Appraisal square footage and ADU

[John Bernardo]

I've received an appraisal back of my property which does not account for livable square footage of my ADU.

The main building's square footage is ~1900 and the ADU is ~400 for a total of ~2300, but the appraiser is using pp/sf figures that only account for 1900 sf, so the pp/sf appears much higher than expected.

We have it listed and have been marketing it at ~2300 sf.

Is this normal?

[Dan H.]

Quote from @John Bernardo:

I've received an appraisal back of my property which does not account for livable square footage of my ADU.

The main building's square footage is ~1900 and the ADU is ~400 for a total of ~2300, but the appraiser is using pp/sf figures that only account for 1900 sf, so the pp/sf appears much higher than expected.

We have it listed and have been marketing it at ~2300 sf.

Is this normal?

In CA it is common that ADUs footage is treated different than the other unit’s footage.  The ADU is often treated like an accessory like pool, Solar, well, non-unit out buildings.  The value added by the ADU is often far below the cost of building the ADU. Not sure if same in chandler, AZ.

This appraisal issue has been discussed on many bigger pockets threads.  The initial negative position of the ADU addition is one of the plethora of reasons that adding an ADU is often one of the worse RE investments (contrary to what many ADU developers/providers state/imply). 

You can try to appeal the appraisal.  It could work if you can find sold comps that reflect the ADU value as significantly higher than your appraisal.  I suspect this will be difficult because in my market the properties with completed ADUs are not selling for a value that reflects the hands off cost of the ADU addition or that values the ADU like the primary structure. 

good luck

[Nathan Brown]

Totally normal for the ADU to be omitted from total square footage of the home. That said, you should disclose the breakdown in your listing for what square footage goes to which spaces, because it'll matter to the buyer's lender.

[Bruce Woodruff]

The ADU will certainly add value to the overall property picture (for most people), but it will cause problems with buyers meeting the appraisal value. They'll have to add cash to make the loan work...

[Joey Streight]

We actually just had the appraisal on a property we have under contract come in today, and they did not include the ADU square footage (as expected). I think this is standard in Oklahoma but as new as I am, I couldn't say for sure. We found ourselves in a good position at the right place and right time on this property however, and it actually appraised over asking (barely over, but better over than under).

[Brad S.]

An ADU is an accessory, it says so in the actual title (ADU - Accessory Dwelling Unit). It is not part of the gla of the main dwelling on a property and should not be included as such. Therefore, if the appraisal was done on a FNMA 1004 form for a typical financing transaction, the form will reflect the 1,900sf as the main gla of the primary dwelling unit. But, this doesn't mean the 400sf ADU was not accounted for, it is just not listed as the gla of the primary unit, since it isn't.

That said, the Appraiser should've still considered the ADU and compared the Subject property to similar recent sales with a similar ADU. I am not going to go into the details and options of what they can/should've done if no similar comps were available. I have done that in previous posts and that is off topic. So, look at the Appraisal and read the addendum comments to see how they approached the ADU valuation. In other words, the ADU should still have value in the market and the Appraiser should've addressed how they estimated it's value and where it is accounted for.

Don't get caught up in the price/sf myth. In residential valuation, that is good for general market evaluation with enough datapoints or a highly homogeneous neighborhood and market area. There are typically too many variables which directly affect specific properties and market areas. Example, the same house located beachfront has a much higher $/sf than if it were located across the street from the beach. In my market, it would literally be millions of dollars difference in total. Other variables affecting market appeal and value may be: lot size, useable lot area, available views, amenities, quality, condition, floorplan, location - busy street, culdesac, etc, and blah, blah, blah, many other variables having nothing to do with gla size.

If an appraiser is basing his valuation off mainly $/sf, I would seriously question their knowledge and skill. $/sf can be used as a very general check and balance AFTER all other variables are accounted for, but not before. And for the record, I am a longtime Appraiser/Investor/Broker

[Wade Barnett]

Quote from @Brad S.:

An ADU is an accessory, it says so in the actual title (ADU - Accessory Dwelling Unit). It is not part of the gla of the main dwelling on a property and should not be included as such. Therefore, if the appraisal was done on a FNMA 1004 form for a typical financing transaction, the form will reflect the 1,900sf as the main gla of the primary dwelling unit. But, this doesn't mean the 400sf ADU was not accounted for, it is just not listed as the gla of the primary unit, since it isn't.

