A Property Comparable to The Single-Family Home You Are Appraising

Are you grappling with the complexities of appraising properties with Accessory Dwelling Units (ADUs)? COMPARE.EDU.VN provides expert insights on differentiating single-family residences from multi-family properties, especially when ADUs are involved. Our detailed analysis helps you navigate zoning regulations, lending guidelines, and appraisal best practices. Explore property valuation, zoning codes, and comparable sales with confidence.

Table of Contents

Understanding Single-Family vs. Multi-Family Classifications
The Impact of Accessory Dwelling Units (ADUs)
Overlay Zoning and Its Implications
Conflict with Lending Guidelines
Transformation of Single-Family Residences (SFR) into Multi-Family
Required Information for Appraisal
Geographic Competency and Local Regulations
The Role of AVMs and Desktop Appraisals
Best Practices for Appraisers
Frequently Asked Questions (FAQs)

1. Understanding Single-Family vs. Multi-Family Classifications

Traditionally, distinguishing between single-family and multi-family properties was straightforward. Single-family homes, typically on single-family residential (SFR) zoned land, were appraised using a 1004 form. Multi-family buildings, with two to four units on multi-family zoned land, required a 1025 form. Properties with five or more units were generally handled by commercial appraisers using a narrative format.

However, the rise of accessory dwelling units (ADUs) has complicated these classifications. ADUs, also known as mother-in-law units (MILs), garage apartments, or backyard cottages, have blurred the lines between single-family and multi-family designations. To understand this shift, it’s crucial to define each property type clearly.

The U.S. Census Bureau and the American National Standards Institute (ANSI) define single-family homes as:

Housing units that are fully detached, semi-detached, semi-attached, side-by-side, row houses, or townhouses.
Each unit must be separated from the adjacent unit by a ground-to-roof wall.
Units must not share heating/air-conditioning systems or utilities.

In essence, a single-family home is a structure designed for use by a single family unit on a single parcel of land.

Multi-family properties, on the other hand, are defined as:

Residential buildings containing units built side-by-side or one on top of another.
Units do not have a ground-to-roof wall.
Units may share common facilities such as attics, basements, heating plants, or plumbing.

Multi-family properties involve one or more structures or units used by multiple people or families on one or more parcels of land, typically owned by a single entity. Importantly, owners of multi-family properties are not required to live on the site.

Understanding these distinctions is the foundation for accurately classifying and appraising properties, especially in the context of evolving zoning regulations and the increasing prevalence of ADUs.

2. The Impact of Accessory Dwelling Units (ADUs)

Accessory dwelling units (ADUs) significantly impact property classification and appraisal. An ADU is an additional living space on a single-family property that can be attached or detached from the main house. These units have become increasingly popular due to their potential for rental income and providing housing for family members.

From a legal standpoint, a county zoning code (King County Ordinance 17841 § 6, 2014) describes an accessory use as follows:

Accessory Use: A use, structure, or activity that is:
- Customarily associated with a principal use.
- Located on the same site as the principal use.
- Subordinate and incidental to the principal use.
Accessory Use, Residential: An accessory use to a residential use, including, but not limited to:
- Accessory living quarters and dwellings.

ADUs enhance the primary use of the lot or primary structure and do not always have to follow the same rules as structures permitted under conventional zoning. They are not the primary purpose or use of the lot and are usually smaller and less noticeable than the main building.

Major entities like Fannie Mae, Freddie Mac, the Department of Veteran Affairs (VA), and the Federal Housing Administration (FHA) have specific requirements for ADUs regarding access, size, kitchens, bath facilities, privacy, and the number of allowable ADUs. Typically, ADUs are not allowed in areas zoned multi-family.

However, the allowance of ADUs can create complexities in determining whether a property should be classified as single-family or multi-family, especially when local regulations permit multiple ADUs on a single-family lot.

