A detached rental in the backyard may sound like a gold mine. And maybe it’s extra square footage, rental income, space for family to stay. However, when it is time to sell, a unit can make for an uncomplicated transaction turn into an extremely complicated one. Was it permitted? Is it currently rented? A lender may not even consider it to be a proper square footage, and these are the questions that probably surprise sellers.
This guide walks through what is considered a detached rental unit or accessory dwelling unit (ADU), why those properties sell differently than typical single-family homes, and what selling as-is for cash looks like when some portion of the property might be a detached unit, permitted or unpermitted, occupied or not.
The information provided in this article is for general educational purposes only and should not be considered as financial, tax, or legal advice. ADUs are subject to different zoning rules, permitting requirements and landlord-tenant law that vary by city and state, so check with your local planning or building department and a licensed professional regarding your case.
What Is Considered a Detached Rental Unit or ADU?
An accessory dwelling unit (such as ADU) is a smaller, self-sufficient home on the same lot as your primary residence. An ADU is defined as an additional living unit that has its own exterior entrance/exit and, together with the main home, comprises a single piece of real property (Federal housing definitions used by HUD near FHA). It’s a standalone unit equipped with its own kitchen, bath and sleeping area rather than just an extra room.
ADUs come in a few forms:
- Internal ADUs: These are in the same building as the primary dwelling but involve a portion of the house, like a basement apartment, being converted into a self-sufficient unit.
- Attached ADUs, which are affixed to the main building (for example an area over a carport)
- Detached ADUs (separate building at the property, like a converted garage, backyard cottage or an entirely dedicated secondary unit)
We wrote this article with an eye on detached units as they typically come with the most unique considerations when it comes time to sell, however much of what follows is applicable to attached and internal units. Each of these units has a variety of names depending on the region: granny flats, in-law suites, casitas, carriage houses or secondary suites. Whatever it is called in your area, the question for purposes of a sale is the same: Is that legally part of the property and how does that influence the sale?
Selling a Property With an ADU and Why It Is Different
Permitting Status Changes Everything
The biggest factor that most impacts a sale is whether the detached unit was built with proper permits. Unpermitted features and accessory dwelling units are really common especially in older neighborhoods where enforcement has been lax to nonexistent over decades, or where an owner put in a unit, not knowing permits were required. Which does not make it uncommon, but it is something a buyer and their lender will look very closely at.
An unpermitted ADU creates some unique issues in a traditional sale.
- Disclosure obligations still apply. Depending on the state you are in, sellers must disclose any known unpermitted work regardless of how long ago it was built or whether it appears to have been drawn by a professional and well done.
- Retroactive permitting is both costly and slow. Retroactively bringing an existing structure to code in order to get permits can easily end up costing more than constructing it correctly from the beginning, and even then there’s no guarantee it escapes inspection unaltered.
- Once unpermitted square footage pops up during due diligence, some buyers and agents will just walk away no matter how useful or well-built the unit is.
Lender and Appraisal Complications
A completely permitted ADU complicates the underwriting process that does not exist for a normal single family home. However Fannie Mae says ADUs are considered a home feature that can be financed with standard loan products, but must also meet certain requirements (different entrance; own kitchen and separate sleeping and bath facilities as part of the ADU space compared to the primary residence). In a lender’s appraisal, a unit that’s not permitted at all usually can’t be counted toward the home’s livable space or value because appraisers typically can’t give square footage credit for unpermitted space. This is also where a conventional, financed sale runs into an immovable wall: lenders don’t lend on unpermitted square footage no matter what the buyer offers to pay for it.
Tenant Occupancy Adds Another Layer
If the unit in question is rented out, either to a long-term tenant, family member or short-term renter, that alters any sale. Of course if you’re actually renting the unit, you have to screen and follow Fair Housing just like any rental. The Fair Housing Act prohibits discrimination in rental of housing because of race, color, national origin, religion, sex, familial status and disability, and the same prohibition applies to an ADU as it would a full standalone rental property. According to the FTC, if you use tenant screening reports: Landlords using consumer reports for tenant decisions must have a permissible purpose and mail or hand-deliver notice of the adverse action (i.e. denial) taken based on information in the report.
Also when selling a rental property with an occupied ADU, you have to deal with the existing lease as part of the sale; most buyers using traditional financing want to buy tumbleweed insurance and compel the seller to present a vacant show-ready property instead of one that has active leases tied to part of it.
Rental Income Is Reported Separately for Tax Purposes
Of course, if the rental unit is a separate entity and rented out, then the rent money can be reported separately from any potential taxable gain on selling the actual personal residence. The IRS wants you to list rental income on your tax return, and the deductions are commonly allowable against that revenue. It adds one level of documentation that a simple, single-family sale for an owner-occupant does not have and is worth discussing with a tax professional because it’s safe to assume you shouldn’t treat the sale of the home as the same as running it out as an ADU.
