Over the past month, multiple clients/friends have contacted me about what I thought about them adding an Accessory Dwelling Units aka ADUs, granny flats, in-law units. The past few years, I estimate about one 1 in 3 Buyer clients of mine indicate that they would be interested in a house with an ADU. Why the trend towards having an ADU or adding one on? Why am I getting more calls about it during current Shelter-in-Place (“SIP”)? What are some considerations from a real estate perspective? Even more interesting is California passed legislation that facilitates a more efficient process by which homeowners can attain city permit approvals to build an ADU at the start of 2020.
We are not referring to the illegally constructed and poorly built playroom/storage/tool shed with dangerous electrical wiring dangling. Many of those were built decades around; they may still be useful as a storage unit or tool shed. However, they are far inferior to quality, utility, functionality and value, as today’s discussion for a highly modernized 300-750 square feet ADU with full bathroom and kitchen which can be lived in, worked out of, or rented out that many now desire.
The following are trends and current SF Peninsula dynamics creating demand for ADUs:
- Many companies allow employees to work from home and having a separate space to do so would be a material benefit. With current SIP, this accelerates future flexibility for more employees to work from home.
- For families with children, a separate living space when grandparents or nannies come help take care of young children would be really nice.
- Many grandparents looking to retire close to their adult kids are challenged with local prices to buy a condo for $800k+ or rent a small apartment for $3k/month. A nice In-Law would be very appealing financially and logistically.
Because of a significant shortage of housing units in many cities, the CA State Legislature passed AB 68, AB 881 and SB 13 that went into law in 2020. Those bills provide homeowners more flexibility with their ADU projects by loosening building constraints, easing bureaucratic processes, and ultimately helping with financial costs and time. They mandated those cities which had tighter restrictions and more onerous processes to modify and abide by those new laws. https://www.nolo.com/legal-updates/new-california-laws-for-2020-expand-homeowners-rights-to-build-accessory-dwelling-units.html
The ADUs being discussed allow for those properties that qualify to be able to either add new structure or transform existing structure into a liveable In-law unit that has a full bathroom and a kitchenette. Many properties have the lot size and capacity to be able to fit a 300-750 square feet beautiful structure. I have seen floor plans and space as small as 250 square feet that is a really sweet space.
Fun, sentimental story…when I first moved to the Bay Area from NYC after graduate school nearly 25 years ago, I rented a small San Francisco in-law apartment in the very popular Marina district that was only about 300 square feet big. My friends may recall that it was an ADU in the rear of a duplex Marina property near corner of Franklin/Chestnut. It had only 1 small window yielding minimal sunlight, and my friends called it “The Cave”. I would catch the 30X bus off Chestnut street dressed in my full business attire ready to do M&A deals in the financial district. With a half a dozen friends living within 5 blocks and right next to Golden Gate bridge, Crissy field and Marin Headlands, I loved my time at The Cave!
Below are links to some various SF Peninsula city ADU websites:
What is the cost to build an Accessory Dwelling Unit? This is a very complex question with a big $ range. There is a big delta between building a new structure versus just converting a current space such as downstair basement, large attic, garage, or other bonus space to a legal ADU. The lot configuration including whether it’s flat or on hillside matters. As with any construction, the interior size, material quality, location, contractor, and timing are factors. Plus, every city has different codes, and requirements that can affect costs. Let’s say a base case range from $250-450 per square feet – it can certainly be a lower or higher, as this is just a rough estimate. The low end would be converting an existing structure with only minimal structural changes. With an average $/square feet for many SF and Mid-Peninsula single family residences at $900-1200/square feet, regardless of one’s viewpoint of how a nice ADU’s $/square feet compares to a main structure, sweat equity and positive ROI is created no matter how one values it.
From an investment standpoint, an ADU can be rented out. You can run the analysis of cost to build relative to potential rental income. Do note, however, that many cities will prohibit the ability to do short-term rentals (e.g. Airbnb) and may require language added to your deed.
To make sure there is no misinterpretation, predicting incremental value of an ADU to the main house structure is inexact science. For a super nice ADU as described above, a buyer can justify placing value in the space at or near that of the main house. Then there are some older ADUs that are functional, just not at the same quality; those will have value but at a lower $/square feet than the main house. And on the low end, those that are “unwarranted” and done without permit from long ago which is merely just an enclosed space of some kind will be minimal or even no value. At the end of the day, value for anything is what a buyer is willing to pay for something from a seller.
If one has a fixed budget to do a house addition of some kind, practicality and function should be factored in. For example, let’s say a homeowner in the Sterling Downs (Belmont) or San Mateo Village neighborhood has the financial budget to add 600 square feet of space and the choice is to expand the existing home or to add a nice 1 bedroom ADU to the backyard. I cite those neighborhoods because many of the original houses built around 60-70 years ago were approximately 3 bed, 1 bath, 1000 square feet on a nice rectangular, flat 5k square feet lot. If your house was the original 1000 square feet, it would be a no brainer to use the funds to expand the house to a 3/2.5, 4/2 or 3/3 1600 sq. ft. with new open kitchen/great room area. However, if you already have an expanded home whose size/layout already suffice for your family, then the functionality of having an awesome ADU might be quite compelling and fit very well in the rear corner on your 5k square feet lot.
Houses with super nice ones just do not come up on the market often. With the new 2020 legislation, the valuable SF Peninsula lots, and needs with people’s living and working situation, I expect more and more homeowners adding an ADU to their property. Forbes magazine had an interesting article https://www.forbes.com/sites/sherikoones/2019/02/06/the-rise-of-accessory-dwelling-units-in-the-u-s-and-canada/#b7fa4337a089. Quick disclaimer: I am a Realtor and have real estate development experience so know more about this than most, but I am not a licensed general contractor or structural engineer. The codes and laws change regularly, so consult local building experts if you are truly considering any construction project. As always, feel free to contact me anytime about anything.
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