7 things Real Estate Agents Need to Know About Middle Housing – NOW!
By Denise Lones, The Lones Group
If your area is not yet buzzing about Middle Housing, get ready! As the first phase of cities and counties in Washington State meet their House Bill 1337 and House Bill 1110 rollout deadlines on June 30 of this year, precedents will be set, zoning will be forever changed, and real estate as we know it is about to get a lot more complicated.
The result of these changes – greater housing supply and affordability, is needed and welcome. In fact, the Washington State Department of Commerce has indicated the State needs to build 1.1 million new homes by 2044 in order to satisfy the current demand and plan for the future. Without innovations such as middle housing, we would be hard-pressed to make those goals without radically expanding our urban growth boundaries and creating more sprawl.
As middle housing rolls out, real estate agents are in a position of having to have the expertise of not only how to assess what is currently on the property, but what can potentially be on the property and how best to move forward given multiple factors that are in play. Your clients are going to have questions and you are going to need the resources to answer these – or be able to point clients in the right direction to do their own research.
Below we have rolled out 7 key questions that will help get you started on your own middle housing information journey. Depending on your location, leaning into local conversations at the city and county level regarding how this is going to roll out, having discussions with your local building departments, and proactively planning for how you will tackle buyers and listings with ADUs or middle housing potential will put you in the best position to take advantage of this opportunity in front of us…and to stay out of legal hot water.
1. What IS Middle Housing?
Middle Housing includes ADUs, townhouses, duplexes up to sixplexes, stacked flats, garden apartments, and cottages. The idea is that our current neighborhoods can squeeze in these additional housing types into existing lots – whether by adding an ADU or two in the backyard, subdividing a lot, scraping a lot and building something new, or combining multiple lots in order to achieve greater housing density by eliminating setbacks.
Middle housing exists in many older neighborhoods now – just take a tour around streets that developed before the 1950s and you may see duplexes, triplexes, fourplexes, and even small apartment buildings tucked in. The idea is to bring this back to create more housing units.
2. ADUs and Middle Housing is coming…when is it coming to my area?
Learn what is already allowed in the cities and urban growth areas that you represent in terms of ADUs and middle housing and when will the new laws be adopted? Each city and county planning under the growth management act creates a comprehensive plan that lays out how the city or county is going to accommodate growth over the next 20 years – and they have six months from that due date to implement the changes outlined by the House Bills.
The Comprehensive Plans for the largest counties – King, Snohomish, and Pierce – were due at the end of 2024 which means the House Bills will be implemented in affected areas by June 30, 2025 (and some have already adopted these changes). Some counties aren’t due until 2027. You can look up your county information and Comprehensive Plan deadlines here: https://www.commerce.wa.gov/growth-management/gma-topics/periodic-update/
3. What exactly do HB 1337 and HB 1110 change about the current law?
HB 1337 will allow two accessory dwelling units (ADUs) in addition to the primary residence on properties in cities and urban growth areas. The locality cannot require ADUs be under 1000 square feet, under 24 feet tall, or require an owner to live on the property in order to rent the unit(s). There may be locally imposed restrictions on permits due to critical areas or lack of utility infrastructure. You can read the entire bill contents here: https://lawfilesext.leg.wa.gov/biennium/2023-24/Pdf/Bills/Session%20Laws/House/1337.SL.pdf?q=202.506.01211129
HB 1110 is much more complex and each city for whom it applies may be rolling it out a little differently. In short, there are three tiers of cities based on population and based on the tier and additional parameters, each residential lot may be permitted to have a duplex up to a sixplex on it. Locality is very important in learning what may be coming to your neighborhoods as a result of this House Bill. You can read the entire bill contents here: https://lawfilesext.leg.wa.gov/biennium/2023-24/Pdf/Bills/Session%20Laws/House/1110-S2.SL.pdf?q=202.506.01211122
4. How do I value and market a property with an ADU?
If you haven’t had to value or market a property with an ADU yet, there is a good chance you will have to someday soon depending on your area. Whether you are helping a buyer shop for a home with multiple living spaces or an investor shopping for a rental or are having to list a property with an ADU, there are several ways to approach value. The challenge is finding comps – and finding a true comp for the primary residence and the ADU together, especially when there aren’t that many out there yet may be very difficult.
The key is going to be to find the right methods (that’s right – you need to develop several) for valuation. For example, what do you do if the primary residence is older but the ADU is new? What do you do if it is actually an income-producing property? What if only the ADU is income-producing? What if the primary residence is being rented out as well as a second ADU unit and the owners live in a second ADU unit? What if the ADU takes up about all of the backyard when a comp still leaves ample outdoor space? What about parking? And finally, is it actually permitted as an ADU or is it just bonus space? There is a lot to unpack when you introduce a second or third dwelling unit onto a property.
