How do you support the value of an ADU in an area where there are no ADU transactions?

[norapp]

Principle of substitution cost approach, since the subject ADU is older then a deprecatiated cost - but what is the contributory value over cost, if any? That is harder to find out. Which is why some never bother and stop at a rote cost approach. However, we know the contribution can be less than or more than cost .

Talk to area RE agents, get feedback from them, how much extra are buyers willing to pay for an ADU ? since not everybody rents them out, it's value is not 100% income driven.

Sometimes with no sales of an ADU I look for a similar value outbuilding such as a workshop with garage or such - and going back in time for sales can work too.

I always talk to agents when I have something I can't support with comps. At least 3 when it's something unusual from the market. The good one's will give you a good idea of what a typical buyer might pay for something.

 

[Zoe]

I agree with the above suggestions. Cost, going 40 miles away, income cap is fine also.

I won't guarantee you that your wife will believe you.

 

[Zoe]

If it was for my wife, I would probably do depreciated cost only. I have no idea what kind of terms are on the lease. The potential buyer may not want to lease it. They may let lease run out and use it for something else.

 

[Zoe]

You could probably do a GRM on it if you have nearby rental single family properties that you would consider to compete with subject for market rent. Idk. The terms of lease make a huge difference. Depreciated cost is likely an absolute necessary. Even 40 miles away, it may be hard to get comparable rentals on an ADU.

If you have nearby comparable rentals that compete, you can build a cap rate and do income cap on subject lease, but I just don't think that is very reliable unless ADU has a 5 year lease on it. It could be 2 years or 3 year lease. You could build a cap rate and do income/expense and cap the income out.

 

[Carnivore]

You could probably do a GRM on it if you have nearby rental single family properties that you would consider to compete with subject for market rent. Idk. The terms of lease make a huge difference. Depreciated cost is likely an absolute necessary. Even 40 miles away, it may be hard to get comparable rentals on an ADU.

If you have nearby comparable rentals that compete, you can build a cap rate and do income cap on subject lease, but I just don't think that is very reliable unless ADU has a 5 year lease on it. It could be 2 years or 3 year lease. You could build a cap rate and do income/expense and cap the income out.

I agree with you.

Something else to consider is the potential for airbnb. Now we are getting into something deeper and more complex

I wonder if this ADU might have the potential for a commercial lease?

Glad its the OP and Not Me. I smell a much larger fee for this assignment.

 

[Carnivore]

My In-Laws lived in the Panhandle of Texas. Stinnett 60 miles north of Amarillo. Grandpa Settled the place and built a small home and a ranch hand small house. Later one of the Daughters(my mother in law) Married a local Cowboy. So they built a newer and larger more modern house. They tore down the smallest house. Something like that(best as I can recall) So they brought Uncle Mark down from Montana and moved him into the original Farm Hand Home.

Later I learned that a woman/beautician leased the smallest house as a country Hair Salon! I think she may have actually lived there or at least nearby

So there are all kinds of Uses for the Smaller House aka ADU. Farmhand, beauty shop. Dog Groomer

 

[Zoe]

My In-Laws lived in the Panhandle of Texas. Stinnett 60 miles north of Amarillo. Grandpa Settled the place and built a small home and a ranch hand small house. Later one of the Daughters(my mother in law) Married a local Cowboy. So they built a newer and larger more modern house. They tore down the smallest house. Something like that(best as I can recall) So they brought Uncle Mark down from Montana and moved him into the original Farm Hand Home.

Later I learned that a woman/beautician leased the smallest house as a country Hair Salon! I think she may have actually lived there or at least nearby

So there are all kinds of Uses for the Smaller House aka ADU. Farmhand, beauty shop. Dog Groomer

It probably had a separate access driveway to it. Many people would not want to share a drive to their principle dwelling with another business or residence. Many would not care. Airbnb is definitely a possible option.

There are places like in Augusta Ga where owner requires tenant to move out during week of masters golf tournament so they can stay there or use it as airbnb. The owner gets to stay there or they get some serious rent during a week or two time frame. That's the whole house. That is not an ADU, however same would apply. They compensate the tenant, but the tenant has to go stay somewhere else for a week or two. It is in the lease agreement when the tenant signs it.

 

[Carnivore]

It probably had a separate access driveway to it. Many people would not want to share a drive to their principle dwelling with another business or residence. Many would not care. Airbnb is definitely a possible option.

There are places like in Augusta Ga where owner requires tenant to move out during week of masters golf tournament so they can stay there or use it as airbnb. The owner gets to stay there or they get some serious rent during a week or two time frame.

I have good Friends who do this with their personal Home. They make huge Bucks and have been renting their home to the same Corporation year after year. The money they make is so large that they use it to go on vacation and have money left over. ADDED Thought/Details. My good Friends home is in Augusta Georgia, Home of the Masters.

 

[Zoe]

I have good Friends who do this with their personal Home. They make huge Bucks and have been renting their home to the same Corporation year after year. The money they make is so large that they use it to go on vacation and have money left over.

It's all good. Tenant knows the circumstances when they sign the lease. If it's owner occupied, they are good with it. They can go take a 2 week vacation and rent pay for it.

 

[Yuanyin]

I've adjusted the additional square footage of the ADU, as well as bed, bath count based on the same adjustment I would apply to the SFR in the area. About $80psf above grade area, 10,000 per bathroom and 15,000 per bedroom.

So a $61,000 adjustment for the 450 sq ft 1 bed, 1 bath ADU. Which isn't far from the depreciated value of the cost to build. The income approach wasn't applied b/c the ADU isn't an investment property for everyone.

$50, 60 maybe 65k seems reasonable to have an old but fairly nice carriage house that can positionally earn you 10-12k a year if you want to deal with a tenant, it's definitely a nice guest house, nice work-from-home office whatever.

But anyway, applying the same adjustment I would for additional sf to an SFR seems reasonable and appears to match quite closely with the cost approach.