3. Overlay Zoning and Its Implications

Many cities and counties have adopted overlay zoning to allow ADUs without changing the official zoning designation. This means that a property can still be zoned as single-family (e.g., SFR 5000, indicating one single-family home per 5,000-square-foot lot) but also permit an ADU. This approach bypasses the traditional requirements for changing zoning, such as public hearings and notifications.

Overlay zoning introduces additional uses and requirements onto existing zoning codes. Appraisers must carefully examine these overlay additions to understand the highest and best use of the property. This includes researching local government websites for information on accessory dwelling regulations and staying updated on zoning codes.

The presence of overlay zoning can significantly affect unit density, highest and best use, land values, and depreciation rates. For example, some cities allow both an attached ADU and a detached ADU (DADU) in addition to the primary house, resulting in three living units on the same site. Appraisers must consider these potential additional uses in their highest and best use analysis and valuation.

Failing to account for overlay zoning and ADU regulations can lead to inaccurate valuations. Automated valuation models (AVMs), for instance, often undervalue properties with ADUs because they do not adjust for these additional units. This makes it crucial for appraisers to conduct thorough research and analysis to accurately assess the value of properties with ADUs.

4. Conflict with Lending Guidelines

The allowance of ADUs can conflict with lending guidelines, particularly those set by Fannie Mae (FNMA), Freddie Mac (FHLMC), the VA, and the FHA. While FNMA will purchase a loan for a single-family home with a single ADU, their forms do not accommodate properties with two or more ADUs.

The standard 1004 form, used for appraising single-unit properties, only provides options for “One” unit or “One with Accessory Unit.” There is no space to identify a second ADU. This limitation creates challenges when appraising properties that legally have multiple ADUs under local zoning regulations.

When FNMA and other major lending entities do not buy loans for properties with multiple ADUs, it can result in fewer lenders offering loans, higher interest rates, and larger down payments. This can inadvertently increase the cost of housing, counteracting the intended goal of cities aiming to lower housing costs by allowing ADUs.

From an appraisal standpoint, a property with two ADUs requires finding comparable sales with the same number of ADUs. This significantly increases the research required and necessitates careful adjustments between properties with and without ADUs, DADUs, or multiple ADUs.

According to the 1004 Form, Certification Page, paragraph 7, appraisers must select and use comparable sales that are location-based, physically, and functionally the most similar to the subject property. This includes matching the number of ADUs, which can be challenging but is essential for an accurate appraisal.

5. Transformation of Single-Family Residences (SFR) into Multi-Family

One of the critical distinctions between single-family homes with ADUs and multi-family properties is the owner-occupancy requirement. Many cities initially required that the owner live in one of the units to maintain the property’s single-family designation. However, several areas, including Washington, Oregon, and California, have changed their laws to eliminate this requirement.

When owner-occupancy is not required, a house with one or more ADUs can be 100 percent rented out. This effectively transforms the property into a duplex or triplex, blurring the lines between SFR and multi-family classifications. This transformation presents a valuation challenge, as the appraiser must determine whether the two or three units in a single-family zoned area are legal or illegal.

Appraisers must also consider whether permits were required for the ADUs and whether the property was grandfathered in, which can impact its value. Some cities require property owners to renew licenses for ADUs annually, and others may have recorded deed restrictions requiring owner occupancy of one of the units.

To accurately assess the property, appraisers should review the title report and research local regulations thoroughly. Legal units have one value, while illegal units likely have another. USPAP requires appraisers to determine the legality of the units or disclose that they did not, which can affect the value conclusion.

The changing landscape of ADU regulations and the elimination of owner-occupancy requirements necessitate a careful and nuanced approach to appraisal, particularly in areas where SFR zoning has effectively been transformed into multi-family zoning.

6. Required Information for Appraisal

Appraising properties with ADUs requires additional information and detailed analysis to ensure accuracy and compliance. The American National Standards Institute (ANSI) requires that the square footage of the primary dwelling and the ADU be indicated separately. This provides a clear distinction between the living spaces and helps in valuation.

