ADU

What it is

An ADU — accessory dwelling unit — is a second, self-contained living space on a single-family lot. It can be a basement apartment, a garage conversion, a backyard cottage, or a full above-garage suite. Some municipalities call them in-law suites, secondary units, or casitas.

The appeal is obvious: two rents on one lot, or a house with a built-in rental income stream that helps it appraise higher. But there’s a big caveat — and I learned it the hard way.

Why it matters

When I was doing bigger and bigger projects in Colorado, I was building second stories, doing major additions, and building accessory dwelling units in the back. That’s what led to losing $200,000 on a single deal. Hit the end of the line — ran out of money, and the house didn’t sell for what I thought it would.

On appraisals, ADUs don’t add value the same way above-grade square footage does. Basements and ADUs — on an appraisal, those don’t add a lot of value. It seems like a value add, but it doesn’t have the same value as your core house. An appraiser gives ADU square footage 50% credit at best, sometimes zero, depending on whether comparable properties in the neighborhood have similar units. If none of the comps have ADUs, yours is an oddbird — there’s no mathematical basis for pricing the premium.

You can’t comp an ADU against a non-ADU house at full value. The neighborhood ceiling is the ceiling, regardless of how much you built.

How it shows up

This comes up in two contexts: buying a house that already has an ADU, and being tempted to build one.

When buying, factor the ADU into the ARV carefully. Don’t use it as a reason to stretch your max allowable offer. Find comps that actually have ADUs. If there aren’t any, the ADU is priced at whatever the market will bear, which might be close to nothing in the appraisal. Ask your hard money lender how they’ll underwrite it before you bake it into your numbers.

When scoping a project, ADUs are almost never in the quick six. They’re extras — sometimes expensive ones. An ADU means a separate entrance, separate kitchen, separate bathroom, potentially a separate HVAC, separate electrical panel, and a permitting process that is its own gauntlet. Ross doesn’t build them on flips. On his rentals and new builds, he’s done them where the numbers justified it, but they’re never a base-case assumption.

The base hits lesson here is direct: a house with a finished ADU is not a guaranteed win. It’s an outlier property. Outlier properties have no comparable sales. No comparable sales means you’re speculating on price, not calculating it.

Related

over renovating, base hits, arv, max allowable offer, oddbird, quick six, range of comps, scope of work