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.
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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?
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Questions: What stands out to you above? Anything else to add? What did I miss?
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So you’re saying that if I buy a 700 sf home for $700,000 and add another 700 sq ft to that home-its not worth $1.4 million? I say we weigh the ADU and determine a price per pound. Good idea or no?
Haha. Thanks Mark. Yes, price per pound is actually how I valued my car. I just took the price per pound from a Lamborghini and applied it to the weight of mine.
Quality comment!
Great methodology. Im building my ADU with lead and concrete. Its gonna be worth more than my house
Thanks Ryan. Great points. If you had a matching graphic, this might equal your Starbucks analogy.
I look at sales of ADUs in a market and develop a range of percentage of contribution for ADUs and then apply it to the subject most of the time. Life would be easier if we could just extend the price per square foot of the main home to the ADU…..
Thanks Joe. I need to crack the code on how to best visualize this and teach it too. I’m not there yet, but this is my first stab. It really struck me though that there is no diminishing returns here with the equation, and that’s very awkward. On one hand, it looks legit in some situations to use the PPSF, but the formula doesn’t produce consistent results, which I think challenges the credibility. Yes, life would be much easier.
If any onlookers have a different take, please speak up. Let’s share ideas and get better together.
I would value the ADU based on the amount of rent it can generate. That should make it close to the actual benefit it can generate, although determining the rent may be tough in some areas.
Thanks Paul. We definitely have to consider the rent. I recall a neighbor with an ADU that was valued at $20K in an appraisal, but the rent brought in about that much during the year. To me, that seemed like a logical clue that something might be off about the value. That would just be such a killer deal.
I agree. I think appraisers need to use a sort of hybrid approach where the main house is appraised as a residence and the ADU is appraised as commercial property. Lenders will just have to adapt. We have two ADUs and their circumstances are exactly as Ryan described- their yearly income is about equal to their total appraised value. Using this math it would be absurd for us to ever sell!
Thanks Kim. Yeah, that’s a tough situation. If you have any insight on how to value them, I’d love to hear. If two ADUs on one parcel also, that presents some other challenges for lenders. When talking to agents, I often like to hear what they think. An ADU recently came in at $25K in an appraisal, and the agent thought it was too low. I asked what the agent thought it was worth, and he said $50K. That’s likely far removed from PPSF math. One thing we have to consider here is age too. A rinky dink ADU that is super old and crusty is a different animal compared to something brand new.
A house with two ADUs is also known as a triplex. Full sales comparison, income approaches to figure it out.
But is it a triplex in the eyes of the GSEs? When they say they won’t allow a single family with two ADUs, should we say it’s a triplex (maybe that’s how the market views it)?
So the price per square foot method is out? Guess I’m going back to price per ceiling fan.
Haha. Seems legit.
Thanks for sharing.
My pleasure. Hoping for solid conversations about this ahead about this.
Great topic Ryan! I love your simple math. Let’s just stick to that. All kidding aside, “cost” would also likely be higher on a price per square foot than the original dwelling, particularly if it was not built at the same time as the main house. That is all else equal, quality etc. So the answer is, then? It depends? We are going to have to dive deeper into this one. Let’s do it!
Price per pound sounds good. LOL! Actually, rent seems logical, although in my market I rarely find much difference for a house that sells with a secondary suite, usually basements or walk-out basements in my market. Where the contributory value of a finished basement as additional living area for the main or fitted out and rented as a suite. Some, maybe equivalent of adding a small kitchen, but nowhere near what the income approach would suggest. In that case, the loss of additional area for the primary and the reduction in privacy and all that goes with tenancy seems to be the offsetting factor. Maybe an ADU has better privacy but that’s about it, and the cost to build would far exceed the cost of finishing a basement as a suite. We also have some of the highest rents in the country, so it is not a lack of demand. I truly believe it has a lot to do with our insane rent controls and overprotective tenancy laws have destroyed the trust of too many potential landlords.
Thanks Paul. I always appreciate your take. It is so expensive to build ADUs in California. I regularly hear about $200K+ units. Someone told me they built one for $125K, and that sounded like a killer price. Haha. The truth is these are not always easy to value since comps can be sparse, but not everyone buys them for rental income either. Lots of households have a family member out there. Someone on LinkedIn said maybe the truth was somewhere in between a PPSF method and some of the lower adjustments appraisers are making. Ha. Something to consider.
