Hello everyone, uber noob here... Thanks for all your insight and support! I purchased my primary residence, a two-building duplex close to the beach in San Diego. It's been a great buy so far, bought it from a flipper for a very good price and the existing tenant is military and a great person. I began the permit process to add an ADU to the building with the current tenant. The numbers will be great after this and my goal was to refinance out of FHA after I'm finished with construction and the ADU is rented. Then use FHA to go find another duplex or SFR that has room for an ADU to be added. I spoke with my mortgage broker today to let him know my plan. I'm still about 3-4 months from the completion of this project but wanted to share this plan with him and get whatever ground level plan going. He told me that if I add the ADU to my duplex, that it will be next to impossible to find financing. That for my plan to work, I will need to go through a different permitting process so that my property becomes a "Triplex" My questions for everyone here is: Is this correct? What options do I have? Any recommendations? There is a vast wealth of knowledge on these forums and many of us learn from the questions others ask. I hope all is well with everyone, stay safe and thank you for your input!!!

Dear all, I was just told by my mortgage lender that Freddie Mac has officially changed their ADU refinance policies, effective immediately. Apparently ADU rental will be able to be used to document rental income, and also duplexes with ADUs will be able to receive Freddie Mac financing. This is long awaited news and a step towards the normalization of ADUs as just another rental unit: https://www.nationalmortgagene... To clarify, there are a lot of caveats I'm reading in the link attached, for instance there might be owner-occupied restrictions, and some of this might not apply for cash-out refinances. Additional restrictions might apply.

My first thought is your bid is probably about 1/3 what that would cost in coastal Southern California. Are you confident your contractor has included everything and can perform at that price? My next thought is that even with the very tempting price, the loss of F/F financing will make this a negative value add and could reduce the value below the cost of the property without the ADU. The initial cash flow goes to recover this negative position. Final thought is if you are going to self fund the ADU/garage there is no leverage on this money and the cash flow will have to be absurd to match the return if this was leveraged. Basically to produce the same ROI, an investment at 0% LTV compared to 80% LTV has to produce 5 times the return in dollars. This would make this challenging to be your best option for COC or ROI. This is not even including the negative initial position from subtracting value. Adding a garage/ADU is effort. It is not passive. I would think it should not be difficult to find investments that will produce a better ROI/COC including some that are more passive (a good, established, conservative RE syndication; S&P 500 that has lifetime return approaching 10%; BRRRR were I typically get infinite return because I extract all my investment; etc). Good luck

@Oscar Miguel @Khoa Ha Try Loan Depot. My LO there, who I did my refi on my primary, told me they underwrite duplex with ADU. I'm about to wrap up the ADU on my duplex in a few weeks and planning to do a refi.

@Cathy Song Hi Cathy, as a matter of fact we have initiated the cash out refinance with Loan Depot and have just completed the appraisal last week. We hope the close it within 2 weeks time from what our loan officer told us.

@Khoa Ha @Oscar Miguel Do you guys mind sharing what the appraisal came back as? Was it greater than the cost of construction? How was the value per square foot evaluated? Thank you!!! I reached out to Loan Depot today and gave the rep on the call some of my numbers. TBD what he comes back with.

Refi issues when adding an ADU to a duplex in CA?!?!?

Bruce May

Lender · San Diego, CA · Member since 2011 · 664 posts · 231 votes

6y

@Oscar Miguel I don't know the answer to your question but we added an ADU to our SFH in Oceanside last year and have been talking with our loan broker about doing a refi. She said she doesn't know how the ADU will be considered by the appraiser or bank because there isn't a good history about them yet. She's hoping we can just have a drive-by appraisal done since it's a refi. We did full permits and I have been watching the tax records and so far our house still shows as a single family property, not a duplex or a SFH with an ADU, and I don't know if it will even be changed by the tax assessor.

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Cesar Cruz

Member since 2019 · 16 posts · 9 votes

6y

Hi! @Bruce May and @Oscar Miguel! I'm trying to add an ADU as well in SFH.... Can we share your contractor details if you are happy with them, and the approximate cost... may even some pictures? Thanks!

Refi issues when adding an ADU to a duplex in CA?!?!?

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