Residential properties with accessory dwelling units — such as in-law apartments or coach houses — may have higher value potential if the properties are valued for investment income using the income capitalization approach, according to an article published this week in The Appraisal Journal.
The Appraisal Journal is the quarterly technical and academic publication of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. The materials presented in the publication represent the opinions and views of the authors and not necessarily those of the Appraisal Institute.
In the study, the authors test an income-based approach to valuing properties with ADUs. For 14 properties with ADUs in Portland, Ore., an income capitalization approach produced valuations that were significantly higher than actual sale prices, by 7.2 percent or 9.8 percent on average, depending on the formula used. ADUs also contributed on average 25 percent or 34 percent of each property’s appraised value, depending on the formula used.
The study shows that appraisers requiring an alternative or counterpoint to the sales comparison approach for properties featuring ADUs can gain insight through the income approach, which may help them develop more credible and consistent valuations for this emerging form of development.
However, the authors emphasize that when an institution such as Freddie Mac forbids the income approach as the primary method of valuation, the income method can still play a role in the reconciliation phase, lending weight to any final opinion of value developed via the sales comparison or cost approaches.
Read Understanding and Appraising Properties with Accessory Dwelling Units in the Fall 2012 issue of The Appraisal Journal.