How to estimate the value of an ADU?

Question

Hi everyone! Looking for some insight on how to estimate the ARV of an ADU in Tulsa, Oklahoma.

The main house is easy to comp, but ADU’s are uncommon in the area. I’m in the process of creating the scope and rehab budget, which I’m hung up on because of the uncertainty with the ARV. Thus, looking for a rough estimate for ADU’s?

Brad S. · Answer

As an Appraiser, it's always better to have market data tell me where the value is. I would try and do a paired sales analysis, to analyze the potential value of the ADU. Basically, it's finding 2 relatively similar recent sales, one which has an ADU and the other without, adjusting both sales for differences, except for the ADU, and analyze the difference. In the best possible world, you'd have multiple paired sales, which differ only in the ADU.

Now, you said ADU's are uncommon in the area. Then, I would expand the search to adjacent neighborhoods (or further, if need be) and adjust for any neighborhood differences, to see what the difference is with an ADU. Also, you want to search for other terms, like guest house, bonus room, mother-in-law suite, separate living quarters, etc. You can also look further back in time, beyond 12 months, and adjust for those market conditions, at the time of those sales.

Another technique is to use the depreciated cost method. Basically, estimating the cost to build the ADU and applying any appropriate depreciation. The problem with this, is cost doesn't necessarily equal market value.

It is difficult to assess the market value of an ADU these days. Many times, I see buyers willing to pay a similar value for ADU gla, as for the main gla. That's not the same as price/sf. So, if I adjust my comps at $100/sf for the main gla, then I might adjust the ADU also at $100/sf. But, that adjustment differs from Subject to Subject, depending on the specific market. Maybe you can talk to a local appraiser or 2 and ask their opinion of gla adjustment they typically use for your Subject neighborhood and a similar property as your Subject. Then you can multiply that by the ADU gla and have that as an idea.

So, a crude, and by no means accurate, technique may be to just add the main gla together with the ADU gla and find recent neighborhood sales with similar total gla, and mentally adjust those downward somewhat, to account for any market difference for the detached gla (ADU). That may give you a general idea to work with.

Now, as an investor, I would talk to local agents, especially any that have sold properties with ADUs, and ask them their opinion. They will have first hand knowledge of the buyers and what they liked or didn't like about them, what they valued, etc. You may also get some info you can use to let the appraiser know, which may help them value the ADU.

Brian Larson · Answer

@Chris Seveney is right.

My personal experience in San Jose, California was that we spent about $300K to build a detached ADU over a garage and that the appraiser only added $150K value to the appraisalal.  You shouldn't build an ADU for the ARV.  It is all about reducing your overall monthly costs and tapping long-term appreciation.  ARVs are not good for ADUs.  However, if you build in a high-demand area, you should come out ahead down the road.

Brigitte McAuliff · Answer

@Brian Larson

Great info! I always love hearing California numbers haha.. a little different than Oklahoma 😅 but sounds like you’ve utilized your situation well. However,  it’s still frustrating getting half the return.

Nonetheless, it’s another data point and I appreciate all the info.

Chris Seveney · Answer

@Brigitte McAuliff

If it’s a single family house it will be comped and appraised as another single family house. They will add monies for the structure but remember single family house appraisals have nothing to do with the potential rental income they bring in

Cara Sides · Answer

Thanks Lara! Feel free to give me a call on what area and type of ADU. I’ve seen appraisers give $30,000-$40,000 on converted detached garages in the Midtown area. (Around 450 sq ft.)

Lara White · Answer

Hi @Brigitte McAuliff  I would check with a local investor agent.  I'm not in Tulsa, but I bet @Cara Sides could help you!

Osazee Edebiri · Answer

Talk to the investor agents in the area they should have an idea. What I would do is look for flips and see homes that didn't have ADU's and then see how much value was added if one was added on to the flip. If their are not many, one thing you can do is tell the appraiser how much you spent on your ADU, that would typically work to get the value over at least what you spent.

Brigitte McAuliff · Answer

@Chris Seveney

Understood. Thanks for the responses!

I think I’m being conservative with 1/3 the main house $/sqft for an ADU, but I’ve heard 1/2 or even 70% of it from another appraisal.

I’ll try and remember to post back when I receive the appraisal in September as to how much they valued our ADU.

Chris Seveney · Answer

I do not. If there are any appraisers seeing this maybe they can shed some light. Here on east coast they appraise finished basements less, with this being similar (but better) because it has natural lighting. It definitely has value just not sure the #.

Brian Larson · Answer

Ahhh.  Sorry.  If it is an existing ADU and just needs updates; I'd go for it.  In the Bay Area, I always advise new real estate clients to look for these "value add" situations with ADUs.

The home was appraised for $1.28M.  Again, without the ADU it would have probably still appraised for a little over $1M so the cash-on-cash return was not great because it was a ground-up new structure.  ADU conversions are much more cost-effective.  Plus, you can probably do it without permits for more savings.

Our ADU was a permitted project.  The apartment is 624 SQFT 1-bedroom and the 2-car garage below is about 576 SQFT.  Again, it costs about $300K and was appraised for only about $150K in increased value.  The apartment rents for $2200 a month now.

The real savings for us came when we refinanced to a lower interest rate (3%) and pulled out more money, which we made further investments with.  We now have a better 30-year fixed rate and when you net out the rents, we pay over $1000K less on our monthly expenses.  Keep in mind, that this is our primary residence too.  Given the higher interest rates and if this is just a rental, the numbers might not make sense still.  Use the BP calculators and run some numbers.