Deal Sourcing & Underwriting

Finding the Right Property

Not every single-family home is an ADU candidate. The best ADU deals aren't listed as "ADU potential" on the MLS — they're properties where you see what others don't. A two-car garage that nobody's using. A lot that's twice the size it needs to be. A shed in the backyard that's structurally sound but collecting dust.

Your job is to find these properties, verify the ADU feasibility, and underwrite the deal before anyone else recognizes the opportunity.

Where to Source ADU Deals

On-Market Sources

MLS / Zillow / Redfin / Realtor.com

Filter for:

• Single-family homes with large lots (5,000+ sq ft, or whatever threshold your market requires for ADU construction)
• Properties with detached garages or outbuildings
• Homes with "bonus rooms," "guest houses," or "in-law suites" that may already be partially converted
• Lots described as "oversized" or "double lot"
• Older homes in neighborhoods with alley access (great for detached ADU access)

Keywords to search in MLS remarks:

• "Large lot," "oversized lot," "extra lot"
• "Detached garage," "workshop," "barn"
• "Guest house," "in-law suite," "casita" (these may already be unpermitted ADUs — which is both an opportunity and a risk)
• "R2 zoning," "multi-family potential," "development potential"
• "SB 9 eligible" (in California)

Off-Market Sources

Direct mail campaigns targeting owners of properties with ADU characteristics:

• Pull lists from the county assessor filtered by lot size, zoning, and improvement type
• Target properties with low loan-to-value (owners with equity who might sell)
• Target absentee owners with older single-family homes on large lots

Driving for dollars:

• Look for oversized lots with garages, sheds, or unused space
• Properties that are clearly under-managed (an investor who might be willing to sell)
• Neighborhoods where ADU permits are already being pulled (visible construction activity)

Wholesalers:

• Let your local wholesaler network know you're specifically looking for ADU-viable properties
• Provide them with your criteria: minimum lot size, target zoning, preferred neighborhoods

Real estate agents:

• Work with an investor-friendly agent who understands ADU criteria
• Ask them to set up automated alerts for properties matching your lot size, zoning, and price criteria

The ADU Feasibility Screen

Before you underwrite the financials, you need to confirm that the property can actually support an ADU. This is a quick pass/fail screen:

Step 1: Zoning Verification

• Pull the parcel's zoning designation from the county GIS portal or assessor's website
• Confirm the zone allows ADUs (most single-family residential zones do in ADU-friendly states)
• Check for overlay zones, historic districts, or other designations that add restrictions

Step 2: Lot Size and Setback Check

• Confirm the lot dimensions and total square footage from the assessor record or plat map
• Look up the local ADU development standards: minimum lot size, required setbacks (front, rear, side), lot coverage limits
• Calculate the buildable area after setbacks
• For conversions: verify the existing structure's footprint and its relationship to setback lines

Step 3: Existing Structure Assessment

For garage conversions:

• Is the garage structurally sound? (Foundation, walls, roof)
• What's the ceiling height? (Minimum 7'6" in most jurisdictions)
• What's the square footage? (400+ sq ft is ideal for a studio or 1BR)
• Where are the existing utility connections? (Proximity to water, sewer, electrical)

For ground-up:

• Where on the lot can a new structure be placed?
• Is there adequate access for construction equipment?
• Are there trees, easements, or utility lines in the buildable area?
• What's the topography? (Flat is cheapest; significant grade changes add foundation cost)

Step 4: Utility Capacity

• Is the property on municipal sewer or septic? (Septic systems have capacity limits — adding a unit may require a system upgrade or replacement)
• Is there adequate electrical capacity? (Older homes with 100-amp service may need a panel upgrade to support an ADU)
• Is there a water meter with adequate capacity, or will you need a new connection?

Step 5: Quick Regulatory Check

• Call the planning department or check the city's ADU webpage (see Chapter 5 for a complete regulatory due diligence framework)
• Confirm: "I'm looking at [address]. Can I build an ADU on this lot? Are there any special requirements?"
• Ask about current permitting timelines and fees

If the property passes all five checks, it's worth underwriting.

Underwriting the ADU Deal

This is where RISE becomes essential. You need to model three scenarios to understand the full range of outcomes.