Fannie Mae also requires specific information about the ADU, and future appraisal forms are expected to include even more detailed fields in a dedicated ADU section. This increased level of detail underscores the importance of thorough data collection and analysis.

The appraisal report must include fully supported adjustments and explanations on how these adjustments were determined. Appraisers need to demonstrate the impact of ADUs on value using the cost, income, and sales comparison approaches. This requires a comprehensive understanding of the local market and the specific characteristics of properties with ADUs.

To provide clear and comprehensive information, appraisers should include a summary of what the zoning allows, especially if there is an ADU on the property. Simply stating the zoning designation (e.g., SF5000) is not sufficient to meet FNMA’s requirements or ensure USPAP compliance.

By providing detailed information and thorough analysis, appraisers can help clients understand the property and its value, ensuring a more informed and accurate appraisal.

7. Geographic Competency and Local Regulations

Geographic competency is crucial when appraising properties with ADUs. Appraisers must be knowledgeable about the specific zoning codes and ADU regulations in the areas where they work. This includes understanding whether the owner is required to live on the site and whether the property is located in a city or state that has eliminated owner-occupancy requirements.

Appraisers should also be aware of any rezoning efforts in their area, such as those in California and Washington, where many residential areas within city limits have been rezoned to multi-family. Staying informed about these changes and their implications is essential for accurate appraisal.

Geographic competency requires appraisers to analyze and answer questions about the legal status of ADUs, zoning regulations, and owner-occupancy requirements. By providing this information, appraisals become more comprehensive and reliable, ensuring compliance with industry standards and client expectations.

In areas with complex zoning and ADU regulations, it is advisable to include a brief explanation of the applicable regulations in the appraisal addendum. This helps clients understand the property’s unique characteristics and the impact on its value.

8. The Role of AVMs and Desktop Appraisals

Automated valuation models (AVMs) often fail to properly value properties with ADUs. AVMs may not account for the additional income potential or the unique characteristics of properties with ADUs, resulting in undervaluation.

Similarly, appraisers providing desktop appraisals may not be aware of the existence of ADUs or DADUs, leading to inaccurate valuations. Properties with ADUs can be undervalued by tens of thousands of dollars, and in some cases, by $100,000 or more.

This discrepancy presents a business opportunity for appraisers who understand and properly adjust for homes with ADUs. By conducting thorough research and analysis, appraisers can provide accurate valuations and earn higher fees for their expertise.

To overcome the limitations of AVMs and desktop appraisals, appraisers should conduct on-site inspections and gather detailed information about the property and its ADUs. This ensures that the appraisal reflects the true value of the property and complies with industry standards.

9. Best Practices for Appraisers

To navigate the complexities of appraising properties with ADUs, appraisers should adopt the following best practices:

Stay Educated: Take continuing education classes on ADUs and highest and best use. These courses provide valuable insights into the latest regulations and appraisal techniques.
Research Local Regulations: Familiarize yourself with ADU regulations in your area by checking local government websites and zoning codes.
Provide Detailed Information: Include a summary of the zoning regulations and ADU allowances in your appraisal reports.
Conduct Thorough Analysis: Analyze the impact of ADUs on property value using the cost, income, and sales comparison approaches.
Verify Legal Status: Determine whether the ADUs are legal and whether the property complies with local regulations.
Use Appropriate Forms: Choose the correct appraisal form based on the number of units on the property. Use the 1004 form for single-family homes with one ADU and the 1025 form for properties with two to four units.
Maintain Geographic Competency: Stay informed about zoning changes and ADU regulations in your market area.
Provide Clear Explanations: Explain your adjustments and valuation conclusions in a clear and concise manner.
Conduct On-Site Inspections: Perform on-site inspections to gather detailed information about the property and its ADUs.
Network with Professionals: Engage with other appraisers, real estate agents, and local officials to stay updated on industry trends and regulations.

