In most markets, financing the construction of ADU’s is notoriously difficult. When constructing an ADU, you need to have all the cash upfront to pay a contractor for the cost of construction. This proves to be a tremendous barrier for many people since ADUs can cost between $40K-$200K to build.
In contrast, when purchasing a new home, you may need as little as a 3.5% down payment using a conventional FHA loan. This means that you would need only $10K cash in hand to purchase a $300K home.
Here’s some reasons why it’s historically been so difficult to get a loan for constructing an ADU:
- National banks can’t determine the value of ADUs as a product, and they typically won’t lend against a product whose value they don’t understand.
- Banks can’t establish the value of a prospective ADU because it’s difficult to appraise the value of ADU’s.
- It’s difficult to appraise the value of ADUs in part because there are so few permitted ADUs in the market place; there aren’t many comparables for the appraiser to use to establish an opinion of market value for the ADU and the main house together.
- There’s so few ADUs in the market place because most cities/counties make it difficult or impossible to build them.
This domino-like set of circumstances amounts to this: If you want to build a permitted ADU, it’s nearly impossible to access capital from banks.
…well, at least that’s been the case up till now.
This is why I am happy to shine a spotlight on one local credit union in Portland that offers a loan product that DOES help individuals who wish to construct an ADU. The new flier below spells out how their rehab mortgage loan product can be used to build an ADU.
Advantis Credit Union, which serves residents of Oregon and Washington, offers this loan product as a pathway for those who wish add an ADU to their existing property, or to purchase a property AND construct an ADU.
As with any bank product, there are some strings attached. For example, you must construct the ADU within six months of receiving loan approval. But, on the whole, this is a fantastic loan product for homeowners who need help overcoming the daunting capital hurdle that ADU construction presents. And at roughly a half point higher than their 30 year loan rates, the current rehab loan interest rates are very competitive (~4.15%, as of January 26th, 2013).In cities that allow ADUs, local banks and credit unions are more likely than national banks to understand the market value of ADUs, and thus, they are more likely to have loan products that help homeowners build an ADU on their property.
Since financing ADUs has been historically difficult, it’s wonderful to see local banks like Advantis Credit Union recognizing this gap and filling it for their local clientele. You can read more about Advantis Rehab Loan product on their website.