ADU Financing: The Fundamentals of Finding Finance Options

Guess how many Accessory Dwelling Unit applicants complete their project?

I was shocked after I reviewed the last 1448 Accessory Dwelling Unit (ADU) applications in San Francisco.

You'll never guess how many were completed.

ONLY 252!

IMAGINE that.

75% of the people who went through so much trouble ended up with nothing to show for it. NO ADU built at all.

The reason?

I can’t speak for everyone but based on what I do know as a real estate and finance guy, they most likely didn’t get the ADU financing they needed.

Many people begin accessory dwelling unit (ADU) projects and are unable to complete them.

Why? What usually goes wrong?

You guessed it.

A lack of financing for their ADU

Securing financing for your ADU is a beast if you don’t know what you need, want, or even where to find it.

It’s important to know what you need for you to find it. Each project is unique therefore financing options will be unique to you and your circumstances.

And these 4 fundamentals that I’ll share with you in just a minute will help you find financing for your ADU project.

But first, here’s what you want to know…

Running out of money will stop you from completing your Accessory Dwelling Unit (ADU).

Nowadays there are plenty of lenders who will loan you money if you’ll pay enough for it Access to capital has never been greater.

Good loans are cheap, easy to understand, and have a long list of requirements.

Bad loans can be expensive, confusing, filled with fees, and have super simple one-page applications.

Not all lenders and loan requests value the same things. All lenders have different application questions and qualifications. To help you find the best possible loan for you and your unique situation you need to find the right lender for you.

Bottom line?

Without financing for your Accessory Dwelling Unit (ADU) you may never get your project completed.

Securing financing is a beast. Tackle that beast by following the ADU financing fundamentals outlined below.

ADU Financing Guide:

How to Get The Financing You Need for your Accessory Dwelling Unit

Homeowners have more choice than ever when it comes to financing an ADU but the reality is… it isn’t a walk in the park.

Here are the 4 things you need to keep in mind.

1- Understanding the Lender’s Requirements

2- Solidify your loan request

3- Have a complete packet ready to submit

4- Persistence is key

Follow these 4 fundamental rules for seeking financing for your Accessory Dwelling Unit.

1- Understanding the Lender’s Requirements

Every lender has a different checklist of requirements. Lenders have different weight scales and boxes they are trying to determine if you fit into. Big banks and community-based banks value different things.

Alternative lenders and traditional lending don’t look at the same things equally. Thankfully more and more lenders are offering financing solutions for Accessory Dwelling Units (ADUs).

All lenders have the same goal. They want to be paid back.

To determine your ability to pay back the requested loan, enders start by looking at your credit history, related experience, and professional background. This initial information will allow them to funnel you in the right direction. Either they can, can’t, or maybe can finance you.

But since you are reading this fundamental guide to finding financing for your Accessory Dwelling Unit you will be able to...

Recognize Good Loans and Bad Loans.

In the world of ADU Financing, there are expensive loans and cheap loans.

Some lenders may need a larger down payment to offset risk and increase your skin in the game. Other lenders might be willing to loan you more money in exchange for a higher interest rate. Thousands of factors come into play when it comes to securing financing.

Access to capital has never been greater. Interest rates on borrowing money and on saving money have never been lower as well. With more players entering the lending game it’s more important than ever to evaluate your options.

Finding the right financing starts by understanding your lender’s requirements. Your first choice might not work out. It usually does not. Finding the right loan is a numbers game. You need to talk to a bunch of lenders to see which is right for you.

Nothing like having multiple quotes and options for you to decide which is best for you.

Your needs are unique and so are your lenders. In case the first lender doesn't work out. You need to start looking elsewhere. You want to do so before entering the application process and wasting any more energy.

It’s your job to make sure the lender understands you and your loan request.

2- Solidify your loan request

When I first got started in the finance world I was helping someone apply for a $10,000 loan. As a newbie, I took in the information from the customer and submitted an application. The application was declined within minutes and I had to deliver the news. Frustrated and upset the customer stormed off.

A few weeks later the same person comes in with the same request to apply for a $10,000 loan. But this time it wasn’t me that helped him. My coworker, an experienced employee, assisted the customer. Within minutes my coworker got this customer approved for the $10,000 they needed.

What did my coworker do that I didn’t do?

Well, my coworker had been doing her job for a long time and knew what questions to ask. She asked the right questions. She knew what she was doing.

Turns out the customer wanted the $10,000 to buy a car. The customer needed a car loan!

When I was helping the customer, I submitted an application for a personal loan. Declined for a $10,000 unsecured loan but approved for a $10,000 auto loan.

The customer got the loan he needed.

My coworker was able to solidify his loan request and understand exactly what the money for.

A clear example of not all lenders are created equally.

Every lender needs to understand what are the customers’ needs. Why are they applying for the loan?

Like the story of someone looking to buy a car on a credit card or someone looking to get a line of credit for a one-time buy.

Without communicating your needs and wants it will be impossible to find the right loan for you. A lender is going to submit an application based on what you ask them to do.

You need to communicate what you will be using the money for. How you will be using the money. Also, where and when will you be using the money.

Be prepared to provide supplementary information. Documents such as a resume, business plan, scope of work, project schedule, and summary.

The information you provide will help the lender better understand your loan request. The goal is for your lender to understand the entire picture of you and your loan request. To do so you must provide them with everything they ask for and more!

3- Have a complete packet ready to submit

Get the lender everything they need and more upfront.

Make it easy for the lender to come to a loan decision. Start by reducing the amount of back and forth requests for more documents.

When you do this… You enhance your likelihood of getting a loan decision. It’s your job to help the lender understand your loan request and your qualifications. Get them everything they need to understand the entire picture of your story.

Insider tip: A best practice for finding financing is to organize all your financials in one place.

Tax documents, bank statements, and other financials should live in one place. Make it easy for you to access and send at a moment’s notice. With Google Drive and DropBox sending documents has never been easier.

Good lenders are busy and for them to take you seriously, you must value their time. At the end of the day, you want to know if you can or cannot get approved for a loan by this lender. The goal is to get to a decision without dragging the process on. Move on to another lender if you need to.

4- Persistence is key.

A traditional lender may not approve your loan request but an alternative lender may. Not all lenders use the same weight scale. Criteria, scorecards, and requirements vary. Lender and loan programs all vary. Find which lender and loan programs are the perfect fit for you.

Taking no for an answer has never been my cup of tea. These days it’s more important to be first than accurate. The days of taking information at face value and expecting them to be true have come and gone.

You’d like to but in all honesty, you can’t trust all you read and here online.

To know that something is a fact, you need to do your research. After you talk to enough lenders yourself you will understand what your real options are.

Many times it’s a numbers game. The more lenders you talk to, the closer you get to finding the right lender.

The story of how I refinanced my first ADU project was like a horror movie with a happy ending. It's about trial and error. It's a numbers game. You need to get a lot of NOs before you get that YES. I interviewed 30 different lenders and submitted 5 applications.

Because I did all this, I got to be choosy. It’s nice to have choices. The choice of which lender I wanted to go with was my choice. Not to mention I applied the same principles to get the best appraisal possible. Persistence is key.

Let’s recap… If you want your ADU financing to go through without a hiccup, keep these 4 Accessory Dwelling Unit (ADU) Financing Fundamentals in mind.

1- Understanding the Lender’s Requirements

2- Solidify your loan request

3- Have a complete packet ready to submit

4- Persistence is key

After and only after can you determine what financing solutions are available to you.

Then it’ll be much easier to figure out what you can build on your property and how much it’s going to cost.

Finding ADU financing is one of the many hurdles in the path of homeowners.