What is an Accessory Dwelling Unit?

So what exactly is an ADU?

Fannie Mae defines and ADU as “an additional living area independent of the primary dwelling that may have been added to, created within, or detached from a primary one-unit dwelling. The ADU must provide for living, sleeping, cooking, and bathroom facilities and be on the same parcel as the primary one-unit dwelling”.

When reporting the living area of an ADU, it should not be included with the Gross Living Area calculation of the primary dwelling. It should be reported and adjusted for on a separate line in the grid, unless the ADU is contained within or part of the primary dwelling with interior access and above grade.  (Hmmm?  That’s a little confusing but it sounds like they will allow the ADU’s GLA to be included in the total GLA of the primary residence if it is all above grade and it has interior access.  I will try to get more clarity on that one folks).  

If a standalone structure does not meet the ADU minimum requirements (see below), it should be treated as any other ancillary structure and included as a separate line item in the sales comparison approach then adjusted based on its contributory value to the subject property.

Whether a property is defined as a one-unit property with an ADU or a two- to four-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utility meter(s), a unique postal address, and whether the unit can be legally rented. The appraiser must determine compliance with this definition as part of the analysis in the Highest and Best Use section of the appraisal. When there is an ADU, the appraisal report must include a description of the ADU and analysis of any effect it has on the value or marketability of the subject property. The appraisal report must demonstrate that the improvements are acceptable for the market. An aged settled sale will qualify as a comparable, and an active listing or under contract sale will qualify as a supplemental exhibit to show marketability.

What are the requirements for classifying an ADU?

  • Only one ADU is permitted on the parcel of the primary one-unit dwelling.
  • ADUs are not permitted with a two- to four-unit dwelling.
  • The ADU must be subordinate in size to the primary dwelling.
  • The ADU must have the following separate features from the primary dwelling:
    • means of ingress/egress,
    • kitchen,
    • sleeping area,
    • bathing area, and
    • bathroom facilities
  • The ADU may, but is not required to, include access to the primary dwelling. However, it is not considered an ADU if it can only be accessed through the primary dwelling or the area is open to the primary dwelling with no expectation of privacy.
  • The kitchen must, at a minimum, contain the following:
    • cabinets;
    • a countertop;
    • a sink with running water; and
    • a stove or stove hookup (hotplates, microwaves, or toaster ovens are not acceptable stove substitutes.
  • An independent second kitchen by itself does not constitute an ADU.
  • The removal of a stove does not change the ADU classification. It’s common for appraisers to waive off an illegal unit or ADU by calling for the stove to be removed and cap the gas line. This new language says that trick won’t work anymore!  On the other hand, this will come in handy when a lender comes back to an appraiser and asks that a legal or illegal ADU, by definition, be deconverted simply by making the appraisal SUBJECT TO removing the stove and capping the gas line. 
  • A borrower must qualify for the mortgage without considering any rental income from the ADU. This requirement is more of an issue for the underwriter, not the appraiser.

Examples of ADUs

Examples of ADUs include, (but are not limited to):

  • a living area over a garage,
  • a living area in a basement,
  • a small addition to the primary dwelling, or
  • a manufactured home (legally classified as real property).

Appraiser A says it’s a single family with an ADU. Appraiser B says, it’s a two flat.  Who is correct?

It’s all about the H&BU folks!  Whether a property is defined as a one-unit property with an accessory unit or a two- to four-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utility meter(s), a unique postal address, and whether the unit can be legally rented. The appraiser must determine compliance with this definition as part of the analysis in the Highest and Best Use section of the appraisal. 

Zoning for an ADU

Some ADUs may predate the adoption of the local zoning ordinance and therefore be classified as legal nonconforming. An ADU should always be considered legal if it is allowed under the current zoning code for the subject property.

If it is determined that the property contains an ADU that is not allowed under zoning (where an ADU is not allowed under any circumstance), the property is eligible under the following additional conditions:

  • The lender confirms that the existence will not jeopardize any future property insurance claim that might need to be filed for the property.  This is the lenders call, not the appraiser.
  • The illegal use conforms to the subject neighborhood and to the market. Basically they are saying that illegal ADU’s are common for the market area and we all know there are many neighborhoods in the Chicagoland area that would meet this requirement.
  • The property is appraised based upon its current use.
  • The appraisal report states that the improvements represent a use that does not comply with zoning (“illegal” use). The lenders are not going to like this one, but you will have to check the ILLEGAL USE box in the site section and explain your reasoning for completing the assignment pursuant to guidance from the GSE’s.
  • The appraisal report demonstrates that the improvements are typical for the market through an analysis of at least two comparable sales with the same non-compliant zoning use. Aged settled sale(s) with the same non-compliant zoning use are acceptable if recent sales are not available. At a minimum, the appraisal report must include a total of three settled sales. Well that’s a little confusing, but I think what they are trying to say here is that you can use dated sales to support your value conclusion, but when that happens the requirement moves up from two comparables with the same non-compliant zoning use to three.

I reached out to Freddie Mac today with a lot of questions on ADU’s, illegal basement or attic units on 2 to 4 family properties and the correct method for calculated Gross Building Area (GBA’s) on 2 to 4 units.  I hope to be posting a follow up article with more info for everyone.  It can get very complicated when we step into a property with these characteristics.  Appraisers love to call for a Certificate of Compliance when public records call it a two flat but there are really four units in the building, all rented, with one in the basement and one in the attic. If the owner can’t provide a cert or permits and the public records and the zoning don’t support the current use…APPRAISER BEWARE!  Don’t just make a baseless assumption.  Ask for assistance from the lender to help you gain clarity or decide if you need to make that appraisal SUBJECT TO. 

Tj