New California ADU Law 2020 : Advice needed

6 Replies

The proposed strategy: Buy an SFR -lets say a 4 bed/ 2 ba house -1600 square feet ...subdivide interior to convert to 3bed/2 ba @1000 square feet plus a 1bed/1ba @ 600 square feet Jadu unit--rent out both units ---refi ...take repair money out -repeat -longterm hold strategy Cost to do this should be much less than converting a garage to jadu or building a detatched adu

Why is nobody talking about this?????????

Can someone point out the advantages and disadvantages to this strategy

Are there any Lenders who would do the refi cash out in California on this type of project??

Are there any podcasts of success stories on this topic on bp.com??

Please help

Thanks

A JADU can only be rented when the primary is owner occupied so that is problem 1 with your plan. 

Problem 2: JADUSs do cost less than garage conversion ADUs, but appraisals are typically valuing them at less than the costs of adding the JADU.  A JADU addition is typically the opposite of a value add (I.e. it adds less value than it costs).  This kills the plan to extract the costs via a refi.   

Good luck

This would be considered a regular attached ADU conversion, Junior/JADU classification only comes into play when there is another ADU on the property so owner occupancy restrictions do not apply.

You will need proper fire blocks between units, which depending on what's on the connecting wall (like a custom shower, kitchen cabinets etc.) can be pricey to tear out down to the studs, install the fireblock, and reinstall what was originally there. 

Also, appraisers will not see this as an increase in value as you haven't added any square footage and there are no recently sold comps to even use to price this non-standard use. 

In my experience new detached builds are cheaper than any of kind of conversion but this may just be my contractor. What you are describing sound more like "house hacking", which depending on how you structure it can be a legal gray area but will save you the cost and headache of going through the planning / permitting process needed for an ADU. Plenty of posts and podcast episodes on this topic.

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Originally posted by @Zul Hirani :

The proposed strategy: Buy an SFR -lets say a 4 bed/ 2 ba house -1600 square feet ...subdivide interior to convert to 3bed/2 ba @1000 square feet plus a 1bed/1ba @ 600 square feet Jadu unit--rent out both units ---refi ...take repair money out -repeat -longterm hold strategy Cost to do this should be much less than converting a garage to jadu or building a detatched adu

Why is nobody talking about this?????????

Can someone point out the advantages and disadvantages to this strategy

Are there any Lenders who would do the refi cash out in California on this type of project??

Are there any podcasts of success stories on this topic on bp.com??

Please help

Thanks

The primary flaw here is that ADUs don't appraise as livable square footage. They appraise as an amenity, like a pool or a deck, and we're seeing ADUs valued at just $50-100K.

So if you take a 1600-sq-ft 4/2, reduce it to a 1000-sq-ft 3/1 plus an ADU valued at $100K, you'll actually appraise for less after the work is done.

Originally posted by @Jon Schwartz :
Originally posted by @Zul Hirani:

The proposed strategy: Buy an SFR -lets say a 4 bed/ 2 ba house -1600 square feet ...subdivide interior to convert to 3bed/2 ba @1000 square feet plus a 1bed/1ba @ 600 square feet Jadu unit--rent out both units ---refi ...take repair money out -repeat -longterm hold strategy Cost to do this should be much less than converting a garage to jadu or building a detatched adu

Why is nobody talking about this?????????

Can someone point out the advantages and disadvantages to this strategy

Are there any Lenders who would do the refi cash out in California on this type of project??

Are there any podcasts of success stories on this topic on bp.com??

Please help

Thanks

The primary flaw here is that ADUs don't appraise as livable square footage. They appraise as an amenity, like a pool or a deck, and we're seeing ADUs valued at just $50-100K.

So if you take a 1600-sq-ft 4/2, reduce it to a 1000-sq-ft 3/1 plus an ADU valued at $100K, you'll actually appraise for less after the work is done.

Unless, in theory, in that particular market, a 1000 3/1 SFR w/ an ADU actually sells for more than a 1600 sq ft 4/2 SFR.

Depending on how this housing crisis continues to pan out, we may just see that day. But, in most markets (I mostly see the big CA markets, Oakland, San Diego, Sacramento, etc), that day is not today.

The big difference between those two hypothetical homes is interior access between the spaces, and the 2nd kitchen. The market currently views the lack of interior access as a bigger 'con' than the 'pro' of the 2nd kitchen. 

This is actually an argument to buy the SFR w/ ADU, rather than build it. Viewed from a rent perspective, that ADU has huge value, but 'the market' doesn't see it that way. Excellent! That means that you, seeing the value of that rent, can get it for a 'discount,' relative to if the market gave that same value to that rent.

Someone out there is frustrated that their 3/1 SFR with a 1/1 ADU isn't selling for what they thought it would sell for. They just converted it a year ago, then their spouse divorced them, and the judge is making them sell. Perfect! There's your seller, there's your house, go buy it.

Between the labor issues, the supply chain, bla bla bla, driving up costs of "downgrading" an SFR into a SFR w/ ADU, and the fact that on the existing home market it is viewed as a "downgrade," there's no argument in favor of building. Buy someone else's folly, instead (& don't get divorced a year later! This only works if you will actually own it long enough for that rent to add up).

@Jon Schwartz :
Hey! @Jon: I am a lender and work with a CA ADU startup. I have been able to get appraisals successfully done to show value beyond the ADU cost. So actual equity gain. Sure its not valued at the same value per sq ft, but it not $50-$100K either. Loans have successfully been closed. Happy to have a chat and share my insights.

I appreciate the tips from all participants. Learning a lot.

Many Thanks to Dan Heuschele, David Arsene and Gabe T for their  advice and mentorship. Wishing you all  my sincere appreciation and respect