Need a recommendation for lenders that work with ADU's

[Mayra B.]

Hello,

My husband and I are looking to buy a SFH in SOCAL with a big lot (>7,000 sq ft.) to build ADU unit in the back yard and we would live in the SFH.

Does any one in this forum could recommend any Lenders that specialize in ADU's?

We are looking to get approved for a home loan.

Any suggestions?

Thank you,

Mayra B

[Dan H.]

Originally posted by @Steven Nguyen:

I just bought a house in Lake Forest on a big lot to build an ADU. I put 10% down on the SFH and will use a HELOC to pay for the ADU in full (~280k for a 1000 sq ft 2 bed/ 2 bath). As mentioned in the forum, there are loans that can pay for the main house + cost of the ADU; however, this loan takes 90 days to close escrow. In this hot market, most sellers will not wait 90 days, but would rather do the standard 21-30 day close of escrow. I'd recommend purchasing the SFH on a large lot first, then worry about the financing of the ADU later. If you do not have a HELOC, you can use a margin loan on your stock portfolio if it is > 500k. Worse case, you can do hard money to build the ADU, refinance your house once the ADU is completed, and use that money to pay off the hard money.

>Worse case, you can do hard money to build the ADU, refinance your house once the ADU is completed, and use that money to pay off the hard money.

I would be leery of this approach for 2 reasons: 1) ADU appraisals consistently come in at less than the hands off cost. For example your $280k ADU will appraise for significantly less than the $280k. 2) typical cash out REFIs are at 75% LTV. You may get 80%, but it will cost in loan terms.

To show the issue, let's use the appraisal provides 50% of your cost as the value to the ADU. The appraisal would value the ADU in this example at $140k. The 75% LTV implies the loan would produce $105k. $175k trapped in the ADU. Some investors would not have that amount to trap in the ADU. Most successful RE investors would not want to trap that amount for the expected cash flow of an ADU. If I have $175k trapped, I would want somewhere over $1.75k/month (preferably over $2k) true cash flow (after all expenses including conservative vacancy, maintenance/cap ex, and miscellaneous). You can see the challenge in the numbers.