ADU Appraisal California
Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
ADU Appraisal California
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Rental Property Investor · Santa Clara, CA · Member since 2019 · 160 posts · 156 votes
5yWanted to share with you a great way to tap into the equity built from your ADU.
The problem today: most appraisers used by traditional lenders would give ADU square footage a second-class treatment than the main house (as some of your mentioned above) since there aren't that many comps and they're trying to be conservative.
However, you can consider taking out a HELOC/doing cash-out refi through Figure.com (HELOC up to $250k, Cash-out refi up to $1M). I just took out a 30-year fixed-rate HELOC through Figure from my San Jose property that has an ADU on it. Unlike the other lenders, Figure.com does automatic appraisal (without a human involved) based on public data and they treat ADU square footage the same as the main house square footage. Because their generous appraisal value, I was able to take out all the cash I invested into the ADU (plus some more). The whole process only took 2 weeks and I'm really happy about it. In fact, you can check your property's appraised value by simply filing out the questions on their website. If you have an ADU on your property, it's super easy to find out approximately how much you can take out through just a few clicks with only a soft credit pull...
A side note: the founder of Figure.com Mike Cagney also founded Sofi and they got pretty some impressive investors. I think they really did a great job simplifying the process and removing all the inefficiencies in mortgage industry today...
39 Replies
- Rental Property Investor · San Jose · Member since 2020 · 44 posts · 22 votes5y
@Brian Larson
You are right. Me and my husband bought our house here in San Jose, CA in 2016. We added an ADU in our backyard. Renting it out for $1500/mo! Our plan in the future is to buy another house, move to that new house and completely rent this whole house with the ADU. I'm imagining that it should cash flow nicely on us!
- Real Estate Agent · San Diego, CA · Member since 2014 · 205 posts · 123 votes5y
@Dan H. Thanks for that perspective. As an investor what are you seeing work in this market right now?
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @David Frandsen:
@Dan H. Thanks for that perspective. As an investor what are you seeing work in this market right now?
The market in San Diego is as heated as 2005. This makes it difficult to achieve the returns of a couple/few years ago.
BRRRR still provide value and minimize investment but properties that would obtain a full extraction of investment are very difficult to find without an assistance from appreciation. I think it is imperative to have realistic expectations. In my market, if I were doing a brrrr today I would be happy if I trapped less than 10% of ARV in the property.
Off market purchases below retail are always great. They provide good/great rent to purchase ratio because of the reduced cost of the property. My last purchase falls into this category. Market rent places the property above 1% ratio. 1% ratios in San Diego is a unicorn find. But getting off market properties that can achieve 0.8% rent ratio may be an easier find.
people with development experience (not me) are able to take advantage of under utilized zoning.Some investors are able to subdivide lots. Some investors in my market purchased properties with a house and subdivided the lot and sell the empty lot reducing the cost of the existing home. If they had development experience they could sell the existing house and develop the new lot.
Finally there is the realization of the historical long term outstanding appreciation (rent and property) and the hope that time will increase the value of the property and the cash flow will improve. Historically, even stupid buy n hold RE investments look very good 10 years after purchase.
- 5yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
@Justin R.@David Alfaro @Brian Larson @Dan Heuschele the success I've had recently with ADU and getting the value of a full separate unit is having a single family (2bed/1bath) home with detached garage and converting the garage into (2bed/1bath) ADU....the zoning allowed for 2 units so when appraiser shows up all he needs to know is that there are 2 dwellings on a lot zoned for 2 units so he valued it as 2 units and used duplex comps which gave us far more value than we could ever get with single family home with a detached adu. Got over 900k value vs a potential value in the 700s had it been comped as an SFR with ADU
Compass5122 Reviews - Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes5y
Originally posted by @Twana Rasoul:
@Justin R.@David Alfaro @Brian Larson @Dan Heuschele the success I've had recently with ADU and getting the value of a full separate unit is having a single family (2bed/1bath) home with detached garage and converting the garage into (2bed/1bath) ADU....the zoning allowed for 2 units so when appraiser shows up all he needs to know is that there are 2 dwellings on a lot zoned for 2 units so he valued it as 2 units and used duplex comps which gave us far more value than we could ever get with single family home with a detached adu. Got over 900k value vs a potential value in the 700s had it been comped as an SFR with ADU
I second Twana's experience - so long as either the actual zoning matches the number of units, or the number of units is common in the area, I've always seen appraisals as duplex/tri/quad as well.
I've got two projects at the moment that will take 4 unit properties and turn them into 5 and 6, respectively. I'm expecting to see commercial 5+ financing when they're done - I see no practical or technical reason they wouldn't be considered so. I'll have to share when they're complete.
- Investor · San Jose, CA · Member since 2018 · 313 posts · 230 votes5y
@Twana Rasoul - Thanks for the tip. That might work for me. I'm zoned R-2 but it won't work for everyone.
- Real Estate Agent · San Diego, CA · Member since 2014 · 205 posts · 123 votes5y
@Twana Rasoul That is very interesting insight. Thanks for sharing.
