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The inn thing: Airbnb and similar services have upended hospitality--but what effect do they have on real estate used for short-term rentals?

When my friends and I traveled to Munich for Oktoberfest in 2017, we didn't book hotel rooms. Instead, we used Airbnb to book a nice residential property close to the train station--it was more convenient and cheaper than any available hotel. Closer to home (much closer), I used Airbnb to rent out my condo for an astronomical fee when Denver hosted the Democratic National Convention in 2008.

Airbnb, HomeAway and similar booking sites have changed the way people stay--similar to how Uber and Lyft have changed the way people ride. While travelers need a place to sleep, many seem to want a more authentic experience than what's possible in a hotel. They also may want to stay in residential neighborhoods where traditional hotel accommodations aren't available. Price is part of the appeal, too: Short-term vacation rentals can be more affordable.

The increased popularity of short-term vacation rentals and the desire to tap into this potentially lucrative market have sparked buyer interest in residential properties with legal accessory dwelling units, known as ADUs. An ADU is a small, self-contained unit located on the same lot as a single-family home. It may be attached or detached, but it is not a separate property. A typical ADU short-term vacation rental is furnished and outfitted with linens, glassware and other items guests will need; many don't have a full kitchen, though, because guests are likely to eat out at "must-try" restaurants.

I first noticed the uptick in interest in these properties around 2010; about three years ago, they registered as common on my "appraiser radar." In just the last few months of 2018,1 had three assignments involving these complex properties, and during that time I fielded seven or eight calls from real estate agent friends asking for assistance in pricing and assessing similar properties. This level of activity is unheard of in my more than 20-year valuation career.

Of course, properties with ADUs aren't new, and they've always been somewhat challenging for appraisers. What is relatively new is their use as short-term vacation rentals, which compounds the challenges appraisers face when valuing them. To illustrate how quickly trends manifest, the Fall 2012 issue of The Appraisal Journal included the article "Understanding and Appraising Properties With Accessory Dwelling Units." This very informative piece was written just seven years ago; however, it doesn't address ADUs as short-term vacation rentals because that wasn't yet a phenomenon.

What makes these assignments so challenging? Consider a single-family home that's used as a primary residence but also has an ADU that's used part time as a vacation rental. Even more complicated, a recent assignment involved a home that was used as a primary residence Monday through Thursday; the homeowners escaped to their mountain retreat for long weekends and rented out their primary home for the few nights they were away.

The legality of any ADU is a significant concern, and appraisers need to research this issue with their city or county assessor or building department to see if zoning rules allow the unit, if its construction was properly permitted and if there are HOA or other restrictions on short-term rentals.

A friend recently referred me to a real estate agent who had questions about a property she was interested in purchasing for herself. The home was in a popular Denver neighborhood, and its detached garage had been converted into a beautiful 420-square-foot ADU. The listing agent priced the property based on comparables with legal ADUs. However, my call to the county assessor revealed that zoning rules do not allow ADUs on lots smaller than 6,000 square feet. Alas, the lot was 5,560 square feet. I suggested that the owner petition the zoning commission to see what could be done, but for the moment the property has a garage that can't accommodate a car (more issues!).

A lack of sales data can make it difficult to value a property with a legal ADU. If you work in a market where recent sales activity involves numerous homes that include and accurately document an ADU and provide a supportable and ironclad sales comparison approach, lucky you! That's not the case in Denver. I think that by virtue of the growing popularity of these types of properties, once they're sold, buyers hold on to them. It doesn't help that the for-sale inventory in Denver has hovered at a record low for the past few years, although it's improving now. The way information is entered into the MLS contributes to sales data difficulty as well. Real estate agents don't always detail an ADU in the MLS listing, so an auxiliary structure listed as "other" or "bonus" is the needle in the haystack I'm hoping to find. I sometimes scour vacation rental sites in a particular ZIP code or neighborhood to generate a list--often lengthy--of homes offering short-term rentals that I cross-reference with the MLS.

What happens when the sales data isn't there? Use the income approach. However, a single-family rental with a traditional year lease for, say, $2,750 per month doesn't equate to a home the owners use as their primary residence while generating $2,000 monthly from renting out their ADU eight to 12 nights, right? To compensate for the difference, I research short-term rental websites in a particular market to find comparable rental data. It isn't concrete, but it's good information for the client, and it helps me explain the intricacies and the differences for my market.

What about the cost approach? That doesn't work well in Denver because the majority of properties with ADUs are in historic neighborhoods where homes are 75 to 125 years old. However, it might be different in your market. If homes or ADUs are recently constructed, homeowners should be able to provide reliable plans and specifications that prove helpful in developing a cost approach.

It's interesting to see how properties with legal ADUs are emerging as a hot market, and how comfortable homeowners are with residing in a house while strangers are simultaneously vacationing in their former garage or man cave or hobby space. Appraisers need to understand how to address the challenges inherent to these properties and recognize an opportunity to become an expert in their market.

Warren B. Boizot III. SRA, is president of BLG Appraisal Group, which he founded in Denver in 2004.

Caption: Valuing properties with legal accessory dwelling units has become more challenging as more homeowners turn their ADUs into short-term vacation rentals, such as these Airbnb accommodations in Denver.
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Author:Boizot, Warren B., III
Publication:Valuation Magazine
Article Type:Travel narrative
Geographic Code:1U8CO
Date:Jan 1, 2019
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