Portland Area Real Estate Appraisal Discussion

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 18^th, 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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Thanks for reading,

Gary F. Kristensen, SRA, IFA, AGA

Great parody. My mother-in-law happens to love an HGTV show that focuses on tiny homes. Personally I don't need a lot of space, but 400 sq ft would be a little too small for my style. It's a good move for Portland to allow ADUs. It seems fitting for property owners to be able to have more utility on their site - especially in light of the higher cost of living these days.

Cute video, Gary. Indeed, ADU's can be a challenge.Coincidently I had an appraiser friend calling yesterday asking if I had any recent data on ADU’s. This type improvement is scarce in our area. We also have some municipalities where the ADU is allowed under certain zoning classifications; however it can’t be used for income producing purposes. As you point out in the article, it’s better to have an appraiser who is familiar with this type property.

Very interesting read and what a challenge for appraisers in your area.

Great topic about appraisals of accessory dwelling units. In Chicago we see all the same problems you describe.

Thank you Ryan, Wendell, Casey, and John for the comments. Ryan, I did not know that there was an HGTV show on tiny homes. Casey, Often I will call other appraisers looking for comparable sales of ADU properties. It seems that people with ADUs do not sell as often as other properties. Wendell, Yes ADUs are a challenge in our area, but I think things will get better as they become more normal in the sales data. John, It is interesting to hear that there are similar trends with ADUs in other cities.

That's a great video to go along with this informative post Gary. I've never really done this type of appraisal but it seems like that while you may have a tiny house that will not necessarily mean you have a tiny appraisal fee. Seems like the work required to do one of these would require a substantial appraisal fee. ;-)

You're absolutely right Tom. Small house is probably lots of work.

Thanks for this insightful and MUCH NEEDED discussion and I hope our next appraisal here in Minneapolis is done by someone more knowledgeable than the last. If the idea is to provide families supplemental income and increase quality rental housing in urban areas there has to be a fair way to account for the cost of creating one. Remember that not everyone that builds these is a trust fund recipient or dual income household with no children. As a carpenter and general contractor I spent the last year building an ADU myself and even with a tenant the reappraisal and refinancing process is extremely difficult and unfair. Cost does not always translate to value but our first appraisal was only 8% higher than the one we got before construction. In essence we built a 1 bedroom house in our backyard and its getting overlooked completely. Something must be done. Before we spend another 4-500 bucks that we don't have on another appraisal we will be prepared. If an appraiser is not familiar with ADUs or willing to assess them as a separate dwelling with rental income can we say "no thanks" without losing our fee? There are NO comparables here since everyone that builds these stays put due to cost. it will be years before anyone sells. Its such a new concept. We are stuck and after working weekends and evenings all year on our ADU Im back to weekends and evenings to pay our loan minimums until someone can fairly appraise and we can refinance. I have 3 kids 6 and under who miss their dad because he has been working for the last year solid. Sorry for the Soapbox Rant but the system is currently flawed. If we sold it would go for twice the value of pre-construction. Thanks again for the topic Gary. Its a wasteland out here I hope others catch on. Any referrals to lenders or appraisers in the midwest that get it would be appreciated.