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?
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
@Dan Heuschele - my son works for a contractor in San Diego that is focusing heavily on building ADUs in and around San Diego. They are seeing huge demand. I don't know that it's equating to a higher selling price, though, as some other posts have said. I think what's driving it is the high cost of housing, lack of affordable housing, the ability to rent out the units as a STR for side income, and of course the extra space to move family members onto the property. So it's driving value, but not necessarily resale value.
@Dan Heuschele - my son works for a contractor in San Diego that is focusing heavily on building ADUs in and around San Diego. They are seeing huge demand. I don't know that it's equating to a higher selling price, though, as some other posts have said. I think what's driving it is the high cost of housing, lack of affordable housing, the ability to rent out the units as a STR for side income, and of course the extra space to move family members onto the property. So it's driving value, but not necessarily resale value.
Many people are doing it, but if they are doing it hands off there are ways to obtain a better return in RE. The issue is the return is primarily set by cash flow. Cash flow of building an ADU is good compared to many San Diego properties, but still poor.
I suspect many of these people are unaware of some of the syndication returns.
I have seen investors doing ADU additions that seem happy with a return just better than lifetime S&P 500. Buy n hold RE is not passive. I would not choose it if my conservative projection was not at least double the lifetime S&P 500 and ideally much better than that.
Many of the ADU investors under estimate the long term expenses of an ADU. Their cash flow projection is not conservative. In particular, they typically underestimate maintenance/cap ex. The 50% rule is conservative, but I want my pro forma to be conservative. Anyone who is going hands off ADU addition should be aware what their return would be based on the 50% rule.
The next issue is the value of the ADU as set by both appraisers and purchasers are less than the typical hands off cost of a first time investor doing an ADU addition. This implies that at completion of the ADU, the investor that has done a hands off ADU addition has a negative return. The initial cash flow is needed to recoup this negative position. If the value is $50k less than the cost of the hands off ADU addition, the first $50k of cash flow goes to recoup this negative position. With realistic expenses used in the pro forma, this will typically be over 5 years if financed (and if not financed, the investor has a lot to learn about leverage associated with return).
In addition, the ADU is often either paid for via poorer loan terms (compared to conventional Fannie/Freddie (f/f)) or as a leveraged loan (HELOC, margin, portfolio loan, etc). These leveraged loans are of course limiting. Once it is tied up in an ADU, that presents few options for extraction, it is no longer available for use (implied by the tied up).
I can do a fairly poor job at a BRRRR and trap less than 10% of ARV using a F/F refi loan (at least for the 1st 10 properties - if you have 10 San Diego properties financing starts to be less of a problem). If I do a rockstar BRRRR, I extract all of our investment (as of this month all our BRRRR have had all money extracted). Likely the BRRRR is more work than hands off ADU addition, but a non owner occupied asset at less than 10% invested is incredible.
I have seen various pro forma for hands off adding ADU (purchasing RE with an existing ADU is different). When they depict realistic long term expenses, they have fairly lot expected return for the effort of buy n hold.
There seem to be many ways to obtain better return including buying a property with an existing ADU.
Very smart answer from @Dan H.. I'm also thinking the same. Since I shall think as an investor, I cancel all my ADU build project and swap them with a duplex. The number of unit costs in the duplex is almost relatively equal to ADU. Duplex is very competitive in every market.
The only way to make money out of ADU is only from the following I think:
- If the ADU is financed by gov. program and we rent it to gov. approved tenant.
- or if the ADU is paid by us and will be used for Airbnb, while we live in the same property --and never sell the property.
@Dan Heuschele - my son works for a contractor in San Diego that is focusing heavily on building ADUs in and around San Diego. They are seeing huge demand. I don't know that it's equating to a higher selling price, though, as some other posts have said. I think what's driving it is the high cost of housing, lack of affordable housing, the ability to rent out the units as a STR for side income, and of course the extra space to move family members onto the property. So it's driving value, but not necessarily resale value.
