Prefab ADUs are more popular than ever. Accessory Dwelling Units (ADUs) add separate living space to existing residences. ADUs are separated from the home, but are often no more than a few feet away.
Building a prefab ADU can involve expenses beyond the purchase price depending on where you live. Hidden costs, such as increased property taxes and permitting fees should be considered before deciding which type of ADU will work best for your situation.
Funding a prefab ADU is within the means of most homeowners as ADUs are often small structures that will fit in your back or side yard.
Today we will discuss the cost to build an ADU, and the additional expenses that may be required for setup.
What is a Prefab ADU?
A prefab ADU, or prefabricated accessory dwelling unit, is a detached form of ADU built primarily in a factory setting. Detached ADUs tend to be the most expensive type of ADU to construct. Site built detached ADUs involve additional expenses like architects and contractors because they are constructed on site.
Prefab ADUs built to appeal to a wide range of buyers, so they may not be attractive to a buyer looking for a custom built ADU. Prefab ADUs will have floor plans that take advantage of the space, where a custom designed ADU may be designed more for comfort.
What Are the Advantages of a Prefab ADU?
Prefab ADUs take advantage of economies of scale to produce an outstanding structure for a fraction of the normal cost. Here are a few of the advantages of a purchasing a prefab ADU:
Prefab ADUs are very affordable because they spread the design and manufacturing costs over hundreds of units. Where a custom ADU might require thousands of dollars in design costs to build a single unit, ADUs are repeatable designs. As a result, a modern look is achieved without investing thousands in design fees.
- High Quality
Build quality is also very high with prefab ADUs, because manufacturing efficiencies take effect. In a factory setting, prefab ADU construction can be highly controlled, which translates to better build quality.
- Computer Design
Because prefab ADUs are not custom built (as many ADUs are), modern, computer aided designs are possible. As a result, high quality prefab ADUs can be produced at a fraction of the cost, with very high consistency in manufacturing.
Similar to the automotive industry, prefab ADU builders use manufacturing efficiencies wherever possible. The result is a high quality, modern form of housing that is cost-effective, well designed, and durable.
Are Prefab ADUs and Tiny Houses the Same Thing?
Accessory Dwelling Units, or ADUs, differ slightly from the tiny home design concept. Although both share similarities, the primary difference is that an ADU is permanently installed while a tiny house is usually portable. Tiny houses often still receive additional foundation support from masonry, but the floor is usually built from steel, not wood.
ADUs are Permanent
The term ADU also describes a variety of design modifications to add living space to an existing home, not just free standing units. An ADU can describe a basement remodel, garage conversion, or a completely detached structure. A free-standing ADU is most similar to a tiny house in structure and size.
Tiny Houses are Mobile
In contrast, a tiny house is free-standing and will usually be completely independent of nearby structures, like another house. Tiny houses are often built in a factory setting like ADUs, but they sit upon a rolling frame that can be transported to the homesite. As such, many tiny houses can be relocated to another site easily, while an ADU will become a permanent structure.
Can I Install a Tiny House Anywhere?
Due to local ordinances and zoning, a tiny house cannot necessarily be installed just anywhere. Because tiny houses are more like mobile homes than traditional housing, they can be considered a mobile home.
In some states, mobile homes must reside in a mobile home park, or other approved zone. Most ordinances define a mobile home as having no permanent foundation, which also applies to most tiny homes. Check with your local zoning official before investing in a tiny home to ensure compliance with local zoning.
Which is Cheaper, A Tiny House or an ADU?
Tiny houses are usually attractive to cost conscious buyers, while ADUs can be very elaborate. Typically, tiny houses will incorporate hidden storage, multi-use shelving, and fold away appliances, and make the most of every inch of space.
ADUs are generally built to suit the occupant, so additional space is only one concern in most cases. ADUs are commonly built for elderly parents to keep them nearby, while providing independence.
Depending on the design of the ADU, connecting the main home to the ADU may require the addition of wheelchair ramps, breezeways. These can have a significant effect on the overall cost and should be considered.
Tiny houses usually cost less than an ADU because a tiny house’s costs are mostly fixed. Small design changes can lead to significant savings over a prefab ADU production run. Site-built ADUs are less affected by small efficiencies because the project is only being built once, compared to thousands of times.
Tiny houses are designed to sit on a very small space, so the costs to install them tend to be small. An ADU can take any form or size, so ADUs on average will be more expensive to build. Slopes must be considered when building an ADU so as not to cause problems for the main home.
How Much Does an ADU Cost?
The range of pricing to construct and install an ADU will be broad. For example, modifying a well built garage space into an ADU can often be done for less than five thousand dollars ($5,000 USD). Conversely, a custom, free-standing ADU requiring new services can cost 30x more.
A prefab ADU can cost as little as $50,000, or as much as $250,000 to purchase depending on the design, size, and location.
