Do not miss the above parody video on Portland tiny homes. It is the hilarious and the perfect introduction for an article on Portland accessory dwelling units.
An accessory dwelling unit (ADU), also known around Portland, Oregon as “granny flats, mother-in-law apartments, and carriage houses” is a second residential living unit on an existing single-family home site. ADUs became popular in Portland in 2010 after the city waived many development fees as a way to increase density and affordability. Portland ADUs come in many shapes and sizes. An ADU can be created by building a small detached home next to (but a minimum of six feet away from) an existing home, by adding an attached unit onto the existing home, or by converting a portion of the existing home, garage, basement, or attic into a unit.
Appraising ADUs is difficult because each is unique and because there are often few comparable sales of other accessory unit properties. Additionally, it is common that ADUs have been built without proper permitting, and income from accessory units is not directly comparable to other more common income properties such as apartments or small detached homes. Rather than write a book about appraising accessory units, here is a list of some interesting appraisal-related facts about ADUs in Portland.
1. All residential zones in Portland allow for accessory units. This means that when an appraiser considers the highest and best use of a property in Portland, adding an accessory unit should be a legally-permissible consideration.
2. In the City of Portland, ADUs and the main house can usually be legally rented, just as with a traditional duplex. However, many of the municipal areas surrounding Portland do not allow renting. It is important for appraisers to understand the legal uses of the ADU because that could change the type of buyers who would be interested in the property.
3. In Portland, ADUs cannot exceed 800 square feet or 75 percent (including basement) of the main home.
4. The kitchen defines an accessory unit in Portland. Simply having a bedroom or a second living space is not considered an accessory unit. Also, ADUs do not require the separately metered utilities or additional parking that are common with a typical duplex.
5. Many ADUs in Portland were created outside of the permitting process. Such units may be unsafe and might not add value to the home. Legally permitted ADUs can be extremely valuable and many are becoming more valuable with the popularity of the “tiny home” and the proliferation of vacation rentals like Airbnb.
6. Sometimes accessory units will have very high site development costs due to sidewalks, permits, the need to match the existing home, utilities, and such. Builders have indicated to me that a person can spend $50,000 before even beginning construction of a detached unit.
7. When building an accessory unit, your entire house could become subject to additional tax due to reappraisal of the whole property and not just the addition of the accessory unit. (Click here for a recent article that shows citizens are upset about this and that reappraisal requirement might be changing in the future.) However, remember that tax laws are complex. Anyone considering building an ADU should first consult with the assessor.
8. Mortgage lenders often are not experienced with providing loans on homes that have ADUs, nor do many appraisers have experience with valuation of them. These two factors, combined with very few comparable sales, different ways for appraisers to report appraisals of homes with ADUs (as a Duplex on a 1025 form or a Single Family with ADU on a 1004 form) can make it challenging to refinance or purchase a home with an ADU. If you need to get a loan on a home with an ADU, I recommend the following.
a. Find a lender with experience in ADUs and income-producing properties. Often local credit unions will have more experience and offer loan options for borrowers with ADUs.
b. Ask your lender to select an appraiser who has experience in ADUs.
c. Provide the appraiser and your lender with documentation that your ADU was legally permitted. Also, list information about rental income, expenses, and detail construction costs (if your unit was recently constructed).
d. If you’re an appraiser, it is important to openly discuss the ADU appraisal with the client before accepting or proceeding with the assignment. Lenders who do a lot of loans for ADUs will often have a specific list of appraisal requirements to follow when appraising ADUs. Following lender guidelines will help appraisers avoid the problems and delays that come from client expectations not aligning with the final appraisal product.
If you want to learn more about appraising ADUs in Portland, I recommend taking Taylor Watkins’ class at Earth Advantage on February 18th, 2016.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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