Merit Real Estate

Accessory Dwelling Units – What you Need to Know.

accessory dwelling units are trending

Accessory Dwelling Units are not a new thing, but the demand for properties that have an ADU or the potential to add one has increased over the past few years. These dwellings are often called various names such as carriage houses, in-law suites, guest houses, generational homes, garage conversions, casitas, etc. Regardless of what we call them, these accessory dwelling units are just separate living spaces that can be attached to or detached from a single-family home.

Whether you are thinking of building an ADU on your property or purchasing a home with an existing ADU, there are some things to know and consider.

Accessory Dwelling Units
Three newly constructed homes built with detached ADUs

What is Driving the Recent ADU Trend?

Over the past few years, a handful of states and cities have passed laws that make it easier for homeowners to add ADUs. These states and cities include Oregon, New Hampshire, California, and Minneapolis/Saint Paul. The laws being passed offer fewer restrictions on the building specs and faster approval timeframes for permits. In some cases, these newer laws remove some of the fees that were once associated with the size and type of ADU being constructed. Passing these laws is a direct response to addressing housing shortages and the rising cost of living that have challenged many communities. ADUs are viewed by many as an affordable solution to increase the availability of affordable housing.

Another driving factor is the aging of the baby boomer generation in the United States. The baby boomer generation significantly outnumbers the generation that preceded it. Now, younger homeowners are seeking to add space to their existing homes in order to house older family members. This trend was likely accelerated by the Covid19 pandemic. Many elderly Americans (over 175,000) died in nursing homes and care facilities. With that unfortunate history in mind, people are looking for other options for housing their older family members.

Carriage houses are ADUs that have been around for decades

The Cost and Access of Accessory Dwelling Units

If you are thinking of converting an existing space such as a garage, basement, or attic into an accessory dwelling unit, the cost will run upwards of $50,000. Building a new, detached structure on your existing lot will likely exceed $150k. The costs and access to permits will vary greatly depending on where you live.

In California, homeowners have a legal right to build ADUs, and local governments aren’t supposed to create barriers to getting permits. Some cities have streamlined the permitting process, and a few, including Los Angeles and San Jose, have preapproved building plans that can further reduce delays. On the flip side, many other cities in the U.S. are fighting the trend by delaying or denying permit requests. There are also many areas across the country that do not allow ADUs or have stringent regulations that impede their development.

Although obtaining permits for your ADU can be challenging, it’s not a good idea to move forward without them. Doing this could make your home difficult to sell in the future as those unpermitted improvements have to be disclosed. There are also restrictions on many mortgage products that don’t allow lenders to finance the purchase of homes that aren’t properly permitted. Additionally, it only takes one disgruntled neighbor or acquaintance to turn you in to the local zoning department. Once they get involved, things could get messy and possibly very expensive.

Is an ADU Worth the Investment?

Generally speaking, adding an ADU to your home or property is a strong investment. Whether it’s for extra income or for additional living space, it is important to recognize the increased costs associated with adding the ADU. The increased costs include higher property taxes, larger homeowners insurance premiums, and payments on loans used to construct the unit, among other expenses. If you are building the addition primarily for extra income, be sure to compare these elevated costs versus the rents you will be receiving. Not all areas will bare a rental market that will make you enough income to offset the costs.

There is no guarantee that adding an ADU will net you a profit or even a dollar-for-dollar return when you are ready to sell the home. The value added really is in the eye of the beholder. The regional location of your ADU-equipped home will likely play a huge factor in how it is valued by the local market.

This range of understood valuation of accessory dwelling units is not dissimilar to that of swimming pools. In-ground pools are an accepted and even expected feature in some neighborhoods, so you may recoup at least some of the cost of building one when you sell your home. In other areas, pools are uncommon and could detract from a home’s value if buyers are concerned about maintenance hassles or drowning risks.

Likewise, ADUs may not add much value in areas where they’re unusual. Some people may prize the ability to rent out the ADU for extra income, but not everyone wants to be a landlord. Also consider that converting an existing attic, basement or garage might deter future buyers who would rather have those spaces untouched.

Basement conversion ADU
Basement conversions with an exterior door make great ADUs.

Conclusion: Is an Accessory Dwelling Unit Right for You?

Many factors should be considered in determining if you should add an ADU to your existing home. The first question I would ask is, “does this bring immediate value to me and my family”? Next, I suggest doing a lot of research about the costs and ease of building/adding this type of addition to your home. Lastly, consult with a real estate professional to determine the level of value and desirability that would be added (or deducted) from your home when it is time to sell it.

Doing this type of investigation will likely provide you with a clear answer as to whether it is the right way to go.