ADU Build + Financing

Raleigh, North Carolina
Land & New Construction
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ADU Build + Financing

Kyle Holden
Raleigh, NC · Member since 2023 · 8 posts · 8 votes

Questions for the community about ADU builds:

1) It seems that building an ADU does not add $:$ equity value to your existing property. On average, the numbers I am finding show a $0.50-0.70 equity increase per $1 invested. If building an ADU is a way to "force equity," it seems to be an inefficient way to do so. Can anyone speak to why this is?

2) Due to #1 above, I have found that the majority of lenders will not lend to build an ADU based on the post-build appraisal (companies like RenoFi are helping rectify this). They will lend against the current equity on property via a second mortgage or HELOC. Does anyone know of other lenders (beside RenoFi's lending network) that will lend against post-build appraisal?


Context - My wife and I own/live in a property in downtown Raleigh, NC. We are looking to build an ADU on our property (above a garage) to use as a STR/MTR. Design/Engineering and build estimates are complete. Exploring financing at this moment.

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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
3y
Quote from @Kyle Holden:

*I guess I have two BP accounts - posting again from correct account*

Thanks Ben! I’ll look up Derek.

The goal for building has always been CF but when trying to finance, not being able to get what I’d consider proper equity value can be frustrating.

We got quotes form several builders - $195-225k before fixtures and furnishings (so assume $220-250k all in) - for a 430 sqft ADU above a 430 sqft garage

Well, at $512 to $581 cost per square foot I would think that kind of improvement would not add comparable equity. I am not surprised a traditional lender would not be interested. 

ADUs make sense in some places, but the more I learn, the less I feel they are appropriate when considering the total cost/reward analysis. 

As stated by others, get multiple bids and compare apples to apples. 

One other comment I'll make: don't compare Raleigh to San Jose or other jurisdictions because the ordinances and rules are not the same. I've been helping a family member with sale of a SJ property (house and sub-divided lot), and it is night and day. SJ has 0' setbacks on urban zoning (e.g. CP zoning) and per my relative's email, "The new urban zoning designations also allow for no setbacks, no driveway, and no parking...." My view is that these changes represent more than valuation today, more like what will urban residential look like in 10 years. 

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  • Benjamin Carver
    Real Estate Agent · Raleigh, NC · Member since 2019 · 316 posts · 290 votes
    3y

    I'm curious how much they quoted you to build the ADU? As for as equity goes, I would build it for the CF. And when you turn to sell, investors will pay a premium for having that ADU. Look into Derek Sherrell and find @thataduguy on instagram and youtube. He responds to DMs too.

    1Reply
  • Kyle Holden
    Member since 2023 · 1 post · 0 votes
    3y

    Thanks Ben! I’ll look up Derek.

    The goal for building has always been CF but  when trying to finance, not being able to get what I’d consider proper equity value can be frustrating. 

    We got quotes form several builders - $195-225k before fixtures and furnishings (so assume $220-250k all in) - for a 430 sqft ADU above a 430 sqft garage

    0Reply
  • Kyle Holden
    OP
    Raleigh, NC · Member since 2023 · 8 posts · 8 votes
    3y

    *I guess I have two BP accounts - posting again from correct account*

    Thanks Ben! I’ll look up Derek.

    The goal for building has always been CF but when trying to finance, not being able to get what I’d consider proper equity value can be frustrating.

    We got quotes form several builders - $195-225k before fixtures and furnishings (so assume $220-250k all in) - for a 430 sqft ADU above a 430 sqft garage

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y

    I am not familiar with NC, but that negative initial position is very common in CA and never discussed by the ADU developers of others making a living from the ADU craze. A search of the bigger pockets forums will show that the values added by ADU additions is often significantly less that the ADU addition costs.

    In CA there are some areas were comps provide a decent valuation for ADUs but in most areas the ADUs are receiving valuations between $50k and $100k. This lower than the value you used as most of these ADU additions cost over twice the value added.

    The initial cash flow goes to recover this negative initial position.  It could take many years to recover the negative position.  

    Here are some reasons I believe the values are poor 1) lot more home owners than home investors 2) if an owner wants an ADU they can easily add one that is exactly what they desire. I equate this to why a new car instantly looses value when sold to someone. Using this logic, an ADU should never add as much value as the hands off cost to add the ADU. 3) it detracts something from the original structure even if it is only yard but often it is garage, privacy, etc. 4) I find refi appraisals to be typically conservative so the appraisal associated with a refi after ADU addition will be conservative. this is compounded when there are no comps that justify a value associated with an ADU.

