CRAZY ADU value on appraisal

San Diego, California
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CRAZY ADU value on appraisal

Greg R.
Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
Hey guys,

I know there's been a few posts on this topic over the years, but I wanted to share my experience to see if anyone has input or new info.

I am doing a cash out VA refinance. My home is in San Diego (single family residence) and I have an ADU. I got my appraisal back and it's AT LEAST 100-150k low. When I got into the weeds of the appraisal report, I was only given 35k value for my 494 sqft ADU which is about $70 per sqft.

My main house was given over $450 per sqft. To add a little context, this is not a garage conversion. The ADU is attached to my home and fully permitted. I also have an attached 2-car garage. Overall the quality of the ADU is equal if not higher quality to my main house. It's also a cash cow generating a very high revenue.

Seems outrageous to me that the appraiser would only give my ADU 15% the value of my main home (that it's attached to).

Again, this is a VA appraisal so I went the route to dispute/ rebut the appraisal with the VA. I got one message from their staff appraiser that said "the ADU’s value will be market derived; therefore, value per square foot of an ADU may differ from value per square foot of main dwelling area in a market area." Their decision is still in process and I should get a response sometime mid-next week.

From talking to my lender and realtor (both have been in the business for many decades specializing in my area), they've never heard of anything like this. They said that it can be somewhat common to get ADU value at 50-60% of the price per sqft of the main house, but never anything like 15%.

Like always, thanks for the time.

Greg


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Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
4y

@Greg R. As mentioned by @Dan H. , low valuations for ADUs in San Diego is not uncommon but I am seeing them get better as slowly there are more property with ADUs that can be used as comps. That said, when doing a cash out refinance, especially with an ADU, your homework with comps has to be done up front and provided to the appraiser beforehand.

An appraiser has very little incentive to go back and redo an appraisal once it is complete as they are not compensated more for doing so unless there is a huge mistake of some sort.  

Also, something to keep in mind. Always check the zoning of your property because a single family home with an ADU on a multifamily zoned property is worth more than that same property on a SFR zone lot and should be compared to 2 unit properties/duplexes as opposed to SFR w/ ADU.

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    4y

    In most areas ADUs are being valued far less than the hands-off cost of adding the ADU and less than the per square foot value of the primary structure. In these areas, an ADU is the opposite of a value add. It is a value subtract.

    Yours is not the worst ADU appraisal that I have heard of, or even close to as bad as the worse I heard of. I therefore question how many ADU refinances your lender and realtor have been involved with. I have heard of quite a few worse than yours and suspect you can search BP to see some of them.  I have seen ADUs more than twice the size of your ADU be given similar valuation to your ADU.

    It is very important to know how the ADU will be valued in your location before adding an ADU. This implies finding comps with ADUs that establish a value. In the absence of comps that justifies a value, it is impossible to know how the ADU will be valued and you should be prepared for a poor valuation from an appraiser.

    Your initial cash flow goes to recover the negative position.  Until the negative position is recovered there is no return.

    Now for something that may be able to be useful to you... Figure.com does (at least did do) automated appraisals that primarily uses the footage and location for valuation. Some investors that have used them are encountering no ADU appraisal penalty issues. You may want to look into if they provide you a solution that is better than your current option.

    Good luck 

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  • Greg R.
    OP
    Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
    4y

    Hey @Dan H. thanks for the response. I see you're right up the road from me in Poway. Are you familiar with this kind of valuation happening in San Diego? If I was in West Virginia (no offense), I might expect this kind of value out of an ADU. But as you know, San Diego prices are sky high. I'm trying to figure out how my main house can get 100% of the value per sq ft, but the attached ADU only get 15% of the value.

    That's the other thing, the appraiser didn't used a single comp with an ADU. All of his comps were single family homes without ADU. His comps were 0.4, 1, and 1.5 miles away from my house. I provided the VA with comps that had ADUs 2.6, 2.7, and 3.6 miles away. Obviously not as close, but the comps right next door are not an equal comparison as they don't have an ADU. I thought the point of comps were not only to find the closest properties, but also to find ones as similar as possible. Not sure why the appraiser didn't use comps that had ADUs. In this San Diego market if you have (2) houses over a million, one with an ADU and one without, the one with ADU is getting way more than 35k on top of the one without.

    Most people who spend over a million bucks on a house love the idea of being able to offset their mortgage through a cash flowing ADU.

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    4y
    Quote from @Greg R.:

    Hey @Dan H. thanks for the response. I see you're right up the road from me in Poway. Are you familiar with this kind of valuation happening in San Diego? If I was in West Virginia (no offense), I might expect this kind of value out of an ADU. But as you know, San Diego prices are sky high. I'm trying to figure out how my main house can get 100% of the value per sq ft, but the attached ADU only get 15% of the value.

    That's the other thing, the appraiser didn't used a single comp with an ADU. All of his comps were single family homes without ADU. His comps were 0.4, 1, and 1.5 miles away from my house. I provided the VA with comps that had ADUs 2.6, 2.7, and 3.6 miles away. Obviously not as close, but the comps right next door are not an equal comparison as they don't have an ADU. I thought the point of comps were not only to find the closest properties, but also to find ones as similar as possible. Not sure why the appraiser didn't use comps that had ADUs. In this San Diego market if you have (2) houses over a million, one with an ADU and one without, the one with ADU is getting way more than 35k on top of the one without.

