Los Angeles ADU valuations explained

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Los Angeles ADU valuations explained

Jonathan Taylor
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes

Good Afternoon Local LA BP folks,

I know this has been a hot topic among the local LA investors and as a mortgage broker I was very curious on how ADUs are actually valued as I keep hearing different sides to this. I spent a good amount of hours talking to local LA residential appraisers to get an idea. Bottom line is, ADUs are NOT valued the same as an additional unit nor is the rental income considered in their valuations. The best example I found was if you have an SFR with a pool and an SFR without a pool. The SFR with a pool is given maybe 20k-30k more in value. Same concept for ADUs. Its a value add line item and assigned values ranging from 20-50k. Now the appraisers I spoke to did not speak in absolutes as they would constantly say 'probably around' and 'depends on the comps of recently sold in the area' to justify the property values assigned to ADUs.

Let me know your thoughts but this seems to stick as I spoke to 5 local LA  residential appraisers, all consistently reiterating the above comments. To be clear, this is info about Los Angeles county ADUs only, I did not speak to any appraiser outside of this county. 

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
6y

The purpose/intent of garage conversions to ADU or stand alone new construction ADU units is to hold and generate either a new income stream from your residential single family property or create a new living space for a family member/friend, etc. It should not be intended to use as value for a flip, rather a long term strategy to build and hold. 5-10 years from now, when your rent pays for the construction and more and more properties with ADU's are sold, there will be more comps and likely given a bit more in valuations as time progresses.

For today, expect to build them to hold for long term and generate higher cash on cash returns than buying a new property. You already own the dirt so all you have is the construction/design/utility connection costs with ADU's. That is what makes them attractive, at least here in Los Angeles with the high rental rates.

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  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    6y

    Investors should be watching SB 1120 in California. It would allow duplexes on SFR zoned lots and even allow for lot splits. Layering that on top of current guidelines around ADUs would be incredibly interesting and powerful for local investors who know what they're looking at. Legislators have learned that NIMBYs are some of the biggest culprits of smashing affordable housing projects and legislation built to facilitate density and adorable housing projects (See SB 50 that can't seem to pass). SB 1120 basically pushes right down passed local zoning and does away with the NIMBYs entirely. It's out of their hands and regulated by the state. Brutal for local control on city planning.

    I will say, again, please don't be a cramlord. I think ADUs are such a cool opportunity but poor design could damage values and quality of life for tenants. I love a well designed ADU where the primary and ADU coexist in thoughtful ways. No one likes high turnover on tenants and no one wants lingering inventory if you do a terrible job on the design front.

    Here's a story on SB1120 for reference: 
    https://www.scpr.org/programs/airtalk/2020/08/26/65958/sb-1120-ca-bill-would-allow-for-duplexes-in-single/


     

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  • Eric McGilloway
    Member since 2020 · 6 posts · 0 votes
    6y

    @Aaron Norris

    Agreed. Design and quality should be top level. I have a large lot. Plenty of space for 1,000 sqft ADU. And we'd split the lot after completion. Already talked to contractors. The low estimate was $150k the high was $230k.

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  • Dennis Maynard
    Real Estate Broker · Los Angeles, CA · Member since 2018 · 300 posts · 146 votes
    6y
    Originally posted by @Eric McGilloway:

    @Jonathan Taylor @Dennis Maynard

    What if you have a corner lot, and build a $150k 2br, 1.5ba ADU in the backyard, get its own address and parking spot, and it becomes its own property. So now you have two separated properties. You can rent out the "ADU" for $2500-$3000/mo. Would this be a profitable venture? I ran the numbers on the rental calculator. Seems profitable from the numbers.

    Lol.  Okay, unless you went through the process of getting a TTM, or did a small lot subdivide, it's technically not two separate properties.  (Semantics I know). Would it be profitable to an owner, potentially yes.  It's subjective to owner returns and what they are looking to accomplish.  Did you include the cost of the land in that equation? Cost of Acquisition?  Can you get those rents in todays market?  

