Should accessory dwellings be valued at the same price per square foot?

Should accessory dwelling units be valued at the same price per square foot as the main house? This question came up recently, and many people believe the price per sq ft of the house should simply extend to the ADU. This post isn’t targeted at any one person, but I have a different perspective that I’d like to share. Let’s talk through this.

UPCOMING SPEAKING GIGS:

2/6/25 She Invests event (register here)
2/11/25 MLS Meeting TBA
2/12/25 Coldwell Banker EDH (private I think)
2/18/25 Travis Credit Union TBA
2/19/25 NARPM (private)
3/6/25 Yolo Association YPN Event
3/12/25 Windemere Sierra Oaks
3/20/25 HomeSmart iCare Realty (private I think)
4/10/25 Yuba-Sutter Association (details TBA)
4/15/25 Culbertson and Gray (private I think)
5/8/25 Private event (details TBA)
5/13/25 PCAR
6/5/25 Auburn Marketing Meeting
9/26/25 PCAR
11/4/25 SAR Main Meeting

SIMPLE ADU MATH WOULD MAKE VALUATIONS EASY:

It would be easy if all we had to do was some simple math. Just multiply the square footage of the ADU by the price per square foot of the value of the main house. And voila!!! We have ADU value. But does this actually work? Sometimes it might, but in other cases the results are wildly off.

EXAMPLE 1 (400 sq ft ADU):
$800,000 house value
3,000 sq ft house
PPSF: $266.6 ($800,000 divided by 3,000)
400 sq ft ADU
$266.6 x 400 = $106,650 value of ADU

EXAMPLE 2 (750 sq ft ADU)
$800,000 house value
3,000 sq ft house
PPSF: $266.6
750 sq ft ADU
$266.6 x 750 = $199,950 value of ADU

EXAMPLE 3 (1,000 sq ft ADU)
$800,000 house value
3,000 sq ft house
PPSF: $266.6
1,000 sq ft ADU
$266.6 x 1,000 = $266,600

Honest question. Does the math seem legit in all of these situations? Do you think real buyers would pay these amounts?

HOUSTON, WE HAVE A BIG PROBLEM:

One awkward thing here is the value changes at the same rate no matter how much square footage we add for the ADU. That’s wild since we typically see some diminishing returns as we build larger. In other words, we typically see price per sq ft get smaller as size increases. Yet, this ADU math yields the same rate of value no matter how size changes. Does that seem a little off? Should we question this type of math? I think so.

THE MATH GETS MESSY ON SMALLER HOMES:

$450,000 house value
1,100 sq ft house
PPSF: $409.1
400 sq ft ADU
$409.1 x 400 = $163,640 value of ADU
$450,000 + $163,640 = $613,640 total value

Would buyers really pay $613,640 for this house with an ADU? Or is it possible buyers would start to ask what they can get elsewhere for this amount?

THE EQUATION STARTS TO GET EMBARRASSING:

$450,000 house value
1,100 sq ft house
PPSF: $409.1
1,000 sq ft ADU
$409.1 x 1,000 =$409,100 value of ADU
$450,000 + $409,100 = $859,100

Do you see what I mean? This is a wild example.

NEIGHBORS WOULD BE ANGRY AT THE MATH:

Do you see how the math gives different results depending on the size of the main house? Are you telling me you’re going to value a four hundred sq ft ADU at $106,650 in one instance, but the same exact ADU is $409,100 next door because the house is smaller in size? Look, I’m not saying the square footage of the main house doesn’t matter because it does. I’m just saying something seems off here with our math equation, so I think we need to give serious consideration about credibility. If the equation doesn’t work in all situations, let’s not use it.

THERE IS NO “SHOULD” IN REAL ESTATE VALUE:

Solar panels should add at least the cost of the system to the value of the house. A kitchen remodel at $50,000 should increase the value by $50,000 at least. A $25,000 concrete driveway should add at least $25,000, right? We’ve all heard stuff like this, but the problem is there is no “should” in real estate because contributory value is going to depend on so many factors – especially location. So, when we say, “An ADU should add at least the value of the total price per sq ft of the main house,” we’re making up a rule that might not actually be legitimately found in the marketplace. Would this rule be true at luxury prices as well as entry-level prices? And is it true in Antarctica as well as Beverly Hills? Backing up, one thing we haven’t done is ask what actual buyers would pay.

WHAT DO THE COMPS SAY?

When we look at comps with an ADU, do we see a value that resembles anywhere close to what the ADU equation above suggests? In other words, if the house was worth $800,000 and we added a 750 sq ft ADU, would that really add $200,000 in value? Or would a 400 sq ft ADU on a $450,000 house really add $163,640 in value? What do the comps say? That’s the question we ask about solar panels, a kitchen remodel, a new driveway, or a house with an ADU. I find looking to the comps can sound like a very frustrating solution, but the focus is really simple. What are buyers willing to pay? That’s always the question.

TIPS FOR FINDING ACCESSORY UNITS IN MLS:

Here’s a post I wrote to talk about how to find ADUs.

CLOSING THOUGHTS:

I realize there are situations where the appraised value of an ADU legitimately comes in too low, and there is no excusing that. So, just as I recommend caution in using an arbitrary math formula, appraisers need to be careful to not just pick a number that doesn’t make any sense when we think about data and the income being produced by the ADU. All I’m saying is the ideal is to scour comps, do our best to discover value, and support the value in whatever credible way we can. And my concern is if listings are priced without consideration of comps or data, it could result in properties not selling and/or appraisal issues in the future. Know what I’m saying?

Thanks for being here.

Questions: What stands out to you above? Anything else to add? What did I miss?

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