Many people are doing it, but if they are doing it hands off there are ways to obtain a better return in RE. The issue is the return is primarily set by cash flow. Cash flow of building an ADU is good compared to many San Diego properties, but still poor.
I suspect many of these people are unaware of some of the syndication returns.
I have seen investors doing ADU additions that seem happy with a return just better than lifetime S&P 500. Buy n hold RE is not passive. I would not choose it if my conservative projection was not at least double the lifetime S&P 500 and ideally much better than that.
Many of the ADU investors under estimate the long term expenses of an ADU. Their cash flow projection is not conservative. In particular, they typically underestimate maintenance/cap ex. The 50% rule is conservative, but I want my pro forma to be conservative. Anyone who is going hands off ADU addition should be aware what their return would be based on the 50% rule.
The next issue is the value of the ADU as set by both appraisers and purchasers are less than the typical hands off cost of a first time investor doing an ADU addition. This implies that at completion of the ADU, the investor that has done a hands off ADU addition has a negative return. The initial cash flow is needed to recoup this negative position. If the value is $50k less than the cost of the hands off ADU addition, the first $50k of cash flow goes to recoup this negative position. With realistic expenses used in the pro forma, this will typically be over 5 years if financed (and if not financed, the investor has a lot to learn about leverage associated with return).
In addition, the ADU is often either paid for via poorer loan terms (compared to conventional Fannie/Freddie (f/f)) or as a leveraged loan (HELOC, margin, portfolio loan, etc). These leveraged loans are of course limiting. Once it is tied up in an ADU, that presents few options for extraction, it is no longer available for use (implied by the tied up).
I can do a fairly poor job at a BRRRR and trap less than 10% of ARV using a F/F refi loan (at least for the 1st 10 properties - if you have 10 San Diego properties financing starts to be less of a problem). If I do a rockstar BRRRR, I extract all of our investment (as of this month all our BRRRR have had all money extracted). Likely the BRRRR is more work than hands off ADU addition, but a non owner occupied asset at less than 10% invested is incredible.
I have seen various pro forma for hands off adding ADU (purchasing RE with an existing ADU is different). When they depict realistic long term expenses, they have fairly lot expected return for the effort of buy n hold.
There seem to be many ways to obtain better return including buying a property with an existing ADU.
Not totally sure I caught Dan's whole point, but another way to say what (I think) Dan's saying is: actually building the ADU as a discrete action is likely a good investment. But, buying a property that doesn't work for investment and adding an ADU to it is unlikely *overall* to be a good investment.
I started in REI by adding units to properties and spent 8 years doing it - before and after ADUs came on the scene. At this point, with (property and construction and rent) prices where they're at, it just so rarely makes sense to further develop a property unless you're adding more like 3+ units to it. I'm building two smaller properties like this at the moment that barely work; there's numbers below in case anyone considering this strategy wants to compare their expectations to reality. It's easy to talk about generalities, but hopefully some hard, actual, current numbers will be helpful to someone. Note this is very much hands-on -- I'm a Developer for a living and while this involves other professionals hired to do what they're good at, there's no do-it-for-me option here. :-)
SFR --> 2 unit + ADU, City Heights
SFR --> SFR + ADU, South San Diego
I'll leave the rest of the proforma as an exercise for those interested in it, but to spoil the suspense and get down to the numbers that really matter (these are for the "City Heights" one):
Note these projects are under construction at the moment, so these are projections. While they will be off somewhat, I've been doing this long enough to know they'll be pretty close to actual.
Couple things to remember when thinking about this (or, "Justin's Soapbox"):
And one final thing on the topic of housing supply here in San Diego: I would encourage everyone to drive to your favorite urban area outside downtown and take a picture. Take the same pic again in late 2022. There is a wave of new supply coming, packing small units into new tall (5-7 story) buildings. The bigger projects we're doing are all getting re-designed right now to bump unit counts about +50%, and I know other Developers are too. I think we'll see stabilizing (and likely falling) rents for 1 bed and studio units throughout the urban areas over the next couple years. That's probably a good thing for society, and it's what the City wants (and needs). I don't know if that impacts ADU rental rates, but it's certainly more options for people on where to live.