    Will you get a loan on the income? No.  Will you get a loan on the improvements? Yes.  Will there be a delta between the two valuations, yes.  

    This was about appraisal valuations.  Cash flow, sure.  

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  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    6y

    @Eric McGilloway - have you explored modular? I was the emcee at an ADU event in San Diego where they had Senator Wieckowski out and it had some interesting vendors from out of the state in the modular and manufactured categories. I was just curious at that price point if you'd explored.

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  • Eric McGilloway
    Member since 2020 · 6 posts · 0 votes
    6y

    I invested a small amount of time researching Modular homes. However, you're not the only person to ask me about it. I'll dig deeper and see what the cost benefit might be. 

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  • Eric McGilloway
    Member since 2020 · 6 posts · 0 votes
    6y

    @Dennis Maynard

    What's a TTM?

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  • Jeffrey IsenbergPro Member
    Real Estate Broker · Los Angeles, CA · Member since 2018 · 176 posts · 65 votes
    6y

    @Jonathan Taylor Great topic and alot of useful insight here. Best one can hope for in the 1-4 space would be construction value, although that seems unlikely. I would be interested in hearing some more examples of post ADU conversion appraisals in the 5+ space in the LA market.

    Logic would dictate that using the income method on appraisals would yield substantial value worthy of adding this element to a value-add strategy.   There are many great properties out there right now that will provide for substantial increases in rental income for minimal investment on the conversions.

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  • Jonathan Taylor
    OP
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    6y

    @Eric McGilloway I asked that question as well and I am currently renovating an ADU on my multi family lot that has a separate address, gas meter and parking spot. This logic still does not solve the issue of ZONING. My property is ZONED as a triplex so the appraiser will place value based on the zoning. In your example, the lot will still be zoned as a single family with a value added ADU. Not the same zoning as a duplex. If you are nodding your head, I understand your frustration. As @Dennis Maynard has said, there are a lot of units for rent and ADUs may bring the value down but there just isnt enough comps city-wide to make a substantial impact. 

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  • Eric McGilloway
    Member since 2020 · 6 posts · 0 votes
    6y

    @Jonathan Taylor Good info. So I wouldn't be able to sell my house and keep the ADU due to how my property is zoned? This changes a lot of things for me. Like you said, coming up with a semi-accurate value of adding an ADU is tricky due to the lower level of comps. However, two house next to me have ADU's. I can ask them their advice and try and obtain value info. I'll be sure to let you know what they say. I'm in Lake Balboa btw.

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  • Dennis Maynard
    Real Estate Broker · Los Angeles, CA · Member since 2018 · 300 posts · 146 votes
    6y
    Originally posted by @Eric McGilloway:

    @Jonathan Taylor Good info. So I wouldn't be able to sell my house and keep the ADU due to how my property is zoned? This changes a lot of things for me. Like you said, coming up with a semi-accurate value of adding an ADU is tricky due to the lower level of comps. However, two house next to me have ADU's. I can ask them their advice and try and obtain value info. I'll be sure to let you know what they say. I'm in Lake Balboa btw.

    Yes you can keep your ADU. You just are not going to sell it as a duplex. It will be a single family with an ADU.

    1Reply
  • Matthew Forrest
    Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
    6y
    Originally posted by @Jonathan Taylor:

    @Matthew Forrest

    I see your logic but a SFH with an ADU is zoned as a SFH and will only be slightly valued higher than a SFH without one. Income isn't taken into account. The laws and opinions may change but as of now that's how it is

    "I skate to where [I think] the puck is going, not to where it has been."

