How do you appraise an ADU (granny flat)

Question

I have the opportunity to convert a garage into an ADU (accessory dwelling unit) which I can then rent out for about 1k/ month. How do I go about working that in to my ARV? There are almost no comps and all of the reading I do gives such variable methods. I estimate 20-30k to convert the garage to the ADU.

Brook Bolger · Answer

@Brian Larson

@Greg Dickerson

Gents,

Thank you for your thoughtful comments. This has been an interesting problem to solve because of many factors. Here in CA, legislation easing the rules on ADU's is relatively new. I spoke to quite a few people today and the consensus is that there is no consensus. However, there are some things we have figured out:

1. If you have a detached, unused structure such as a garage that can be retrofit to an ADU for 20-50K and it brings in 12K/yr in income, it is a no brainer. HOWEVER, there are not enough comp's to  see what the market actually supports. so making a decision like converting an existing garage or structure is very difficult. After all, you may be chopping off resale value in exchange for cash flow - you are losing your garage. 2. Adding the ADU's square footage to the house makes a lot of sense for an attached ADU.

3. Using a cap rate or a gross income multiplier leads to valuations that are crazy outrageous and just cannot be accurate in a market where real estate trades around a 3-6 cap, and a 166 - 200X monthly GIM.

Greg Dickerson · Answer

If it’s detached you value it using the replacement cost method. If it’s attached it’s added heated square footage.

Brian Larson · Answer

@Brook Bolger

This has been debated on the forums a bunch of times since the California State Law was passed a few years ago. I have not seen a good answer yet because appraisers have not really adjusted to this new real estate model so there is no standard way to evaluate and not enough comps in the marketplace yet.

Anyway, let me know if you find more info on the topic because I am very interested.