The in-laws are coming!

I lived at home with my parents for one year after graduating college until I bought my own house. I loved my parents, but I was ready get out on my own. Fourteen years later, my husband and I moved in with my parents again for a summer. We had sold our house and were waiting to find a new one. It was the best summer ever! I have always considered multi-generational living a possibility as my parents age, and I am not alone.

The rise of multi-generational living

According to Pew Research Center’s last analysis in 2014, 19% of the U.S. population lived in multi-generational homes (approximately 60.6 million Americans). According to Generations United in 2021, that number has climbed to 26% of Americans.

Multi-generational living is typically defined as at least 2 adult generations living in the same household. These multi-generational living arrangements can come in a variety of structures. It could be as simple as recent college graduates living with their parents, or another common situation facing many families – the “sandwich generation.” This is a generation, typically in their thirties or forties, who are raising their own children while also caring for their aging parents. Sometimes, the logistics just work out better if everyone is under the same roof. The reasons for the decision to have multiple adult generations live together could be financial, practical, cultural, or any combination of these and other factors.

In-law quarters – what you need to know

The official term for in-law quarters is “accessory dwelling unit.” According to the Fannie Mae Selling Guide, an accessory dwelling unit, or ADU, is defined as “an additional living area independent of the primary dwelling that may have been added to, created within, or detached from the primary dwelling. The ADU must have basic requirements for living, sleeping, cooking, and bathroom facilities on the same parcel as the primary dwelling.”

What is most important, especially for financing, is determining whether the property is a one-unit with an accessory dwelling unit or if it is, in fact, a true two-unit property. Multiple unit properties often have less favorable financing terms than single-unit homes. The other issue is zoning and whether multiple-unit properties are permitted. We will talk about zoning a little more later.

For financing purposes, the appraiser makes the ultimate decision on whether to classify the nature of an accessory dwelling unit. The guidelines are not black and white. Appraisers are given a list of characteristics to consider in total. The final decision is subjective. Some of the characteristics an appraiser will consider are:

• Whether the unit is detached or attached
• Whether the unit is subordinate in size and character to the primary dwelling
• Whether it has a separate entrance and/or separate utilities
• Whether the unit was created by converting part of the original primary dwelling

For the typical residential purchase, an ADU classification is much preferred. If it is questionable, have your agent be ready with information to support your position.

Zoning is the second factor that needs to be considered when dealing with a property with in-law quarters. Local municipal zoning laws almost always address accessory dwelling units within the various zoning districts. In-law quarters aren’t allowed everywhere. The municipality may require the homeowner file for a variance (special permission to not follow the regulations) or they may not allow an in-law quarter under any circumstance. This is important for both buyers and sellers to understand. Sellers may not be able to sell their property in its current configuration if they did not research and comply with local zoning laws when they created the in-law quarters. Buyers should always do their due diligence on whether a property they are considering complies with zoning laws. 

Being extra thorough will save everyone time, money, and aggravation. A true story – an appraiser once required an in-law quarter be dismantled (ripping out an entire kitchen) and turned into a bedroom suite in order for the financing to go through. The municipality did not allow in-law quarters under any circumstance. 

Do they add value?

As with many value questions, it depends. The square footage of the ADU is not calculated in the gross living area of the main dwelling. It is considered separately. Ideally, the appraiser will find comparable sales that also contain ADUs that are similar in size, character, and location. Basement in-law quarters have a different utility and desirability than first level quarters. The appraiser will also consider whether that unit was truly added to the property or whether it was a conversion from other space. For example, if a garage is converted then the property has gained an ADU, but lost a garage, so it could end up being a wash in terms of value. 

Appraisals are often slow to catch up to the value connected with new and emerging trends. This is because the majority of their values and adjustments to value come from “matched-pairs analysis.” Basically, over time they find enough sales that are almost identical except for that one main distinguishing difference. The value of the item is derived from the difference in the sale prices, but this approach takes time for enough sales to occur to draw reliable conclusions. Examples of this are solar panels, smart technology, in-law quarters, and, looking back in history, central air.

It is clear from the research that demand for in-law quarters will continue to grow. If you are unsure about adding in-law quarters to your home and what effect that will have on value, an appraiser or experienced agent can help advise you.

I don’t know about you, but I am looking forward to the day I get home from work and yell, “Dad, I’m home!”