Written by Bill Waltenbaugh, as originally published in The Reverse Review.

So you have a two-unit property that needs to be appraised. Simple enough, but how should it be classified and reported? Is it a small, income-producing, two-family property that needs to be reported on the Fannie Mae 1025 form, or is it better described as a single-family residential (SFR) home with an accessory dwelling unit (ADU), to be reported on the Fannie Mae 1004 form? These are questions I get weekly from both lenders and appraisers. Everyone wants to know, “What is this two-unit property?”

To answer this question, we first need to define ADU. In short, ADUs are additional living quarters on single-family lots that are independent and smaller than the primary dwelling unit. These spaces are often self-contained with their own entrance, cooking and bathing provisions. ADUs can be attached or detached from the primary structure and, in

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some cases, even located within the interior of the main unit in areas like the basement or attic. It is also important to note that the primary units of these properties are designed with owner-occupied intentions.

These arrangements are often referred to as, among other things, in-law units, granny flats, mother-in-law suites and carriage houses. It isn’t uncommon for these descriptions to incorporate a reference to relatives. That’s because the occupants are often parents in need of informal caregiving or an adult child making use of an affordable living alternative during significant or unexpected life event transitions. One well-known ADU is the one-room efficiency located above the Cunninghams’ garage that was once occupied by Arthur Fonzarelli in the 1970s hit TV show Happy Days.

On the other hand, a two-family, double or duplex is typically defined as two nearly equivalent units contained within one structure. The primary purpose is to generate income, which is accomplished by renting 8 both units to separate tenants or living in one unit and renting the other at market cost to assist the owner in paying their own living expenses.

Understanding the typical purchaser’s motivation is key to determining if a property is an SFR home with an ADU or an income-producing, two-family residence. If the main unit is a significant factor in the typical purchaser’s decision, the property is best described as an SFR home with an ADU. In other words, the owner intends to occupy the main unit as their primary, long-term residence and the second unit is considered an accessory or additional feature, much like a finished basement or outbuilding; it is an extra with respect to the main purpose. However, if income potential is the main priority, a two-family

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classification best describes the property and should be reported on the Fannie Mae 1025 form.

It’s really that simple. It doesn’t matter how the property is currently being used and it doesn’t matter how the borrower intends to use the property. It doesn’t matter if the unit is currently rented or if the property has separate electrical meters. To a certain extent, the zoning isn’t even the deciding factor. It all comes down to how the typical market perceives the property, and the typical purchaser’s motivation is the key.