By following these best practices, appraisers can provide accurate and reliable valuations for properties with ADUs, ensuring compliance with industry standards and client satisfaction.

Navigating the complexities of modern real estate appraisal, particularly when dealing with properties featuring Accessory Dwelling Units (ADUs), demands a comprehensive understanding of evolving regulations, market dynamics, and appraisal methodologies. The interplay between single-family residences and multi-family properties, further complicated by the presence of ADUs, presents a unique challenge for appraisers aiming to provide accurate and reliable valuations. One crucial aspect that appraisers must meticulously consider is identifying A Property Comparable To The Single-family Home You Are Appraising. This task goes beyond mere superficial similarities; it requires a deep dive into the nuances of zoning laws, property characteristics, income potential, and legal compliance. In this detailed exploration, we delve into the critical factors that appraisers should consider when searching for comparable properties, ensuring that their valuations are both defensible and reflective of the true market value.

The paramount importance of identifying truly comparable properties cannot be overstated. A well-chosen comparable serves as the cornerstone of the sales comparison approach, one of the three primary valuation methods employed by appraisers. This approach hinges on the principle that the value of a property can be accurately estimated by comparing it to similar properties that have recently sold in the same market. However, the effectiveness of this method is directly proportional to the degree of comparability between the subject property and the selected comparables. When dealing with properties featuring ADUs, the complexity of this task escalates significantly, necessitating a more granular and sophisticated analysis.

10. Frequently Asked Questions (FAQs)

Q1: What is an Accessory Dwelling Unit (ADU)?

An Accessory Dwelling Unit (ADU) is an additional living space on a single-family property that can be attached or detached from the main house. It is also known as a mother-in-law unit (MIL), garage apartment, or backyard cottage.

Q2: How do ADUs affect property classification?

ADUs can blur the lines between single-family and multi-family classifications, especially when local regulations permit multiple ADUs on a single-family lot or eliminate owner-occupancy requirements.

Q3: What is overlay zoning?

Overlay zoning is a regulatory tool used by cities and counties to allow ADUs without changing the official zoning designation. It introduces additional uses and requirements onto existing zoning codes.

Q4: Why is geographic competency important for appraising properties with ADUs?

Geographic competency is crucial because ADU regulations vary significantly from one locality to another. Appraisers must be knowledgeable about the specific zoning codes and ADU regulations in the areas where they work.

Q5: What is the 1004 form used for?

The 1004 form is used for appraising single-unit properties, including single-family homes with one accessory unit.

Q6: When should the 1025 form be used?

The 1025 form should be used for appraising properties with two to four units, which is classified as multi-family.

Q7: How do AVMs perform when valuing properties with ADUs?

Automated valuation models (AVMs) often fail to properly value properties with ADUs because they may not account for the additional income potential or unique characteristics of these properties.

Q8: What is the impact of owner-occupancy requirements on property classification?

If owner-occupancy is not required, a house with one or more ADUs can be 100 percent rented out, effectively transforming the property into a duplex or triplex and blurring the lines between SFR and multi-family classifications.

Q9: What information should be included in an appraisal report for a property with an ADU?

The appraisal report should include a summary of the zoning regulations, ADU allowances, fully supported adjustments, and explanations on how these adjustments were determined. It should also include the square footage of the primary dwelling and the ADU separately.

Q10: Where can appraisers find information on ADU regulations in their area?

Appraisers can find information on ADU regulations by checking local government websites, zoning codes, and consulting with local officials and real estate professionals.

By understanding these FAQs and staying informed about the latest regulations and appraisal techniques, appraisers can navigate the complexities of appraising properties with ADUs and provide accurate and reliable valuations.

Compare various appraisal scenarios at COMPARE.EDU.VN

Understanding Single-Family vs. Multi-Family Classifications.