Custom Free-Standing ADU
Custom, free-standing ADUs are typically the most expensive. A free standing, custom ADU is really just another home built on the same lot. The ADU may, or may not share utilities with the main home. If not, a custom, free standing ADU will incur the same construction expenses as any other home, so they tend to be more expensive.
Custom ADUs usually add value to the property, especially in areas friendly to ADUs, like Los Angeles, California. As a result, the cost to build can sometimes be offset by the increase in home equity.
An attached ADU will often be the least expensive option because much of the construction is already done. Attached ADUs are usually treated as a remodel, as opposed to an addition. Prices can range from a few thousand dollars to hundreds of thousands, depending on how the ADU is finished.
Detached Garage ADU
Garage ADUs are another less expensive ADU option. Again, the primary structure is there, so the conversion often focuses on updating a dead load design to a live load design.
Many garage ADU conversions can be done for less than $10,000. However, if the ADU is over 1000 sq.ft. and requires extensive updates, the cost can be 5x higher to build.
Junior ADUs are a small form of ADU, usually containing less than 500 square feet of living space. Junior ADUs are defined as being completely contained within an existing structure, yet having separate its own egress door. Junior ADUs can share amenities with the existing home, like a bathroom.
Basement ADUs are very common because so many homes are built on sloping lots. Many homes have full or daylight basements that provide the required egress door. Basement ADUs are often very cost effective because nearly all of the structure is already in place.
Which is Cheaper: A Prefab or Site Built ADU?
With very few exceptions, a prefabricated ADU will be less expensive than a site built ADU. Prefab ADUs are all about using efficient construction techniques to lower the cost to build. Products can be built much more efficiently in a factory setting than a work site because nearly every aspect of the build can be tightly controlled.
A prefab ADU avoids much of the waste and inefficiencies of on-site construction because it is not affected by the weather, material deliveries, and labor not showing up. A prefab ADU will still require the services of a professional to set up, but these costs are tiny compared to the costs to build the same structure on site.
What Are the Hidden Costs of a Prefab ADU?
Prefab ADUs eliminate or reduce much of the work and expense of adding living space, but they still require the same build quality of a normal house. Any residential construction project will require the creation of a “seat” where the structure will contact the ground. This involves using machinery to clear away vegetation and establish a flat footprint for the prefab ADU to sit on.
The costs associated with proper permits should also be considered. Here are a few other unforeseen costs to be aware of:
Transportation costs to move a prefab ADU can be significant depending on the distance from the factory. Prefab ADU manufacturers usually offer help in calculating transportation expenses.
If a prefab ADU design is modular, the installation may also involve machinery like a crane. Some prefab ADUs can be assembled together on site, so often a crane and operator are hired. Most crane operators can be hired in increments of a half day.
Some companies offer prefab ADUs in kit or part form. However, the parts still must be assembled to form the ADU. Labor, consumables, and insurance coverage can add significant costs to a prefab project.
Increase in Taxes
In most areas, the addition of a prefab ADU will increase the overall property taxes for the property. Property taxes are based on value, so if you increase the value of your property by adding a prefab ADU, your property taxes will probably go up.
However, as prefab ADUs become more popular, many local governments put a 1% cap on the additional value for tax purposes. In most instances, the cost of the prefab ADU is not considered for tax purposes, just the value it adds to the property.
Site and Foundation Preparation
The seat will ensure that vegetation is cleared away and the appropriate ground slope is established. The seat is also required to create a flat spot for a prefab ADU and ensure the soil will accept the footings.
For any prefab ADU, footings must be dug and ground slopes must be established for drainage. Due to the small cost of a prefab, sometimes site preparation represents a large portion of the total cost.
However, because most ADUs have a small footprint compared to a standard home, the foundation and associated expenses for an ADU are a fraction of a regular house. Landscaping and other drainage control measures are also common to correct any issues the addition of the ADU foundation may cause.
It is important to include the initial costs of making the utility connections in your budget. Water, electricity, gas, and internet connections can add up, especially if new poles will be required. Trenches may be needed for underground utilities or soil pipes, which usually involve the services of a trencher.
Electrical service, plumbing supply lines, and gas requirements all have the potential to inflate the total cost of installing a prefab ADU. Careful consideration should be given to determine where the electrical and plumbing services will come from.
Upgrades to the main panel and water meter may be required, so planning for them in advance is a smart move. For example, a small prefab ADU might be serviced with a subpanel attached to the main home. However, if the main panel does not have room for additional circuits, a new main panel may be needed.
Plumbing and gas connections may also require modification to provide gas and water to the prefab ADU. Often the best strategy is to have new dedicated meters for both water and gas installed for the ADU. The initial cost is a bit higher, but that way the ADU cannot adversely affect the pressure of these utilities entering the main house.
