is being charged. My question is per local regulations can it be rented. I only ask because various markets in my area do not allow the ADU to be rented per regulations.

Legally, it can only be rented if the primary residence is owner-occupied. Or, the primary residence can be rented only if the ADU is owner-occupied - (or vacant (edit)).

 

[glenn walker]

Well rent IS being charged. I'm not sure what the potential insurance or liability complications are which any party to this could be subject to. If the renter throws a fit, could he get his rent back?.... I don't know. It may not be a securable source of income if pressed, but its working right now despite being illegal.

It's not Illegal its An-UN-Permitted Use - Greg ( RIP ) used to say on here, People commit crimes not Properties LMAO

 

[Surf Cat]

I would explain in the report what you've discovered but not include it. Reconcile with most weight on the SCA.

1. Code requires some form of owner occupancy for ADU to qualify.
2. It's a non-permitted converted garage. Hopefully there's no natural gas in there as, it may not be vented properly for that.
3. Does zoning require 2 car covered parking? If so, that's out.

I know the below is from California....but I would assume some items would be similar in Idaho.

https://www.tobenerlaw.com/renting-an-illegal-unit/

If that doesn't scare the bejeebers out of you and put your E&O in the back of your mind....well good luck then.