Navigating the appraisal landscape, especially with the increasing prevalence of Accessory Dwelling Units (ADUs), requires a keen understanding of how zoning and lending guidelines intersect. Richard Hagar, SRA, a seasoned appraiser and educator, sheds light on this complexity, emphasizing the importance of accurate property classification. The core challenge lies in determining when a single-family home with an ADU transitions into a multi-family property, a distinction that significantly impacts valuation and lending practices.

One of the primary criteria for differentiating between single-family and multi-family properties is zoning. Traditionally, single-family homes are located in areas zoned for single-family residences (SFR), while multi-family properties are situated in zones designated for multi-family use. However, the introduction of ADUs has blurred these lines, particularly in cities and counties that have adopted overlay zoning. Overlay zoning allows for the construction of ADUs on SFR-zoned properties, effectively increasing the density without officially changing the zoning designation. This regulatory approach complicates the appraiser’s task, as they must now consider not only the base zoning but also any overlay regulations that may permit additional dwelling units.

Lending guidelines further compound the complexity. Major entities such as Fannie Mae (FNMA), Freddie Mac (FHLMC), the Department of Veteran Affairs (VA), and the Federal Housing Administration (FHA) have specific requirements for ADUs, including restrictions on their size, access, and number. While FNMA will typically purchase a loan for a single-family home with one ADU, their guidelines do not accommodate properties with multiple ADUs. This discrepancy between local zoning regulations and federal lending standards creates a challenge for appraisers, who must navigate these conflicting requirements to ensure that their valuations align with both the legal and financial frameworks.

Richard Hagar underscores the importance of thorough research and analysis in these situations. Appraisers must carefully examine local zoning codes, overlay regulations, and lending guidelines to determine the highest and best use of the property. This includes investigating whether the ADU is legally permitted, whether it complies with all applicable regulations, and whether it meets the requirements of potential lenders. Failure to account for these factors can result in inaccurate valuations and potential legal liabilities for the appraiser. In essence, appraising properties with ADUs requires a nuanced approach that combines a deep understanding of zoning laws, lending guidelines, and appraisal best practices.

1. Zoning Laws and Regulations

Zoning laws play a pivotal role in determining the comparability of properties, especially when ADUs are involved. Appraisers must possess an in-depth understanding of local zoning ordinances to ascertain whether the subject property and potential comparables are subject to similar regulations. Key considerations include:

Base Zoning District: Identifying the base zoning district of both the subject property and the comparable is essential. Different zoning districts may have varying restrictions on lot size, building height, setbacks, and allowable uses.
ADU-Specific Regulations: Many jurisdictions have implemented specific regulations governing the construction and operation of ADUs. These regulations may dictate the maximum size of the ADU, its location on the property, parking requirements, and occupancy restrictions.
Overlay Zones: As mentioned earlier, overlay zones can significantly alter the allowable uses on a property. Appraisers must be aware of any overlay zones that apply to the subject property or comparables, as these zones may permit ADUs in areas where they would otherwise be prohibited.
Legal Compliance: Ensuring that both the subject property and the comparable are in full compliance with all applicable zoning regulations is crucial. Non-compliant properties may be subject to fines, penalties, or even legal action, which can significantly impact their value.

By meticulously examining zoning laws and regulations, appraisers can identify properties that are truly comparable in terms of their legal permissibility and potential for ADU development.

2. Physical Characteristics of the Property

Beyond zoning, the physical characteristics of a property play a significant role in determining its comparability. Appraisers should consider the following factors when evaluating potential comparables:

Lot Size and Configuration: The size and shape of the lot can influence the feasibility of adding an ADU. Larger lots with favorable configurations may be more conducive to ADU construction.
Building Size and Layout: The size and layout of the primary dwelling can also impact the potential for ADU development. Properties with ample square footage or flexible floor plans may be better suited for incorporating an ADU.
Existing Structures: The presence of existing structures, such as garages or sheds, can affect the cost and complexity of adding an ADU. Converting an existing structure into an ADU may be more cost-effective than building a new one from scratch.
Topography and Site Conditions: The topography of the lot and other site conditions, such as soil quality and drainage, can also influence the feasibility of ADU development. Properties with challenging site conditions may require additional engineering and construction costs.