    On the positive, you seem to have a handle on the highest risk item associated with adding an ADU. Many people learn this short-coming after they have added the ADU and do not get the refi appraisal to cover the costs of the ADU addition.

    Good luck



    2Reply
  • Kyle Holden
    OP
    Raleigh, NC · Member since 2023 · 8 posts · 8 votes
    3y

    Dan, fantastic feedback! Thank you. So thorough.


    Good, then that shows I’m not crazy and this is more commonplace. Those explanations make sense. Appreciate the insight 

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Kyle Holden:

    Questions for the community about ADU builds:

    1) It seems that building an ADU does not add $:$ equity value to your existing property. On average, the numbers I am finding show a $0.50-0.70 equity increase per $1 invested. If building an ADU is a way to "force equity," it seems to be an inefficient way to do so. Can anyone speak to why this is?

    2) Due to #1 above, I have found that the majority of lenders will not lend to build an ADU based on the post-build appraisal (companies like RenoFi are helping rectify this). They will lend against the current equity on property via a second mortgage or HELOC. Does anyone know of other lenders (beside RenoFi's lending network) that will lend against post-build appraisal?


    Context - My wife and I own/live in a property in downtown Raleigh, NC. We are looking to build an ADU on our property (above a garage) to use as a STR/MTR. Design/Engineering and build estimates are complete. Exploring financing at this moment.


    What you said is 100% correct.

    I shared this story before. I used to very active trying to build ADU. But as time passed I found more creative idea. By purchasing house that already has (broken ADU). It take years !! So I spent 30k fixing this ADU to be a standard level, it was water damage all over before. Now the place is being rented or $2,100/mo.

    And I don't even pay it, because my 30k contractor cost is paid by tenant in monthly basis. LOL.

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Kyle Holden:

    Dan, fantastic feedback! Thank you. So thorough.


    Good, then that shows I’m not crazy and this is more commonplace. Those explanations make sense. Appreciate the insight 


    There is new initiative from white house recently to optimize ADU (build,repair,financing) , this is huge. This also means in next decade, ADU is the new normal, which means...price going to be cheaper as rules would be relaxed. In the future, rental income from ADU can be included in DTI. So I guess it is win win for everyone.

    In this condition, if you are ADU enthutiast, you could either wait and see when and if ADU price and valuation would be adjusted so it's more profitable if it's being built.

    There's alternative though, like container house is only selling 40-50k that includes bathroom. If regulation is being relaxed in the future, this could be making sense to be invested as well.

    Key here is buying large lot.

     

    0Reply
  • Jeffery Chang
    San Jose, CA · Member since 2014 · 8 posts · 10 votes
    3y

    I have a detached Adu in one property and attached Adu in another property. I find attached Adu is better valued from appraiser since they just counted as extra square footage of the house. Whereas detached Adu demands better rent and less issues between renters. 

    4Reply
  • Kyle Holden
    OP
    Raleigh, NC · Member since 2023 · 8 posts · 8 votes
    3y

    @Jeffery Chang That's great feedback! So riddle me this - we have a deck that enters our house from the rear. The ADU architecturals are drawn up such that stairs leading to the ADU are attached to the deck which accesses the house. The structure is detached but the deck technically attaches both structures together. Have you heard from any appraisers on how they would value/classify that?

    1Reply
  • Jeffery Chang
    San Jose, CA · Member since 2014 · 8 posts · 10 votes
    3y

    I think you need to check with your local rules or permitting office.  For San Jose, and I quote:

    "Must share a wall with the main residence, OR, share a roof structure with the main residence and be separated by no more than 10 feet."

    If this was in San Jose, I would build a roof structure to extend to the ADU within 10 feet, assuming that is possible. Like a Porte-cochère.

    0Reply
  • Byron VallesPro Member
    MSFP, CFP, Financial Advisor · San Francisco Bay Area · Member since 2020 · 66 posts · 53 votes
    3y
    Quote from @Dan H.:

    I am not familiar with NC, but that negative initial position is very common in CA and never discussed by the ADU developers of others making a living from the ADU craze. A search of the bigger pockets forums will show that the values added by ADU additions is often significantly less that the ADU addition costs.

