Duplex with ADU - freddie-mac && fannie-mae insured loans
Rental Property Investor · 94568 · Member since 2021 · 13 posts · 5 votes
Hi Folks -
First time investing in a multi-unit.
I am on a contract and might close in 30 days if everything goes well. It is a duplex plus a garage converted without a permit as a studio according to building code. I spoke with the city and got to know I can get a permit (with the 2020 new ADU rules) without much hassle.
Question: According to my loan officer, Freddie-mac and Fannie-mae loans do not come forward to loan the Multi-unit + adu. Single-family + ADU is more favorable. Is it true? Even if lenders consider to loan, permitted ADU does not come under appraisal value, this is shocking. Is it true?
I think my loan officer does not have enough experience with multi-units or maybe I am too noob to understand.
Edit: I just found some info from https://sf.freddiemac.com/faqs...
No. A Mortgage secured by a 1-unit property with more than one accessory unit is not eligible for purchase by Freddie Mac. Additionally, a 2- to 4-unit property with one or more accessory units is not eligible.
Exactly Greg.
Lately, most of the cities have eased the ADU rules and big-brother (Freddie Mac and Fannie Mae) rules are still uninviting.
There are those that argue that Fannie/Freddie/FHA/etc shouldn't do ANY lending on anything larger than a vanilla single family home.
Anyways, the pragmatic solution is to go all the way. Instead of duplex+ADU, get permits/zoning/etc to make it a real legit triplex.
If your potential buyers in the future cannot get institutional financing, the ADU very well may cause the value of your property to go DOWN, even if you spend $200k on the improvement. Values are dictated by willing and able buyers. It does not mater that people want to pay $XYZ more dollars, they have to be able to. And if most of them can't, because they can't get the loan, then your buyer pool is reduced to cash buyers only. Everyone knows that a non-luxury listing with "cash buyers only" in the MLS description is going to sell for a non-trivial discount. In general, anything reducing the buyer pool is going to harm the value. The fact that buyer-spouse 2 often doesn't want to share walls with neighbors, for example, is why 2-4 unit real estate tends not to appreciate as fast a SFRs - spouse 2 (times a zillion spouse 2s) not wanting the shared wall reduces the size of the buyer pool (incidentally, this slowed appreciation serves to help price:rent ratios).
You have found the actual direction.
In practice, the appraiser/lender may not ever look to determine if a unit is an ADU. This depends on factors such as number of multiplexes in the vicinity, how cohesive the new unit looks (does it look to be part of the original construction), etc. @Justin R. may be able to provide more insight.
As for the appraisal associated with ADUs, they are all over the place but typically do not come in as high as the hands off ADU addition costs and often way below the hands off ADU addition costs. Make sure you can find comps to determine a value. In the absence of comps, recognize there is not much clue as to how it will appraise.
As for an unpermitted ADU, I suspect that if the appraiser can easily note that it is unpermitted it will not receive much of an appraised value.
Good luck
Thanks for the info Dan.
It is surprising, in some cities (Oakland, Berkeley) ADU permits themselves cost 60k or more plus construction cost and it does go into worthless if the appraiser doesn't consider it in the property value. Most of the cities/towns ease the ADU restrictions lately and owners are leveraging it. How do the properties get sold with an ADU at a market price?
My worry is more toward the time when I sell the property.
Thanks for the info Dan.
It is surprising, in some cities (Oakland, Berkeley) ADU permits themselves cost 60k or more plus construction cost and it does go into worthless if the appraiser doesn't consider it in the property value. Most of the cities/towns ease the ADU restrictions lately and owners are leveraging it. How do the properties get sold with an ADU at a market price?
My worry is more toward the time when I sell the property.
My view is that you cannot find comps of properties that can be used to justify the value that makes it worth it to you, then do not proceed. You could start with a huge negative position. Too many investors have added ADUs without realizing the value of the ADU as set by an appraiser using comps. Some ADU providers compound this problem by indicating a value based on income (rent). For less than 5 units, value is set by comps and not based on income.
Then recognize the financing challenges of ADUs and their level of effort. I personally think an ADU addition rivals a BRRRR in effort but produces a return that is far worse. Our BRRRRs all have infinite return due to investment being $0 (all investment extracted).
If the ADU is going to start with a large negative position, it could consume years of cash flow just to recover the negative position. This would not be a good investment compared to other options.