Viel Glück!
@Dan Heuschele - my son works for a contractor in San Diego that is focusing heavily on building ADUs in and around San Diego. They are seeing huge demand. I don't know that it's equating to a higher selling price, though, as some other posts have said. I think what's driving it is the high cost of housing, lack of affordable housing, the ability to rent out the units as a STR for side income, and of course the extra space to move family members onto the property. So it's driving value, but not necessarily resale value.
Many people are doing it, but if they are doing it hands off there are ways to obtain a better return in RE. The issue is the return is primarily set by cash flow. Cash flow of building an ADU is good compared to many San Diego properties, but still poor.
I suspect many of these people are unaware of some of the syndication returns.
I have seen investors doing ADU additions that seem happy with a return just better than lifetime S&P 500. Buy n hold RE is not passive. I would not choose it if my conservative projection was not at least double the lifetime S&P 500 and ideally much better than that.
Many of the ADU investors under estimate the long term expenses of an ADU. Their cash flow projection is not conservative. In particular, they typically underestimate maintenance/cap ex. The 50% rule is conservative, but I want my pro forma to be conservative. Anyone who is going hands off ADU addition should be aware what their return would be based on the 50% rule.
The next issue is the value of the ADU as set by both appraisers and purchasers are less than the typical hands off cost of a first time investor doing an ADU addition. This implies that at completion of the ADU, the investor that has done a hands off ADU addition has a negative return. The initial cash flow is needed to recoup this negative position. If the value is $50k less than the cost of the hands off ADU addition, the first $50k of cash flow goes to recoup this negative position. With realistic expenses used in the pro forma, this will typically be over 5 years if financed (and if not financed, the investor has a lot to learn about leverage associated with return).
In addition, the ADU is often either paid for via poorer loan terms (compared to conventional Fannie/Freddie (f/f)) or as a leveraged loan (HELOC, margin, portfolio loan, etc). These leveraged loans are of course limiting. Once it is tied up in an ADU, that presents few options for extraction, it is no longer available for use (implied by the tied up).
I can do a fairly poor job at a BRRRR and trap less than 10% of ARV using a F/F refi loan (at least for the 1st 10 properties - if you have 10 San Diego properties financing starts to be less of a problem). If I do a rockstar BRRRR, I extract all of our investment (as of this month all our BRRRR have had all money extracted). Likely the BRRRR is more work than hands off ADU addition, but a non owner occupied asset at less than 10% invested is incredible.
I have seen various pro forma for hands off adding ADU (purchasing RE with an existing ADU is different). When they depict realistic long term expenses, they have fairly lot expected return for the effort of buy n hold.
There seem to be many ways to obtain better return including buying a property with an existing ADU.
Not totally sure I caught Dan's whole point, but another way to say what (I think) Dan's saying is: actually building the ADU as a discrete action is likely a good investment. But, buying a property that doesn't work for investment and adding an ADU to it is unlikely *overall* to be a good investment.
I started in REI by adding units to properties and spent 8 years doing it - before and after ADUs came on the scene. At this point, with (property and construction and rent) prices where they're at, it just so rarely makes sense to further develop a property unless you're adding more like 3+ units to it. I'm building two smaller properties like this at the moment that barely work; there's numbers below in case anyone considering this strategy wants to compare their expectations to reality. It's easy to talk about generalities, but hopefully some hard, actual, current numbers will be helpful to someone. Note this is very much hands-on -- I'm a Developer for a living and while this involves other professionals hired to do what they're good at, there's no do-it-for-me option here. :-)
SFR --> 2 unit + ADU, City Heights
SFR --> SFR + ADU, South San Diego
I'll leave the rest of the proforma as an exercise for those interested in it, but to spoil the suspense and get down to the numbers that really matter (these are for the "City Heights" one):
Note these projects are under construction at the moment, so these are projections. While they will be off somewhat, I've been doing this long enough to know they'll be pretty close to actual.