    In CA there are some areas were comps provide a decent valuation for ADUs but in most areas the ADUs are receiving valuations between $50k and $100k. This lower than the value you used as most of these ADU additions cost over twice the value added.

    The initial cash flow goes to recover this negative initial position.  It could take many years to recover the negative position.  

    Here are some reasons I believe the values are poor 1) lot more home owners than home investors 2) if an owner wants an ADU they can easily add one that is exactly what they desire. I equate this to why a new car instantly looses value when sold to someone. Using this logic, an ADU should never add as much value as the hands off cost to add the ADU. 3) it detracts something from the original structure even if it is only yard but often it is garage, privacy, etc. 4) I find refi appraisals to be typically conservative so the appraisal associated with a refi after ADU addition will be conservative. this is compounded when there are no comps that justify a value associated with an ADU.

    On the positive, you seem to have a handle on the highest risk item associated with adding an ADU. Many people learn this short-coming after they have added the ADU and do not get the refi appraisal to cover the costs of the ADU addition.

    Good luck



    Very well put, @Dan H.! I must have one of the few cases in CA you wrote about. I converted a detached 450sqft garage into a studio in the East Bay Area for around $90K. We finished it in March of this year and the appraisal came back showing a $140K bump from the purchase price in Dec 2021. 

    The two important factors I kept in mind while deciding to go through this ADU process were 1. ADUs are still relatively new and it seems that no two appraisers agree on how to evaluate them 2. Rental demand and rates are so strong in the Bay Area that even with little to no forced equity, the ADU cost would be offset in 3-4 years by rental income.

    650-376-0034
    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Byron Valles:
    Quote from @Dan H.:

    I am not familiar with NC, but that negative initial position is very common in CA and never discussed by the ADU developers of others making a living from the ADU craze. A search of the bigger pockets forums will show that the values added by ADU additions is often significantly less that the ADU addition costs.

    In CA there are some areas were comps provide a decent valuation for ADUs but in most areas the ADUs are receiving valuations between $50k and $100k. This lower than the value you used as most of these ADU additions cost over twice the value added.

    The initial cash flow goes to recover this negative initial position.  It could take many years to recover the negative position.  

    Here are some reasons I believe the values are poor 1) lot more home owners than home investors 2) if an owner wants an ADU they can easily add one that is exactly what they desire. I equate this to why a new car instantly looses value when sold to someone. Using this logic, an ADU should never add as much value as the hands off cost to add the ADU. 3) it detracts something from the original structure even if it is only yard but often it is garage, privacy, etc. 4) I find refi appraisals to be typically conservative so the appraisal associated with a refi after ADU addition will be conservative. this is compounded when there are no comps that justify a value associated with an ADU.

    On the positive, you seem to have a handle on the highest risk item associated with adding an ADU. Many people learn this short-coming after they have added the ADU and do not get the refi appraisal to cover the costs of the ADU addition.

    Good luck



    Very well put, @Dan H.! I must have one of the few cases in CA you wrote about. I converted a detached 450sqft garage into a studio in the East Bay Area for around $90K. We finished it in March of this year and the appraisal came back showing a $140K bump from the purchase price in Dec 2021. 

    The two important factors I kept in mind while deciding to go through this ADU process were 1. ADUs are still relatively new and it seems that no two appraisers agree on how to evaluate them 2. Rental demand and rates are so strong in the Bay Area that even with little to no forced equity, the ADU cost would be offset in 3-4 years by rental income.


    Agree. Actually conversion could be made cheap. Insulation, bathroom,kitchen, water pipe, is not something that's too expensive and still following code.

    Detached ADU, sometimes could have appraisal of 25% of the main house, if it is in good condition and looks similar to main house.

    I rented my 1BR ADU or 2k as well.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y

    One thing that I really suggest to the city for example, is they should have pre-approved plan for conversion of two car garage and the plan must be owned by the city. Currenty the pre-approved plan is owned by private party which they sell for over-profit I think.

    If the city of san jose, can ofer and say, hey you follow this plan for 15k. Get stamped. Then everyone would be doing it.

    They're just not too smart and too bureacratic in the approach to provide affordable housing.

    0Reply
  • Patrick Knapp
    Contractor · Wake Forest, NC · Member since 2019 · 138 posts · 132 votes
    3y

    @Kyle Holden

    You need to message me, I’m a GC in raleigh and I’m pretty sure I can get the price less than what you are getting quoted. Seems high for 435sq ft

    3Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    3y
    Quote from @Kyle Holden:

    *I guess I have two BP accounts - posting again from correct account*

    Thanks Ben! I’ll look up Derek.

