The debate over the ADU issue was pretty heated at first. Still, with seniors now a growing homeless population and with the construction of 20k units (or retroactively permitted), the issue has all but faded away.
Here’s info that will make you look good to your clients! The original post was 1600 words – my edit is 800, or you can click on the headline below for the entire post!
Building an ADU isn’t a quick project or cheap. So ask yourself questions.
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How Will an ADU Affect Your Property Taxes – Resale Value?
By Jon Healey
Southern Californians are racing to build ADUs, or accessory dwelling units — small, fully equipped homes on the same lot as a larger house.
A common pitch for accessory dwelling units is that building one will add a lot of value to your property.
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How much, though, is a bit of a mystery. And that can pose a problem for homeowners looking to build one. An ADU isn’t just extra square footage — it’s a complete home with its own kitchen, bathroom and utilities.
You can use it to house family members, caregivers, tenants or even yourself if you decide to downsize and rent out your current home.
But here’s where things get tricky. You can’t sell your ADU separately, at least not under current state law; instead, it’s just another improvement on your lot, like your main home.
And when the sale is made, there’s no line in the contract indicating how much the buyer is paying for the ADU.
There’s just one sale amount for the entire property. Appraisers say that they estimate the value of an ADU by comparing sales of houses with an accessory unit to other sales in recent months involving houses of similar size, condition, and location that don’t have ADUs.
But even though ADUs have boomed since the state made it easier to get permits for them in 2017 — only 20,600 ADUs were built in 2022 last year alone — there haven’t been many homes with legal ADUs sold.
That means appraisers don’t have as much data about comparable sales as they typically have to determine the property value.
For example, according to Zillow, 642 houses with about 2,000 square feet of living space sold in Los Angeles over the last three months (Feb-April 2023), but only 106 of the listings included an ADU.
That’s why there are different ways to estimate the value of an ADU — one used by property tax officials, others by lenders and home buyers. And for some homeowners, the former will be higher than the latter.
ADUs and Property Taxes
Adding an ADU to your lot will raise your property tax bill. Tax officials say your house will not be reassessed, but the value of the ADU will be added to the value of the improvements on your lot.
Stephen Whitmore, the public information officer for the L.A. County assessor, says the process of determining the ADU’s value is straight forward.
The county taxes property at a rate of 1%, and local parcel taxes and other levies increase the toll by roughly 0.25%.
So, if you have a house valued at $1 million and spend $200,000 to add an ADU, your annual tax bill will increase by about $2,500, from roughly $12,500 to roughly $15,000.
Loans for an ADU
But what is the value of an ADU that hasn’t been built yet? Lenders need a good estimate because it affects the loan size they’ll be willing to make.
For example, an FHA-backed renovation loan can be up to 97.75% of the value of the property after the ADU is finished, and Fannie Mae supports refinances that cover up to 97% of the post-construction value.
Note: If you are finacing your ADU with HELOC money – List the purposes of the cash-out / loan proceeds simply as “property renovation” versus specifically stating it’s for an ADU that will cause delays.
Other ways to borrow money for an ADU, such as a home equity loan or line of credit, typically set 70% loan-to-value limits. Lenders rely on professional appraisers to estimate the value added by an ADU.
And although Fannie Mae and Freddie Mac have issued guidelines for appraising properties with ADUs, they seem more applicable to existing ADUs than planned ones.
Appraisers typically look at comparable sales when valuing homes and rental income when renting properties out. For ADUs, though, real estate pros say there’s no standard approach, at least not yet.
Anthony Dedousis of Revival Homes, a Los Angeles-based firm that helps homeowners find financing and contractors for ADU projects, said his company takes a big-data approach to overcome the shortage of ADU sales in individual communities.
It collected sales data for single-family homes with ADUs across L.A. County since 2017, then compared it with sales of about 90,000 homes without ADUs.
After controlling for factors such as lot size, main house size and ZIP Code, he said, “We find that the typical ADU adds 24% (about $250,000) to the sale price of a single-family home in L.A. County.”
The company uses this model to project the value of a home after an ADU is completed, which is factored into its lending partner’s calculation of how large a loan to offer.
This approach, Dedousis said, makes ADU projects far more feasible for newer homeowners, whose lack of home equity limits their borrowing.
Mortgage Vintage in Newport Beach offers ADU construction loans financed by investors, not traditional lenders, which gives the company more flexibility in its approach to appraisals.
Still, its appraisers look at the same things that most appraisers do when valuing property comparable sales, construction costs, and potential rental income.
Evolving Approaches
The shortage of data has led to some conservative appraisals of ADUs. For example, in a discussion about ADU values in Los Angeles on a BiggerPockets forum in 2020 and 2021, real estate pros said appraisals were coming in well below the cost of building an ADU.
“Based on conversations I’ve had with loan officers, for every dollar you spend on an ADU, about 55% (55 cents) goes to the appraisal value,” one investor wrote in 2021.
