Talk to any real estate investor these days and they will say there's "just no deals". Maybe, though, they're just not looking hard enough, or smartly enough. If you know what to look for, where to look for it, and have some patience, you can find the hidden value in deals that are regularly right there on the MLS in plain sight!
For this post, we are going to walk through a recent Bay Area investment that is breaking even for our clients (yes, really) and will cash-flow next year once the hidden value of the property is realized.
What should you be looking for?
An obvious hidden value to check is the square footage and the bedroom count for any investor. You come to know that a 400-600sq.ft home is usually a one-bed, 750sq.ft or more is a two-bed, and that decent three-beds usually start at 1,000sq.ft. As an investor, you should immediately be interested if you see 1,000+sq.ft home that is only 2-bed, 1-bath. You should immediately be wondering where the third bedroom and potential second bath could go.
For this property, the square footage and bedroom count immediately jumped out on the Redfin ad. So too did what looked suspiciously like an existing ADU. Our clients reached out and we got to work in advance of them closing the deal to see what was possible.
One quick look at the "floor plans" on the ad and you really start to see the opportunity. You realize that one of the bedrooms and one of the bathrooms must be in the ADU which leaves a whole heap of square footage for the Main House. People were apparently pretty unimpressed by the "master bedroom" at the open house, and it's lack of a master suite! This was actually a signal to our clients that house was missing some value you would normally have expected from something of its location and size.
Another pretty obvious piece of hidden value was the breezeway between the Primary Residence and the ADU. With the roof and necessary structure already in place, this would be cheap square footage to add. We didn't know exactly what would go in that space but new square footage always adds value. Plus, as you can see from the photo, the connections from inside to outside were not ideal and, in any California home, a better connection to the outside is always welcome.
MLS listing photo with sketch overlay showing opportunity to add easy square foot
The property, of course, did already have that one ADU but we also wanted to check if it could accommodate another. Our Clients were keen to maximize the property's house-hacking potential so we would turn the existing ADU into a Junior ADU as this home was going to be owner-occupied. Using a combination of the County's Assessor's Map, Googlemaps, and that drawing that was on the MLS Listing, we were able to put together a site plan sketch during the Client's due-diligence period to quickly test that out.
This is Northern California so outdoor living space, and connecting the inside to that space, is key to a successful home design. The beauty of this layout is in the private yet still decently-sized yards that each unit gets without making the property feel cramped. The primary residence still gets to feel like a comfortable single-family home but the site performs, in an investment-sense, like a multi-family property.
The thing we haven't looked at by now is the interior of that primary residence and how we can optimize the living experience!
What value can an architect provide in an interior home remodel?
Many existing single-family homes were built fast and without enough thought during the design process. As such, many just do not work as well as they could for the people who live in them. A 1,300sq.ft, 2-bed, 1-bath, single-family home (for instance) implies a LOT of space that probably no one is using.
The gallery below shows just a few examples of that wasted space; a superfluous hallway to a superfluous exterior door, a very inefficient bathroom layout, and a huge dining room that could pretty easily have become a third bedroom.
These were the clues but we really wanted to do a deeper dive and look at what the optimal solution could be and also provide our clients with some options that could provide options to suit their needs and the best bang for their buck!
The first sketch below identifies the areas of opportunity. The breezeway, we mentioned already, but just look at all those closets AND that exterior door beside the back bedroom in a house that has THREE back doors! Those closets, plus the inefficient bathroom layout seem like the ideal location for a new bathroom given they are already close by the existing plumbing.
Our proposed design adds value but also has a few important design elements that just make this home a much more enjoyable living experience. The connection to the backyard was actually a pretty poor one (the three back doors not withstanding). This version of the design creates a a more direct path outside and opens the relocated dining right onto it, creating a more fluid and enjoyable indoor-outdoor experience.
The house also didn't have air conditioning despite being in a very, VERY hot Walnut Creek. We took that as opportunity to add a new HVAC unit in the attic and create a new hallway in place of the old furnace that runs right by the new third bedroom through to newly added second bathroom. The result being a much more enhanced house that works for a family as both an home AND an investment.
But how much is that all going to cost? And is there a cheaper option?
The light-touch, very-easy value-add is to just create the third bedroom. It's makes for a pretty funky hallway but it does still work while retaining a fully functional living room. The other interventions could still be added at a later date as budget allows.
The alternate option is to spend the money on the big value-add first by infilling the breezeway to create new square footage. The increased equity along with the newly-designated, income-generating "Junior ADU" will then help fund the addition bedroom and bathroom in the main house at a later date. In the interim, the house is still a versatile home for a young family.
So where are things at right now?
We are still working it through with the City but things are mostly going to plan so far. The City's Planning Department are being sticklers about the Junior ADU needing to be part of an existing home. We need to permit the existing ADU as an addition to the main home and then, at permit approval, re-apply for it to be a Junior ADU. We do not have to wait until the home is built. Even they admit that's all a little silly, but that's the joy of permitting (and what architects are for)!
Construction is due to start in October for completion in February - by which point, the detached ADU will have been permitted and be ready to start on-site!
Our clients plan to move in then and rent out the Junior ADU portion with the detached ADU joining the housing stock two months later.
Can Dwelling Lab do the same for me?
Of course! We created our quick-turnaround Deal Test service for investors and future homeowners looking for value-add deals just like this one. We've spent years testing deals and are very familiar with California's ADU legislation and the latest Building Code. Our knowledge in the bank can be an essential tool for investors looking to understand possibilities of a property before they pull the trigger on a deal.
Please reach out to Dwelling Lab to see if we can help turn your property, or potential property, into an amazing deal!
(312) 952-9680
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