How to Value Condo ADU’s and Other Details

AB 1033 passed 10/11/2023, goes into effect 01/01/2024 
The new law will allow for ADU’s to be sold as condos, in cities that adopt the new law.  Homeowners and investors will likely be asking more questions about the potential for selling an ADU.  I have appraised at least a dozen homes with ADU’s and they can be challenging, but valuing a home and ADU that can be or has been converted to condo is much more complex.  I expect the ADU values to increase significantly when converted to condo, but the existing home will likely lose value.

How do you value an ADU condo?
I researched 2023 through October for detached condo sales in San Diego county, specifically properties with 2 to 4 homes not located within a development, which would be most similar to single family homes with an ADU.   All the sold comps I found in MLS were 2-4 units converted to condo ownership, as follows; 

This data is just a starting point and the price per square foot can vary significantly with living area in addition to many other factors.  An example from the data above is the home in the University Heights 92116 zip code selling for a higher price per SF than a home in 92037 La Jolla due to the significant living area difference.   The median PPSF of all 7 comps is $832.  ADU’s will be limited to 1,200 sf, the top 3 sales on the list all have over 1,450 sf, if they were 1,200 sf the price per square foot would be higher.

How do you value the main house?
With an ADU condo the main house is also a condo and the ADU is no longer an amenity to the main house, it detracts from the main house for diminished lot utility and privacy.  This is where the lot size and layout of the improvements can significantly impact the value.   The better the main house yard utility the higher the value.

To determine the value of the main house I performed desktop appraisals on some of the detached condo comps above to determine the market value at the time of sale as if there were no other units on the lot.  The sales price of the detached condo was then deducted from appraised value to determine the value difference in terms of percentage, which can vary with each property.  See below;

92037  634 Arenas St                1,514 sf             25%              loss in value to main home

92103  3656 Curlew St             1,456 sf             24%              loss in value to main home

92104  4128 Oregon St            1,246 sf              23.5%          loss in value to main home

91932  1252 13th St                   817 sf                22%             loss in value to main home

Example;

Let’s say a property in La Jolla is worth $2,500,000 without an ADU and the plan is to build and sell an ADU that will be worth $1,200,000, the total value of the property isn’t $3,700,000, it could be closer to $3,075,000 ($2.5M – 25%=$1,875,000, + $1.2M=$3,075,000)

Every property can differ and there are many variables that can affect the example above such as yard utility.  Larger lots that allow for a fully usable rear or side yard for the main house will result in the highest value to the main house.

Please Note: The percentage discounts are primarily for front and back units, so if the front home sold, the rear half of the lot is used by the rear home, this is a significant loss in lot utility and reduced privacy.  However, if the subject property were on a 20,000 sf lot, for example, and the ADU was built in the side lot leaving a fully usable rear lot with the main house, I would expect the discount to the main house to be less than the percentages listed above.  I don’t have any of those sales yet to extract that discount.

ADU Cost to Build
I recently contacted 5 contractors that build ADU’s and their typical costs ranged from $275sf-$400sf, depending on many factors including living area and quality of the materials.  In looking at the sales prices per square foot above, which range from $704sf-$1,189sf, it appears that building and selling ADU’s can be profitable.

Condo Conversion
To sell an ADU it has to be converted to condominium ownership with the rest of the property, so all legal homes and units on the property will be condos.  The condo classification is based on legal ownership rather than improvement type, a condo can be attached or detached.  One difference is condos include a shared interest in the entire lot with the other homes on the same lot rather than owning their own separate lot.  There are costs and issues to convert a property to condo ownership, here are some of them;

Lienholder approval is required, if you have a loan the lender has to agree to the conversion

The existing improvements will have to pass inspection for code compliance and permits

There is special insurance for condo HOA’s

The condo conversion fees can cost over $20,000

The condo conversion process can take over 4 months

Existing tenants require special disclosures before conversion, may have first right of refusal to purchase and may be entitled to relocation assistance equal to 3 months rent

Here are some issues to consider when valuing an ADU condo
Some of the first questions, is the ADU permitted, is the ADU converted to condo?  An ADU adds value to a property as an amenity, but once it’s converted to condo it will detract from the main property.  Here are some other ADU issues to consider;

ADU max living area 1,200sf, JADU 500sf

How many ADU’s and JADU’s can be built on the lot?

Is there car access to the ADU

Is there covered parking?

How much usable yard area?

Is there adequate privacy?

Is there a loan on the property?  Lienholder consent is required to convert to condo

Sirkin Law quoted typical condo conversion fees in San Francisco are $26,600 and 4-8 months

The beach areas with the highest land values appear to be the most ideal locations, detached units converted to condos are not uncommon in La Jolla.  Obtaining lienholder consent to convert to condo could be a sticking point for those with home loans.

Disclaimer: The initial research was done prior to 2024 and is just a starting point for valuing ADU condos, this research is a work in progress and will be updated as new information becomes available.  The data herein is not meant to be applied to any given property, each property is different and requires it’s own analysis to determine the ADU and main house values.  Please consult with an appraiser or real estate agent experienced in ADU valuations before making financial decisions regarding ADU’s and your property.