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  • Jeffrey IsenbergPro Member
    Real Estate Broker · Los Angeles, CA · Member since 2018 · 176 posts · 65 votes
    6y

    @Matthew Forrest It worked for Gretzky. Hopefully over time, appraisers will give more value to ADU's as they gain in popularity,

    [email protected]
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  • Henry Mattingly
    Los Angeles, CA · Member since 2019 · 3 posts · 0 votes
    6y
    Originally posted by @Will Barnard:

    The purpose/intent of garage conversions to ADU or stand alone new construction ADU units is to hold and generate either a new income stream from your residential single family property or create a new living space for a family member/friend, etc. It should not be intended to use as value for a flip, rather a long term strategy to build and hold. 5-10 years from now, when your rent pays for the construction and more and more properties with ADU's are sold, there will be more comps and likely given a bit more in valuations as time progresses.

    For today, expect to build them to hold for long term and generate higher cash on cash returns than buying a new property. You already own the dirt so all you have is the construction/design/utility connection costs with ADU's. That is what makes them attractive, at least here in Los Angeles with the high rental rates.


    Thoughtful perspective on this. I work with many flippers in LA who have used ADUs to add value via additional sqft on their exit, through both garage conversions and stand alone . What I am getting from the conversation so far is that this may not be a great strategy. I am fairly neutral about how they want to execute their projects, but would like to hear more thoughts on why, so that I can be more informed for those I am working with.

    I have seen it done successfully with the right property and the right additional factors such as neighborhood, access, lot size & layout, quality of build, other ADU comps, etc... The trend I have observed is that it may not always add dollar for dollar on their exit in regards to sqft in reference to other non ADU comps, but has been close enough that they are adding this to their criteria and strategy. 

    0Reply
  • Eric McGilloway
    Member since 2020 · 6 posts · 0 votes
    6y

    Talking with @Dennis Maynard and he had a good idea to add an ADU but not huge. Keep rent low. And add a room like an office attached to the ADU and there I can write of my ADU office space. Is this something anyone has experienced?

    0Reply
  • Andrew Maxion
    San Francisco Ca · Member since 2020 · 30 posts · 17 votes
    6y

    Hi Jonathon,

    Agreed. I'm in the Bay Area and appraisers avoid speaking in absolutes when evaluating SFR with ADUs. Typically, appraisers follow sales comps analysis, and there aren't a ton of ADUs in CA, and a lot of SFR that has them hasn't sold yet. However, with the new state laws that relaxed these restrictions, many homeowners/investors are picking up quickly on this trend and are taking advantage of this opportunity. The best strategy for ADUs is to Buy N Hold mainly because once the market catches up to this trend, then ADUs can be comp more accurately for impressive returns.

    1Reply
  • Collin Chan
    Investor · Dublin, CA · Member since 2019 · 167 posts · 134 votes
    6y

    I do believe there is opportunity with ADUS and future VA appreciation. The fact that it hasn't caught on and may be a detractor for many who don't see the value add for additional equity however, I think that provides opportunity for buying properties with larger lot sizes.

    What I see is in certain areas, you can rent out a $250k ADU for 2500/mo in many areas of CA which achieves the 1% rule people are looking for but is hard to find. I think there are ways by breaking even or making some on the main house to cover expenses and add an ADU for additional income.

    0Reply
  • Matthew Duch
    Los Angeles, CA · Member since 2019 · 9 posts · 4 votes
    6y

    It seems to me that the Buy & Hold strategy would work perfectly if one's plan was to build an ADU. This is probably the strategy that I'm going to take because I'd imagine that more ADU comps would come out in the long-run, and obviously ADUs will allow me to cashflow in the meantime.

    0Reply
  • David Williams
    Member since 2019 · 4 posts · 0 votes
    6y

    Does anyone have a contractor in the LA area who has ADU experience that they can recommend? I'm interested in purchasing a property with a half completed ADU and am looking to hire a contractor to walk the property with me to assess potential costs to complete it.

    0Reply
  • Jonathan Taylor
    OP
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    6y

    @Matthew Duch agreed but as long as a cash out refi based on 'forced appreciation' isnt the basis of the long term hold. 

