Adieu ADU

Adieu ADU

There are two subjects that I keep returning to consider like a bee drawn to a flower. The first is getting an RV and using it to travel around the country. I think that one may finally have been put to rest two years ago when we rented a Sprinter van and went up to Ojai for what was supposed to be three days and turned out to be only two. That is how much RV camping very quickly proved disagreeable to both Kim and me. The second subject is that of building an Accessory Dwelling Unit (ADU) or granny flat or casita on our property to house guests beyond what out two guest rooms can hold. For three years now Kim has been asking me what we will do when all the kids want to come out at once. I have generally said that was a low-odds event so not to worry. Now we are planning a trip for 2023 summer to the Lodge at Red River Ranch and it seems like we will start by having all the kids with us here on the hilltop. That, combined with my current dearth of active projects caused the topic of building an ADU to once again come onto the front burner for consideration.

I tested the waters on the internet by Googling tiny home kits. One of the listings took me to Home Depot where they had the perfect little 400 sf unit that was tastefully designed and cost $33,000. That suddenly put me back into the ADU game even though I knew it would cost me a bit more than the list price after I was done building and fitting it out. I was still optimistic. I then went to the website of the manufacturer, where they had hundreds of models, mostly bigger and none as nice as the one chosen for resale by Home Depot. The strange thing was that the list price on the manufacturer’s website was $57,000. Unfortunately neither the Home Depot nor the manufacturer’s website gave enough detail to sort out what would give rise to the added $24,000 in cost. What the manufacturer’s website did tell me (as I pretty much expected) was that I would need a slab foundation, which would cost $6,000. It then went on to describe all the water, sewage and electrical connections to the unit. That made me think about the need for HVAC and internet connections. My mind was starting to spin. When I had last priced out the cost of a manufactured ADU, I could not seem to get it much below $150,000, and that was before furnishing it.

I spoke to my sister and brother-in-law, both local architects, and they said that I would be lucky to bring the project in under $150,000, even for a small, 400 sf one-bedroom unit like Home Depot was selling. I spoke with Kim and she didn’t feel it was worth doing if we didn’t build a two-bedroom unit. I could feel the price point heading towards $250,000. Let’s stop an consider that number for a moment. A two-bedroom unit pencils in at about 1,000 sf. At that size, we would have to keep it all very simple to bring it in at $250/sf in construction costs. The average residential construction costs in San Diego County are $300-400 per sf. If we take the average of $350/sf that implies a cost of $350,000. I believe that would go up somewhat for a free-standing ADU due to the separate infrastructure costs and HVAC. It would not be crazy to suggest that it would cost $400,000 if I had it built for me. If I did the contracting myself and pitched in with some of the manual labor (this would be my project du jour), I think I could bring it in for $250,000, which is about $200,000 more than I’m prepared to pay.

I have a point of view on local home prices and despite the recent rise in real estate prices all across the U.S. and locally, I am of the opinion that our house is already at the top of the local price point that this community can support. Our house is 4,000 sf and Zillow tells me its value is up to $1,815,000, which is twice what we paid for it ten years ago. That means it has appreciated by 7.5% per annum. That’s about half as much appreciation as the S&P 500 has realized over that same ten years. So, if this was a large cap stock portfolio, the house would be worth $3.6 million. However, since this was a leveraged investment, it is fair to say that my return has been closer to 20% give or take a little for the very modest interest I have had to pay over the ten years. But nevertheless, even if Zillow is right and regardless of the sort of return that represents, I simply don’t feel that this area can carry a value of an added $250,000. At 4,000 sf, the house is currently valued at $454/sf. The added cost of $250,000 would take that to $516/sf. Rancho Santa Fe has an average value per sf of $748, but this is decidedly not Rancho Santa Fe. This is my elaborate way of saying that I do not feel that we could get our money back on this ADU investment.

So the evaluation of the investment comes down to how much use we expect to get out of the ADU. We already have two guest rooms in the house, so this ADU would only be used when we had added guests. Kim specifically references my children visiting since we would be responsible for paying for their hotel rooms if we didn’t have the room at the house. I do not think they would come here en masse more than every other year (as it turns out they won’t be here until next year, so my estimate holds). According to actuarial tables, at my age, I have a life expectancy of 13 years. While I am sure my kids will maintain a good relationship with Kim after I die, I doubt there will be the impetus for the same type of family gatherings. Therefore, I am using 13 years or let’s say 7 times that they will all want to visit at once and therefore need to use the ADU. Even if we assume a weeklong visit each time, that would mean that the cost of $300/night or, say, $2,000 per visit. That means that the value of the ADU is $14,000. Even if we double the cost and double the usage, that still only gets us to $56,000, which is about what I was willing to pay to build the ADU. In short, this makes no financial sense.

Now then, am I forgetting any intangible value here? Clearly the real value of the “Granny Flats” is their availability for some needy relative (granny or not) that needs a place to live. I can think of an endless array of possible relatives who might find a need or a desire to come and live with us in our ADU, especially if we build it out very nicely. Of course, that would make it unavailable for its primary purpose of being available for the kids to visit. And while I know I will get into all sorts of trouble putting this into writing, I would posit the question to my readers of whether it is really value added to make it easier for someone to ask to come to stay with us permanently. Obviously, if the need should arise, that is an entirely different matter and one does whatever one must or should do when needed. But none of that says one must make an inviting option available for anyone in the family to contemplate.

All of this has caused me to put the ADU right along side the Sprinter camper van. It is time to simply say adieu ADU once and for all.