Value Add Flip, ADU vs Dwelling Unit, San Diego, Imperial Beach

Justin R.

Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes

3y

@Benjamin Mavity Yeah, there's basically no reason to build a traditional DU in a multifamily zone if you can accomplish your goals with an ADU.

The challenge in parts of IB (and other coastal areas) is often whether you can get the product you want -- unit size and height -- under the 30' coastal heigh limits. If you're outside the coastal zone, it's way less of an issue.

As a general comment, I will add this, based solely on what I've learned in my life journey (put as much or little weight on that, given you don't know much about me): "Real Estate Developer" is a professional position as projects get larger. There's no such thing as having money and investing in a project to build a bunch of units and hiring fee-for-time consultants to do it for you (or your client). There are two questions with these projects:

1. What Should be Built Here?

2. Should we Build it?

Most people go straight to the question What Can be Built Here? which is interesting, but most people don't appreciate the difference between that question and #1 above. They don't know what they don't know. From an investor perspective, the two questions above are the only ones to focus on.

My friendly advice is just to help your client understand this difference -- they'll thank you for it eventually. "Can I" is an easy question to answer. "Should I" is exceedingly more important, more difficult, and more valuable to answer.

2 Reply

https://www.sandiego.gov/sites...

OP

Member since 2022 · 10 posts · 0 votes

3y

@Justin R. Ok that makes sense, don't make it harder than it needs to be. After I posted this I found another BP forum where someone said that appraisers don't have enough ADU comps to accurately use. But that was from 2020 I know a lot has changed.

It is in the coastal overlay (just one street over would have been out!) but luckily the investor is only planning on 1 story, but the CC will still be a factor. My friend at ADU Geeks sent me this a few weeks ago from what I understand it rolls back a little of the red tape w/ ADU's in coastal.

That is some good insight, thank you. I will contemplate your questions further and take it into account moving forward. If I'm understanding you highest and best isn't always most and biggest. Just because you can legally build 20 units on that 4500 sq ft lot doesn't mean you should. Weighing costs, timelines, risks, use case, worst case scenarios, market tolerance/demand, etc should all be factored in to projections. It's easy to look at how much money you COULD make, but NOT losing money needs to come first, nothing is guaranteed. And even if it the deal looks good on paper doesn't automatically give you the green light. Developing is a different beast from doing a fix or ADU add. It's not a side project or part time job, this will require your full attention and a lot of time. You need experience and a good trusted team to successfully see a development through. If the project is beyond your current experience and resources then it may be better to let the deal pass by. It is better to have no deal than a bad deal. Also will it be the best use of your time. Maybe you should consider if its worth doing this one big project vs doing other less involved ones in the same or less time. Its possible the opportunity costs from tying up your time and capital in this deal will be more than its worth.

Is that in the ball park of what you were saying? I am speaking only from what I've learned working with my clients on development deals. Not having built them myself and only been involved sourcing, analyzing, and transacting I can't speak from actual experience. So hopefully I'm learning in the right direction. Thanks for taking the time to drop some knowledge! Learning from people like you is how I got to where I am now so I appreciate it.

OP

Member since 2022 · 10 posts · 0 votes

3y

@Dan H. Thanks for the input! I've seen his posts elsewhere, its good to hear an opinion coming from experience. Based on his and your reply I will be recommending the ADU route. Gotta get the purchase locked in first though haha. Appreciate the guidance and I'll let y'all know how it goes!

https://www.sandiego.gov/sites...

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Benjamin Mavity:

@Justin R. Ok that makes sense, don't make it harder than it needs to be. After I posted this I found another BP forum where someone said that appraisers don't have enough ADU comps to accurately use. But that was from 2020 I know a lot has changed.

It is in the coastal overlay (just one street over would have been out!) but luckily the investor is only planning on 1 story, but the CC will still be a factor. My friend at ADU Geeks sent me this a few weeks ago from what I understand it rolls back a little of the red tape w/ ADU's in coastal.

That is some good insight, thank you. I will contemplate your questions further and take it into account moving forward. If I'm understanding you highest and best isn't always most and biggest. Just because you can legally build 20 units on that 4500 sq ft lot doesn't mean you should. Weighing costs, timelines, risks, use case, worst case scenarios, market tolerance/demand, etc should all be factored in to projections. It's easy to look at how much money you COULD make, but NOT losing money needs to come first, nothing is guaranteed. And even if it the deal looks good on paper doesn't automatically give you the green light. Developing is a different beast from doing a fix or ADU add. It's not a side project or part time job, this will require your full attention and a lot of time. You need experience and a good trusted team to successfully see a development through. If the project is beyond your current experience and resources then it may be better to let the deal pass by. It is better to have no deal than a bad deal. Also will it be the best use of your time. Maybe you should consider if its worth doing this one big project vs doing other less involved ones in the same or less time. Its possible the opportunity costs from tying up your time and capital in this deal will be more than its worth.

