Property Taxes for the ADU

Many people have inquired about how the ADU effected my county property tax. Up till now, I had no idea how the addition would impact it. Even the county's appraiser who inspected the ADU last spring couldn't give me any sense about the impacts of the ADU on my overall taxes.

I finally have an answer: It is raising my taxes a lot! In my case, it's raising my property taxes by $2,422.32. Said another way, it's more than doubling my property taxes (a 2.5X increase to be exact).

Whereas before, the total value of my property's structures (just the main house) previously were $177K; now, with the ADU added to the property, the county is assessing my property's two structures (the main house and the ADU) at $320K. I assume of course that the vast majority of that $142K increase in the county's structural valuation is attributable to the addition of the new ADU.

This doesn't reconcile with what a private appraiser found as the worth of the property with the ADU addition. In fact, this county valuation is over 50% higher than what the appraisal said.

This property tax anecdote should be considered with a grain of salt, as each property has unique attributes and history that would effect how an addition would increase the tax burden. With ADUs being relatively rare, this story can serve as one reliable data point. However, there are many factors than play into property taxes, so I won't speculate as to how this data point compares with other properties that have ADUs.

And, it's important to note that this relatively huge new property tax burden does not hold a candle to the very tangible financial benefits provided monthly or annually by having the ADU.

If ADU Financing is of interest to you, I encourage you to attend the Build Small, Live Large Summit this Friday, October, 26th. I'll be speaking on a panel entitled Financing the Accessory Dwelling Unit.

Finishing The Stairs

(Editor's note: I've authored a related post called Staircases in ADUs on AccessoryDwellings.org)

I'm authoring this post a year after we completed building and moving into the ADU. Dare I say, this is the last substantial construction project for my ADU.

Over the last year, Deb and I have slowly tackled various projects which I've described previous blog posts (the artistic sound barrier, the artistic handrail, landscaping and more). But, as any homeowner knows, it seems as though the work is never done. Once we moved in, it was easy to let the final stair riser tiling project slip off our immediate calendar.

With the ADU being on the upcoming Build It Green tour on Saturday, September 22nd, we motivated ourselves to put the finishing touch on the stair case (the end of this post includes several ADU related announcements which may be of interest to readers).

The finished stair tile risers.

From the outset, the stairs have posed an intriguing design problem. Complying with stair codes is sometime difficult in small and stout houses, such as ADUs. Portland's code requires that an ADU roof must be no taller than 18ft at its mid-point, so fitting a stair with adequate head room (6' 8") on the top stair landing, can prove to be a tricky design challenge.

There are two common design solutions. One can position a straight, simple staircase in the middle of the house, which can interfere with the spatial layout of the main floor. Or, one can position the stairs along the side of the house, and turn the top of stairs toward the center of the house before you reach the 2nd floor landing to avoid hitting your head on the ceiling.

My architect worked through many sketches before finally figuring out a functional, compliant, attractive, and space-efficient staircase design, consisting entirely of "winders". The final stair design consisted of 14 "winders": stairs which are not rectilinear, but have an angled curve as they rise upwards.

This is the architectural drawing of the winding stairs from above

The master framer would built this stairs claimed to have build over 2,000 stair cases and said that he had never built a staircase in which every step was a winder. It was a wonderous feat to watch how he constructed the framing for them.  

In addition to the unique bend of the staircase, we added a few other design elements to the staircase. When staining the stairs, we stained the nose of each tread a lighter color so that it would be easier to see each tread in lower light. Additionally, we added an LED rope light under the nose of the treads, to create an attractive perimeter/safety light solution for climbing the stairs in low light.

The LED rope lighting under each tread accents the stair below it. The nose of each tread is stained a light color in contrast to the rest of the tread, which makes each tread "pop" nicely in any kind of light, such as the low light as shown above.

Then, we added the amazing salvaged steel handrail, part of which is shown below.

Last but not least, we finished the stair risers with tiles this week. We acquired these tiles in New Mexico last year, knowing that we wanted to eventually finish the stair risers with Talavera tile. Here are some pictures of the process and finished product.


Here's a video of the finished product.

Some other ADU announcements:

• As mentioned earlier, this ADU, along with seven others, will be the Build It Green Tour on September 22nd. As part of the tour this year, there will be workshops throughout the day. I'll be leading a short workshop on ADUs at 9am.  