Couple things to remember when thinking about this (or, "Justin's Soapbox"):
And one final thing on the topic of housing supply here in San Diego: I would encourage everyone to drive to your favorite urban area outside downtown and take a picture. Take the same pic again in late 2022. There is a wave of new supply coming, packing small units into new tall (5-7 story) buildings. The bigger projects we're doing are all getting re-designed right now to bump unit counts about +50%, and I know other Developers are too. I think we'll see stabilizing (and likely falling) rents for 1 bed and studio units throughout the urban areas over the next couple years. That's probably a good thing for society, and it's what the City wants (and needs). I don't know if that impacts ADU rental rates, but it's certainly more options for people on where to live.
Viel Glück!
You were clear that this is not a hands off effort. The implication being that the cost would be much higher doing this hands off and the projected return subsequently less (assuming they use similar cost estimates, but having seen your pro forma in the past it is my belief most new RE investors would not use cost projections as high as your (or my) pro formas).
You were also clear that you have a lot of experience. The person doing this for the first time is not going to be able to match these costs or the projected return (again using similar hold cost projections).
I suspect no matter what RE investment path is chosen, the efficiency/profit increases with experience, but I suspect this is more true of new development than other RE investment options.
In general, most RE investors will do better purchasing a property with an existing ADU than building their own. It is my belief that the hands off ADU addition produces one of the worse RE returns and often takes years to recover from the negative position of having paid more for the hands off ADU addition than the value as set by appraisers and buyers. Even $20k negative position will consume years of cash flow and most ADUs are being valued at more than $20k below the hands off construction costs. The investor must do their research on the projected ARV value after adding an ADU to determine how long it will take recoup the negative position.
What if you used a modular as an ADU vs stick built?
@Dan Heuschele - my son works for a contractor in San Diego that is focusing heavily on building ADUs in and around San Diego. They are seeing huge demand. I don't know that it's equating to a higher selling price, though, as some other posts have said. I think what's driving it is the high cost of housing, lack of affordable housing, the ability to rent out the units as a STR for side income, and of course the extra space to move family members onto the property. So it's driving value, but not necessarily resale value.
Many people are doing it, but if they are doing it hands off there are ways to obtain a better return in RE. The issue is the return is primarily set by cash flow. Cash flow of building an ADU is good compared to many San Diego properties, but still poor.
I suspect many of these people are unaware of some of the syndication returns.
I have seen investors doing ADU additions that seem happy with a return just better than lifetime S&P 500. Buy n hold RE is not passive. I would not choose it if my conservative projection was not at least double the lifetime S&P 500 and ideally much better than that.
Many of the ADU investors under estimate the long term expenses of an ADU. Their cash flow projection is not conservative. In particular, they typically underestimate maintenance/cap ex. The 50% rule is conservative, but I want my pro forma to be conservative. Anyone who is going hands off ADU addition should be aware what their return would be based on the 50% rule.
The next issue is the value of the ADU as set by both appraisers and purchasers are less than the typical hands off cost of a first time investor doing an ADU addition. This implies that at completion of the ADU, the investor that has done a hands off ADU addition has a negative return. The initial cash flow is needed to recoup this negative position. If the value is $50k less than the cost of the hands off ADU addition, the first $50k of cash flow goes to recoup this negative position. With realistic expenses used in the pro forma, this will typically be over 5 years if financed (and if not financed, the investor has a lot to learn about leverage associated with return).
In addition, the ADU is often either paid for via poorer loan terms (compared to conventional Fannie/Freddie (f/f)) or as a leveraged loan (HELOC, margin, portfolio loan, etc). These leveraged loans are of course limiting. Once it is tied up in an ADU, that presents few options for extraction, it is no longer available for use (implied by the tied up).
