Hard money loan for ADU?

Question

Can I use a hard money loan to put an ADU on my property? Then refi the loan as a whole after the ADU is built? And with little down.

Matthew Forrest · Answer

@Steven Macdonald I would not rely on a refinance to pay off the hard money loan. I completed my ADU and went for a refi and got an appraisal at property purchase price +$20k. Essentially this valued the ADU (700 sqft 1/1) at $20k. If there are good comps in your area it may work out for you, but I wouldn't take the risk if you could go the HELOC route.

Steven Macdonald · Answer

Thank you Jeff! Yeah I only have 50k in equity and the ADU quote I received was for 120k. It’s sounds like the ADU might not appraisal for what I spent on it at 120 then?  Yeah I will look into ADU specific lenders and see what they say!

Lien Vuong · Answer

Have you consider refi your current loan into a construction one? Alternatively you can use a personal loan - typically with a Credit Union, that would be able to get some good funds to you quickly.

Jeff S. · Answer

Not a bad idea, but there are a few problems, @Steven Macdonald.  If there is another loan on this property, you’ll probably have a tough time obtaining a hard money loan.  This is because most hard money lenders will not make a second position loan.  Plus, ADU’s are relatively inexpensive and most hard money lenders don't like to make a low dollar loans.

Even if you found a lender willing to make this loan, there is no guarantee that you’d be able to refinance your way out.  A wise hard money lender would want some sort of assurance in advance.

If you have enough equity in the property, perhaps you could refinance now and use that cash for the ADU?  Alternately, many of the companies that build ADU’s offer their own financing so you might ask around.

Brian Larson · Answer

@Matthew Forrest is correct.  ADUs are still so new that many appraisers fail to give them a proper value increase.  I would exercise extreme caution when factoring a refi to pay off any debt.

Personally, I am using a HELCO for my ADU project in San Jose, California.

Steven Macdonald · Answer

Thanks lien! I have not looked into a construction loan yet. Do Construction loan lenders go for people trying to use equity as a downpayment to finance the loan? Also I will have to check out a credit union.

Hard money loan for ADU?

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