• The next ADU Class for Homeowners will be on Saturday, November 5th. This course is filling up so I'll likely offer another full day class shortly thereafter.

• For the first time, I'm also able to offer CE credits to Oregon's real estate professionals who attend this class, thanks to the Earth Advantage Institute. The class will equip them with substantial knowledge about ADUs, enabling them to help more of residential clients identify suitable properties for ADUs, and provide information on how a residential client can proceed through the ADU financing,designing, and building process.  Please tell Portland realtor acquaintances about the class.

• There will be a one day ADU-focused conference in Portland, Oregon, on Friday, October 26th, held in conjunction with the Portland EcoDistricts conference. I'll be helping lead one session on ADU financing, and there will many fantastic sessions there. 

• Lastly, my ADU was featured in a great blog called Small House Bliss which I'd commend to readers who are seeking inspiration on modern, small house design. 

An Artistic Sound Barrier

Residents and architects know the importance of visual privacy, but the psychological value of sound privacy is often forgotten in building design.

In attached dwellings, sound transfers between adjacent structures. Hotel guests have experienced the lack of adequate sound privacy between room walls, and apartment building residents may have been subject to the sound of their upstairs neighbors' footsteps. Indeed, sound privacy is an attribute that helps makes detached ADUs preferable to attached units.

In contrast, detached ADUs can be quiet urban retreats due to not sharing structural walls with another unit. My ADU has thick, insulated walls, which deaden the sound of the busy city that surrounds it. But, inside the exterior walls, sound travels freely.

A collage of images of the finished artistic sound barrier

Why is Sound Privacy Relevant to ADUs?


Good small house design attempts to make a place feel large despite the smaller size. This is accomplished by designing a relatively open floor plan. This means conjoining the living room, dining room and kitchen, into a "great room". Vertically, ceilings are lofted, and ideally, parts of the 2^nd floor ceiling should also be visible directly from the ground level to create an illusion of grandeur.

Clean indoor air quality design utilizes hard surfaces instead of rugs and carpets, which tend to trap atmospheric deposition and dust mites (and their excrement), collecting and exporting particulate matter into the ambient indoor air that we later breathe.

Deliberately utilizing both of these design techniques, our ADU had both an open floor plan and hard surfaces (concrete and hardwood floors). Unfortunately, when coupled, the byproduct of these two design techniques was noise reverberation from one room to the others. Sound tended to reverberate off of the hard surfaces and it traveled easily from one open room of the house to another.

Prior to building, I wasn't sure how the sound would behave in the ADU, but while living in the ADU over the last ten months, I have experienced it first hand. Noise transfer has actually caused me to loose sleep this year- no laughing matter for a lover of sleep.

For example, if my partner woke up and quietly made coffee while I was sleeping, it was audible enough that it woke me up. If I watched a movie downstairs at night, it was very easy for my partner to hear it from the bedroom. When my dog was lying in the living room scratching behind her ears, it jingled her metal name tag and it was like she was shaking a tambourine.

In the design phase, we'd considered the possible audio impacts of the vertically open floor plan, but thought that it would be wise to actually live in the ADU before making a decision about whether, and how, to enclose the bedroom walls to prevent the transfer of sound from the downstairs to the bedroom.

Arriving at the Sound Barrier Design Solution

My partner and I loved the look of the opening to the bedroom, but it wasn't worth continuing to lose sleep over it.  Our design goal was to develop an artistic sound barrier that would still let light pass through the house, but that would cut down the amount of reverberating noise into the 2nd floor bedroom. I worked with a Portland craftsman and friend, Eric Bohne, to develop, design, and execute a functional design to visually fit alongside the stunning metal handrail and the alternating tread staircase to the attic.

After many iterations of design ideas (which I won't bother to describe, but you're welcome to see in the photo and video collection below), we settled upon a design that would accomplish the desired goals. We decided to use stained glass as the medium, structurally connect the pieces with a steel frame. This captioned photo and video collection shows the chronological steps of the design, building, and installation process. There are ~65 pictures and ~5 videos in this collection.


The finished piece would look like a sunburst of textured, rich colors from a bejeweled sun. Beyond the window centerpiece, stained glass rays would graduate from semi-opaque to semi-translucent toward the outer frame. Here is a photo of the operable window centerpiece:

A beveled gem, enshrouded by a colorful burst of clear bevels and richly toned stained glass, composes the focal center of the metal and stained glass sunburst sound barrier.