I can do a fairly poor job at a BRRRR and trap less than 10% of ARV using a F/F refi loan (at least for the 1st 10 properties - if you have 10 San Diego properties financing starts to be less of a problem). If I do a rockstar BRRRR, I extract all of our investment (as of this month all our BRRRR have had all money extracted). Likely the BRRRR is more work than hands off ADU addition, but a non owner occupied asset at less than 10% invested is incredible.
I have seen various pro forma for hands off adding ADU (purchasing RE with an existing ADU is different). When they depict realistic long term expenses, they have fairly lot expected return for the effort of buy n hold.
There seem to be many ways to obtain better return including buying a property with an existing ADU.
Not totally sure I caught Dan's whole point, but another way to say what (I think) Dan's saying is: actually building the ADU as a discrete action is likely a good investment. But, buying a property that doesn't work for investment and adding an ADU to it is unlikely *overall* to be a good investment.
I started in REI by adding units to properties and spent 8 years doing it - before and after ADUs came on the scene. At this point, with (property and construction and rent) prices where they're at, it just so rarely makes sense to further develop a property unless you're adding more like 3+ units to it. I'm building two smaller properties like this at the moment that barely work; there's numbers below in case anyone considering this strategy wants to compare their expectations to reality. It's easy to talk about generalities, but hopefully some hard, actual, current numbers will be helpful to someone. Note this is very much hands-on -- I'm a Developer for a living and while this involves other professionals hired to do what they're good at, there's no do-it-for-me option here. :-)
SFR --> 2 unit + ADU, City Heights
SFR --> SFR + ADU, South San Diego
I'll leave the rest of the proforma as an exercise for those interested in it, but to spoil the suspense and get down to the numbers that really matter (these are for the "City Heights" one):
Note these projects are under construction at the moment, so these are projections. While they will be off somewhat, I've been doing this long enough to know they'll be pretty close to actual.
Couple things to remember when thinking about this (or, "Justin's Soapbox"):
And one final thing on the topic of housing supply here in San Diego: I would encourage everyone to drive to your favorite urban area outside downtown and take a picture. Take the same pic again in late 2022. There is a wave of new supply coming, packing small units into new tall (5-7 story) buildings. The bigger projects we're doing are all getting re-designed right now to bump unit counts about +50%, and I know other Developers are too. I think we'll see stabilizing (and likely falling) rents for 1 bed and studio units throughout the urban areas over the next couple years. That's probably a good thing for society, and it's what the City wants (and needs). I don't know if that impacts ADU rental rates, but it's certainly more options for people on where to live.
Viel Glück!
You were clear that this is not a hands off effort. The implication being that the cost would be much higher doing this hands off and the projected return subsequently less (assuming they use similar cost estimates, but having seen your pro forma in the past it is my belief most new RE investors would not use cost projections as high as your (or my) pro formas).
You were also clear that you have a lot of experience. The person doing this for the first time is not going to be able to match these costs or the projected return (again using similar hold cost projections).
I suspect no matter what RE investment path is chosen, the efficiency/profit increases with experience, but I suspect this is more true of new development than other RE investment options.
In general, most RE investors will do better purchasing a property with an existing ADU than building their own. It is my belief that the hands off ADU addition produces one of the worse RE returns and often takes years to recover from the negative position of having paid more for the hands off ADU addition than the value as set by appraisers and buyers. Even $20k negative position will consume years of cash flow and most ADUs are being valued at more than $20k below the hands off construction costs. The investor must do their research on the projected ARV value after adding an ADU to determine how long it will take recoup the negative position.
Broadly, agree. It's true I'm executing at lower cost than a new investor would be (ignoring cost of my time). But aside from the construction costs obvious to anyone is the costs associated with the DECISIONS that are made. Every property can have an ADU built - which ones make most sense to do so? How big should it be built? Attached or detached? Should other work be done while the ADU is being done? Does it make sense to pursue additional dwelling units in addition to the ADU when considering the public improvements and fees involved? How should utilities be designed and handled?