When searching for comparable properties, appraisers should prioritize those that share similar physical characteristics with the subject property. This will help to ensure that the sales comparison approach yields accurate and reliable results.

3. Income Potential

One of the primary motivations for adding an ADU is to generate rental income. Therefore, appraisers must carefully consider the income potential of both the subject property and potential comparables. Key factors to evaluate include:

Rental Rates: Researching current rental rates for similar ADUs in the area is essential. Appraisers should consider factors such as size, location, amenities, and condition when comparing rental rates.
Occupancy Rates: Understanding the occupancy rates for ADUs in the area is also important. High occupancy rates indicate strong demand for rental housing, which can support higher rental rates.
Operating Expenses: Appraisers must also consider the operating expenses associated with renting out an ADU, such as property taxes, insurance, utilities, and maintenance costs.
Net Operating Income (NOI): Calculating the NOI for both the subject property and potential comparables can provide a valuable metric for comparing their income potential. NOI is calculated by subtracting operating expenses from gross rental income.

By carefully analyzing the income potential of properties with ADUs, appraisers can identify comparables that are truly reflective of the subject property’s market value.

4. Legal Compliance and Permitting

Ensuring that both the subject property and potential comparables are in full compliance with all applicable laws and regulations is crucial. Appraisers should verify the following:

Building Permits: Confirm that all necessary building permits were obtained for the construction of the ADU. Unpermitted ADUs may be subject to fines, penalties, or even demolition.
Certificate of Occupancy (CO): Verify that a CO was issued for the ADU, indicating that it meets all applicable building codes and safety standards.
Rental Licenses: In some jurisdictions, landlords are required to obtain a rental license before renting out an ADU. Appraisers should confirm that the property has a valid rental license, if required.
Deed Restrictions: Review the property’s deed for any restrictions that may prohibit or limit the use of an ADU.

By thoroughly investigating the legal compliance of properties with ADUs, appraisers can avoid potential pitfalls and ensure that their valuations are based on accurate and reliable information.

5. Market Conditions and Trends

Finally, appraisers must consider the overall market conditions and trends in the area when searching for comparable properties. Key factors to evaluate include:

Sales Volume: Monitoring the sales volume of properties with ADUs can provide insights into the demand for this type of housing.
Price Trends: Tracking price trends for properties with ADUs can help appraisers understand how the market is valuing these properties.
Inventory Levels: Analyzing the inventory levels of properties with ADUs can indicate whether the market is in a state of oversupply or undersupply.
Days on Market: Monitoring the days on market for properties with ADUs can provide insights into how quickly these properties are selling.

By staying abreast of market conditions and trends, appraisers can make informed decisions about which comparables to use and how to adjust for any differences between the subject property and the comparables.

When you run across properties with ADUs, all sorts of additional information is required in the appraisal. ANSI requires the square footage to be separately indicated. Fannie Mae needs additional information specific to the ADU, and just wait until you see FNMA’s new appraisal “form,” along with its 20-plus new information fields in the special ADU section. If you want an example of how we provide square-footage information, email me (See author bio) and I’ll provide you with a copy of the form we use.

The appraisal will also require fully supported adjustments, explanations on how you determined the adjustments, and the ADUs impact on value measured by the cost, income and sales comparison approaches.

Know Your Stuff.

In conclusion, identifying a property comparable to the single-family home you are appraising when ADUs are involved requires a comprehensive and nuanced analysis of zoning laws, property characteristics, income potential, legal compliance, and market conditions. By meticulously considering these factors, appraisers can ensure that their valuations are accurate, reliable, and reflective of the true market value. For more detailed information and expert guidance on navigating the complexities of appraisal, visit compare.edu.vn. We are located at 333 Comparison Plaza, Choice City, CA 90210, United States. You can also reach us via Whatsapp at +1 (626) 555-9090.