Here are images of the artistic sight lines created by the finished sound barrier in varying lighting conditions.




To accomplish this design, Eric built a precisely-measured frame from steel tubing. I hired a talented glass worker, David Schlicker to do the complex stained glass elements. Together, Eric and David created a piece that accomplished the design goals- it deadened the sound transfer but still artfully allowed light through, creating an artistic piece that augmented the space, rather than detracting from it.

Before and after images of the sound barrier. These images are taken from the kitchen below.

Before and after images of the sound barrier. These images are taken from the bedroom side.

This five-minute video shows the stained glass piece in completed form, and details the architectural and design aspects of the stained glass and the layered construction method that was used to minimize sound transfer.



In this five-minute video, David goes into detail about the types of glass used in the stained glass piece. He explains each element of the production of the window centerpiece.


 

The whole project took two months to build. The metal frame took about a week and the glass took about six weeks. Both the metal and the glass were built off-site in the respective studios. Installation went flawlessly, and only took a few hours.

While on the topic of artistic sound barriers, I recently built a hatch door for the attic. This gives both visual and sound privacy for guests who sleep there occasionally. Here is a two-minute video that shows what the hatch door looks like and how it works. It's built from a salvaged wooden door that match the other doors in the ADU.

Open-Sourcing the Plans

This ADU process was informed by the notion of open-sourcing. I found great ideas online, learned from others, built upon those ideas, and shared my experience so that others could build upon my experience as they (hopefully) pursue building their own ADU. In this vein, my architect and I are now sharing the ADU plans and the associated SketchUp model. This material is owned by the architect, but we hope it will serve as a useful reference for others.

Here are the basic ADU plans and section drawings

Here is the full set of ADU permit drawings

And, here is the ADU SketchUp Model.

You can see fly-through animations that I put together before construction of the ADU from this SketchUp model. The ADU ended up looking very similar to the 3D model in real life, proving the model's value as a planning tool to envision how a space will look, function, and flow. Increasingly, architectural design will use 3D modeling tools. I've praised SketchUp in previous posts because it is free and relatively simple to use.

My architect drafted fifteen schematic design phases with me before we finally settled on this final plan. That back and forth process took a couple months. I was a picky client with lofty ideas. He was a talented perfectionist who appreciated the challenge of designing so much function in a relatively small space and riffing off of my energy design goals and particular design criterion.

The result of this drawn-out design process paid off. The space-efficient design makes the ADU highly functional, and the lofted nature of the 1st floor ceilings and cathedral ceilings throughout, make it feel very large. The ceilings are 9ft in the living room, and over 20ft in the grand room. The kitchen, dining area, and living space, are visually separated by the ceiling and paint colors, but most areas of the house have 25ft views.

This photo is taken from the dining area on the 1st floor, looking up past the 2nd floor catwalk, to the towering cathedral ceiling and hidden attic space along the east side of the ADU.

The south facing window bank gives a nice vantage of tree canopies on neighboring properties, creating an illusion of grandeur. The full light french doors open the space into the sizable back yard. Yes, even on a standard sized 50 x 100 lot (the standard sized lot in much of Portland), it's certainly possible to have a large house, a full-sized 800 sq ft ADU, and still have ample garden/landscaping space.

Bank of south facing windows and french door, visually connecting the interior space to the backyard

The ADU is 21ft wide and pushed up against the 5ft setback requirement for new buildings in Portland. This still left half of backyard for us to use for fire patio, an outdoor patio table set, a grassy area, plants, a covered awning with a chair swing, and more.

The deciduous canopy on the south side of the ADU was a major part of the design consideration.

Every ADU is different from the next. Since most ADUs currently are built by the current homeowners; they are custom-tailored to the homeowner's desired use. ADUs are often accented with custom craftsmanship that adds further textured interest to the small space. This level of detail results in quaint, intimate, and beautiful, customized structures. Beautiful structures will be cherished, and will be tended to by their owners over time. Unlike much conventional spec-housing stock, beautifully designed ADUs, executed under the watch of astute and financially-vested homeowners, are likely to last for generations, ultimately resulting in less residential construction landfill waste and less wasted energy.

Refinancing my Property with an ADU

Payback Rate--better than previously stated?

