ADU on 4 unit CA

[Tony Cavalli]

Hey fellow investors! Has anyone completed and re-appraised/refi'd a property that they added an ADU on a small multifamily (2-4 units) in California? I have a deal where I want to do this but I'm concerned about how the bank and appraisal company will appraise the property. Based on GRM/Cap rate it should significantly increase the value of the property BUT its not a commercial property. I'm concerned they will lean more on the neighborhood sale comps vs the income because its a 4 unit (residential). Hmmmmm....

[Brad S.]

My guess is very few,  if any appraisers have come across this situation yet. I haven't (I am an appraiser). If I were to get this type of assignment, I would either turn it down or ask for a high fee, for the extra research and analysis, and potentially additional liability, involved.

There are 2 distinct issues here: 
#1) How the lender will view it and underwrite it.
and
#2) How the appraiser will look at it and approach the valuation problem.
And those viewpoints are not always aligned. In other words, just because a lender tells me how they would like me to view or value a property, doesn't mean I will agree, that I CAN do it that way. A big part of my job is to not create a misleading report.

As an appraiser, we are taught to look at the market, which reflects the value of a property. We look for market evidence to hint at what the value should be. WE don't set the value, the MARKET does. So, the proper question for the appraiser should be: How would the market (typical buyer and seller) view this property?

My guess is they would see it similarly as you, as 5 legally rentable units, or a 5-unit property. If the 5-units on your property are; legally permissible, physically possible, financially feasible, and maximally productive. Then they would most likely reflect the 5-unit use as the property's highest and best use.

It would also seem reasonable to assume that today's buyer/s would look at it as a 5-unit property and be willing to pay for it as such. Therefore, my approach would most likely be to value it as a 5-unit property, against similar 5+ unit properties, utilizing the sales-comparison, the income approach and possibly the cost approach - as a commercial property (5+ units). The Lender can decide to look at it anyway they please, but it won't affect how I approach it.