available for all owner or property types. However, let’s explore ways other investors are making this strategy work in hopes your location will soon have ADUs as an option. FLIPPERS Adding ADUs is likely not a good flip strategy, at least for now. In hot markets where inventory has been hard to come by, investors have spent the last few years creating deals by adding square footage like an additional bedroom and primary bathroom. But there’s a big difference between adding square footage and building ADUs. With ADUs, an investor is building the most expensive square footage (kitchen and bathroom) in a small footprint. An appraiser, unable to find like-kind comparables, will create a general cost per square foot and average it out across the entire property. This won’t work in your favor. However, as states lock down ADU regulations and municipalities finalize ordinances, lenders will come around eventually as their refinance business slows. The market needs a hybrid mortgage product willing to consider compa- rable sales but also include the income potential of the secondary unit. Until then, expect challenges on flip appraisals with ADUs. EXAMPLEADU STRATEGIES ADU projects are creative in their own right. Leave it to investors to take it to the next level and find more cre - ative strategies within the strategy. Kristi Cirtwill is an investor based in Southern California who special- izes in hoarder homes. She recog- nized the ADU opportunity early and was one of the first to tackle ADUs in multiple Southern California coun- ties. One current creative project she’s working on involves a lot split
plus ADUs. She is pursuing a lot split where she will then build an ADU on the property and then build a new home plus ADU on the new lot once it’s split. It’s taken over a year in permitting, unfortunately, but prices have increased in the market making the project even more valuable. Ward Hanigan is a well-known educator and investor out of San Diego who focuses on what he calls dingbat rentals. His average length of tenancy is 25 years as he focuses entirely on Section Eight senior housing. ADUs are ideal for his strategy as he always targets bungalow-style properties that are single-story, one-bedroom, and around 500 square feet. He’s target- ing a specific block where properties feature a detached garage that backs an oversized alley. He’s approach- ing owners with the concept of converting the garages to an ADU on his dime and he will manage it in exchange for a forgiveness note. When the owner(s) pass, the heirs inherit an income-producing asset. Yes, Ward does not own the property! Retrofit1 is a design and build firm in California that specializes in retrofitting soft-story buildings to meet the current California building code. Tuck-under parking on 1970s
multifamily performs poorly during large earthquakes. Instead of com- mercial owners spending $60,000 to upgrade parking, Retrofit1 is helping them convert the tuck-un- der parking into income units while simultaneously complying with ret- rofitting requirements. FINDINGADUOPPORTUNITY IN PUBLIC RECORDS There are a few tactical ways to identify ADU opportunities in public records. Some ways are augmented by your local knowledge of a local market. PROPERTY SIZE ADU contractors say they are looking for a minimum lot size of 7,500 square feet while the primary residence is 2,500 square feet or less. The number of stories will come into play, but the goal will always be to have enough room on-site to create an ADU that meets local building code while creating a functional and well-designed space that keeps both tenants happy. UPZONING Investors are finding opportunities on properties that have been upzoned but where the owner never took advantage of the opportu- nity. In California, if an investor
80 | think realty magazine :: may 2021
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