Is that in the ball park of what you were saying? I am speaking only from what I've learned working with my clients on development deals. Not having built them myself and only been involved sourcing, analyzing, and transacting I can't speak from actual experience. So hopefully I'm learning in the right direction. Thanks for taking the time to drop some knowledge! Learning from people like you is how I got to where I am now so I appreciate it.

>After I posted this I found another BP forum where someone said that appraisers don't have enough ADU comps to accurately use. But that was from 2020 I know a lot has changed.

ADUs in many areas are still getting appraisals far below the cost to add the ADU. Justin and I were both referencing adding an ADU in a MF zoned area.

If you are in a pure SFH neighborhood and add an ADU, it typically will not appraise at the same value as the primary home. It will likely appraise below the hands-off cost of adding the ADU. Also adding an ADU is not passive even when hiring out what can be hired out.

In summary, be careful to extrapolate what we indicated for the OPs scenario to other scenarios. His candidate property is in a MF zone that has other MF in the vicinity.

https://www.redfin.com/CA/San-...

OP

Member since 2022 · 10 posts · 0 votes

3y

If you are in a pure SFH neighborhood and add an ADU, it typically will not appraise at the same value as the primary home. It will likely appraise below the hands-off cost of adding the ADU. Also adding an ADU is not passive even when hiring out what can be hired out.

In summary, be careful to extrapolate what we indicated for the OPs scenario to other scenarios. His candidate property is in a MF zone that has other MF in the vicinity.

@Dan H. Ah yes I see. That makes a lot of sense. That is actually a question I've been pondering lately so that's helpful. For this dea I could tell it had some bigger MF nearby and I went to see it today. Its completely surrounded by MF buildings so that's a good sign right? Even had a little detached garage that you couldn't see, might work as another ADU.

@Justin R. And on an unrelated note I just listed a Development deal in Linda Vista, a duplex with approved plans/permits for 3 more units. A bit of a shameless plug since I know you are both in the area or close by. But mainly I would love if you had any feedback for me on this. If you don't have access to the MLS i can send you the plans. And I can provide any further details you might need, thanks!

Sebastian MarroquinPro Member

Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes

3y

I see people's point here... but I do think based on data, that a second unit will add way more value to a property than an ADU.

Things to consider :

1. If you build another unit : the building requirements for the city will be greater: set backs will be different, parking needs, utilities... and maybe more... (maybe gas, electrical and sewer implications) : but and a big one: the overall property will be worth more (consider price per sq foot in your area or that area) if the price per sq ft on the sale or appraisal is say: example: $600 per sq ft: then the 1000 sq ft second unit will gain $600k in value for the property (the ADU won't )

2. If you build an ADU: you won't need a garage, sewer , electrical and gas could or will be attached to the main home... etc

Less hassle, but also less value. For the same reasons you mentioned above (not enough inventory for appraisers) and they just don't count an ADU as a "second unit" and when you go to sell it... or refinance they will see it as such.

If the thinking is to keep it forever as a rental: (which doubt it will happen :) as many people will traded for a better asset later), but lets assume that rare scenario.... then, do your numbers according to the rents the unit can bring in. and it will be more cost effective and a better return on investment from that perspective.

Hope this helps

OP

Member since 2022 · 10 posts · 0 votes

3y

@Sebastian Marroquin super helpful, yea it would depend on his strategy. He is a flipper so yea it'd be hard to say which. But for now we have decided against it due to the extended timelines being in the Coastal Overlay. Would be awesome for a BBRRR Buy, build, at the purchase price you'd get a pretty good CoC depending on the build.

Tk Dugan

Investor · Bay Area, CA · Member since 2023 · 3 posts · 1 vote

3y

in connection with this discussion - does anyone know how long SFR add-on permits are taking rn in SD? Debating adding a level or pushing forward plus ADU in Oceanside. ! thanks in advance!

Sebastian MarroquinPro Member

Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes

3y

Quote from @Tk Dugan:

in connection with this discussion - does anyone know how long SFR add-on permits are taking rn in SD? Debating adding a level or pushing forward plus ADU in Oceanside. ! thanks in advance!

Adding a level will require much more engineering and will add to cost: so keep that in mind.

* Now: for timeline: the time it will take for permit approvals will be the same for adding sq footage, adding a level or doing an ADU (new construction or conversion). In all cases the process will be the same: Zoning, plan check, and building and safety.

(Unless the property has more layers : like hillside… or raw land, or splitting lots etc

Your costs: now that will be much different for each scenario.

If you want to know actual time frame: you should see around your neighborhood and see who is doing heavy construction: and they should know. The city and building and safety themselves won’t give you accurate time frames… (you can still call building and safety and ask to speak to the 3 departments and get some guidelines and timing from them if you like).