    0Reply
  • Jonathan Taylor
    OP
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    6y

    @David Williams There are specific ADU companies in LA but I dont have a contractor Id recommend. Expect $150-200/ft on average even on projects with existing structures. I got quoted 50k for my 300sqft ADU. Its an existing garage conversion that is already up to code. But still getting 166/ft. Best is to get quoted from as many contractors as you can. The less involved you are, the more it will cost you.

    0Reply
  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    5y

    Our city just our RHNA numbers adjusted. I sit on the housing task force to try to figure out a way to construct or create 13,000 here in my hometown. I don't think we'll even get close UNLESS we seriously consider ADUs. I pulled public records data on lots in the city that were over 10,000 square feet, then showed them how many were owned by investors. THEN, I showed them how many investors lived out of the county. Investors have the properties, the experience, access to financing, and know how to build. These would not be political like we see with bills like SB 50 where NIMBYS and out politicians continue to say they want affordable housing but not if it's in their backyard. 

    I also really like ADUs post Covid because you've got he work-from-home angle. How many have magically seen co-workers relocate into the garage in the last month? Now that it's not hot outside, they just need some quiet to get things done. Working from home has som tax benefits. ADUs could be an office, income-producing unit on site, or a home for aging parents. Just don't be a cramlord. Design great products that people want to live in and don't screw up the values. 

    1Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    5y

    The most I have seen appraiser give is $50,000 for a 2 bed ADU in the Valley. I have one client who owns three ADUs, worked with a developer who has flipped 3 ADU homes, plus other clients and I own one myself (I currently live in mine while renting out the main house). Appraisers just aren't on top of it quite yet. I would focus on the cash flow and go from there. Just make sure you design the ADU to maximize rent and privacy. Happy to chat further if you would.

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  • Erin O'Connor Smith
    Los Angeles, CA · Member since 2017 · 75 posts · 24 votes
    5y

    @Rick Albert @Aaron Norris @Jonathan Taylor @Dennis Maynard @Will Barnard

    I'm considering building an ADU on my half-acre triplex rental property in Glassell Park (LA). There are three SF homes with 0% vacancy at top-market rents and I could easily fit a 1200 sf ADU at the top of the hillside lot which has spectacular views. No issues with parking. This has been a buy and hold property for me since 2004, and the equity/cash flow is considerable. I could get $2500-$3000 per month for this ADU so 1% rule is met. I'm not worried about appraisals (buy and hold) and I have an architect in the family. Feels like a no-brainer yes to me since I own the dirt... but I've never dealt with new construction or modular homes. Anything else I should think about in my deal analysis or funding?

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  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    5y

    @Erin O'Connor Smith

    On the surface it makes sense. I would factor in parking for everyone and privacy.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y
    Originally posted by @Erin O'Connor Smith:

    @Rick Albert I'm considering building an ADU on my half-acre triplex rental property in Glassell Park (LA). There are three SF homes with 0% vacancy at top-market rents and I could easily fit a 1200 sf ADU at the top of the hillside lot which has spectacular views. No issues with parking. This has been a buy and hold property for me since 2004, and the equity/cash flow is considerable. I could get $2500-$3000 per month for this ADU so 1% rule is met. I'm not worried about appraisals (buy and hold) and I have an architect in the family. Feels like a no-brainer yes to me since I own the dirt... but I've never dealt with new construction or modular homes. Anything else I should think about in my deal analysis or funding?

    Erin, I would need to see the lot to be sure but it sounds very plausible and that area is a great rental market. I have several projects in the area as well, some completed, some almost complete. I would certainly consider the parking aspect as that adds value for each rental unit and of course the lot will determine how expensive the foundation will be. Likely hillside if it has those views so that can get pretty costly if it requires caissons or any other expensive foundation. Other than that, it should be easy. 

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