Preparing to List a or Assist a Buyer With an ADU Property

Issue 28

In our last newsletter, we addressed the different types of ADU construction we may be seeing in the years ahead (stick-built, modular, manufactured, and modular components). At least for the time-being, most existing ADU-type product (the older stuff) will be stick-built. One only has to walk through the alleyways of urban areas to see converted garages, hidden doorways, and the old wood siding of guest cottages of decades-past. Remember, these may or may not be defined as an ADU by the city, so ensuring that you actually have an ADU before calling it that in the listing is important.

Information-Gathering for a Listing Presentation

If you are going to be listing a property with an ADU, whether it was built last week or last century, set the stage with the seller on the importance of providing records. Agents should help sellers gather proper documentation for buyers, agents, and appraisers, including permits, builder or manufacturer specifications, foundation certifications (in the instance of a manufactured home), and energy efficiency details (great for newly-built stick and modular construction, but value-adding for manufactured). Modular ADUs on permanent foundations should appraise comparably to stick-built units, but documentation should be provided to support this equivalency.

The time to gather this information is before the property is listed for two important reasons: It will help with both the pricing strategy and the positioning strategy. A permitted modular or stick-built ADU should be marketed as real value added to the property, while manufactured units may require more nuanced positioning depending on local market perceptions.

Furthermore, how financeable an ADU is in relation to the primary residence should be explored to determine how large the buyer pool may be. Here are a few resources to read up on (and make sure your favorite lenders are up on this information as well):

• https://sf.freddiemac.com/working-with-us/accessory-dwelling-units
• https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/accessory-dwelling-units (although it doesn’t look like this page has been updated yet with their announcement on allowing multiple ADUs on a property:  https://singlefamily.fanniemae.com/media/44506/display)
• https://www.hud.gov/sites/default/files/OCHCO/documents/40001-hsgh-Update-17.pdf (yes, it is a whole handbook – I recommend doing a search instead of reading all 1886 pages of this)

Note – in some cases rental income may be used to bolster buyer income requirements. Therefore, if rental income has been established or rental income exists, that may also be used to widen the buyer pool if other requirements are met – which can impact list price strategy.

What if the Seller Never Applied for a Permit?

An unpermitted ADU can be a liability regardless of construction quality. Some cities are ramping up enforcement and cracking down on ADU-type structures that were never permitted, inviting the homeowners to go through the correct channels to get the ADU permitted. Unfortunately, this often means bringing the ADU up to the current building code requirements, including energy code.

For example, say a property owner converted a stand-alone garage/workshop on an alley to a separate dwelling unit years ago. The unit already had a bathroom hooked up to city facilities, so the owner went ahead and added a shower and kitchen sink and made separate rooms for a bathroom, bedroom, and kitchen. The homeowner has been renting this out for years. Now the owner is older, ready to downsize, and wants to sell.

The buyer for this property may be put in a difficult position in the coming months or years if the City indicates that the unit either needs to be permitted or converted back to its original permitted use. In this case, if the ADU-like unit must either revert back to being a garage/workshop or it must be brought up to code, that could be a huge financial hit to buyers who was relying on steady rental income without having to make a large investment.

And what of ADU-like units that were built, not converted, and never permitted? Homeowners may be shocked to learn that if construction quality is lacking, they may be required to tear it down. Disposing of building materials can be costly in addition to losing the rental income.

One other thing to note is that just because something isn’t zoned correctly doesn’t mean it is illegal. For example, if an area doesn’t allow manufactured homes but the manufactured home was placed before that rule took effect, it may be regarded as “non-conforming”. This is an important distinction.

Because of rogue ADU product, buyers should beware, sellers and listing agents should disclose, and permitted versus non-permitted should be factored into the price and marketing strategy.

Buyer Agent Considerations

When showing properties with existing ADUs or ADU-type product, agents should address construction type and permit status proactively rather than waiting for buyers to ask (as they may forget or not understand how important these questions are). Different construction types create different opportunities and constraints that affect how buyers should think about the property.

For properties with existing modular or stick-built ADUs, the conversation should focus on income potential, functional use, condition, and again – permit status. Ask about rental history if applicable, confirm that utilities are separately metered (or understand the cost-sharing arrangement), and verify that the ADU has proper access and parking (if required).

If the existing ADU is a manufactured home, especially an older one, be upfront about potential financing implications. Some lenders have restrictions on properties with manufactured structures, even if those structures are legally permitted ADUs. Buyers planning to use financing should consult with their lender early in the process to avoid surprises.

For properties with ADU potential, help buyers understand which construction types are actually permissible in that jurisdiction. A lot that would be perfect for an ADU might not allow manufactured homes or tiny homes (if that is a buyer’s intent, brush up on where those may be located and adjust the search parameters to that). Connect buyers with local ADU specialists who can provide feasibility assessments before they make offers contingent on ADU development.

Key Takeaways for Washington Agents

As Washington's ADU market continues evolving, agents who understand construction techniques, options, and their implications will better serve clients and facilitate smoother transactions.

• Modular ADUs on permanent foundations should be valued comparably to stick-built construction.
• Manufactured homes may face jurisdictional restrictions (HOAs and some areas of zoning) and potential financing complications, though these attitudes are changing as affordability challenges loom and the industry is seeing upgrades in construction quality. 
• Tiny homes typically don't add value to the property unless they're on permanent foundations and meet local ADU requirements.
• Hybrid modular component systems offer a middle ground that's worth exploring for clients who want more customization than full modular allows but more efficient construction than stick-built provides. Expect to see more of this construction type in the future for ADUs, primary residences, and middle housing.

The most important factors for ADU value are proper permitting, quality design and execution, and functional integration with the property.

Client education around value is imperative both at the listing presentation and with buyers when evaluating properties.

Want to know more? Check out our Marketing a Property with an ADU course that even provides you with an easy-to-follow checklist for providing the information and resources for helping sellers get top-dollar for their ADU properties! 

https://www.middlehousinghelp.com/offers/HgH7xNaB/checkout