Do ADUs add Property Value?

Do ADUs add Property Value?

How do ADUs add property value? Accessory Dwelling Units (“ADUs”) are an up-and-coming trend in the real estate development and real estate investment world. An ADU maximizes unused or underutilized space on one’s property. Replacing a patch of grass or dirt with a profit-bearing asset can bring in rental income and appreciate in value.

We previously have covered the ROI of an ADU, which dives into detail on how cash flow and appreciation work hand in hand to generate a healthy return on one’s investment. We definitely recommend giving that a look after you are through with this article! Please check out Investopedia’s guide on How to Find Your Return on Investment (ROI) in Real Estate.

Factors That Determine Appraisal Value Generally

Do ADUs add property value? To understand the effect an ADU has on property value, we will take a look at how homes are appraised. You will also learn what factors any professional appraiser will consider in determining value. We don’t want to overwhelm you, but some appraisers have dozens upon dozens of factors that they take into account. We actually think the Appraisal Foundation does a great job of covering the go to factors. There are some helpful definitions in the article, here. For our purposes, we will cover the top 8 factors.

1. Location

Location, location, location. We’ve all heard the saying, and it rings as true today as when it was first said. The one who said was some paleolithic real estate salesperson showing off the latest and greatest caves. Any appraiser worth their salt will look at property’s proximity to the important locations. Such as schools, hospitals, parks, bus stops and other forms of public transit, and Starbucks (probably). The better the surrounding neighborhood and the options and attractions nearby, the better the price.

location of an ADU is very important

2. Square footage

Square footage is the easiest heuristic for home value. A larger number is better in almost every instance, other than golf, cholesterol, and divorces. Adding square footage to a home is a surefire way to add value to the property. When done right, in a presentable and sensible way, an Accessory Dwelling Unit can add massive value to a property. A study on ADUs specifically concluded that ADUs add 25% to 34% in property’s assessed value. They also add up to 51% in resale value. Click here to see how you can easily add 495 square feet to your property.

3. Number of Bedrooms and Bathrooms

As with square footage, more bedrooms and bathrooms correlates to better property values. Adding an Accessory Dwelling Unit is an easy way to increase a 3 bed/2 bath to a 4 bed/3 bath property.

One word of caution, we think there is an upper limit. Please read up on the Winchester Mystery House on how adding beds and baths can get out of hand.

4. Heat and Air

Most homes in this day and age have heating and air conditioning. Although homes in temperate climates, such as the Bay Area more often than not do not have air conditioning. We are seeing trends away from this, especially as air conditioning becomes more efficient and easier on the pocketbook. When it comes to adding an ADU, be sure to ask whether or not A/C is included. Cedar ADUs come with a mini-split system, which keep customers and appraisers alike, nice and cool.

5. Current Age of the Property

Any good appraiser will consider the age of a property when determining value. If your home is as old as mine (80 years), do not despair, older homes can appraise well so long as they are well maintained and well taken care of. Adding an ADU does not take years off the age of the primary residence but does give the appearance that a homeowner is investing in their own property and seeking to maintain and beautify what they have. Adding an a Accessory Dwelling Unit is a fantastic way to show to both potential buyers and appraisers that one’s home is worth investing in.

6. Current State of the Real Estate Market

If you are reading this, you likely are clued into the fact that real estate prices are on a tear all over the country. In California alone, the median home price was up 23.9% from March 2020 through March 2021 (for more reading, click here). There are similar reports from Idaho to Virginia. There are articles that ponder whether we are in a housing bubble, if the possibility of inflation are causing future home buyers to pick up the pace, or if this is the new normal.

In a mid- to post-coronavirus world, one thing is certain: the landscape has changed and people have turned inward towards their own homes as a place to work, to exercise, and to be protected. Investing in an ADU is one way people are upgrading and fortifying their surroundings.

7. Quality of Build & Updates

When I was purchasing my own home, my realtor was more interested in showing me the pipes and the brace bolts in the crawl space, than the bedrooms and bathrooms. I thought he might be a little odd, but later I realized how thorough and wise his approach was. My realtor was not trying to get me in some shack with 3 or 4 bedrooms, which might fall apart the moment the purchase was completed. He wanted to make sure that I was happy for years to come in my home, and that I wouldn’t have any major issues to worry about for many years to come. Appraisers think this same way. A home that is one its last leg will appraise very differently than a home that has been built with quality materials and the intent to last.

Accessory dwelling units are no different. The quality of the build absolutely matters and is reflected in the appraisal value. Beware of companies that indicate they can get you a better price by cutting corners. Cedar ADU uses high quality materials that are made to last. Our build system utilities materials with incredibly high R-values for premium energy efficiency and are more fireproof as well.

8. Comps

Comps are an age old, time tested factor in determining your property value. The saying goes that price is whatever someone is willing to pay. To understand what someone might be willing to pay for your property, and thereby understand the price or value of your property, appraisers look at homes that recently were sold in your area that are similar in size and shape. This is not a perfect science, but does lead to a fairly close and accurate approximation of the value of your home.

Determining the value of a property with an ADU is a bit tricker, if there are no other homes with an accessory dwelling unit in the area. Fortunately, ADUs are on the rise and we are seeing more and more data, which will help us better understand valuations.

do adus add property value

ADUs add Property Value: Nuances of Appraisal Value

How do ADUs add property value? We want to flag a few complexities in appraising a unit with an ADU. For one, the square footage of a recently added ADU cannot be added directly to the primary residence, unless it was done via a garage conversion and the proper permits have been filed. When considering the square footage of a detached unit, it is better to think of the square footage of the entire property as opposed to the square footage of the primary residence. For example, adding a 700 square foot ADU to a 2,000 square foot house, means that the total property now has a square footage of 2,700 total square feet, between the residence and the ADU. However, the primary residence is NOT 2,700 square feet.

Let’s pause for a minute, because the above is somewhat nuanced. What we are getting at here is that ADU adds to the total square footage of the property but not directly to the main home.

One other nuance is in permitted and unpermitted units. Not all unit is the same in the eyes of the law. An exact replica of a unit will appraise for much less if it does not have the proper permits. In fact, a unit without a proper permit is likely to be deemed as “storage” and will be assigned a much lower value (click here for more information). When shopping for an ADU, be sure that the company handles permitting and is upfront about permit fees. I won’t name names, but someone like Cedar ADU, which is committed to making that process as easy as possible.

Do ADUs add Property Value? The Bottom Line

An Accessory Dwelling Unit can add tremendous value to one’s property, and can appraise for far more than the cost to build one, depending on a number of factors, including location, square footage, number of beds and baths, HVAC, age of the property, quality of the build, state of the market, and comps.

Cedar ADU is committed to helping you traverse these factors and any questions you may have. If you think an accessory dwelling unit is right for you, please reach out to hello@cedaradu.com and let’s walk through the issues together.