Permitting an ADU
Most local jurisdictions require some form of permit to install an ADU on a property. Property setback lines, population density, and zoning can have a significant impact on an ADU project depending on where you live. Some regions are more friendly to ADU construction than others.
For example, in an effort to combat homelessness, the state of California introduced a bill known as SB-9, or the California Housing Opportunity and More Efficiency Act (HOME). In effect, the HOME Act prevents local jurisdictions from disallowing one additional ADU to be added to a single family home zoned for single family living.
Zoning regulations are designed to control what type of structure can be built and for what use. Single family zoning usually indicates that only one single family home can be built on each lot within the zone. SB-9 however, opens the door for California residents interested in adding an ADU by removing this older zoning requirement.
Why is Permitting an ADU Critical?
Permitting an ADU project is like buying cheap insurance. Permitting an ADU project usually means a building inspector will ensure that your ADU installation is correct. Once approved, this means your ADU was installed as it should be and is safe to occupy. It also means a prospective buyer can look up the record of your ADU and see that it was done correctly.
Additionally, permitting an ADU means your neighbors cannot complain about the size or location of your ADU. When your ADU project has been approved by a building official, they will defend you in the event of a dispute. If you consider the minimal expense of permitting an ADU project, the benefits of quality construction, third party oversight, and peace of mind are obvious.
What is the Downside to Permitting an ADU?
As with any construction project requiring permitting, a copy of the permit is forwarded to the property tax assessor. As a result, when taxes are reassessed, the value of the property increases, so the tax burden does as well. However, increasing a home’s value is rarely a bad thing, so increased property taxes can be offset by a home’s increase in value.
How Can I Finance an ADU?
Financing an ADU can often be done through a construction loan, home equity loan, or financed by an investor. These ADUs can include garage remodels, attached ADUs, or free-standing ADUs. Some options even include no monthly payment. In California, legislation and an ADU friendly environment provide even more financing options for ADUs.
Financing an ADU using a construction loan usually works like a traditional construction loan for a home. In most cases, the buyer will have a 15%-20% down payment and the construction loan essentially reimburses the buyer for work performed. Buyers are qualified in advance, so the satisfactory completion of the project is usually the goal.
After the project is completed and approved, the balance of the funds are disbursed to the buyer. In most situations, the construction loan is then converted into a mortgage. Often this allows the buyer to avoid paying closing expenses twice for the same project.
Construction loans typically require a substantial down payment. Depending on the size of the ADU, the down payment required can be significant. Buyers depending primarily on financing may find a construction loan more difficult to obtain.
Fannie Mae Renovation Loan
Fannie Mae loans take the value of the project after the renovations into consideration. Since the ADU will add value to the property, this allows the owner to borrow against the future value of the property, not the current value.
Fannie Mae loans can also work with CALHFA grants, which. Low and moderate income borrowers can apply for reimbursement of up to $40,000 USD for the predevelopment and non-recurring closing costs incurred to install the ADU.
Fannie Mae backed loans are designed to help the most homebuyers, but not everyone will qualify. Fannie Mae secured loans are primarily for low and moderate income earners, so those with large incomes may be disqualified.
HELOC is an acronym for a type of financing that uses home equity to finance an ADU. Known as a Home Equity Line Of Credit, HELOCs are often the most feasible way to finance an ADU. Since the ADU will become part of the property, the financing is often treated as a home improvement loan.
Essentially, the existing home is appraised and compared to the balance left on the home’s mortgage. If the amount will cover the cost of the ADU, some lenders will offer a temporary HELOC to finance the ADU. When the ADU is completed, the property is re-appraised and a new first mortgage is created.
Generally, as with any loan the buyer’s goal is to avoid as many closing costs as possible. Some lenders offer packages that use the home’s equity as collateral to offer streamlined financing options. When set up correctly, a new loan can be created at the touch of a button, so the costs are minimal.
Taking out a HELOC may tie up the equity in your existing home. Depending on how much equity you have compared to the cost of the ADU, you may be limited in future borrowing. A HELOC will use your home’s equity as collateral for the loan, so if you need to borrow money in the future, the available funds may be limited.
Home Equity Investment Products (HEIP)
Home equity investment products are a relatively new form of home equity provided by investors instead of bankers. HEIPs allow homeowners with equity in their homes to literally sell a financial interest in it to an investor, while still occupying it for the length of the agreement.
Instead of borrowing money traditionally, these homeowners contract with investors for a lump sum that is not repaid in monthly installments, but upon the sale of the home. HEIPs can be used to finance ADUs or any other home improvement that increases the property value.
In these HEIP arrangements, the investor views the home like a stock, hoping the value will go up over the life of the investment. The investor usually has a secondary position behind the original mortgage lender and is repaid their investment when the home is sold.
The value of their investment however, is completely tied to the value of the home. If the resale value increases over time, the investor will have made a safe, profitable investment. If the value falls however, the investor can’t go back to the homeowner and demand the investment be repaid.