    Most people who spend over a million bucks on a house love the idea of being able to offset their mortgage through a cash flowing ADU.

    I have seen poor ADU appraisals in San Diego and all of the bad ones that I have heard about are in high price CA markets, most even higher priced markets than San Diego.

    I would state in most areas of San Diego properties 2.6 miles to 3.6 miles are not comps (they would be comps in very rural locations). So, the comp has to be on an adjusted basis based on sold properties that are in your location. ADUs are getting terrible valuations on adjustments. It is why the comps to establish a valuation should be performed before adding the ADU. If you search my posts with respect to ADUs, that is my most stated point.

    Try Figure.com. I have heard from a couple of different sources that they value the ADU like the primary home. I do not know how they do this and question if they keep the loan in house and that it is not a Fannie/Freddie loan. I guess it is not really required to understand how they are able to provide such a different valuation. It is important to note that they have provided a different valuation.

    Good luck

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  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    4y

    @Greg R. As mentioned by @Dan H. , low valuations for ADUs in San Diego is not uncommon but I am seeing them get better as slowly there are more property with ADUs that can be used as comps. That said, when doing a cash out refinance, especially with an ADU, your homework with comps has to be done up front and provided to the appraiser beforehand.

    An appraiser has very little incentive to go back and redo an appraisal once it is complete as they are not compensated more for doing so unless there is a huge mistake of some sort.  

    Also, something to keep in mind. Always check the zoning of your property because a single family home with an ADU on a multifamily zoned property is worth more than that same property on a SFR zone lot and should be compared to 2 unit properties/duplexes as opposed to SFR w/ ADU.

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  • Sebastian MarroquinPro Member
    Real Estate Agent · Pasadena, CA · Member since 2015 · 477 posts · 263 votes
    4y

    Not sure that this would help… but you could go to any major ADU construction company and ask them for a quote for a New Construction ADU. It will be in the $150k to $250k range.

    Then send it to the appraiser or lender: Maybe- just maybe- they will take that into consideration and up the value. 

    This should have been done at the appraisal meeting/ appt. 

    I have done this many times with home renovations with my clients and miraculously, we more often than not, get the value we want :) 

    You also have to be nice and respectful to the appraiser on site when they come. :) 

    My 2 cents. 

    You could get another appraisal all together : and you will get a different person and you can try this option to see how it goes. 

    I would have a conversation with them and ask them a bunch of questions also. 

    Ie how many appraisals do you have today? Do you do appraisals for investors outside of the bank? Really… ok- bc we are thinking of doing appraisals for every investment / flip property we buy this year (do you buy a lot ) we do between 7 and 10 per year and I have investor friends that do the same. 

    Can I have your business card? Great, thanks 

    ;) build the relationship and what do you know… value comes in a bit higher ! 

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  • Matthew Forrest
    Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
    4y

    @Greg R. I've had great appraisals and always try to network with the appraiser. For the ADU appraisals I have had (one ADU with multiple appraisal attempts) the comparison isn't between the ADU and interior square footage, its was between the ADU and something extra on the property like a massive shed or a pool. I got $35k for a 700 sqft ADU so $50/sqft. I'm not upset about it... the cash flow is good, but no more ADUs for me until the appraisals are changed.

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  • Greg R.
    OP
    Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
    4y

    Thanks for the response @Sebastian Marroquin. I didn't think to get an ADU quote from a construction company, very good idea for next time. On your other suggestion, I'm always very nice to appraisers... I offer them coffee, water, something to eat. I try to converse with them as much as possible, but sometimes they are in a rush and are trying to get in and out. In those situations, I try not to be a pest.

    Love your example about appraisals outside of the bank. Really good info, thanks again. 

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  • Greg R.
    OP
    Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
    4y
    Quote from @Matthew Forrest:

    @Greg R. I've had great appraisals and always try to network with the appraiser. For the ADU appraisals I have had (one ADU with multiple appraisal attempts) the comparison isn't between the ADU and interior square footage, its was between the ADU and something extra on the property like a massive shed or a pool. I got $35k for a 700 sqft ADU so $50/sqft. I'm not upset about it... the cash flow is good, but no more ADUs for me until the appraisals are changed.

    Thanks Matthew. Unfortunately, this one is a VA appraisal. It's been a while since I used my VA loan, but apparently once there's an appraisal, is uploaded to a VA portal. When a value is uploaded to the VA portal there can't be another appraisal for 6 months! Doesn't matter if you switch lenders.  
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  • Greg R.
    OP
    Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
    4y

    All, I wanted to let you know that my rebuttal of the VA loan was somewhat successful. I was asking for a 50k increase but was granted 25k. Not what I was hoping for, but for a cash out refi I'm happy w/ any increase. I'm told that getting any positive adjustment after an appraisal comes in is pretty rare - so again, happy for that.

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