The Numbers You Need

Before you open RISE, gather these inputs:

Acquisition:

• Purchase price (your offer price, not asking price)
• Closing costs (typically 1–2% for an investor purchase)

Construction:

• ADU construction cost (get at least two contractor estimates, or use per-sq-ft benchmarks for your market — see Chapter 6 for the contractor vetting framework)
• Permitting fees (call the city)
• Impact fees / utility connection fees
• Architecture / engineering plans ($3,000–$15,000 depending on complexity — see Chapter 7 for the design and permitting process)
• Survey / soils report if needed ($1,000–$3,000)
• Contingency (15–20% of construction budget — this is a reserve for cost overruns, not an upgrade fund; see Chapter 7 for how to manage it)

Carrying costs:

• Property taxes (use the assessed value post-purchase, not the seller's current rate)
• Insurance (builder's risk during construction, landlord policy post-stabilization — see Chapter 9 for coverage requirements and costs)
• Utilities during the hold period
• Interest on your loan (RISE calculates this for you based on your financing inputs)

Revenue / exit:

• If selling: after-repair value (ARV) with the ADU completed. Pull comps of properties with legal ADUs in the area. If no ADU comps exist, use a blended approach: main home value + income capitalization of the ADU rent.
• If holding: projected monthly rent for both the main unit and the ADU. Use Zillow, Rentometer, or Craigslist comps for the specific neighborhood.
• Transaction costs on sale: agent commission (5–6%), seller closing costs (1–1.5%)

Modeling in RISE

Scenario 1: Fix & Flip (Build and Sell)

Open RISE → Select "Fix & Flip" → Select "Purchase"

• Purchase Price: your acquisition cost
• Rehab Budget: total ADU construction cost (including permits, architecture, contingency)
• ARV: your projected after-repair value with the ADU complete
• Hold Period: months from purchase through construction completion and sale (be conservative — add 2 months to whatever you think it will take)
• Transaction Costs: your closing costs on buy and sell side
• Carrying Costs: monthly taxes, insurance, utilities
• Financing: your expected loan terms (LTV, rate, points)

What to look for in the Returns Summary:

• Net Profit: is it worth your time and risk? Most investors target $30K+ net profit on an ADU flip.
• Cash-on-Cash ROI: what's your return on the cash you actually invest? 20%+ annualized is a strong ADU deal.
• Margin of Safety: this is the buffer between your all-in cost and the ARV. Above 15% is comfortable. Below 10% means one cost overrun or appraisal miss can turn the deal negative.

Scenario 2: BRRRR (Build, Rent, Refinance)

Run the same deal through RISE twice:

First pass — Fix & Flip mode to understand the construction phase economics (cash required, carrying costs, timeline).

Second pass — DSCR/Rental mode to model the stabilized rental income:

• Total property rent (main unit + ADU)
• Refinance value (this is your ARV)
• DSCR loan terms (rate, LTV, etc.)

Key question: Can you refinance out enough to recover all or most of your invested capital while maintaining positive cash flow? If yes, this is a BRRRR play. If the rent doesn't support a DSCR refinance at a high enough LTV to get your money back, you'll have capital trapped in the deal.

Scenario 3: Buy and Hold (Long-Term Rental)

RISE → DSCR/Rental mode

Model the property as a stabilized rental from day one. Include the ADU construction cost in your total investment. Calculate:

• Total monthly rent (main unit + ADU)
• Monthly expenses (PITI, maintenance reserve, vacancy reserve, property management)
• Monthly cash flow
• Cash-on-cash return on your total invested capital

Target benchmarks:

• Cash-on-cash return: 8%+ for a buy-and-hold ADU deal
• DSCR: 1.25+ for comfortable debt service coverage
• Monthly cash flow per door: market-dependent, but $300+/door is a reasonable floor

The Underwriting Checklist

Use this before making an offer:

• Zoning confirmed — ADU is a permitted use
• Lot size and setbacks verified — buildable area is adequate
• Existing structure assessed (if conversion)
• Two contractor bids received (or reliable per-sq-ft estimate)
• Permitting fees and impact fees confirmed with the city
• ARV supported by comparable sales
• Rent projections supported by comparable rentals
• RISE model shows acceptable returns in at least one scenario
• Margin of safety is 10%+ (flip) or DSCR is 1.25+ (hold)
• Total cash required is within your available capital (or financeable)

Making the Offer

Once the deal passes your underwriting, structure your offer with the ADU project in mind:

Negotiation leverage:

• Most sellers don't know their property has ADU potential. You're not competing on the same basis as a retail buyer. Use standard investment criteria to negotiate — you don't need to reveal your ADU plans.
• If the property has been sitting on market, the seller may accept below asking.
• If there's an unpermitted existing structure (a converted garage someone did without permits), this can be leverage — it's a liability for most buyers but an opportunity for you.

Contingency period:

• Use your inspection/due diligence period to get a contractor on-site for an estimate
• Use this time to have a preliminary conversation with the planning department
• Get your architect or designer to do a quick feasibility study on the lot

Financing the acquisition:

• Close fast with a bridge loan (Rev Cap can fund acquisition + construction in a single loan)
• A fast close with financing already in place gives you an edge over buyers who need 30-45 days for conventional loans