Selling SFH with ADU -- appraisal?

Question

I'm thinking of building an ADU on my single family house in Sunnyvale. I was wondering if there are any agents or sellers out there who have experience selling houses with permitted ADUs?

The main issue with my 540 square foot house is that it is legal nonconforming use (in a business park). The city won't allow me to expand the main house, but has allowed me to build an 800 square feet ADU.

My plan is to refi after completion of the ADU and house hack. My concern is that because ADUs are such a new thing in California and there are only few houses that have been sold with permitted ADUs in my area, no precedent has been set for the value add of ADUs. The appraiser might just see my ADU as just a "feature" or a "bonus" of the property, rather than as additional square foot of the dwelling, even if my ADU is permitted and 50% larger than my main house. So in essence, I would have 1340 square feet of permitted living space, but only 540 sqft would count towards appraisal purposes.

Any thoughts on this? Lenders out there who have experience appraising permitted ADUs?

Jonathan Pflueger · Answer

@Wesley Yu

I have an ADU on my property (650 sqft) and just completed a refinance. In the appraisal the ADU was given $100,000 in value added. The ADU rents for over $2,200 a month and is obviously worth way more than $100,000 - you could not even re-build it for close to that. It is going to take a while for appraisers to start giving ADU's the value they deserve in markets like the Bay Area.

Sherry Chen · Answer

I agree that it all depends on the appraiser. Do they have experience evaluating ADUs? What are the comps in the area? There are several approaches they can take to evaluate an ADU, including the cost-approach (how much did it cost to build the unit) or even comparing an SFR + ADU to a duplex.

Since ADUs are so new to California, appraisers, lenders, buyers and sellers are still figuring out how to evaluate ADUs. I also agree that ADUs make the most sense for a buy and hold strategy. This provides time for your property to appreciate while in the meantime, you're reaping the benefits of monthly rental income. After about 2-3 years the hope is that there will be more ADU comps in the area and the industry will have a much better understanding of their value. I hope this helps!

Chen Zhou · Answer

@Wesley Yu

Wanted to share with you a great way to tap into the equity built from your ADU.

The problem today: most appraisers used by traditional lenders would give ADU square footage a second-class treatment than the main house (as some of your mentioned above) since there aren't that many comps and they're trying to be conservative.

However, you can consider taking out a HELOC/doing cash-out refi through Figure.com (HELOC up to $250k, Cash-out refi up to $1M). I just took out a 30-year fixed-rate HELOC through Figure from my San Jose property that has an ADU on it. Unlike the other lenders, Figure.com does automatic appraisal (without a human involved) based on public data and they treat ADU square footage the same as the main house square footage. Because their generous appraisal value, I was able to take out all the cash I invested into the ADU (plus some more). The whole process only took 2 weeks and I'm really happy about it. In fact, you can check your property's appraised value by simply filing out the questions on their website. If you have an ADU on your property, it's super easy to find out approximately how much you can take out through just a few clicks with only a soft credit pull...A side note: the founder of Figure.com Mike Cagney also founded Sofi and they got pretty some impressive investors. I think they really did a great job simplifying the process and removing all the inefficiencies in mortgage industry today...

Grace Ronquillo · Answer

@Wesley Yu I am in the process of refinancing my SFR w ADU and it has been a bit of a pain -- the appraiser wanted to change the property type to a duplex instead of SFR w ADU. I think we have it almost sorted out now but the ADU didn't add much value to the appraisal (if at all). Hope you have better luck than I did.

Orlando Perez · Answer

@Grace Ronquillo is your appraiser through the refinance company or is this your own? How exactly are they comparing to a duplex? Are there duplex that have similar lot size? Combined sq. footage similarities? In some cases, I've heard of appraiser only taking the ADU into account for comparable rental income as a factor? I'm curious to what is being done.

Matthew Forrest · Answer

@Wesley Yu I had my property with ADU appraised and it in deed was looked at as a feature or bonus. The ADU square footage was not included in the appraisal because the ADU was not attached.

Chen Zhou · Answer

@Vic Buibought the house in 2018 for $1.1M, invested $200k into the ADU, now appraised by Figure.com at $1.5+M and pulled out $250k.

Vic Bui · Answer

@Chen Zhou that's super interesting! how is your ADU valued with figure.com? would you mind sharing some details how their appraisal approach is compared to others?

Grace Ronquillo · Answer

@Orlando Perez The appraiser was through the lender. They ended up valuing it as a SFH with the ADU as an accessory and not added to the square footage.

Andrew Maxion · Answer

Hi @Wesley Yu,

I specialize in prefab ADUs in the Bay Area and discuss this with many homeowners/investors. Many appraisers follow sales comps analysis when conducting their evaluation, where they check for other SFH with permitted ADUs that are sold in your area. However, with the new state laws that relaxed these restrictions, many homeowners/investors are picking up quickly on this trend and are taking advantage of this opportunity. With that being said, using this as a House Hack/ Buy N Hold is the best strategy for ADUs as you’ll find high cap rates and returns on this investment.

Hope this helps and happy to discuss more!

Selling SFH with ADU -- appraisal?

Most Popular Reply