Unlocking the value of your property might be as simple as considering the addition of an Accessory Dwelling Unit (ADU). However, how much value does an ADU actually add to your property? Let’s unpack the complex relationship between ADUs, property taxes, and resale value.
An ADU, with its own kitchen, bathroom, and utilities, is more than just additional square footage. It’s a versatile space that can house extended family, caregivers, tenants, or even serve as a downsized residence for yourself. But estimating its value can be a challenging task.
The Complex Equation of ADU Valuation
When it comes to selling, you cannot sell your ADU separately as per current state law; it’s considered an improvement on your lot. The sale doesn’t explicitly state the ADU’s price, leading to the question of its actual value.
Appraisers typically estimate an ADU’s value by comparing sales of similar properties with and without ADUs. Despite the boom in ADU construction since 2017, there’s a shortage of data on such comparative sales. For instance, according to Zillow, of the 642 houses sold in Los Angeles in the past three months, only 106 listings included an ADU.
The ADU-Property Tax Relationship
Building an ADU will increase your property tax bill. L.A. County assessor’s public information officer, Stephen R. Whitmore, explains that the ADU’s value is determined by its construction cost and added to your property’s current assessment. The county taxes property at a rate of 1%, and local parcel taxes and other levies increase it 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 approximately $12,500 to around $15,000.
Navigating the Loan Landscape for ADUs
When it comes to securing a loan for an ADU, lenders need to estimate its value even before it’s built. For example, a Federal Housing Administration-backed renovation loan can be up to 97.75% of the property value after the ADU’s completion. Lenders rely on professional appraisers for this estimation, but due to the limited data on ADU sales, there’s no standard approach yet.
The Emerging Trends in ADU Valuation
As the ADU market evolves, so will the valuation methodologies. Some real estate professionals have reported conservative appraisals of ADUs, with some even valuing them below their construction cost. On the other hand, appraiser Jun Ho Lee based in San Gabriel, finds that ADUs typically add 10% to 20% to a property’s value, depending largely on the location.
Revival Homes, an L.A.-based firm, has developed a big-data approach to overcome the shortage of ADU sales data. By comparing sales of single-family homes with ADUs with those without since 2017, they found that the typical ADU adds around 24% (about $250,000) to the sale price of a single-family home in L.A. County.
At The ADU Guide, we believe in the potential of ADUs, both in terms of their value addition and their versatility. As more ADUs get built and sold, the data pool will grow, enabling more accurate valuation.
Ready to explore the potential of an ADU for your property? Get started with The ADU Guide’s free ADU property check.
Discover New Possibilities for Your Property with an ADU!
Original article written by Jon Healy for the Los Angeles Times.