Thinking about building an ADU? There are some expensive mistakes you need to understand before you start construction.
After funding more than 100 deals involving ADUs, Kenny Simpson has seen what can go wrong, from appraisals and construction costs to refinancing problems and properties that don't produce the value owners expected.
In this week's The Brief, Kenny breaks down 7 ADU landmines every homeowner and real estate investor should understand:
1. What are you actually building?
Do the comps and rents support your plan?
2. What will it really cost?
Spending $350,000 doesn't automatically add $350,000 in property value.
3. The appraisal
ADUs can be difficult to value, and the wrong appraisal can create major problems.
4. Your takeout loan
Don't assume you'll automatically be able to refinance and pull your construction money back out.
5. Selling the property
The market may not value your finished project the way you expected.
6. Qualifying for financing
DSCR, residential and commercial lenders can treat these properties very differently.
7. Your team
The lender, loan officer, appraiser, agent, and other professionals you work with can make or break a complex ADU project.
The biggest takeaway: do the research before you build.
Understand the potential value, rents, appraisal, financing, refinance strategy, and exit plan before committing hundreds of thousands of dollars to an ADU project.