Selling a Property With an ADU Through Traditional Sale vs. Cash Sale
| Factor | Traditional Listed Sale | Cash Sale (As-Is) |
| Unpermitted ADU square footage | Arranged outside of the appraised value; can freeze financing regardless | Integrated into the offer, as a part of its state |
| Disclosure of unpermitted work | Required | Required |
| Retroactive permitting or demolition | Commonly required by purchasing party or lender prior to closing | Not required before selling |
| Occupied ADU (active tenant) | Typically requires vacancy prior to a listing or closing | Often available with the tenant in situ |
| Lender involvement | ADU status directly impacts underwriting, and is therefore required | None |
| Typical buyer pool | Once unpermitted status comes to light, narrows significantly | Cash buyers and investors |
| Timeline | May be stuck for weeks as a result of permitting or appraisal disputes | Days to a few weeks |
When Selling for Cash Has an ADU and What That Actually Looks Like
Owned and operated by Eagle Cash Buyers, a leading cash home buyer in the area, we buy houses as-is including properties with detached rental, (ADU) permitted or unpermitted units that are vacant or occupied. Here’s what that generally involves:
What you do not have to resolve is unpermitted work. We often purchase homes with accessory units or additions that were built without a permit and in these cases we take the unpermitted condition into account in placing our bid and do not require you to go back later and seek a retroactive permit or remove the structure. Questions about permitting tie into what is assessed post purchase not something you need to resolve pre-purchase.
Tenant-occupied units are workable. This means that if there is a tenant in the detached unit, that’s not an eviction or having to sell after a lease. You factor the tenancy into the offer instead of using it as a disqualifier. We go into further detail about this method broadly on our sell my house page.
No repairs or agent commissions. There is no obligation that anything be repaired before you make an offer, regardless of whether the detached device desires work or not, and excessive agent commission (which can commonly range from 5-6%) is eliminated with a direct cash sale.
An established closing timeline you manage. Like other types of new from the ground up construction, closings are done in just days & weeks instead of a stalled financed sale that can take months to complete to close because there is not even an appraisal process for lenders to navigate around ADU status. Check out our how it works page to see the general step-by-step process.
Actually, disclosure still ould not have been out of the question. You’re still required to disclose what you know about the permitting history of any unit, its condition and anything in place tenancy wise. No matter to whom you are selling, that is an expectation in law and telling people about it right at the beginning is what keeps a fast sale, fast.
In case you have a similar zoning question, such as if a variance might be applied to your own property, our guide on what a zoning variance is goes over the workings of that process as well as how it’s different from merely disclosing an already existing condition when selling.
What Makes a Property With an ADU Worth More
Those things? Well, a cash offer on a property with an ADU is a few steps further than your average single family home.
- Permitting status. Even if one looks the same from looking at a permitted, code-compliant ADU versus an unpermitted structure, favorite regular readers already know that is an extraordinarily different asset to own.
- The state of the detached unit itself. This is computed separately from the main residence and takes into consideration the age of the building, any foundation issues as well as if all utilities are properly connected.
- Current occupancy and rental history. The buyer’s approach to the property may depend on whether the unit is occupied by a tenant, vacant, or occupied family.
- Local zoning and ADU regulations. Many cities have relaxed restrictions on ADUs recently, which could impact the practical ability of an unpermitted structure to be later brought into compliance.
- Utility setup. The current rentability (or possible future permitting path) of the ADU is influenced not just by whether you have boarding or separate metering, but also how utilities are shared between the two.
Frequently Asked Questions
Q: Can I Sell a House if the ADU Does Not Have a Permit?
Yes. You must report any known unpermitted work, but you’re not obligated to get permits or make the structure compliant prior to selling. A cash sale buys the property as-is, taking into account the unpermitted status in the offer rather than making it a condition to be resolved first.
In the Case of an Arm’s Length Sale, Will My Home Appraise More Poorly With Regard to a Non-Permitted ADU?
Typically, yes. Because appraisers typically cannot attribute square footage to unpermitted space that will pass legal muster, an unpermitted detached unit does not usually add to appraised value in a financed sale, and in some scenarios it can thoroughly complicate the lender’s ability to bless the deal.
Q: Can I Sell the House With a Tenant in the ADU?
In many cases, yes. In certain markets, Eagle Cash Buyers buys properties with ADUs that are occupied, but includes the tenancy in its offer. This can include selling a property without needing to wait for a lease to finish or going through an eviction process.
Your ADU Is Un-Permitted, Do You Have to Disclose This?
Generally, yes. Except for a few exceptions, most states require sellers to disclose well-known material facts regarding the condition of the property itself, and unpermitted construction is usually considered material information regardless of how a sale transaction may be structured.
Rental Income From ADU Will Not Be Taxable?
Yes. The IRS expects you to report rental income on your taxable income with related expenses usually being deductible. This is distinct from other capital gains tax implications of the home sale, and it depends on your individual circumstances, so worth reviewing with a tax professional.
Does My Home Value Go Up if I Have a Detached Rental Unit?
It can be done, especially if the unit is a permitted and well-kept rental with a track record. The effect on value of an unpermitted unit is more nuanced since it may provide real utility, but if a ballpark traditional financed sale were to happen without permits the appraised value would often not reflect that practicality (and this is part of why cash offers treat it differently).
The Bottom Line
On top of that, if it’s an entirely its own rental or ADU, you’ve got real questions a single family sale doesn’t face: is it permitted at all? Is it occupied? Would anyone even lend on it? When appraisers sift through those questions, it can’t touch a traditional listing for weeks, while lenders and wary buyers sort through it. By assessing the property, unit included, in its current state instead of requiring permitting or vacancy or repairs to be complete, a cash sale avoids most of that friction before a deal can close.
If you are considering buying an actual occupant ADU or rental unit (permitted or unpermitted) we encourage you to contact our team. Using our cash offer option, we buy houses in as-is condition across 44 states, but are happy to work with you to see what one would look like for your property. Check out our sell my house page so you can get started today.