Thank you for this info. I am currently working on pricing a home with an active AIRBNB that is generating approximately $30,000 a year. Main house is 1608 sq feet build in the 40’s. It’s very hard to find comps. and not all buyers will want a STR on their property. I have done a lot of research on this and this article is very helpful. I guess the market will tell us what a buyer is willing to pay once we go live.
Thanks Shawn. Good luck with that. Yeah, not everyone wants to have a short-term rental on site. It’s essentially operating a hotel. I suspect the Airbnb rent would be much higher than market rent. So, where is market value in the midst of this? That’s always the question. I have to think buyers are going to want the extra unit though regardless. Did you see the link I shared at the bottom? Try that out to see if you can find some data.
Sellers seem to take a bath on building ADUs and buyers gain the value, especially if used as a rental. If sellers are renting it, they benefit to. But if you’re not charging grandma to stay, you’re not seeing equal cost to value.
Are we using an appraisal model for valuing ADU that needs to change?
I think that’s a good way to put it. Buyers gain tremendously. Yet, that’s so often the case with just about any remodeling or addition. I find it’s hard to get back every dollar we spend in actual value (unless we’re watching HGTV). Does the model need to change? Maybe. I think there is a learning curve for appraisers, data isn’t always ample, and we are going to have to think about ADUs differently in the future as they become more common. For instance, the line between an accessory dwelling and a full-fledged second unit is getting blurry. And the GSEs don’t allow more than one ADU on site right now. To me, hopefully that will change. Let’s not forget the market though. What are buyers actually willing to pay? Seems very far from cost in many cases when surveying agents, appraisers, looking at comps, etc… So, this isn’t just an appraiser issue.
Hey Ryan,
Great piece on ADU valuation! Thank you for bringing these concerns to the forefront. It’s a complex issue for sure.
(IMHO) From what I see day-to-day, ADUs, like any accessory to a home (be it a pool, tennis court or an extra garage) add potential that’s hard to measure in simple square footage terms. My thought process? What do they REALLY add to the main structure? How do they fit into the bigger picture? Does the ADU over-improve for the area? How does it blend with the property?
Take a pool, for instance. It’s supposed to be a big value boost, but if it eats up all the backyard space, how valuable is it now? Or, an ADU might be a game-changer in a neighborhood where rentals are hot, but not so much where everyone values their open space and privacy. I’ve experienced this one first hand. A whole community got up in arms, so the value of an ADU won’t matter much in this community.
It’s important to look at ADUs from multiple angles or a wider lens, and how it affects a property’s overall feel and usefulness. At least for right now. But who knows what the future may hold. 🙂 What I know for sure is definitely not PSF, lol.
I think we’re on the same page about pushing for a better way to value ADUs that reflects their real worth, especially as our cities and housing needs change. 🙂
Thanks Kee. Yeah, it’s complex. I think we have to consider so many different angles. Comps, rental income, quality of construction, location, cost of construction, etc… It’s not just one simple equation. It would be sort of like doing an addition on a house with an extra 400 sq ft. We wouldn’t just take the price per sq ft from the original house and apply it by 400. No, let’s look for new comps that now compare better.
Agreed!
Ryan, Well now you have opened a can of Bees! One of your top photos tell the story. I think these are very important questions and I believe there are to many variables from location, quality, use, etc. Comps, willing buyer and willing seller are the best analytics. Thanks for all the hard work.
Yeah, this is a hot topic without really simple answers. At the end of the day, what are buyers willing to pay? That’s what matters most, but it’s not always easy to measure.
“All ADU’s are not created equal… “Next step? Print this out and paste it above your computer monitor.
I come from the School of Hard Knocks…. Yes… I built an ADU here in Petaluma, CA. in 2019…when the wind of change, meaning the overriding California ADU “house rules” … had yet to arrive.
It was difficult, time consuming and yet … powerful instructive to my Appraisal career… My ADU construction project from start to finish took 1 year, 5 months and 8 days… on a project that should have been only 3 months, tops! But… I learn to use shortcuts and market know-how, to overcome government regulations, that were very unfriendly.
But… my ADU point of view is more nuanced…. And more three-dimensional… Meaning, you have to do your HOMEWORK… and build a database of detailed ADU knowledge in your markets where you work… What features does the ADU have? In-unit Washer / Dryer? (I have it) Covered parking? (I don’t have it) No utility fees? (I don’t charge the tenant for electricity, gas or water, but some ADU’s have separate meters) You must uncover and research that… This will take time…
Okay, Bruce … what’s your point? You, the working Appraiser, will have to pull more research, call more Realtors and homeowners, ask more questions, uncover city and county records, etc.… You can’t rely on the MLS to do the homework.