    The goal for building has always been CF but when trying to finance, not being able to get what I’d consider proper equity value can be frustrating.

    We got quotes form several builders - $195-225k before fixtures and furnishings (so assume $220-250k all in) - for a 430 sqft ADU above a 430 sqft garage

    Well, at $512 to $581 cost per square foot I would think that kind of improvement would not add comparable equity. I am not surprised a traditional lender would not be interested. 

    ADUs make sense in some places, but the more I learn, the less I feel they are appropriate when considering the total cost/reward analysis. 

    As stated by others, get multiple bids and compare apples to apples. 

    One other comment I'll make: don't compare Raleigh to San Jose or other jurisdictions because the ordinances and rules are not the same. I've been helping a family member with sale of a SJ property (house and sub-divided lot), and it is night and day. SJ has 0' setbacks on urban zoning (e.g. CP zoning) and per my relative's email, "The new urban zoning designations also allow for no setbacks, no driveway, and no parking...." My view is that these changes represent more than valuation today, more like what will urban residential look like in 10 years. 

    5Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Chris Martin:
    Quote from @Kyle Holden:

    *I guess I have two BP accounts - posting again from correct account*

    Thanks Ben! I’ll look up Derek.

    The goal for building has always been CF but when trying to finance, not being able to get what I’d consider proper equity value can be frustrating.

    We got quotes form several builders - $195-225k before fixtures and furnishings (so assume $220-250k all in) - for a 430 sqft ADU above a 430 sqft garage

    Well, at $512 to $581 cost per square foot I would think that kind of improvement would not add comparable equity. I am not surprised a traditional lender would not be interested. 

    ADUs make sense in some places, but the more I learn, the less I feel they are appropriate when considering the total cost/reward analysis. 

    As stated by others, get multiple bids and compare apples to apples. 

    One other comment I'll make: don't compare Raleigh to San Jose or other jurisdictions because the ordinances and rules are not the same. I've been helping a family member with sale of a SJ property (house and sub-divided lot), and it is night and day. SJ has 0' setbacks on urban zoning (e.g. CP zoning) and per my relative's email, "The new urban zoning designations also allow for no setbacks, no driveway, and no parking...." My view is that these changes represent more than valuation today, more like what will urban residential look like in 10 years. 


    Correct.

    1. ADU is only useful in the market where land psf > building cost psf
    2. Every jurisdiction has their own regulation towards ADU
    3. However, building cost to build ADU either in Raleigh or San Jose, are not really different, as labour cost and materials are similar
    4. which means, building/repairing something/anything in more expensive land area is very beneficial 

    2Reply
  • Avery Heilbron
    Realtor · Raleigh-Durham, NC · Member since 2018 · 324 posts · 218 votes
    3y

    Hi @Kyle Holden that seems high. Currently doing my ADU in Durham. My brokerage also has a construction arm. We can help you with the construction on this for sure and it would not be that expensive. I'll send you a PM.

    3Reply
  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
    2y

    @Kyle Holden

    1. The price quote seems really high unless there's something unusual in your situation.

    2. Regarding lenders, reach out to AAPL (American Association of Private Lenders) and see if they have any members who operate in the ADU space.

    1Reply
  • Kyle Holden
    OP
    Raleigh, NC · Member since 2023 · 8 posts · 8 votes
    2y

    @Adam Schneider

    @Adam Schneider I think where I didn't provide enough clarity - the ADU will be built above a garage. Structurally, this might explain why the quotes I've gotten are between $195-260k


    2) Thank you! I’ll reach out 

    2Reply
  • Sean Anderson
    Member since 2022 · 11 posts · 6 votes
    2y

    I'm currently building a detached ADU in Orlando loft style as owner builder and I'm about 125k all in at the moment including a paver drive, covered deck, and complete septic upgrade.

    Your quote is definitely high but not crazy so consider the owner builder route. 2nd stories  are always more expensive to frame and structurally your extisting footers/support walls will need reinforcement of some sort. 

    As for the appraisal, square footage is square footage and should be relatively close to your primary? I’m not a realtor but given the fact that there will most likely be some sort of kitchenette, bathroom, washer/dryer, etc prices more like a duplex. Mine will.

    If you need advice hit me up. 

    1Reply
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