Can you BRRRR with an unpermitted ADU? Will the appraiser call it

Question

Can you BRRRR with an unpermitted ADU? Will the appraiser call it out? What if the contractors did a great job? Is this a gray area? I have a client who wants a home, its been flipped, there is a 1200 SF adu, its one room, with bathroom, wants to build out walls and kitchen without permits... and then wants to BRRRR. Its for a long term rental. I am telling him BRRRR wont work most likely since it is not on the tax records as 2 SFR on the same lot. Also a detached garage is there with 1 bedroom that we could convert into 3rd ADU.. this is in San Diego county

John Fortunato · Answer

Hello, I was recently looking into the new ADU bills that came into effect as of Jan 1 2020. This is what I came up with.

Bill 881

• -you can now build ADU’s up to 4 feet of setbacks
• -You can now build an ADU up to 50% of the primary residence square footage. Maximum of 1200 square.
• -Minimum of 800 ft.²  so if your house is 1200 square-foot you can still build an 800 square-foot ADU.

Bill 670

• -Eliminates HOA’s from regulating ADU’s

BILL 12

• -illuminates impact fees on ADU’s 700 ft.² or less.

Bill 68

• -If a property is zoned as a single family living home. bill 68 allows you to have three rental properties on it now.

I hope this will help you out.

Dan H. · Answer

The current ADU regulations includes a provision for an unpermitted structure being converted to an ADU (SB13). Basically it dictates that such a structure would only need to address items related to health and safety. This policy is in effect only for 5 years.

Therefore my suggestion is your client first determine exactly what is required to get the existing ADU converted to a legal, permitted ADU. Ideally this can be done at a reasonable cost and results in significantly more value than the cost.

The current regulations allow a JADU, an ADU, and the original SFR.  Therefore, the 3 units is not an issue.

I suggest both you and your client research the 6 existing CA ADU bills. Currently a jurisdiction can mandate a property with a JADU have a unit on the property be occupied by the owner. I expect this restriction will be eliminate within a year but there is some risk assuming this.

Good luck

Joe Vahedi · Answer

Thanks so much for the info gentlemen!!

Justin R. · Answer

@Joe Vahedi Every project I've done with recently added units has had some level of difficulty with appraisals - I have had to go out of my way to prove that the additional unit is permitted and compliant with zoning in order to qualify it with the underwriter and the income from it.

Here's Fannie Mae's guidance on it: https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B4-Underwriting-Property/Chapter-B4-1-Appraisal-Requirements/Section-B4-1-3-Appraisal-Report-Assessment/1736875861/B4-1-3-05-Improvements-Section-of-the-Appraisal-Report-10-24-2016.htm#Accessory.20Units

Lenders and underwriters can speak to the details better than I can, but I would be VERY cautious about assuming a building with an unpermitted unit (even if typical for the neighborhood) would appraise with that unit included.  At this point, there's really no reason not to permit the thing, unless he's got a really funky situation - the rewards are high and the costs are low.

Can you BRRRR with an unpermitted ADU? Will the appraiser call it

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