Last week, an agent asked me how much value a 500 sq ft ADU would add to a home, and I was so wrong with my guess that I had to blog about it.
But first, I want to talk about my grandma’s home in Hitchcock, South Dakota (population: 110) – to illustrate a key point.
When I visited her home as a child in the 1960s and 1970s, the town’s population was about 550, and it seemed like paradise.
It was a perfect grandma home, always full of family, love, laughter, and holiday cheer, and it was adjacent to several large farms and nearby ponds, lakes, woods, and haystacks that provided year-round fun.
We hunted, fished, rode minibikes, drove snowmobiles, ice skated, drove tractors, jumped in the hay, antagonized cows, and had every necessary ingredient (like all farm kids) to make an unlimited supply of gunpowder (until my brother nearly burned his arm off – which was just a “learning lesson” back then; today it would be national news and a reason for politicians to outlaw saltpeter).
My grandma also kept the house fully stocked with an unlimited supply of cookies, candy, homemade caramels (her specialty), and a giant vat of bacon grease that sat on the stove, ensuring every food item could be appropriately fried.
The home did have its drawbacks, though, as it only had one bathroom, which was problematic given that there were often more than 20 people in the home.
Fortunately, though, there was a fancy “two-seater” (true story) outhouse right outside that we kids took advantage of often.
The other issue was the smell from both the nearby farms and the sulfur-laced tap water that smelled just like the farms.
The single bathroom always smelled awful, and you never knew whether it was due to the water, the nearby farms, or the previous occupant.
Anyway – when my grandma died in the early 1990s, the town’s population had fallen to about 150 people (from 550).
Even though the house was still perfectly functional and charming, there were no buyers for it, so they ultimately decided to tear it down.
And this is the point of my entire story: no matter how nice or how beautiful of an ADU someone might have added to that home, it would have added NO value at all.
That is the case for all of the homes in the shrinking farm towns across the Midwest, where homes sell for less than the cost of a Ford truck or sit vacant with no buyers at all.
And this is to make another point: how much value an ADU adds depends entirely on the local market.
How Much Value Does an ADU Add to a Home?
Last week, an agent asked me how much value a 500 sq ft ADU would add in a neighborhood with smallish homes in the $850,000 range.
My estimate, based on years of experience, was approximately $100,000 – but I had our Appraisal Team conduct a thorough analysis by reviewing comparable sales with ADUs dating back three years.
As I mentioned above, I was ridiculously wrong. The ADU will add at least $200,000 of value in that particular area, as it will command substantial rent, and there is tremendous demand for homes with ADUs.
Our Appraisal Team then did additional analyses across numerous other high-end and low-end areas.
In some of the high-end areas, an appealing ADU can add as much as $1 million to the value of a home (which also shocked me).
In mid-range areas (median home price in the $500,000+ range), the ADUs almost always pay for themselves.
In lower-end areas (under $500,000), ADUs don’t always pay for themselves.
So – what did I learn?
- In mid-to-high-end urban and suburban areas with high populations and strong rents, ADUs almost always seem to pay for themselves and then some (assuming they don’t impair the lot utility or the appeal of the home too much).
- ADUs seem to be much more desirable and accepted nowadays compared the “olden days” when I appraised in the early 1990s (which explains why I was so wrong).
- In shrinking farm towns that smell like sulfur (or worse), ADUs are worthless.
Lastly – if anyone has a client considering an ADU, our appraisal team would be more than happy to estimate the value it will add.
