ADU Deck Mjb

8/3/2019 ADU Deck Mjb

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Understanding and Appraising

properties with ADUs

Martin John Brown

andTaylor Watkins


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Funder and event sponsors


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Click icon to add picture

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The big context for ADU developmentis demographics


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Americans households are gettingolder and smaller

They want to age in place, but are itschallenging. Need for millio

ns of new 1-2person dwellings in next decades.


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ADUs seem like the perfect solution


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ADUs sound great to their advocates

Low environmental impact

Infill development, increases density

Small Size = Green Development

Social and economic impact

Supports informal support networksProvides legit rental housing (for community)

Provides legit rental income (for owner)

Increased home values say some


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ADUs sound horrible to a fewopponents

Crowding

Loss of single family feel

Absentee landlords

Decline in property value


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Most of this argument is hypothetical

All these claims are hopes & fears

Very few of these notions have actually beentested

Very few legal ADUs exist, so the subject ishard to study

In Portland, 0.3% market penetration


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What is going on in reality instead of inargument?

Stealth apartments. Illegal ADUs.


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There are hundreds of thousands ofunpermitted ADUs

Unsafe, unhealthy, mostly in east and westcoast cities

Mostly in basements

Nearly all rented out, because they aremeeting real needs.


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Illegal units suggest moneyis the keyissue in ADU development

With ADUs, the developers are homeowners

They need strong motivation

The most common motivation is money

There may be social benefits, but they aresecondary


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Money is key for buyers & developersof ADUs. But real estate industry isntset up to help.


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GSE policies are at the root of muchconfusion

GSE t t


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GSEs po c es create very strongsuggestions on how ADUs should beperceived

Message: ADU likely to be illegal

Message: ADU Of only incidental value

Message: Otherwise they need to go into

another lending program

Scenario of legal ADU with real value is

ignored


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As a consequence valuation iscompletely detached from reality


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What is the true value of an ADU?

The GSEs want it to be zero.

ADU advocates want it to be a lot.

Residential appraisers have a hard time telling

because of lack of comparable sales.

Legal ADUs are too rare.


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Our project:

Create an alternative method of appraisingproperties with ADUs

Use this method to appraise a selection of

Portland properties with permitted ADUs thathave already sold. We found 14.

Compare our valuations with actual salesprices.


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Two different perspectives on value

Sales comparison uses market prices

Income perspective uses productivity in termsof rent


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Sales comparison & income methodshave different bases


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To create an Income-based valuationformula for properties with ADUs

Recognize that SFRs with ADUs are verysimilar to duplexes

Write out an income-based formula for aduplex

Modify it to account for the fact that thedwellings are closely associated


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The duplex formula


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The correction for close association

We came up with two different ways ofapproaching this.

1) Land-based correction: corrects the GRMfor the ADU based on the lack of landassociated with the ADU. (A 35% reduction)

2) Rent-based correction: corrects the rents of

the units based on observed behaviors oflandlords and tenants in real ADUs. (A 10%reduction on each unit)


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Two different formulas to choose from:corrections for land and proximity


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Valuation Results


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Summary of Findings

An income approach yielded valuationssignificantly higher than actual sales prices,by 7.2% or 9.8% on average, depending onthe formula used.

ADUs contributed 25% or 34%, on average, ofeach propertys appraised value.

Valuation by income can increase appraiserinsight as ADUs become common.


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So what does all this mean?Implications depend on your role.


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For those with short term needs

Not much has changed.

Buying or selling a loan or a property in theshort term? Market prices may be a better

guide

Claims for contractors: We found that ADUscontributed roughly 30% of each propertys

value. So adding an ADU = an instant 42%increase in market value? Sorry, not in theshort term?


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Opportunity for those with long-termviews

Homeowners planning to stay in place for awhile

Investors

Lenders to the above

All could find higher valuations justified withthe right properties


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People who want to encourage ADUs

Should lobby Fannie Mae, Freddie Mac, andHUD to reform ADU policies

Should recognize the economic motive behind

ADU development (resist restrictions on legalrenting)

Should explore creation of ADU-specificfinancing, where rental income rather than

equity is the security

Should support research into testing ADUbenefits


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For those wondering how importantADUs really are to the world

Basic research will help

To begin to test all the claimed benefits of

ADUs: start with a systematic survey ofowners and tenants.

To get a sense of their environmentalpotential: Start with an inventory ofconvertible properties in a well-chosen city orregion. Follow up environmental footprint.


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ADUs are such a simple idea, why arethey so hard to realize?


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Many Thanks

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ADU Deck Mjb