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Valuing An In-Law Unit Or An ADU (Accessory Dwelling Unit)

a brown wooden in-law unit or ADU in a backyard with green grassI touched on this last year a few times but am getting questions again because so many people have built Accessory Dwelling Units (ADUs) as a result of the COVID crisis.

HOW MUCH IS MY ADU WORTH?

An ADU or in-law or granny flat or outside cottage (or whatever you want to call it) is a habitable unit that is separate from the primary dwelling.

And its value depends entirely on the prevalence of comparable sales in the area with similar ADUs.

One of the many advantages of so many ADUs getting built right now is that it will make it easier to find valid comps that will in turn support higher values.

ADUs are so popular now that many builders are including them within the footprints of primary residences and marketing them as “junior ADUs.”

And finally, because of the overall shortage of affordable housing, many jurisdictions are making the permitting process for new and existing ADU’s much easier – so we should expect the ADU trend to continue.

Here is a 2019 article from Curbed discussing this.

ADUs CAN’T BE ADDED TO PRIMARY DWELLING SQUARE FOOTAGE

One mistake we often see people make is combining ADU and primary dwelling square footage and then comparing the total square footage to single dwellings with similar square footages.

This usually results in inflated values. For example, a 3,000 square foot (sf) home with a 1,000 sf ADU will usually be worth less than a 4,000 sf home with no ADU (although it will depend on the market).

More importantly, a 4,000 sf home should not be used as a comp for a 3,000 sf home with a 1,000 sf ADU.

In this blog, I told a story about a Realtor who overestimated the value of his home by $500,000 because he combined his ADU and primary dwelling square footages and thus used the wrong comparable sales.

ATTACHED/DETACHED/ACCESS TO MAIN DWELLING

It makes no difference if an ADU is attached to or detached from the main dwelling.

But, if an ADU is attached to the main dwelling and there is direct access to it via stairs or a hallway, it is often not considered an ADU.

If an ADU is accessible to the main dwelling, then that is a situation where the ADU square footage can be added to the main dwelling square footage.

And we often recommend it because it allows appraisers to employ larger and higher-end comparable sales.

PERMITTED OR UNPERMITTED UNITS

Units built with permits in a workmanlike manner will obviously command a much higher value than units built without permits.

Units without permits will in fact often be deemed “storage” and given minimal value, irrespective of the cost to build them (with some exceptions – discussed below).

ITS ALL ABOUT THE COMPARABLE SALES (NOT COST)

The value of a permitted ADU comes down entirely to comparable sales and to marketability in a particular neighborhood (and not on the cost of the unit unfortunately).

If there is strong demand for ADUs in a particular area and there are comparable sales of homes with similar ADUs, we sometimes see them giving significant value – in the six-figure range.

More often than not, however, comparable sales with ADUs are non-existent or simply inadequate.

When that is the case, appraisers often estimate the value of an ADU very conservatively – in the $25,000 to $50,000 range.

If they are not conservative, underwriters will kick back the appraisal and demand additional comparable sales that usually do not exist.

If a unit is not permitted, a similar analysis applies.

If unpermitted units are typical for the area and highly marketable (like we see in the City of San Francisco for example), then appraisers will give them significant value.

As mentioned above, however, it is far more common for appraisers to give unpermitted units minimal value b/c comparable sales with unpermitted units that support higher values usually don’t exist.

In addition, many underwriters refuse to allow appraisers to give any value to unpermitted space, irrespective of market conditions – so buyers should definitely beware. 

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Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167