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.
If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event. We will do everything possible to assist you.
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I received a call recently from a Portland area real estate agent asking how a basement kitchen, installed by the homeowner without going through the usual building permit process, will affect the appraisal of her pending sale. Basement kitchens are typical around Portland, are attractive to many homebuyers, and often are not “permitted.” Issues with unpermitted areas are complicated, are much more of an issue now than in the past, and can come down to the discretion of the lender or the appraiser. However, remember that the appraiser is just reporting the facts to the lender and analyzing the marketability of those facts. The lender is concerned with liability of an unsafe improvement and the value of the collateral. Here are five factors to remember with regard to a basement kitchen.
A basement kitchen that is not permitted could be a hazard due to fire or ventilation and therefor a liability to the lender. This is usually only a factor when there is a freestanding or built-in stove or oven. Basement kitchen sinks and refrigerators typically are not seen by lenders as risky. If a range or oven is identified as not permitted or unsafe, the lender will typically condition it to be brought up to code (or outright removal) prior to funding of the loan. The appraiser will usually be asked to return and certify that the work is completed.
The appraiser is not an expert in building code. However, the appraiser should understand local building codes enough to recognize visible issues, should research codes with the appropriate authorities, and should communicate results to the client. Basement kitchens usually require electrical, mechanical, or plumbing permits that are in excess of the normal building permit to finish a basement. Asking the right questions is important.
It is not the appraiser’s responsibility to report code violations to authorities. Appraisers have a strict ethical responsibility of confidentiality. When querying local building officials (rather than saying, “This property has a basement kitchen”), the appraiser might ask, “What permits would be necessary to install a kitchen in the basement of the subject?”
The appraiser should take plenty of pictures. A simple appraiser photograph might put a nervous lender at rest because the photo shows that there is no stove or range.
Most lenders or appraisal management companies have specific instructions for an appraiser to follow when dealing with unpermitted areas or basement kitchens. An appraiser should alert the client about issues like a basement kitchen prior to delivery of the appraisal, to make sure that lender protocol is followed.
I often have discussions with other appraisers and property owners around Portland, Oregon about the difficulty of appraising vacant land. Many are surprised that it can be more difficult to appraise property without a home than with a home. There are several principal reasons for this.
When appraising vacant land, there are typically more feasible options to explore about, “What is the highest and best use of the land?” This is because, when there is already a house built (one that is in good condition) in an area of similar homes, it is usually easy for the appraiser to see that it would not be feasible to tear down the existing structure and build something different. However, with vacant land there may not be any homes around it, or the homes that are around the land are old and are no longer the ideal improvement for the current real estate market. The phrase “highest and best use” is important in appraising because it tells us what sales are comparable. A similar looking tract of land might be maximally productive to build a duplex, rather than a single-family residence. We would not want to compare that duplex site to property that it is more suited for a single-family residence.
Since the highest and best use question may not be obvious for vacant land, the market analysis tends to require more detail. This means that an appraiser might not only need to know the trends in vacant land sales, but also the trends in new construction sales. For example, the appraiser should know what builders are building, what prices builders are receiving, and how much competition there is with different types of improvements to help estimate the ideal improvement for the subject vacant land. This kind of detailed market analysis is important with vacant land because most buyers of residential land are looking to answer the question, “How much profit will I make if I build and sell a house that costs X on this property?”
Often there are unknowns for the subject vacant land and comparable sales of land when it comes to cost for septic, well, road improvements, legal cost of obtaining easements, special foundations, and so forth. For example, many times I come across land sales that outwardly appear to be the same as the subject property. However, after interviewing the parties to the transaction, I find that the comparable development required utilities and road improvements (including sidewalks) to be installed. These represent a cost that the buyer of the vacant land acquires that may not be precisely known at the time of purchase. Therefore, the buyer of the vacant land must factor a risk premium into the purchase price that accounts for time and unknown costs. Appraisers call that risk “entrepreneurial incentive.”
In addition to all of the above, land is particularly difficult to appraise in Portland, Oregon and many of the surrounding suburban and rural areas because there are fewer overall comparable sales. Vacant land does not tend to sell as often as homes and there is now very little vacant land available to build on around Portland. Therefore, where a typical home may have several similar properties within a one mile radius, a vacant piece of land might require searching Portland’s entire east side for similar sales. To make matters worse, many vacant land sales occur outside of the local multiple listing service as a result of builders approaching land owners or because of “across-the-fence” deals. Finding and verifying these sales through vague county records data can be extremely tedious and time consuming.
If you find this information interesting or useful, please subscribe to our blog and like us on Facebook. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book Gary F. Kristensen to speak at your next event. We will do everything possible to assist you.