When it comes to marketing, in order to make the buyer pool as deep as possible, information is key. Including everything from the permit to the historical income, floorplans, 3D tour, drone photos, and more will allow potential buyers to really envision the space and how all the pieces work together. In short, your marketing plan for a property with an ADU should be customized for the particular opportunity and be thorough.
5. What is condoization?
Condoization is simply the process of converting one space into several separately owned spaces, by determining the common areas and limited common areas that are owned or managed by one or multiple owners. Developers are taking advantage of this in areas where it is already allowed, creating three units – a primary residence and two ADUs usually, condoizing the entire lot, creating an HOA, and selling each unit separately. This is great for increasing homeownership, but it may get tricky down the road if the HOA isn’t well-managed.
If you aren’t familiar with these, check out these properties on the market in the greater Seattle area right now. Some giveaways to look for in the MLS are – the ADUs are usually under 1000 square feet, they may be listed as either residential or condos, read the broker remarks for clues on how it is structured, and look through the supplements. If or when these come to your area, you need to be ready.
6. How do I determine how to sell a property with Middle Housing development potential?
Let’s say you get a call from a seller of a 1000 square foot home on a 7500 square foot lot. The house has seen better days (built 70 years ago with a failing roof, plenty of rot, and some foundation issues), but it is in the city limits and your city allows up to a four-plex to be built on that lot. What are you going to do?
Research is key to selling a property with middle housing development potential – from verifying the potential with the local planning department, determining the developer buyer pool, valuing the property (which may require you to go beyond the MLS into public records or reverse-engineering local developments); just doing your due diligence in order to get ready to sell is one thing. Creating an attractive, and thorough, development package, making it easy for potential developers to see the potential, is key – and some of the tools that agents who specialize in development like this are not what is typically in a residential agent’s marketing toolkit.
This is a good moment to determine what you would do if an opportunity like this presented itself to you. A good idea is to find an agent partner or someone to refer to now. Even if your goal is to learn and possibly specialize in this yourself one day, there is a big hill of knowledge that you must summit in order to adequately represent your seller. Don’t assume this is in your wheelhouse if it isn’t.
7. Will lending and appraisals be affected by ADUs and Middle Housing?
In short – yes! If you think real estate agents are going to be challenged, let’s take a look at lending and appraisals when it comes to both ADUs and middle housing development potential. In terms of ADUs, state law will allow two ADUs per property, but the federal parameters under programs like FHA, Fannie, and Freddie indicate there can only be one ADU per property to fall in their typical residential guidelines. Furthermore, Fannie specifically says that ADUs are not allowed on a multi-family property while Freddie says a 1-3 unit property with an ADU is okay, but not two ADUs. There is much more to unpack in terms of lending and ADUs.
Where do we go from here? With other states like California also loosening their ADU requirements in order to build more housing, in some cases also allowing for multiple ADUs on a single lot, it may very well be that the federal programs may change their parameters eventually. However, if you are selling a property with two ADUs, be aware of the lending challenges since that can affect the buyer pool.
On the appraisal side, there are two big issues to be aware of – determining whether the ADU is a permitted ADU (as this may affect the appraised value), whether comps are permitted ADUs, and what the market is accepting of both permitted and non-permitted ADUs. When it comes to middle housing development potential, since a residential appraiser can only appraise up to four units, in the event the potential of up to six units should be realized due to other local development which indicates the highest and best use IS the full six units, then the residential appraiser must call in a commercial appraiser. The research that an appraiser will need to complete on an ADU or middle housing project will take time and additional fees are likely. Be prepared!
We have just touched on the tip of the iceberg when it comes to Middle Housing in this article, and there is so much more to learn! In fact, each and every one of these topics requires a deep dive, learning about what is happening in your area and determining your very own special set of tools for doing research.
Denise Lones
Denise Lones, president of The Lones Group and author of the weekly syndicated Zebra Report, brings over two decades of experience in the real estate industry with expertise in branding, strategic marketing, business analysis, and broker/managing broker training. You can reach Denise at (360) 527-8904 or at www.TheLonesGroup.com.
Need Middle Housing Help?
The Lones Group has created hours of content organized into easily digestible courses designed to help you with everything from learning about the House Bill details to valuing a property with an ADU, marketing a property with middle housing potential, or how appraisals will be impacted. This landscape is changing every day and it pays to be prepared!
If you want an education and an edge when it comes to Middle Housing knowledge, head over to The Middle Housing Resource Center: www.MiddleHousingHelp.com.*
* This article offers programs not affiliated with or endorsed by the Washington REALTORS®.