With my main house rented out, I have no living costs. In fact, the main house is generating a substantial monthly profit. Financially, the main house/ADU combination is working out far better than I initially expected.

Based on the assumption that renting the ADU would cost me $1,000/month, I had previously stated that the payback period for the ADU was 8 years (8 years x $12K/year=$96K). However, these initial calculations did not include the income that I am now generating from the main house each month. The main house is generating ~$1,000/month on top of the monthly PITI payments. In other words, the profit from the rental income from the main house will pay entirely for the cost of the ADU in eight years (8 years x $12K/year=$96K).

In four years, the main house will have generated $48K in profit (48 months x $1,000), and I will have saved $48K in ADU rent (48 months x $1,000). Therefor, it’s valid to say that the payback for the ADU is actually four years, not eight years.

You can figure out which payback rate calculation makes sense to you, but given that "living expenses" are typically "expenses" instead of "income", both payback rates are phenomenal. Rather than a “living expense”, my living situation provides a "living income". Consider that a renter paying $1K/month would spend $96K over the same eight years living in an equivalent space.

Each financial scenario will vary greatly for homeowners who build ADUs. Most will somehow finance the cost of construction. And, for most, the cost of financing an ADU will likely be less than a realistically achievable rent. Any difference between monthly finance payments and the rental income is good for the owner. The full financial benefit will come when the ADU is fully paid off.

Clarification about Total ADU Cost

In one of my ADU classes (the next class will be April 14th), a class participant astutely pointed out that I hadn’t included my personal labor in the ADU cost calculations. I spent $96K building the ADU (or $110/sq ft), but this cost does not include the value of the personal labor that I put into the ADU, which I’d estimate at ~$15K. So, it’s fair to say that the ADU really cost $110K, or $137/sq ft.

That said, it’s also fair to say that the ADU is actually 1,000 sq ft of conditioned, livable space, instead of the 800 sq ft counted by the City.

If we count the total cost of the ADU as $110K (instead of $96K), and the total space as 1,000 sq ft (instead of 800 sq ft), the cost is still in line with my initial calculation of $110/sq ft.

Distilling narratives from financial data like this reminds me of a funny phrase I read in a NY Times article recently: “All the data in the world can’t teach us how to sift through data”.

Mortgage Payments

Now that the ADU was built and permitted with the City, I also wanted to take advantage of the equity that I added to the property in building the ADU in terms of my mortgage payments. When I purchased the property in December of 2010 for $325K, I got a fantastic FHA loan in which I only had put down 3.5% of the principal costs--the loan was at a 4% interest rate--- historically, this is very good rate. My mortgage payments (including Principal, Interest, Taxes, Insurance --a.k.a. ‘PITI’) were ~$1,900/month for the main house and property.

With only 3.5% down (~$10K) for the initial property purchase in 2010 ($325K), I was required to pay mortgage insurance, which amounted to $233/month. If I refinanced with a conventional "80/20 loan", I’d be able to drop the mortgage insurance, saving $233 each month. To refinance the property though, I had to prove that I now had accrued '20%' equity in the property.

I needed to prove that the equity I’d added to the property by adding the ADU, was equal to 20% of the total loan amount. The property (the main house and ADU and their shared lot) needed to appraise at $398.75K (80% of $398K = $319K) in order to qualify to refinance with a conventional loan (without mortgage insurance).

Amazingly, interest rates in 2012 are even lower than they were in 2010, and I was able to get an interest rate lock to refinance the property at 3.875%. Since the housing crisis in 2008, loans are more difficut to secure than they used to be. A rate lock is only useful if one can prove that the property is a safe investment for the cautious lenders. This is probably a good thing---this means that one’s personal finances have to be in order, and that the property must be worth an amount to justify the amount that is being loaned by the bank to the homeowner.

The Appraisal - A Non-Trivial Matter

I was lucky to have Taylor Watkins as the home appraiser. Taylor was the co-author of a recent study entitled Understanding and Appraising Properties with ADUs. Based on the findings in this paper, Taylor used the ‘Income-Based Valuation’ appraisal method in addition to the ‘Cost to Build’ and ‘Sales Comparison’ methods to inform his ‘opinion of value’ for the property.

