It’s been a while since I brought in my friend Jay Vorhees of JVM Lending. Let’s get back to him, with a blog he shared recently that got me thinking about everybody considering doing an in-law unit or ADU, and whether you know how much value that unit adds to the overall price of a home? Read on!
Realtor misses value of his own home by $500,000
Years ago, I was refinancing a realtor who insisted his remodeled 3,700 square foot home was worth at least $1.5 million. I was, therefore, shocked to see the appraisal come in under $1 million. I reviewed the appraisal and quickly realized why it was so low. The “main house” was only 2,300 square feet, while there was a fully permitted 1,400 square foot in-law unit above his massive garage.
No interior access
Because there was no interior or direct access from the main house to the in-law unit, it could not be included in the overall gross living area. Hence, the appraiser could only use comps that were similar in size to the 2,300 square foot main house. He also used comps with somewhat similar in-law units, but he was only able to support a value estimate for the unit of $75,000 (even though it was so large and brand new).
Permitted in-law units
An in-law or “accessory dwelling unit” that is built with permits can only be included in the overall gross living area if it has direct interior access to the main house, as mentioned above. Interior access often makes the in-law unit more valuable on paper because appraisers can then correlate to much larger comparable sales overall. When there is no interior access, appraisers must support value using comps with in-law units and main dwellings that are similar in size to the subject’s main dwelling. They then “extract” the estimated market value with what is called a “paired sales analysis.”
In most cases, the estimated market value of such units ends up in the $25,000 to $50,000 range, depending on the market – much less than most people think.
Unpermitted in-law units
In-law units built without permits can never be included in the overall gross living area, whether there is interior access or not. They can, however, be given value, similar to permitted units, IF the appraiser can show that there is marketability in the area for such units. The appraiser must, however, find similar comparable sales, with in-law units, to support the value. In many cases, however, unpermitted units are given no more value than similar-sized storage space (which is often minimal, at $5,000 or less).
No stoves, please!
If a unit is unpermitted, underwriters often require that stoves be removed from the units prior to funding, as such stoves represent “health and safety” hazards. While most buyers simply replace the stoves after their loans fund, this is a requirement that all parties to a transaction should expect.
As you may or may not know, I have been considering an ADU myself, but when rates went up last year, I decided to really save money before I start. As I learn more, I keep re-thinking what I will do. I am now thinking I will attach the in-law unit to my existing home and maybe keep it on the same sewer line, but have separate PG&E services. It is still a work in progress, but I need to get going on it sooner rather than later. What I am finding is contractors are busy and you have to book out months in advance, in part due to all the work from wildfires, plus the price of wood has gone up due to demand from the fires. I also heard a few new positive changes will be coming our way in the form of lower fees, as we have a housing shortage and the ADUs are a way for people to find living situations.