Need an appraisers eye on a cash out refi

[Bobby Andrews]

Just completed a down to the studs rehab on a ~1300 sq ft property in Indiana. We pulled separate permits for the ~1300 sq ft house and the 400 sq ft 1 bed 1 bath detached garage conversion in the back. The appraiser made no mention of the rear unit on the appraisal so we submitted a ROV. Then we got that back with no adjustment at all to the appraised value but still no mention at all of the rear unit. I know conversions or extra space like this are sometimes valued differently than if it were part of the GLA but it seems inaccurate to assign zero value.

For context, I've done several BRRRRs in this market and the price per square ft of our completed refinances are all very similar to the price per sq ft of the ~1300 sq ft front unit. If they somehow included that rear unit in their valuation, that would mean the whole property ppsqft is like 25% less than our other nearly identical properties (completed in the past few months as well) with no outlying differentiators. 

I haven't had an issue like this before so I'm trying to figure out what to do. Thanks!

[Dan H.]

ADU additions have poor valuations. The most extensive study I have seen was performed in many large cities by NAR. It showed poor valuations in most cities including less than $20k added on average in my very expensive San Diego RE market. It showed in some cities (rare but there is at least one per the study in southern Ca) that the property value declines by adding an ADU.

There are a lot of reasons adding an ADU may be a poor investment option. In my market the value added per cost of the ADU is likely the biggest reason why it typically does not make financial sense.

When you did your underwriting, how did you assign a valuation for the ADU conversion?

I believe it is likely the ADU conversion adds some value. At a minimum it should be listed as an amenity in the appraisal (like pool, solar, etc).

good luck