People don't need super human knowledge to figure these things out, but looking back at all the lessons learned (and which a rising real estate market bailed me out of) I'm very aware of the difference between what you're calling a "hands off" approach and a "hands on" approach in terms of the outcome one will get.
This is not trying to dissuade people from doing it ... just advice not to think of it as a clean transaction where you are promised something, pay the money, and get what you're promised. :-)
I agree the ADU phenomena is not always what's it's cracked up to be- especially for most people who are trying this with SFH's. The main issue is the appraised value of the ADU not being close to covering construction costs, especially in CA. And I don't know if this will easily change in the future, because once a precedent has set it's hard to transition the ADU value from current $20-50k to $200-400k, which is where it needs to be.
I've been fortunate as I've done these projects on duplexes. And when I eventually sell the city records will reflect a triplex. So I believe I will reap full unit value. But this is for San Francisco, where SFH's and 2-4 unit buildings frequently sit next to each other cheek by jowl. But when you have a suburb of SFH's, all of a sudden a SFH+ADU is lookin' like a white elephant. And white elephants are never good at getting top appraisals (unless you can radically alter the project into something easily understood from a bank and appraisers perspective.)
————-
my2c
I agree the ADU phenomena is not always what's it's cracked up to be- especially for most people who are trying this with SFH's. The main issue is the appraised value of the ADU not being close to covering construction costs, especially in CA. And I don't know if this will easily change in the future, because once a precedent has set it's hard to transition the ADU value from current $20-50k to $200-400k, which is where it needs to be.
I've been fortunate as I've done these projects on duplexes. And when I eventually sell the city records will reflect a triplex. So I believe I will reap full unit value. But this is for San Francisco, where SFH's and 2-4 unit buildings frequently sit next to each other cheek by jowl. But when you have a suburb of SFH's, all of a sudden a SFH+ADU is lookin' like a white elephant. And white elephants are never good at getting top appraisals (unless you can radically alter the project into something easily understood from a bank and appraisers perspective.)
————-
my2c
>when I eventually sell the city records will reflect a triplex.
Are you sure? The reason I ask is that Fannie/Freddie (F/F) are fairly clear that F/F funding is not available for multiplexes with an ADU. A Duplex with an ADU in my view is no more a triplex than a SFR with an ADU is a duplex. Note if a duplex with an ADU is now a "triplex", what prevents an ADU from being added to the newly created "triplex"? Soon you have a small apartment building.
I hope you are certain. Without F/F funding, selling at retail could be real challenging.
@Justin R. Do you know if this (that duplex with ADU are treated like a triplex for appraisal and loan purposes) has been the case in San Diego?
---> most RE investors will do better purchasing a property with an existing ADU than building their own <---
This is the most realistic answer. I've been digging all sold MLS listing that has ADU on it. The price is very competitive and actually giving an advantage to the buyer. There're only a few in the market.
I agree the ADU phenomena is not always what's it's cracked up to be- especially for most people who are trying this with SFH's. The main issue is the appraised value of the ADU not being close to covering construction costs, especially in CA. And I don't know if this will easily change in the future, because once a precedent has set it's hard to transition the ADU value from current $20-50k to $200-400k, which is where it needs to be.
I've been fortunate as I've done these projects on duplexes. And when I eventually sell the city records will reflect a triplex. So I believe I will reap full unit value. But this is for San Francisco, where SFH's and 2-4 unit buildings frequently sit next to each other cheek by jowl. But when you have a suburb of SFH's, all of a sudden a SFH+ADU is lookin' like a white elephant. And white elephants are never good at getting top appraisals (unless you can radically alter the project into something easily understood from a bank and appraisers perspective.)
————-
my2c
>when I eventually sell the city records will reflect a triplex.