Good luck
Thanks again Dan.
As per my loan agent, even if get permitted ADU (now it becomes Duplex+ADU) I might not get the FHA loan. This is a surprise to me.
Here is my plan,
My loan officer (he is experienced) says it is not possible. His lender pool doesn't give loans to a duplex(multi-unit)+ADU.
I just wonder how come all these multi-units in SF, LA, Oakland cities with ADUs get a loan. If my loan agent is correct, how are others doing? I have 15 days to decide and I am still stuck at exploring loan options.
In some forums most of the investors got FHA loans in the above scenario, I am confused. Can someone guide me?
I just don't want to trap in hardmoney loans despite having a permitted ADU.
Some good info from the previous posts.
https://www.biggerpockets.com/...
Can someone please explain the original intent of this language? I doubt the intent was to discourage legal adus from built. Legal adus have been around for years, so why is it taking so long for Freddie Mac to issue clarifying guidance?
Can someone please explain the original intent of this language? I doubt the intent was to discourage legal adus from built. Legal adus have been around for years, so why is it taking so long for Freddie Mac to issue clarifying guidance?
Exactly Greg.
Lately, most of the cities have eased the ADU rules and big-brother (Freddie Mac and Fannie Mae) rules are still uninviting.
Exactly Greg.
Lately, most of the cities have eased the ADU rules and big-brother (Freddie Mac and Fannie Mae) rules are still uninviting.
There are those that argue that Fannie/Freddie/FHA/etc shouldn't do ANY lending on anything larger than a vanilla single family home.
Anyways, the pragmatic solution is to go all the way. Instead of duplex+ADU, get permits/zoning/etc to make it a real legit triplex.
If your potential buyers in the future cannot get institutional financing, the ADU very well may cause the value of your property to go DOWN, even if you spend $200k on the improvement. Values are dictated by willing and able buyers. It does not mater that people want to pay $XYZ more dollars, they have to be able to. And if most of them can't, because they can't get the loan, then your buyer pool is reduced to cash buyers only. Everyone knows that a non-luxury listing with "cash buyers only" in the MLS description is going to sell for a non-trivial discount. In general, anything reducing the buyer pool is going to harm the value. The fact that buyer-spouse 2 often doesn't want to share walls with neighbors, for example, is why 2-4 unit real estate tends not to appreciate as fast a SFRs - spouse 2 (times a zillion spouse 2s) not wanting the shared wall reduces the size of the buyer pool (incidentally, this slowed appreciation serves to help price:rent ratios).
@Chris Mason knows more about lending rules than I ever will. He is not wrong on the rules.
What I can say is that people are getting traditional (f/f) financing on multiplexes with ADU in areas where the ADU is not an obvious ADU. The reason is that in these cases no one checks. I do not want to get into too much detail on a public forum, but properties are purchased regularly with F/F financing that does not meet some F/F rule/guideline. Whether this is an ADU added to a multiplex, 2 ADUs (ADU plus JADU) with a SFH, non-permitted units, etc. A key is that it cannot be obvious. Quality of work, integrated look, etc. is important. No loan that I am aware of has requested permits to verify if something is permitted, including entire units, if the work looks like it was permitted (this may change in the future). Similarly, they do not ask if a unit is an ADU or a non-ADU unit (again this may change).
Another thing to keep in mind, just because currently you can get F/F financing where not allowed by the rules does not imply in the future they are not much more diligent in verifying things and enforce the rules when you go to sell. Recognize the risk.
Basically I am saying there is the rules and then there is what is actually occurring. they do not always match. But just because the rules are not currently being enforced in all cases does not mean the rules will not be enforced in the future.
Good luck
Dear all, thank you for the comments - I have been investing in a few ADUs in Inland Empire for some time and have come to understand that ADUs are essentially a cash flow play - you won't be able to get the money out in refinancing, and also the ADU income won't count towards debt-to-income calculations when buying another property. Chris Mason if you have any comments on this last part it would be much appreciated.
One thing though - given the way California legislation is going, I wouldn't be surprised if in a few years ADUs become more established, allowing appraisers to include them more fully. This might be happening as we speak with the new SB 9 legislation making the rounds, I wonder if ADUs could become full duplexes if and when this passes. Regardless of the status of SB 9, building or buying an ADU is a regulatory play as well as a cash flow play.