Appraisal for newly built ADU?

Question

Has anyone had experience with how ADUs are appraised? My consideration is to use a BRRRR model to purchase a SFR, then build an ADU/Companion Unit on the property. San Diego is a tough market for cash flow (initially) but adding units seems to be an effective way to overcome the rent ratio. However, I'm unsure how the addition of an ADU would impact the appraised value.

Do you have resources around this topic or know how appraisals are measured on ADUs, in CA, if know? Thanks in advance for input on the topic!

Do you have resources around this topic or know how appraisals are measured on ADUs, in CA, if know?  Thanks in advance for input on the topic!

Christina Labowicz · Answer

@Matthew Forrest this is a new law for us here in CA so there is still some ambiguity in the process.The lenders we use are saying that they will lend based on the new income (as long as the ADUs are permitted) and essentially count the ADUs as normal units.

Tim G. · Answer

Variables are plenty. If you have an SFR and think turning your garage into a studio you now have a duplex you will be bummed when the appraisal doesn't reflect that. The appraisers I've spoken to aren't taking any risks and have zero guidelines yet on approaching ADU's. The appraisal industry needs to catch up still.

Most homes with ADU's are long term holds, so there are few sales comps for appraisers to use and many I've spoken to are hesitant to compare them to anything but other SFR's. Should you build something with separate structures, meters etc in an area where other true multi units exist your odds are better but its all so new so there isn't much data to go by.

The other factor is many builders are treating ADU's like equity cash machines for owners who aren't really investors but like the idea of building something and maybe one day cash flowing. So the prices are going up, but there are ways to keep the costs down if you're willing to manage the project.

Matthew Forrest · Answer

@Christina Labowicz Thanks for the feedback! Do you have an conventional lenders that you recommend that are have experience with properties with ADUs?

Dan H. · Answer

I believe that the ADU adds less than the cost of the ADU in value.  My original protégé has a SFR with detached ADU listed below the cost of the SFR and cost to build the ADU and it has not sold in 3 months.

The SFR (3/1) is worth $420K to $450K by itself.  It has a one BR ADU with class B type construction (granite counters, nice cabinets, indoor laundry, nice flooring).  Only negative about the ADU is that it has a strange entry to the unit.  I believe he is asking $530K.  It is unlikely you can build a detached ADU of this size and quality, not doing the work yourself, for $80K.  I think he will likely only get ~$500K for the property.

I think most investors would be better off buying an RE with existing ADU than constructing their own ADU, except for the knowledge gain.  The financing is also easier (traditional home loan, no need for construction loan, etc.).

Chen Zhou · Answer

@Mark Doty

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...

Christina Labowicz · Answer

Hi @Matthew Forrest and @Jessica Lawrence

CJ Donovan and Caroline Gilligan with First Foundation are 5+ lenders (same company, work independently). If you convert a 4plex into a 5 or 6 unit they can refinance with the additional value or finance a purchase with the ADUs in place.

Rick Dennis with Evergreen Home Loans is my go-to for SFR and 2-4 units. He is familiar with lending with 75% of the ADUs income (must be permitted) to help qualify for the loan.

Let them know I sent you if you call! Feel free to pick their brains.

Best,

Jessica Lawrence · Answer

@Christina Labowicz I'm also interested in knowing what lenders you have worked in CA with for ADU financing. Thanks in advance!

Matthew Forrest · Answer

@Christina Labowicz Do you have any experience with or know what happens to financing when it goes from 4 units to 4 units and two ADUs? Basically I'm curious if lenders are using "6 unit" commercial loans for these properties.

Christina Labowicz · Answer

Hi Mark, a great play we are seeing is investors adding ADUs to 2-4+ units. Specifically with a 2 car garage, carport or storage space that can be converted into another 1-2BR unit. This, for example, turns the duplex into a triplex and increases the income. You buy the duplex at duplex cost, put $100K into ADU conversion, and now that extra unit will sell for retail price, depending on the area that additional unit will be worth $150-$200K.

Our client who has a 4plex up in Carlsbad, for example, can convert carport and storage space by spending $150K (the existing square footage is already there) and now his 4 unit will be a 6 unit and will jump up in price from $1.2Mil to $1.8Mil.

The ADU play is great in the 2-4+ setting because buyers area already in it for the investment rather than their dream home. Not all home owners will put value in owning a unit in the back of their house or worse, sacrifice their garage for one.

Here is a specialist that I reach out to sometimes with questions: ADU Pros (google them because I can't put contact information)

Hope that helps!

Joshua J Cawthorn · Answer

The ADU market is definitely pretty hot in San Diego right now. It's a great way to drive revenue on a SFH, assuming you have the space for it. The recent bills passing have indeed made it easier. However, as a result of the aforementioned, the demand for contractors has gone through the roof. If you don't already have a solid contractor crew in mind with a timeline established, I'd encourage you to work that angle of the plan. It's a pretty long process from design to completed construction, with the appraisal being at least a year away.

Best of luck!

Appraisal for newly built ADU?

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