Are you sure? The reason I ask is that Fannie/Freddie (F/F) are fairly clear that F/F funding is not available for multiplexes with an ADU. A Duplex with an ADU in my view is no more a triplex than a SFR with an ADU is a duplex. Note if a duplex with an ADU is now a "triplex", what prevents an ADU from being added to the newly created "triplex"? Soon you have a small apartment building.
I hope you are certain. Without F/F funding, selling at retail could be real challenging.
@Justin R. Do you know if this (that duplex with ADU are treated like a triplex for appraisal and loan purposes) has been the case in San Diego?
The appraiser -- as described to me by an appraiser friend and borne out in appraisals I've gotten -- isn't required to check whether something is an ADU or a formal DU. They're just charged with determining what the value of the property is. And, that is based on what is typical for the neighborhood. If it looks like a duck and quacks like a duck and there's other ducks around, it's a duck.
I've done at least 3 refinances of properties with ADUs where the ADU was appraised as an additional dwelling unit. One was zoned for SFR, but there are multifamily within a block grandfathered from previous zoning. The other two are in MFR zoned areas.
I've also had one appraisal where the appraiser questioned whether one unit was permitted. In that case, it was permittable in that zoning and he eventually included it as a DU for valuation. Point being, they're looking to see if things make sense. If they don't, my experience is you'll have a hard time. That's true for ADUs in entirely SFR neighborhoods, which others are describing and F/F explicitly guides against valuing.
From the City's perspective, the ADU (or, technically, CU in San Diego) is most definitely not a normal DU. They don't get confused and let you add multiple of them. :-). But, the appraisers just don't check technicalities ... and nor should they. I'd argue that two duplex properties side by side - one with 2 DUs and 1 with a DU + 1 ADU - would sell for substantially the same so long as each could be rebuilt as is if necessary.
The value is independent of the main house if it is new construction. You may have a ADU that is worth more than the main house. I think the selling point is for house hackers (which you have to educate the general public about) to cover part of their mortgage.
@John Kim
I’m in Hawaii and we have a cottage on our property behind our main house and I’ll have to look up what value they gave on our appraisal —It seemed like a good amount as our appraisal came out significantly higher than I thought it would for the size and condition of our home compared to similar homes in our neighborhood, which usually have “attached” adu ‘s instead of a seperate structure like ours. Maybe that’s the difference.
@Dan H. and @Justin R. since I have not sold or refinanced, I cannot say with certainty. But I suspect my properties will be treated in a similar manner Justin described. I also think it is very dependent on the zoning in the area, and also if similar properties already exist. Plus I'm sure it county dependent, and San Francisco is in a world of its own: I'm my cases I didn't technically add an ADU. We have a program that allows owners to legalize pre existing inlaw units, which is what I did, as they waive most city fees, and are generally more lenient with planning and bldg requirements than adding ADU's. Also the way the city records work, when you pull a 3R report, it updates any work you have done on the property, and the unit count changes when adding a unit. Most appraisers go off the 3R, so if you get that to reflect 3 (instead of 2) units, I think you're looking good. All of this is still new territory!
I read this article (from Stessa's digest email) and pricing seems to be going the right direction for properties with ADU. Still some ways away, but early evidence that ADU is catching on given how new it is.
https://www.forbes.com/advisor...
@Amit M. Legalizing unpermitted ADU is an entirely different thing.I thought before you've built ADU before but you didn't. But you're lucky when you able to acquire the unpermitted ADU. Obviously getting an unpermitted ADU is technically better than building a legal ADU these days.
@Hai G. unless we see the exact sqft appraisal from a sample property, it's hard to make a statement that ADU appraisal is done correctly.
@Carlos Ptriawan in my specific cases all the properties are in San Francisco, which has a San Francisco only program to legalize existing inlaw units. They are not referred to as ADUs. I wouldn’t extrapolate that to other counties in CA, which are mostly relying on the state law allowing ADUs.
Thanks, Amit. In our Santa Clara County, we have a program to legalize the ADU as well.
When you bought the unpermitted ADU, did you face any problem with insurance or lender? There's one duplex in MLS currently with one unit is unpermitted ADU. Not sure I shall place a bid or not.