In closing, the mature ADU market has finally arrived… but it is messy and confusing and not clearly described in the MLS listings…. so, start by sharing your ADU data with your trusted Appraiser colleagues, in your adjacent cities / counties / markets… this requires you to be collaborative and forward thinking… for the greater good.
Ryan’s cautionary advice of not using arbitrary math formula should be followed… Nothing beats good old-fashion solid market research, because your ADU knowledge might be your “calling card”.
Great stuff, Bruce. I appreciate hearing your story, and I especially like your wording of “mature, messy, and confusing.” That seems about right. When we look at the number of ADUs in California, they are expanding rapidly, so there is a learning curve for everyone. I find formulas to be simplistic, so we’re going to have to keep cracking the code here. And the public’s perception of value will change over time also.
Thank you Ryan. Do you have any thoughts on valuing a single-family home with 2 new ADUs on it (in the city of Sacramento) for the purpose of renting all 3 units? I’ve seen a few properties like this sold over the last couple years, and the value seems to be similar to other multi-unit properties (triplexes and fourplexes) in the same general locations. It makes me think that a property like this (SFR + 2 ADUs) is valued based on its potential rental income, similar to how a 3-4 unit property would be. I would also assume the buyer for a property like this is most likely a buy and hold investor, and probably not someone looking for a home to live in. You also can’t get a conventional loan on a property like this which will limit the buyer pool. For these reasons, it seems logical the value would be based on potential rental income. I’d be curious to hear your thoughts on this. Thank you!
Hi Nic. It’s a tough situation on one hand because lenders aren’t likely to allow financing on a single family home with two ADUs. I wrote about this last year. https://sacramentoappraisalblog.com/2024/04/04/adding-too-many-adus-gets-awkward/ So, this could limit marketability for some for sure. Does that affect value? One of the challenging aspects is we’re unlikely to find comps with two ADUs. However, they do happen. I know I’ve seen a few properties in the region sell like this. My advice would be to try to find comps with two ADUs and compare those to traditional 3-unit properties. Comps are not perfect here, so we’re going to have to do our best (but really understand if there is a difference in the perception of buyers about ADUs vs full-fledged units). My concern would be blindly comparing a SFR with two ADUs with a triplex without studying if there is a value difference (if we can discern that). I concur that this could probably be an investor purchase more than anything. As we know, investors are not just all cash. In fact, only about 20% of 2-4 unit sales in 2024 were all cash in the region. This reminds us how important financing is in the marketplace. In short, it’s a tricky situation due to financing, and I think financing is going to have to evolve. To me, this rule seems archaic now, but I don’t get to make the rules.
Thank you for your reply and insight Ryan, this is very helpful.
Here are are few questions to consider:
1. Is the ADU being built to use as a rental?
2. Is the ADU on a separate meter from the main home? Many ADU’s are not. A meter and related runs of materials can cost up to $30,000 and more.
3. Is the interior finish of the ADU the same as the main house?
4. Access to the ADU – is there parking, does the user of the ADU walk through the private yard of the main house or is there a private entrance.
5. Also, building permits to build the ADU can be as expensive as permits for a single family home.
6. Actual costs to build an ADU can be very high.
7. Is the ADU free standing or attached to the main home.
I have an ADU on my property and when I bought the home the appraiser gave almost no value to the ADU. Some of the reason is there was NO actual comparable. The valuation was very low.
I have a listing in escrow, with an attached ADU, and the appraisal gave the ADU square footage to the house.
No easy answers on this one.
Thanks Georgina. Yeah, it is tricky. So many considerations. I know a local property where the owner built a “fourplex” on Madison Avenue, but two of the units were permitted as accessory units because it saved money to build that way. I do think you’re right that a lack of comps contributes to this sometimes. It does get interesting when an ADU is attached. It seems like the GSEs are saying that if there is no expectation of privacy, then it’s legit to count it in the square footage. There are many things an appraiser needs to consider on this though. And it’s important to stay in tune with what Fannie Mae says also (not that Fannie Mae creates value in the market though).
No. Then my tool shed, unless quality and condition are evaluated, is worth $250k. If ADUs are a fad, which is my opinion, then we’re wasting time discussing them.
Well, thanks for contributing to the conversation here. Ha. I appreciate you as always, Jay.
