CA ADU House Hack Deal Analysis

[Christopher Beloud]

Hey Guys! 
looking for some wise counsel.

My wife and I are first time home buyers. Our goal is to create a househack out of a home that needs renovations and has capability of ADU (with new CA laws in place, the city we are buying in is very ADU friendly and this lot is zoned R2)

We found a home listed at 619k in a great area. It is a 1400 sqft 3 bed 2 bath on 7500 sq foot lot with detached garage. The house to the naked eye before inspection needs cosmetic repairs/modernizing and ADU addition or conversion to complete the entirety of our plan.

Our agent who's experienced with flipping and familiar with the area stated we should offer 550k and estimates 75k in rehab. Comps ran at 775k ARV and possibly 820-850k w/ADU, ARV.

We ended up Offering $565,000 w/ 15,000 seller closing cost credit (we did not want to go above 565). We are using a FHA 203k Rehab Loan (I know the headaches that many have deal with these, but luckily our agent and lender deal with these often) For our situation this is the best way for us to fund it. We are approved conservatively for $700,000 total (House +Renovations).

The Sellers Counter offered at 595k (did not counter the closing credit) but stated they will not pay for termite repairs. My agent suggests if we are still interested countering at $575,000 and accept that we will pay for any termite. Home would still be contingent on inspection (Extend of termite repair and other fixes.) loan and appraisal. 

If accepted at $575,000 we'd have $125,000 for repair and renovation.

Our end goal is wed have a renovated home with newly converted adu, live in the adu, rent the house and the rent estimate between 2500-3000 a month based on rent comps (most homes unrenovated pulling that much rent) in the area. Initially our PITI would be approx 4200 which we can cover without renters if needed, we understand until refinance we will have to pay money toward the mortgage even while house hacking . After refinance our PITI is quoted at 2900 based on 725k ARV (which was an old comp estimated by my agent before he checked officially) so PITI could be even less if appraised between 775-850k. With our PITI between 2700-2900, our rent would cover the entire mortgage and we would live for free. Once we move out of the house hack the adu would bring approx 1500-2000 in rent leaving our gross rent income at $4500-5000.


LONG STORY SHORT, If we get an accepted offer at 575,000 and the termite repairs don't dip to far into our renovation budget, does this deal throw any redflags? My concern is at 575 instead of 565 we are taking away 10,000 dollars from the repair budget, which I am well aware by throwing the ADU into the mix leaves us with a tight budget, but we are hopeful.

Remember we are FIRST TIME HOMEBUYERS, which leaves us nervous/excited and just want some wise counsel from the BP community.

Thank you guys for your input!