- Real Estate Agent · San Diego, CA · Member since 2014 · 205 posts · 123 votes5y
@Michelle Harrington I'm curious about your ADU experience in San Jose. I am familiar with the ADU regs here in San Diego but I imagine it could be slightly different there. How long was the permitting process? Was it City of San Jose? Any strange requirements you ran into? (soils study, ect)
- Investor · Orange County, CA · Member since 2018 · 41 posts · 16 votes5y
Thank you @Dan H. for bringing some much needed clarity to this issue. Some of the investors in this thread appear to be in denial about the added value of ADUs in their investment. I made this mistake myself, spent over $120K in a 750sf ADU only to see it add about $20K to $30K in appraisals, it's heartbreaking. Thankfully the property cash flows nicely and I got the money back through appreciation.
I second the comment that buying existing ADUs is much better than building them. Also, ADUs allow to create positive cash flowing properties which is quite difficult to do in CA.
- Rental Property Investor · Santa Clara, CA · Member since 2019 · 160 posts · 156 votes5y
@Twana Rasoul This is really great! With SB9, I feel that the zoning issue will be an issue of the past. Maybe all ADUs can be valued and appraised just like duplex in the future.
- Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes4y
Hey Y'all,
Just wanted to update everyone on a property with an ADU and a JADU down the street from my house that sold for $1,150,000. That's insane! Homes in this neighborhood are selling in the low 500's. That house is very similar to mine (also have an ADU and JADU), but mine has a little more square footage overall. I talked with the lender that the agent, that's representing the owners, recommended regarding the appraisal. Apparently CA SB 9 changed the game. He said that since the bill got rid of r-1 zoning in California, appraisers are now allowed to use multifamilys as comps for a single family home with ADUs. I'm waiting on the property to close so I can get a HELOC to start investing full time. I was here thinking that there was no way someone would pay that much for a property in a neighborhood with an average home value in the low 500s, but they got an offer accepted within a few days the property hit the market.
- Member since 2021 · 4 posts · 1 vote4y
Hi @David Maldonado, just stumbling across your update now - I'm in a similar situation where I've finished my ADU in Los Angeles and now I'm looking into the post-build appraisal value to determine whether to hold or sell.
Do you have the contact information for the lender that did the appraisal who referred to SB9 as a gamechanger? I'm curious whether the bill now means that they can use duplexes as comps for all California properties, rather than just some cities/regions. Feel free to DM me directly as well. Thank you!
- Investor · Pasadena, CA · Member since 2017 · 612 posts · 523 votes4y****************************
Quote from @Caleb Lee:
Hi @David Maldonado, just stumbling across your update now - I'm in a similar situation where I've finished my ADU in Los Angeles and now I'm looking into the post-build appraisal value to determine whether to hold or sell.
Do you have the contact information for the lender that did the appraisal who referred to SB9 as a gamechanger? I'm curious whether the bill now means that they can use duplexes as comps for all California properties, rather than just some cities/regions. Feel free to DM me directly as well. Thank you!
Hey Caleb,
I am a local appraiser, amongst other things, and have some insight into this issue. This is a big topic amongst appraisers these days, and is still kind of an unknown black box. How it is handled depends on the appraiser that gets the assignment, not the Lender. The Lender cannot have any influence on choosing the appraiser, so it is a crapshoot.
For similar assignments, I have been able to find some recent sale comps with ADU's. Or, I also look for R1 zoned properties with guest houses, since they can typically be readily converted into an ADU, or currently have a similar utility (use). I try and steer away from duplex or triplex comps, that might have zoning other than R1. There may be some differences with those properties with different zoning, so I prefer to find comps with similar zoning, if possible.
Now, it is not always possible to find other ADU properties or other R1 zoned duplexes. So, i'd say in that case it may be reasonable to comp an SFR + ADU with a duplex, but then we should take into account any potential appeal differences between those properties. Usually, the higher density properties are in different neighborhoods, and may have a different appeal.
Also, SB9 allows 2 dwellings on an sfr zoned property and an ADU (3rd unit). But, my understanding is that some municipalities will not allow all 3 units to be rented if the property is not owner-occupied. Therefore, a triplex on a multi-zoned lot may have different legal rights (all 3 units can be rented regardless of owner occupancy). So, that might cause a different market appeal. This is why I try and stay with similar zoning for my comps.
But, honestly, my guess is that most appraisers will just pick those properties that seem like good comps, irrespective of their zoning. That may be good or bad. Some areas I work in have higher values for sfr's than duplexes, and therefore, the sfr + ADU would be more valuable than a duplex.
So, bottom line is it may be a roll of the dice. To address your last comment - the bill does not allow or disallow us (appraisers) to do anything, for that matter, neither do Lenders or anyone else. it is always up to our discretion to do what we see fit and appropriate, in order to do the assignment.
That said, I did find a couple of comps which give me a general idea of value of adu properties, in your area. Feel free to DM me, if you want to discuss it further.
- Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes3y
ADU Appraisal update:
I have mentioned a similar house in my neighborhood with both an ADU and a JADU that sold for $1.15 million, after only being listed for a few days. Properties around my neighborhood are worth around $550,000. I was able to get a copy of the appraisal report and the comps that were used were mulit-familys (tri-plex). As of today, that house was the first and remains the only property with both an ADU and a JADU in my area, that has sold.
If I were to apply for a HELOC, would that $1.15 million dollar property be the only objective comp that can be used to determine my property's value? Feel free to chime in appraisers!
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