Shawn be careful with STR as Fannie and Freddie and none to excited. If a STR exists on the site and that is how the seller wants to frame the sale, get prepared for a rough ride or a cash buyer. The appraiser if residential can’t look at it as a STR as that is a commercial product and the residential appraiser isn’t licensed for it and Fannie doesn’t loan on commercial property with a residential mortgage rate. Fannie put out a ML in November 2024, I believe that stated if a residential appraiser was doing the appraisal they could consider the STR but only with a monthly Lease rate under a 12-month lease not a nighttime
or weekend rate. So be careful on how you price and what type of buyer you are looking to hook.
Thanks Brad. Yeah, I like the idea of pricing for market value (not hotel value) as that is how an appraiser is going to look at it for mortgage purposes.
The best way I have found to find a real ADU in the MLS is to add the criteria ” 2nd Unit Kitchen – YES”. Guest rooms are not ADUs and I don’t want them. Of course we are relying on the well trained RE Agent to properly fill out the Listing……… This is in the Rapattoni system, don’t know what the other systems list this as, but I’m sure they have a similar search criteria.
Another question is Legal vs Illegal ADUs adding value or not, how to support our opinions for either and comp selection of properties with similar illegal ADUs.
Or, now that a CA property Owner can sell off their ADU as a Condo, what impact does this have when appraising on of these SFR with a Condo, (ADU) on it.
Or, Or, now that the State has alered the Zoning restrictions for all cities, properties with an ADU that previously had to have the owner occupying one of the two units, those Owners may now rent BOTH the SFR and the ADU – now you have a Duplex property, back to a good HBU to show which it will be,,,,,1025 or 1004 wonder what’s next!
Rick, you have a can of worms here. I think we are in the middle of a learning curve, and the line between an ADU and a second unit is getting blurry I think. I’ll have to try your 2nd Unit Kitchen tip. I’ve not thought of doing that before. Thanks.
Thanks for this Ryan! I was recently asked for some back-of-the-napkin math on “how much value could an ADU add”. For lack of comps, I calculated value by estimating CAP rates and market rents for both the main house and the ADU (discounting rent on main house 5-10% after ADU addition). Any thoughts on that approach?
Garrett, you get points for creativity and critical thinking, but I’m not personally a big formula guy because it may or may not work in every situation. Maybe feel things out to see if you are getting results that seem somewhat legit. My concern is the formula might do what I showed with the formula in my post. One of the challenges about ADUs is investors could look at the unit differently from owner-occupants (who may or may not be renting the unit).
While it’s possible for ADUs to be valued similarly to primary residences on a per-square-foot basis in some cases, many variables can lead to differences in valuation. It’s advisable to consult with a real estate appraiser or expert when determining the value of an ADU.
The idea that an ADU should be considered the same as the main improvements is not rational since the ADU improvements cannot be separated from the main unit. Additionally, the ADU has no land component as well as bundle of rights similar to that of the main structure. Yes the ADU has a value but only a contributory value (i.e. pool, barn) . If you try to develop a value of an ADU under the same criteria as the main improvements you are grossly overstating the usefulness of the ADU given that the ADU does not have a land component and cannot be transferred as a separate entity. Just my $0.02
Thank you so much, Larry. Yeah, I think sometimes people use math that produces the results they want to hear.
Hello all. To add to Larry’s thoughts.
A simplified example. 1) Owner is building a 2500 sf home valued at $300 psf. You find comps that are new and adjust at $150 psf for GLA variances. 1/2 way though the build the owner decides to add 400 sf. It is very likely that the additional 400 sf would be valued similar to the GLA adjustment for the comps ($150 psf). It does not get a $300 valuation as you need to back out land, infrastructure, etc.
The alternate scenario is that instead of adding 400 sf to the house the owner decides to add a 400 sf guest house. The only difference between the guest and and the sq footage in scenario 1 is a small kitchen. Most appraiser will adjust the guest house similar to the above $150 psf, though some may add a bit for the 2nd kitchen.
The income approach in both scenarios will be different, with the guest house getting more, however Fannie Mae does not allow us to use the income approach as the basis of our valuation.
Thank you so much, Mark. I think there is confusion in the real estate space between square footage adjustments and simply using the total price per sq ft to adjust for square footage differences.
Great point. And I agree it’s more important to look at the comps.
Thanks Andrew. Nothing wrong with formulas and ideas for how value might work. But as you said, let’s not forget to look at the comps.
In valuing an ADU including $/sf, I would look at a number of paired sales (house vs house with ADU) and try various adjustments to get at least a rough idea for ADU value. Might need to go to competing locations and make a lot of adjustments to get ‘ball park’ adjustment rates.
Then I would talk with some experienced local agents with similar properties.
Then report the process in my appraisal.