Los Angeles ADU valuations explained

[Jonathan Taylor]

Good Afternoon Local LA BP folks,

I know this has been a hot topic among the local LA investors and as a mortgage broker I was very curious on how ADUs are actually valued as I keep hearing different sides to this. I spent a good amount of hours talking to local LA residential appraisers to get an idea. Bottom line is, ADUs are NOT valued the same as an additional unit nor is the rental income considered in their valuations. The best example I found was if you have an SFR with a pool and an SFR without a pool. The SFR with a pool is given maybe 20k-30k more in value. Same concept for ADUs. Its a value add line item and assigned values ranging from 20-50k. Now the appraisers I spoke to did not speak in absolutes as they would constantly say 'probably around' and 'depends on the comps of recently sold in the area' to justify the property values assigned to ADUs.

Let me know your thoughts but this seems to stick as I spoke to 5 local LA  residential appraisers, all consistently reiterating the above comments. To be clear, this is info about Los Angeles county ADUs only, I did not speak to any appraiser outside of this county. 

[Aaron Norris]

@Erin O'Connor Smith, this is amazing. Do some homework on the number of projects you can fit on the site. I had an investor call with a similar project that decided to install three ADU units on an existing triplex project. But, he decided to build smaller units over new garages he built because the site was larger. He simultaneously created three more units and also three new parking garages going vertical. The units over the garages were smaller, and I believe the play was targeting someone that would maybe not have cars. Then again, he could charge separately for the garage and they could go with the units up top or the existing. If you've got an architect, definitely play. That is a nice-sized lot and you may have even more options than you realize.

[Rick Albert]

For what it's worth I am in the process of my refinance and the appraiser gave my studio ADU $45,000 in value. I'm in the northern end of the San Fernando Valley. This is the highest I've seen from an appraiser for a studio ADU in the SFV.

[Tarita Patterson]

@Matthew Forrest Can you provide the contact information for both appraisers please?

[Jonathan Taylor]

@Erin O'Connor Smith Thats a great project. Just remember that if you need financing the appraisals i have seen for ADU value add projects are not there yet. I see @Rick Albert got the higher end of ADUs value but ground up is 180-230 a square foot based on the ground up builders I know in LA. That means a ROUGH estimate of 200-300k for your build. With a return of 30,000/yr (based on $2500/month rent) you are looking at a 10-15% return. This is rough but if you have the funds thats a good return.

[Rick Albert]

I agree with @Jonathan Taylor, in the big scheme of things it is a good return. Once there are more sales it will certainly help. I had to provide ADU comps to the appraiser because he didn't realize that agents advertise the homes with the combined square footage (both the house and the ADU) so he thought they were out of the "square footage allowances" to count.

[Steven Nguyen]

Hello,

I am the process of building an 1000 sq ft ADU in my lake forest property for around 275k in Lake Forest, CA. Based on conversations I've had with loan officers, for every dollar you spend on an ADU, about 55% (55 cents) goes to the appraisal value. For a 275k ADU, I would expect 150k additional at best. Personally, ADUs build great cash flow and hits the coveted "1% rule" aka 275k ADU rents for around 2800-3000/month which is impossible in CA. Any additional forced appreciation is a cherry on top for me. I was looking at TurnKey in Memphis, TN for the 1% rule, but pivoted back to CA once I learned more about ADUs.

I hope this adds value.  Thank you.

[Dennis Maynard]

Originally posted by @Erin O'Connor Smith:

@Rick Albert @Aaron Norris @Jonathan Taylor @Dennis Maynard @Will Barnard

I'm considering building an ADU on my half-acre triplex rental property in Glassell Park (LA). There are three SF homes with 0% vacancy at top-market rents and I could easily fit a 1200 sf ADU at the top of the hillside lot which has spectacular views. No issues with parking. This has been a buy and hold property for me since 2004, and the equity/cash flow is considerable. I could get $2500-$3000 per month for this ADU so 1% rule is met. I'm not worried about appraisals (buy and hold) and I have an architect in the family. Feels like a no-brainer yes to me since I own the dirt... but I've never dealt with new construction or modular homes. Anything else I should think about in my deal analysis or funding?

Hi Erin,

Great question. Sounds like you are in a great position on this one.  I would say do an analysis between your 1200 sf return vs costs.  I'm a big proponent that bigger isn't always better, great design is always better.  I would also get multiple bids and concept design reviews (modular - different types, and new construction).  [Solicitation Removed by Moderators]