Duplex or "In Law Suite"

13 Replies

I have an interesting situation. I own 3 duplexes. All of which I have been doing the BRRRR strategy. 2 are now refinanced and I'm about to start on #3.

The first 2 duplexes all have 2/1 units.  #3 had a 3/2 and a 2/1.  All are brick ranch style houses.  One issue we see in our area are very few comps for duplexes.  I'm familiar with all of them.  They are all 2/1 or 2/2 units and all sold around $200k.  Not suprising that both of my appraisals came in between $195k-200k.

As I'm trying to estimate the appraisal value for duplex #3, I've noticed a few brick ranch houses that have sold for much higher ~$289k.  Many are 3/2's with an "in-law" suite.  I'm trying to understand if these are valid comps and what distinguishes a "duplex" from a house with an in-law suite?  It seems my appraisal value could vary drastically depending on how it is classified? Any suggestions for maximizing my appraisal value for my cash out refi?

@Peter M. - Thanks for the advice.  I will look at contacting them.  I was also hoping to get some agents or appraisers on here that could help clarify as well.

@Thomas S. - Help me understand what you mean by legal rental?  Are you referring to zoning?  As far as I'm aware I can rent an in-law suite very similar to a unit in a duplex, assuming there isn't a zoning restriction.  I've also seen some with seperate meters already available.  

As far as prices, you are correct, the prices are driven by home buyers but that doesn't mean it's not a valid comp for me, correct? If I were to buy SFR, it would be comp'd based on home buyers not investors as well. In my understanding that is true for anything less than 5 units. Obviously, there are less home buyers buying fourplexes rather than SFR or duplexes, but I'm not sure why the bank cares as long as it counts as a comparable unit.

I'm not trying to sound contradictory, I just still haven't fully understood the distinction yet.  

I have never heard of a in law suite being permitted as a legal rental. If there is a separate meter it is legal and is not a in law suite. There is a distinct difference in the legalities and the building requirements of the unit. This however does not make it a duplex and the prices are still only driven by home buyer mentality.  

A duplex and a home with a secondary suite simply do not compare. It is a totally different market.

Sorry but I can not explain any better. Sufice to say th ebanks know th edifferance.

@Ryan Howell Usually a duplex has a separate meter for each unit. Check your local city website for zoning of your property to see if it’s zoned for multi-family for that area.

@Ryan Howell - Definitely agree on checking the zoning. Also, Check local laws. Generally, if there isn't a separate meter, landlord can't make tenant pay utilities as there is no way to truly decider what portion of the bill belongs to which tenant. That is how it is for us in VA.

Thanks everyone.  Just to clarify.  My duplex is okay per zoning and was originally built with 2 units and is metered seperate for both electrical and water.  I already own the property and I'm doing a cash out refi.  My question was more about if other houses that are generally referenced as  houses with an "in law" apartment would count as comps or not, as they tend to go much higher in price than the typical "duplex".

@Ryan Howell - I only compare like properties when giving estimates to clients. Since a 3/2 can differ in value from one neighborhood to the next, I'll give a range of value depending on upgrades and small differences. I'm not going to use an in-law suite as a duplex for comparables, but I'm a bit conservative. I'd rather list the property with plans to decrease asking price based on market interest. In your case, you may have to plan on a low appraisal just for your numbers. You have a history of success so maybe a candid conversation with your lender will tell you where they might go with it.

Originally posted by @Thomas S. :

A in-law suite is not a legal rental so the appraisals are not comparable. The prices are being driven by home buyers not investors. Apples to oranges.

I'm curious to know why you think this, because I don't think it's accurate. Even a room rental is a legal rental. I agree that an in law wouldn't be the same as a duplex for appraisal, but your comment about it not being legal is inaccurate IMO.

So from further discussion with some other investors, they explained that an in-law suite generally has a door between units so that you do not have to go outside to get into the other unit.  This seemed to be consistent with what I’ve seen so far.

In many cases a duplex each side would be on two separate pieces of property, so each unit would be deeded separately, they may also be metered separately for electric, water, etc... where a home with an in law suite rarely is.  This may not be the case in your situation but many times that would be a factor. 

As far as valuation differences a single family home would almost always be sold using market value, with the duplex they could use income value  or market value. Depending on how things are selling and the income they are generating would depend on which is more beneficial. Typically if a duplex is in an area with lots of other rental properties it may sell lower than an area of single family homes with mostly owner occupant homes, so location may also be the driver behind the value differential. 

You would also want to look at zoning requirements and deed restrictions if you are going to try and change property type. 

Keep us posted as to what you decide to do and how it turns out. This is an interesting topic! Good Luck!