ADU's- What are they and how do they impact the appraisal process?

Accessory Dwelling Units (ADUs) are secondary residential units on the same property as the main dwelling. They provide homeowners and potential buyers with opportunities to enhance property value, generate income, or accommodate multi-generational living. It's important to understand how ADUs can impact property value and financing options, particularly considering the restrictions set by Fannie Mae and FHA lending guidelines. Let's explore further.

First, what is an ADU? An ADU is a separate living space, often with a kitchen, bathroom, and sleeping area, located on the same property as the main residence. It can be a detached structure, converted basement or garage, or an addition to the primary dwelling.

Benefits of purchasing a property with an ADU:

  • Extra income potential through renting the ADU as long as there are no zoning restrictions.

  • Flexibility for multi-generational living arrangements especially when they might be older and need some moderate assistance.

  • Versatile space for personal use, such as a home office or guest suite.

  • It can have the potential to increases property value.

There are some financing fonsiderations that need to be considered when attempting to purchase or build a property that has an ADU with money from the bank. Fannie Mae Restrictions and FHA have very similar restrictions. These include:

  • The ADU must have its own entrance, kitchen, and bathroom.

  • The property must be appraised as a single-unit with an additional value attributed to the ADU. (The living area of the ADU cannot be combined with the living area of the primary residence.)

  • The rental income from the ADU may be considered for loan qualification purposes, subject to specific criteria.

If you are considering a property with an ADU, they are a powerful asset that can increase property value and offer financial opportunities. However, it's important to consider the restrictions imposed by lending guidelines. By understanding these guidelines, buyers can make informed decisions about financing options and ensure a smooth transaction when purchasing a property with an ADU. With the ability to generate income, accommodate changing needs, and contribute to affordable housing, ADUs remain an attractive feature in today's real estate market.