How are sale values of ADU's?

22 Replies

Anyone have recent experience on how an ADU (accessory dwelling unit) or backhouse is valued these days relative to the main house?

For example, say if you have a house that is 1500sf and it would normally sell for $500/sf, what are people's thoughts if there was an ADU of 750sf built in the back with similar construction type as the main house?

Would future buyers significantly discount the ADU? If so, how much? 10, 20, 30% relative to the cost/sf of the main house?

Originally posted by @Dean Kaeo :

@John Kim

In Hawaii lenders do not count the income of the ADU when borrowing. Need to confirm with California lenders.

Yeh same here more or less in CA. You have to leverage equity in main house to borrow. I do hear there is a very nascent lending industry based off of rental income but my guess it wouldn't be cheap.

I'm analyzing the last two years sold the property within MLS in central San Jose,CA (not your area). I search for "ADU" keyword, I found hundreds of entries but only as buzzwords to the enticing buyers (such as "potential ADU" blabla). I checked many listings and only very few sold property that already has ADU when being sold.

Those are MLS ID ML81797004 , ML81704057.

Then I run the comps. I found their PSF value is actually the same as other property that doesn't have ADU. Of course, this method may not be that accurate. Maybe the sale value of ADU will be appreciated properly when there's many more adoptions in the market. Who knows.

Originally posted by @John Kim :

Anyone have recent experience on how an ADU (accessory dwelling unit) or backhouse is valued these days relative to the main house?

For example, say if you have a house that is 1500sf and it would normally sell for $500/sf, what are people's thoughts if there was an ADU of 750sf built in the back with similar construction type as the main house?

Would future buyers significantly discount the ADU? If so, how much? 10, 20, 30% relative to the cost/sf of the main house?

John,

I'm a realtor in LA.

I'm been told by lenders that ADU's aren't appraised as additional square footage. They're appraised as an amenity, like a swimming pool or garage. Most appraisers are assigning about $50K as the value of an ADU. So for appraisals, the value isn't there.

In terms of buyers' perspectives, in my experience, ADUs don't carry the same value per square foot as the main house. For example, I'm in contract on a 2/1 in the Valley with a studio ADU attached. Compared to recent sales, we're paying more per square foot than nearby 2/1's and less than nearby 3/2's. From the seller's perspective, there's plenty of value in the ADU, but it's still a 2/1 house.

My advice is if you're considering building an ADU is to consider rental income, not resale value. The resale value won't make you much return; if you're planning to hold the property for a few years, the rental income from the ADU will generate your return.

Good luck!

Best,

Jon

In San Diego, what I have seen is that buyers often value the ADU more than the appraisers. This result in properties with ADUs often getting appraisals below the agreed price.

This typically results in the seller having to reduce the price.   It makes sense as 1) few buyers want to pay more than retail 2) few buyers want to bring additional cash to close. 

This happened with my original protege about 9 months ago (just prior to COVID).  He ended up meeting the buyer somewhere in the middle.

I think as a seller, in my market, you are lucky if the appraiser gives you a value of 50% of the hands off construction costs of the ADU.

Building an ADU is not currently a value add in my market unless you do a significant amount of work yourself.  It does help with the cash flow, but due to the typical financing used it often produces worse return than other options.  

Good luck

We're small time buy and hold, smf investors in LA and completely agree with @Jon Schwartz. We seek out properties that we can force an increase in rental income potential through ADUs. The numbers don't hold up (right now) for ADU valuation and there is tons of inconsistencies across appraisers, lenders, and how the units are built are all contributing factors. Be very conservative with these units if in LA- build or buy it for the rental income and in the event you gain value in another way, BONUS!

@Jon Schwartz Jon answer is the key here and super helpful. I heard the same story in Bay Area market. It seems ADU primary use is for family use/inheritance and the house will not be sold until the next few years.

There's no way I build ADU for 300k and be appraised for only 50k. It doesn't make sense. 

The only lucky guy is those who bought the property with illegal ADU especially during 2009 crash as the ADU is now legal.

@John Kim We purchased a house with ADU (location 90 minutes north of Seattle) in 2016 and the appraiser valued the ADU around $27k. I found more value in the ADU than that since we could rent it for $1150 a month. We just sold the property last month for $448,000 and I never saw the appraisal but priced it thinking that the house was valued at $410k and the ADU around $38k.

Thanks, Julie, you're very lucky when you're able to get this property with ADU literally appraised as zero and rent it out for > 1k. I shall be thinking the same. These days just the cost of architect+permit itself is already 20-30k.

