Hi JB,I would add option #4 which is what I do: Don't do any meter work and split up utilities based on square footage of both units (usually I do 60% upstairs 40% downstairs) and let them pay for everything including the water.

We know this because of security camera footage (that I check fairly regularly because we have a STR in the unit next door).

This Product is for a Primary SFR only ( I missed the MFR in the heading) Some criteria with this loan is; Any increase to the square footage of the property is limited to 5% maximum. 

Square footage can also be at play.

Biggest thing that appraisers look at to determine value is the total square footage, number of bedroom/bathrooms, and finding similar homes (typically under .5 miles away) that have sold in the last 180 days (or less) with similar finishes. 

If there is any way you can increase sq footage, like finishing an attic somehow, that will improve the appraised value.

Or higher sq footage and find out what a price per sq foot is and adjust by a number that makes sense (30% of the per sq foot per built sq foot).

Is the similarity based on square footage, # of bedrooms and baths, type contruction, etc?

For example how much credit or deduction is used for a 1/2 bath, more or less square footage, an extra bedroom etc...etc....I've seen an adjustment value of $15/sq ft of space but not sure where that figure comes from or if it can be applied to all appraisals.

Seems to me like there is enough backyard, so you probably don't want to reduce the square footage of the house.