Buying SFH with ADU, then rehab, will increase ARV?

Question

Hi BP Team! I've learned so much through this forum and really want to get my real estate journey started. I am considering a property listed at $800,000, which includes a 2-bedroom, 2-bathroom main house (1100 sq/ft) and a separate ADU of the same size. The ADU has separate meters and a separate address but is being listed as one property. The property requires significant rehab and I am considering to put in a lower bid than the asking price. The comps in the area, which are 3-bedroom 2-bathroom or 2-bedroom 2-bathroom homes (1100-1500 sq/ft) with no ADU, are valued around $800,000. I am curious about the ARV once the renovations are completed.  Could you provide insight into whether the presence of the ADU will help boost the ARV beyond the comps that I am seeing? Thank you in advance!

Dan H. · Answer

In general ADUs add less value than their cost.  In addition buying an existing ADU has the following advantages over building one 1) typically pay less for the ADU than the cost of doing a hands off ADU addition 2) get RE purchase financing which is superior to financing that is specific to the ADU addition.  3) there is no delay between financial outlay and income when purchasing an existing ADU.  ADUs can take over a year to complete and virtually always take over 6 months to complete.

As @Sebastian Marroquin stated it is important to verify that it is a legal ADU.  Verify permits.  An illegal ADU has a fraction of the value of a legal ADU.

Good luck

Sebastian Marroquin · Answer

The answer is yes. If you see comps in the $800k to $850k for the home (no adu) then once you renovate the home - by itself it will be valued like other homes like it that are renovated (likely around $900k ish) Be careful with numbers mentioned and do your own homework of course.

Also be careful with the ADU, bc they may be calling it one but it may not have permits. (I would question it since the main home is not renovated) what are the chances that they did everything right on the ADU but didn't have the funds to do the home… hmmmm doubtful

Make sure they have the permits (call the city and see if they have permits on file).

You could also instead: get a construction loan and buy a fixer home with no ADU and you build it yourself.

usually - I see people buying a home like this for $650k to $700k and then adding the ADU for $100k where you end at $750k to $800k with a well renovated home!

Let me know if you need help! good luck

Bob S. · Answer

IMPOSSSIBLE to answer, Also you have zero experience , but are doing an 800k deal, HMM