Using the ‘Income-Based Valuation’ method, Taylor determined that the house would rent for $2,100/month, and the ADU would rent for $700/month, totaling $2,800/month. When appraised as an income-generating property, using a ‘gross rent multiplier’ of 145, the total value of the property came out to $406K ($2,800 x 145=$406K).

Even though the appraiser determined that the ADU could rent for $1,000/month, he deducted 30% of that theoretical ADU rental value based on fact that the land is shared with the main house. This 30% discount calculation was one of the ADU appraisal methodologies discussed in Taylor and Martin’s recent study on the Appraisal of ADUs.

---In reality, both of these rental income estimates are less than the actual rental income. I have been able to rent the house as a vacation rental for $3K ($900/month more than the estimate) for the last several months and I suspect that I could rent out the ADU for closer to $1500 ($800/month more than the estimate). ---

Using the comparable sales method, Taylor determined that 'comparable properties' had sold for $400K. Using ‘Income-Based Valuation’, the comparable sales method, and the ‘Cost to Build’ method, Taylor then determined his ‘opinion of value’ for the property to be $400K.

Without the aid of the income based valuation, which is rarely used in single family home appraisals, the opinion of value would likely have been lower. This method is also discussed in their recent study.

With the appraisal coming in at $400K, my loan was approved, and I was able to secure it. Without the $233 mortgage insurance burden, my new 30 year, conventional mortgage payments (with interest and taxes) will be reduced by over $200/month, to $1,700/month.

And yes, for those still following me, this refinance actually reduces the payback period for the ADU down by 5 months (to 3 years 7 months)...but who’s counting?

Working with my great and talented mortgage lender, Heather McGarry, who has personal and professional experience with ADUs, we followed the guidance document below. I’d encourage anyone dealing with an appraisal of a property with an ADU to reference this guidance document.

Guide to Appraising ADUs


I’m attaching the actual appraisal here as well. I hope that referencing it, as a companion piece to the aforementioned study and Guide to Appraising ADUs shown above, will aid future homeowners, lenders, and appraisers, who are seeking to fairly appraise a property with an ADU.

Appraisal of Property with ADU

(update- 3/13/12: My mortgage adviser, Heather McGarry, has authored a piece about this same refinance transaction from her perspective on accessorydwellings.org)

An Artistic Guardrail

Since the inception of the design for the ADU, it was clear that the staircase and catwalk guardrail and handrail would be centrally visible from throughout the ADU. Though I did not want to attempt a creative rail during the construction, I knew that eventually, I did want to make the guardrail into the feature piece of the ADU.

The major section of steel guardrail for the catwalk hangs from a steel beam, on its way to being installed

I worked with Mike Suri from Suri Iron to do this guardrail fabrication and installation. Rather than create a metal rail from scratch, I wanted to reuse old metal and give it new life. I visited a couple local steel yards, and found remnant sections of solid steel from which industrial parts had been cut out (these are sometimes referred to as 'steel skeletons').

The steel yard was littered with a range of skeletons with circular, arced, and rectangular cutouts, but when I stumbled upon this enigmatic beauty, I immediately knew that this one would look magical.

2" thick, this 10' x 10' plate of steel weighed a couple thousand pounds before we cut a couple sections from it.

Working on the rail involved templating the existing staircase, working with the steel yard to cut the steel precisely to match our dimensions, transporting the rails to his workshop (no easy task when the individual pieces weigh up to 675 pounds), sanding the steel, fabricating and welding fastener tabs and fabricating other miscellaneous steel rods that we used to fill out the negative spaces where necessary. The steel cost $0.60/pound and the preparation work took Mike about 40 hours.

Here are some photographs of the process, from finding the steel, fabricating it, installing it, and then some artistic shots. 






The pieces of steel rail weigh, 675, 375, 350, and 120 pounds, respectively. An electric winch was used to hoist the steel sections into place. Setting up the winch correctly was an engineering feat in itself. Mike and his colleague spent hours talking through each step of the installation process before installation day. It showed-the installation went exactly as planned.



The rails look amazing and unique. It's fun to look up and think about where they came from. From every position throughout the house, their wild curvilinear shapes, rusty and imperfect finish, and their solidness, all add to the aesthetic of the ADU. Daylight and evening house lighting show off the artistic railing and reveal a range of curving contrasts against the colorful backdrop of the walls.

A series of images of the artistic handrail in different lighting conditions