Also: reach out to a contractor on yelp in your area with great reviews and ask them the same questions : they should be able to answer

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Sebastian Marroquin:

I see people's point here... but I do think based on data, that a second unit will add way more value to a property than an ADU.

Things to consider :

1. If you build another unit : the building requirements for the city will be greater: set backs will be different, parking needs, utilities... and maybe more... (maybe gas, electrical and sewer implications) : but and a big one: the overall property will be worth more (consider price per sq foot in your area or that area) if the price per sq ft on the sale or appraisal is say: example: $600 per sq ft: then the 1000 sq ft second unit will gain $600k in value for the property (the ADU won't )

2. If you build an ADU: you won't need a garage, sewer , electrical and gas could or will be attached to the main home... etc

Less hassle, but also less value. For the same reasons you mentioned above (not enough inventory for appraisers) and they just don't count an ADU as a "second unit" and when you go to sell it... or refinance they will see it as such.

If the thinking is to keep it forever as a rental: (which doubt it will happen :) as many people will traded for a better asset later), but lets assume that rare scenario.... then, do your numbers according to the rents the unit can bring in. and it will be more cost effective and a better return on investment from that perspective.

Hope this helps

I personally know no one in San Diego who has done this more than Justin R. I take what he states about adding ADU in MF zone appraising and adding value the same as adding a non ADU unit as near gospel because I have some idea of how many times he has done this.

Until someone has done close to as many as Justin tells me otherwise I will go with what he indicates (and I likely will still believe Justin even if someone approaching his experience in this area tells me otherwise because I know justin).

Note neither of us are stating this is the case in non-mf areas. Those ADUs can be valued at pathetic values.

Sebastian MarroquinPro Member

Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes

3y

Quote from @Dan H.:

Quote from @Sebastian Marroquin:

I see people's point here... but I do think based on data, that a second unit will add way more value to a property than an ADU.

Things to consider :

1. If you build another unit : the building requirements for the city will be greater: set backs will be different, parking needs, utilities... and maybe more... (maybe gas, electrical and sewer implications) : but and a big one: the overall property will be worth more (consider price per sq foot in your area or that area) if the price per sq ft on the sale or appraisal is say: example: $600 per sq ft: then the 1000 sq ft second unit will gain $600k in value for the property (the ADU won't )

2. If you build an ADU: you won't need a garage, sewer , electrical and gas could or will be attached to the main home... etc

Less hassle, but also less value. For the same reasons you mentioned above (not enough inventory for appraisers) and they just don't count an ADU as a "second unit" and when you go to sell it... or refinance they will see it as such.

If the thinking is to keep it forever as a rental: (which doubt it will happen :) as many people will traded for a better asset later), but lets assume that rare scenario.... then, do your numbers according to the rents the unit can bring in. and it will be more cost effective and a better return on investment from that perspective.

Hope this helps

I personally know no one in San Diego who has done this more than Justin R. I take what he states about adding ADU in MF zone appraising and adding value the same as adding a non ADU unit as near gospel because I have some idea of how many times he has done this.

Until someone has done close to as many as Justin tells me otherwise I will go with what he indicates (and I likely will still believe Justin even if someone approaching his experience in this area tells me otherwise because I know justin).

Note neither of us are stating this is the case in non-mf areas. Those ADUs can be valued at pathetic values.

@Dan H. (maybe we are talking about the same things and actually agreeing here) :) and not just to go against you at all: this is meant to elaborate on the conversation not just to rebuttal you at all. I see Justin's point and he is right, just bc you can build it doesn't mean you should, right. The point that I was making and actually not taking sides at all, were that:

1. One option is less costly, faster to get approved but could have a lower value at the end should they decide to sell.

2. and other option, would be more costly, take longer, have more red tape from city but could have better higher value at the end.

I was saying to explore both and do research on both: to make a better educated decision.

I would go to 1 or 2 appraisers and get their opinion about it also. Which would cause the entire property to have more value at the end (1 unit + ADU) or (2 units).

From what I have seen in San Gabriel valley: and LA county when we sell properties: 2 units have shown to sell for more (accounting for the same square footage and bedroom and bathroom count). Plus, some (not all) but some investors are willing to pay more for a 2 unit property bc they can add more units (1 or 2 extra ADUs) assuming that the lot and property allows it. I would ask Justin:

Why did you choose to go the ADU route? Are you keeping all units? is the ultimate goal in the future to sell them?

and if he did sell any of them and capture all of the potential gain : meaning he sold them for maximum value possible (same or more than going the 2 unit route) great! and I am more than willing to learn from his answers! :)

Again: no ego here, and not meant to be an attack to your reply at all. Cheers