All Forum Posts by: Chen Zhou

The big variable on building ADUs is how they will be valued with respect to the building costs. I have recommended everyone do their research on the value of the ADU (what do local comps show). I make this suggestion because I regularly see ADUs (especially in single family areas) that are valued at about $50k. Note on a $350k build, a value of $50k would consume years of cash flow (hopefully a $350k build is value much greater than $50k). This negative initial position can consume years of cash flow and result in many ADU additions being poor investments compared to other RE investments with a similar level of effort. It is my view that an ADU addition can take effort similar to BRRRR. A decent BRRRR returns at least 50% 1st year. A great BRRRR returns infinite return because all costs have been extracted.

I also see numerous ADU providers advertise ADU values based on rents. There are investors that do not realize the rent price only affects the value if local comps justify the value. RE with less than 5 units are valued based on comps, not income. I consider it a deceiving practice by the ADU providers that do this.

My original protege had a 1 BR garage conversion ADU that we placed hands off cost at $115k to $120k (prior to Covid related material price increases). He was active in the process and spent significantly less than $115k. He had a purchaser who properly valued the ADU, but the financing appraisal came back low because of the low value associated with the ADU. It worked out fine for my protege as the buyer ended up bridging most of the appraisal gap because my protege was willing to rent the place and therefore was not going to sell it at the appraised value (good to have back up plans).

what value were you expecting an appraiser to put on your ADU? Have you got the refinance appraisal and if so, what value did the appraiser place on the ADU?

Any further lessons learned at this stage?   Would you do it again?

@Chen Zhou

Is this on your primary residence? I just spoke with figure.com last week and they said they do not have a product for investment homes yet. Would be great if they ever do.

@Chetan Patil that's a good question, as Ive been hearing about how several people who added ADUs have been getting effed on the new appraisals! Basically appraisers are totally subservient to the banks, and have not been receptive to the value of an ADU. Partly because ADUs are relatively new, and appraisers are very conservative (read: chicken sh!t) to allow much value for them- either as added sq footage, OR as added income property. 2 years ago I thought this was going to happen, but I would have hoped that by now it's gotten more standardized to add some tangible value to an SFH+ADU.

So if anyone has had direct experience where they have gotten anything more than a token $ value for adding an ADU to an SFH, please chime in!

Fwiw, we've had custom, stick-built projects for cost-efficient homeowners go for $260-$275/ sq ft and 3-5 months of construction. End to end, 7-9 months depending on speed of design and permitting is reasonable with a good GC who moves quickly and a well managed project.

Why bother with prefab when you can build custom ADU fitting your backyard shapes? the cost difference is not big enough to justify the sacrifice in quality and design flexibility. In premium BAY area locations, the quality is much more important than saving a few bucks. Come on, you are adding value to your property, it's not time to get cheap.

I checked a few Prefabs, they are actually more expansive than my site built cost, if you add the additional utility, foundation, and soft cost. I think the problem is they lack enough scale to cut down the cost. I chose to site build until a true good quality prefab can prove itself sometime in the future.

Hello, new friends! I am an owner-builder, working with my father on an ADU in SF Bay Area. The only parts we hired contract labor for were foundation and electrical, rest is DIY. We're moving on to the inside work, and I must say what an adventure it's been! Over the past 1.5 years, I've accumulated a slew of knowledge that I can't wait to share: from getting permits and passing inspections to selecting materials and calculating budget. I plan on writing a series of blog posts, and would love to find out what everyone's #1 pain point has been when building a house or remodeling (either DIY or hiring contractors)? I've had quite a few, so would love to narrow down and focus on the most relevant ones. Thank you and please feel free to ask away if you have any immediate questions!

Experts 

I am planning to Build ADU 750 SQFT in San Jose area. Not sure i should take a route of Normal ground up building or go for prefab. Also checked few prefab companies one who are not listed in san jose preapproved list, they say the approval process will take 3-4 months , but one of the general contractor says now the process will take an average of 8-10 months based on his recent 3 approvals from the city of san Jose.

Any pointers to get the Approval fast ,please let me know .

Thanks in advance

@Javier G. the option for you would be to do some digging on the city you live in, and what they require. You should look at JADUs and ADUs. Do some research on the area too, see if there were any properties with ADUs that have sold that you could use as an ARV. The trouble is as Dan mentioned is that there are not a lot of comps to support a great return, that is where the research comes into play on finding a good agent, or doing the research yourself to see what the market shows.

A couple pieces of insight, we have an ADU project now we are working on, and this is what we have for our current market. We are converting a garage and adding onto it cost will be 140-150psf of the project cost, it will cost us $112K for build, $7,500 for plans/drawings, permit fees $3,500, and $5K for the utilities. All in $130K, for rent of just the back unit $1850 a month. There was a property one block away on our street that sold for $580,000, front house had 1 less bedroom and 200sf smaller, and the back unit was an ADU that was 200sf smaller than our current ADU will be. We had another comp with an $575,000 that had an ADU down the street as well from our property, and that puts us 400sf more as a total and two good solid comps if they wanted to just use those comparable properties. We bought for $420,000 last year, so we are already ahead $30K projections after build not including the newer construction we will have and bigger square footage we have as well.

There is a contractor in LA that I had on my podcast, he does all ADU builds and the values come out of their properties due to the comps in the area that they do them in. They have comps throughout LA because that county is very progressive in their approach to housing/ADUs.

@Chen Zhou JADUs are only allowed with owner occupancy.

@Chen Zhou - Thanks for the recommendation. However, appraisal value has nothing to do with your lender. You may have had a great experience with figure.com but implying you got a “good” appraisal from them is fundamentally wrong.  Lenders and appraisers are intentionally disconnected to prevent fraud.