That said, the Appraiser should've still considered the ADU and compared the Subject property to similar recent sales with a similar ADU. I am not going to go into the details and options of what they can/should've done if no similar comps were available. I have done that in previous posts and that is off topic. So, look at the Appraisal and read the addendum comments to see how they approached the ADU valuation. In other words, the ADU should still have value in the market and the Appraiser should've addressed how they estimated it's value and where it is accounted for.

Don't get caught up in the price/sf myth. In residential valuation, that is good for general market evaluation with enough datapoints or a highly homogeneous neighborhood and market area. There are typically too many variables which directly affect specific properties and market areas. Example, the same house located beachfront has a much higher $/sf than if it were located across the street from the beach. In my market, it would literally be millions of dollars difference in total. Other variables affecting market appeal and value may be: lot size, useable lot area, available views, amenities, quality, condition, floorplan, location - busy street, culdesac, etc, and blah, blah, blah, many other variables having nothing to do with gla size.

If an appraiser is basing his valuation off mainly $/sf, I would seriously question their knowledge and skill. $/sf can be used as a very general check and balance AFTER all other variables are accounted for, but not before. And for the record, I am a longtime Appraiser/Investor/Broker

Hi Brad, thanks for your insight. That's very helpful info. I'm curious since you're in the same market as I am (hi neighbor!), roughly how much value you would give a detached 2 bedroom, 2 bathroom 900 square foot ADU. In Altadena, tree lined street, not a main street. The lot is 9200 square feet. Flat lot. Main house is 3/2, 1500 square feet. The main house is a good 20 feet away from the ADU. I know your number won't be exact, just curious a ballpark from someone with your experience level.

If the ADU generated income would that effect your valuation method at all? If not, if both the primary home and ADU were rentals would that change your method of valuing the property? Or would it still be off of sales comps?

[Brad S.]

Quote from @Wade Barnett:

 Hi Brad, thanks for your insight.  That's very helpful info.  I'm curious since you're in the same market as I am (hi neighbor!), roughly how much value you would give a detached 2 bedroom, 2 bathroom 900 square foot ADU.  In Altadena, tree lined street, not a main street.  The lot is 9200 square feet.  Flat lot.  Main house is 3/2, 1500 square feet.  The main house is a good 20 feet away from the ADU.  I know your number won't be exact, just curious a ballpark from someone with your experience level.

If the ADU generated income would that effect your valuation method at all? If not, if both the primary home and ADU were rentals would that change your method of valuing the property? Or would it still be off of sales comps?

Hey @Wade Barnett

That's the million dollar question. :P
I have a couple of things to say about that:
First off, as a licensed Appraiser, I am legally bound by certain standards and can't openly share specific professional opinions (even ranges), etc, especially on a worldwide public open web platform.  :)

Now, that said, I am happy to discuss generalities offline. Feel free to DM me with your contact info, and we can talk further. I actually have a good client in your area right now, where we are working on a couple of potential prospects. 

I'll address the second part of your post.
As an Appraiser, we are looking to the market (buyers/sellers, sales data, etc) to "tell us" what the value is in a market. And since residential properties are mainly bought as personal residences, they are "valued" by buyers as such and not solely investments (ie. the returns they produce). This is glaringly evident by the lack of significant returns available in our areas. Example being, a $1m house does not pencil out too well with a $3,500/mth rental potential, even if you add a $2,500/mth ADU

Sorry, that's a long of way of saying NO, how you use that residential property (owner occupy or rent both units) wouldn't affect the main valuation methods, which would be the sales-comparison approach. And unfortunately, IMO, many appraisers would probably under value the ADU these days, either due to their lack of knowledge/experience, or due to their lack of willingness to put in the extra work which may be required to research the contributory value of the ADU.