Accessory Dwelling Units (ADUs) come with many names, as the title of this blog implies.
They are more popular than ever now as a solution to solve the affordable housing shortage and to provide more space for the post-COVID work-from-home crowd.
Local and state governments have made the ADU permitting process far easier (especially in CA), and many builders now offer ADUs with their new builds.
Using ADU Rental Income To Qualify
Another reason to “love” ADUs is that they can provide an excellent source of additional income.
But – in the “old days” (prior to 2023), lenders could not use ADU rental income to help qualify a borrower unless there was a history of said rental income on the tax returns (which was almost never, as few people “declare” their ADU income).
But, Freddie Mac recently came out with new guidelines that treat ADU income much like duplex income; borrowers can now use the market rent, as determined by an appraiser, to help qualify for a mortgage – even if they don’t have a history on their tax returns.
Lower Interest Rates For SFR + ADU vs Duplex
Another reason to love ADUs is that properties with ADUs get “single-family residence”(SFR) interest rates which are lower than duplex interest rates, as duplex loans come with slightly higher rates than SFR loans.
As an aside, underwriters sometimes confuse ADU properties with duplexes, and try to deem ADU properties “duplexes,” calling for a more expensive “duplex” appraisal and a higher interest rate.
So, agents and/or homeowners should be prepared to prove that the property is actually an ADU property with country records and/or permits.
Valuing An ADU
Attached/Detached: I touched on this recently but will hit it again. If an ADU is accessible from the main dwelling, it can be included in the overall square footage of the house. If it is not accessible though, it cannot be included. So, a 2,500 square foot home with a 1,000 square foot ADU – needs to have 2,500ish square foot comps (with ADUs hopefully), as opposed to 3,500 square foot comps.
Permitted/Unpermitted: Permitted units can always be given value, based on what the market dictates. But ADUs built without permits can never be included in the overall square footage of the property and will ONLY be given value if the appraiser can find other comparable ADU properties without permits. The appraiser also must state that ADU properties without permits are “typical for the area.” Great examples of where ADUs without permits are “typical for the area” are San Francisco and the Oakland hills – where lower levels are often built out without permits but still add tremendous value to the properties.
Escape From OCD Spouses…
One more reason to love ADUs is that they are excellent escape avenues in case your spouse is too OCD, and that is the sole reason my wife Heejin is hellbent on building an ADU at our home. She is not quite as “tidy” as I am, so she’s determined to build an ADU that she can leave as messy as she wants 😊.