I think the root cause of the problem is a combination of such things:
- construction cost is too expensive
- existing home is cheaper than new construction
- Market/rent value is actually more beneficial to the renter 
- since ADU is not popular, there's no common way how to appraise it properly.

"Anyone have recent experience on how anADU (accessory dwelling unit) or backhouse is valued these days relative to the main house?"

I'd think unless it's like a mobile home (ie sell it with Bill of Sale and not a deed), it'd be treated as an amenity on the property. However, there are some guys that are building these and leasing them and paying prop owners a land lease (don't know how successful).

In any case, if he's appraising as residential think an amenity, if as an investment, then just add in the ADU income tp total NOI?

Originally posted by @Jon Schwartz :
Originally posted by @John Kim:

Anyone have recent experience on how an ADU (accessory dwelling unit) or backhouse is valued these days relative to the main house?

For example, say if you have a house that is 1500sf and it would normally sell for $500/sf, what are people's thoughts if there was an ADU of 750sf built in the back with similar construction type as the main house?


Would future buyers significantly discount the ADU? If so, how much? 10, 20, 30% relative to the cost/sf of the main house?

John,

I'm a realtor in LA.

I'm been told by lenders that ADU's aren't appraised as additional square footage. They're appraised as an amenity, like a swimming pool or garage. Most appraisers are assigning about $50K as the value of an ADU. So for appraisals, the value isn't there.

In terms of buyers' perspectives, in my experience, ADUs don't carry the same value per square foot as the main house. For example, I'm in contract on a 2/1 in the Valley with a studio ADU attached. Compared to recent sales, we're paying more per square foot than nearby 2/1's and less than nearby 3/2's. From the seller's perspective, there's plenty of value in the ADU, but it's still a 2/1 house.

My advice is if you're considering building an ADU is to consider rental income, not resale value. The resale value won't make you much return; if you're planning to hold the property for a few years, the rental income from the ADU will generate your return.

Good luck!

Best,

Jon



Thanks for your feedback Jon, noticing that too with the lending scenario.  Seems like a lot of banks are not taking into account or heavily discounting the rental income.  Maybe way down the line when there is more familiarity with these things perhaps appraisals will come up a bit. 

 

I'm on the mortgage side, so I deal with these a few times per month. Your biggest concern should be the appraisal. Appraisers base it on how it's zoned. If the county has it zoned as a single family unit, the appraiser will use the ADU sq ft, but not the market rent for it, which can make getting financing hard. If you have a home worth $200k and an ADU adding another $100k, that's a $300k property. Well, if the appraiser is only counting rent from the main house, it won't cash flow enough for the value for a lender.

Hi Tim, actually it's good news. I believe in some high-priced market in CA there's very less appraiser that uses the income-based approach as usually, it gives lower value to the property due low rent/market value ratio.If the ADU PSF is being priced equal to the main house ADU then there's still hope of building ADU ( as long as the appraised main/ADU PSF > 1.5 * construction cost of building ADU ).

I've refi a couple of SFR homes with ADU, 1 last year and another earlierthis year and I usually get 50-75k max for an ADU appraisers don't like to value them as same square footage from the main house. I'm actually in the process of refinancing one right now so it will be interesting to see if this has changed.

Question: "How are the sale values of ADU's?"

Short answer: They suck...especially for SFH's

But keep in mind that adding an ADU to a 2-4+ unit building is a different animal. Namely, the appraisal should account for the added unit's direct value. You may need to have your county adjust their official record to include the ADU in their unit count, so a duplex is categorized as a 3 unit bldg, etc. Then the appraiser should be able to appraise it accordingly.

That's a big difference from the appraisal challenge with SFH+ADU everyone mentioned above.


@John Kim If the ADU can be a rental or have rental history it can be worth a lot more based on a CAP rate. If it's just utilized as an ADU, it will be worth only based on sales comps and present condition.

Originally posted by @Luis Castellon :

I've refi a couple of SFR homes with ADU, 1 last year and another earlierthis year and I usually get 50-75k max for an ADU appraisers don't like to value them as same square footage from the main house. I'm actually in the process of refinancing one right now so it will be interesting to see if this has changed.

Hi Luis, when you mention 50-75k max, how much of the project cost is that and how big are your ADU's?

 

Originally posted by @Brandon Carlson :

Curious to know if you can change zoning from SFR to Duplex? If so, wouldn't that increase resale value?

Not where I am at but that would be massive if they allowed that.

 

@John Kim

I've done a couple of ADUs around 450-500 square feet and cost around 35k and I refinance last year and did another refi this year and both got around 50k more SFH comps around my house this is because I don't think there's that many comps with ADUs.