ADUs and Accessory Dwelling Units Get Zero or Negative Value in Appraisals

Accessory dwelling units (ADUs) — backyard cottages, garage conversions, basement apartments — cost homeowners $100,000-$300,000 to build and can generate $1,500-$3,000/month in rental income. States like California, Oregon, and Washington have passed laws specifically encouraging ADU construction to address housing shortages. Yet when these properties are appraised, the ADU frequently adds zero value — or worse, the appraiser treats it as a negative because the property now deviates from the 'typical' home in the neighborhood. This matters because if a homeowner spends $150,000 building a legal, permitted ADU and the appraisal gives it zero value, they cannot refinance to recoup the construction costs. They cannot get a HELOC against the increased property value. When they sell, the buyer's lender will not lend against the ADU's contribution to value because the appraisal does not support it. The buyer must come up with additional cash or the seller must lower the price, effectively donating the ADU for free. This creates a massive disincentive to build ADUs at exactly the moment when cities desperately need more housing units. The structural reason this persists is that the comparable sales approach requires finding other homes with ADUs that recently sold in the same area — and those comps almost never exist because ADUs are still relatively rare in most neighborhoods. Without comps, the appraiser cannot quantify the value contribution using accepted methodology. The income approach (capitalizing rental income) is available but rarely used for residential appraisals because Fannie Mae and Freddie Mac treat single-family homes differently from investment properties. An appraiser who uses the income approach on a single-family home with an ADU risks having the report flagged by quality control. The safe choice is to ignore the ADU or note it as a 'site improvement' with de minimis value.