@Carlos Ptriawan no issues with insurance. But yes with financing, there is a little song and dance that you and the realtors must do: basically you can have everything in the unit EXCEPT a stove! Yeah it sounds weird, but the appraiser will just look at everything as non legal bonus rooms, including a kitchenette. They just don’t want to see a stove, which for them defines a full kitchen. So as long as there isn’t a “full kitchen” it’s not considered a “unit”. Having extra unpermitted rooms, bathroom and a “kitchenette” are ok, they just add minimal value to the appraisal. In our case a handyman pulled the stove out, put it in the garage and covers it with a tarp ;) after appraiser came he put it back in ;);) It’s a bit silly but it worked.
You can buy the place then legalize the unit as an ADU.
@Justin R. What about a Duplex purchase, with 3 Units added legally (convert garage, add two detached units). Could that be valued as a 5 DU building, Commercial financing / valued with cap rate on income?
@Justin R. What about a Duplex purchase, with 3 Units added legally (convert garage, add two detached units). Could that be valued as a 5 DU building, Commercial financing / valued with cap rate on income?
What are those three new units? ADU and JADU plus one by right?
I've never done that particular situation, but I have a four-unit plus 1 ADU that the lender treated as a commercial finance. I also have a 16 + 2 unit new construction that the lender appears to be treating as an 18.
I wouldn't do a project if it required the ADU to be appraised as a regular DU. there may also be city-specific access to information that appraisers could use to differentiate. That's not the case in my market (San Diego). Regardless, if it makes sense for the neighborhood and can be rebuilt if destroyed, I'm seeing all dwelling units (ADU or otherwise) treated equally.
@justin
Whats your definition of DU vs your +2 on the 16+2?
Two detached ADU + 1 Garage Conversion as ADU + duplex = 5 rents
I built a 900 SF 2 bed/2bath ADU in Anaheim for a friend and it appraised for 140,000.00. I didn't ask anymore details but it sees promising, or more along the lines of what you are saying. I also think these ADU's range in quality so much it's hard to compare apples to apples. There are so many poor ADU's that are built legally and unpermitted that look nothing like the main dwelling, smell like cat piss and are an eye sore for the property. The one we built looks nicer than the house, LVF, quartz counters, nice cabinets, etc.
@justin
Whats your definition of DU vs your +2 on the 16+2?
Two detached ADU + 1 Garage Conversion as ADU + duplex = 5 rents
In San Diego, the municipal code differentiates between "Dwelling Unit" and "Companion Unit". A CU is basically equivalent to an ADU as defined in the state laws. It's kinda a wonky distinction, but important to understand if you're developing and pushing the envelope.
They consider a "Dwelling Unit" as something that is permittable by right or discretionary review. So, say a piece of land is 10000sf. Its zoning support one dwelling unit per 1000sf of land. So, its base density is 10 dwelling units by right. Pick from a smorgasbord of density bonus programs and, lets say, you get to 16 dwelling units with bonuses. I pay DIF fees (and other fees) based on all 12 of those units.
Separate from that, state laws comes in with ADU rules. So, let's say, that allows for another 2 "Companion Units" (or, "ADUs" in state parlance). Fee structure, as well as some physical requirements I'm sure you're aware of, are substantially different.
No one would be able to differentiate the +2 units from the rest, and I can't imagine anyone would require the plans at appraisal time to understand the difference. It is functionally an 18 unit building, and I'll say there's a ~100% is appraises as such. That's what I was trying to say in my other post.
@Adam - Does it work similar or totally different in your market?
I get it...
In San Jose, not many pushing the boundaries of ADU in Multifamily, from what I can tell. Most of my question revolves around financing of (purchase + construction) for a Duplex (Single Family via Fannie / Freddie) and creating 5 rentable units. Are you now into a possible Commercial loan buying out, maybe a 203k loan?
2 turning into 5 DU is different than 10 turning into 16