Valuation issues for granny flats

[mgs4]

Looking at the potential value add of granny flats does anyone have some experience on valuation issues for granny flats.

Eg lets say you buy a house for $400k that normally rents for $400 a week, you spend $100k to add a granny flat that rents for $200 a week. Your spend is $500k and your rent is $600 a week. But will a bank give you a $500k valuation for the property, some people have told me banks are very consertative and may only give you say a $60k val for the granny flat being a $460k val for the whole place?

The valuation issues obviously makes it more difficult to access further capital as needed to grow a portfolio, any thoughts?

 

[Scott No Mates]

Cost does not equal value.

 

[Jamie M]

Agree with Scott - last couple I did came in lower than the combined value + costs. GFs are good for strengthening yield/cash flow but not so much for value adding.

If your banks allows it - arrange for an on completion, upfront valuation before submitting an application.

 

[mgs4]

Agree with Scott - last couple I did came in lower than the combined value + costs. GFs are good for strengthening yield/cash flow but not so much for value adding.

If your banks allows it - arrange for an on completion, upfront valuation before submitting an application.

Thanks for the feedback. So you can provide a bank a development proposal, and rent forecast and they can give you a conditional valuation based upon that?

Is there any particular reasons why banks give lowers vals that the cost of the granny flat, is it because a lot of property investors get poor terms on the build of a granny flat? Or perhaps because PPOR buyers don't value a granny flat as much as the cost of it?

 

[Rolf Latham]

much depends on the demographic and median you buy in

Blacktown and region for eg tends to give 70 to 80c in the dollat increase

northern beaches 1.1 to 1.5

Small statistical data but seemingly valid

ta
rolf

 

[Jamie M]

Thanks for the feedback. So you can provide a bank a development proposal, and rent forecast and they can give you a conditional valuation based upon that?

No worries.

Pretty much - you need to get a fixed price building contract from the builder. You provide that to your banker/broker so they can order an upfront valuation. The bank will then lend against that value. If you have sufficient equity in the property already - you may not need to contribute a deposit.

Is there any particular reasons why banks give lowers vals that the cost of the granny flat, is it because a lot of property investors get poor terms on the build of a granny flat? Or perhaps because PPOR buyers don't value a granny flat as much as the cost of it?

It's what the valuers determine. I guess their line of thought is that just because you've slapped a $100k GF out the back doesn't mean the properties value as risen by the same. They probably aren't the easiest properties to sell either - so that reduced marketability probably has an impact on end value.

Cheers

Jamie

 

[Terry_w]

much depends on the demographic and median you buy in

Blacktown and region for eg tends to give 70 to 80c in the dollat increase

northern beaches 1.1 to 1.5

Small statistical data but seemingly valid

ta
rolf

Excellent observation Rolf and so true.

 

[mgs4]

much depends on the demographic and median you buy in

Blacktown and region for eg tends to give 70 to 80c in the dollat increase

northern beaches 1.1 to 1.5

Small statistical data but seemingly valid

ta
rolf

Thanks for the feedback, this variance is presumably related to the higher value per metre of land in the northern beaches relative to say Blacktown?

Northern beaches properties are obviously much more expensive which makes the capital requirements higher to buy something and benefit from the granny flat option.

Your quotes on these are in terms of bank valuations and not sales prices/market values, right?

 

[Rolf Latham]

Please see below

Thanks for the feedback, this variance is presumably related to the higher value per metre of land in the northern beaches relative to say Blacktown?

Perhaps, I havent looked into it with that much detail

What I have found works for me is to find the undeniable trends and rules and work with them and encourage my clients to do the same.

Northern beaches properties are obviously much more expensive which makes the capital requirements higher to buy something and benefit from the granny flat option.

in additon, the rental returns on grannies are commensurately higher !

Your quotes on these are in terms of bank valuations and not sales prices/market values, right?

Both. It is rare that there is a sustainable vacuum between market price and
valuer estimate over any period of time. The same lag of valuers looking to catch up exists for more normal stock, but where grannies suffer most in where there havent been many comparable sales and valuers must struggle to get some comparables, and thence they must resort to things like 5 bed houses.........

ta
rolf

 

[devank]

Eg lets say you buy a house for $400k that normally rents for $400 a week, you spend $100k to add a granny flat that rents for $200 a week. Your spend is $500k and your rent is $600 a week. But will a bank give you a $500k valuation for the property, some people have told me banks are very consertative and may only give you say a $60k val for the granny flat being a $460k val for the whole place?

This is would be my guess:
New rent for the main house = $375 per week
Granny flat rent = $250 per week
Additional costs: Water bill (unless the meter is read separately) + 2nd Insurance

New valuation = 400+ 75K = $475K.

 

[neK]

Here's a thread I wrote up using some real data.

http://somersoft.com/forums/showthread.php?t=103724

Confirms a few of the points mentioned here.

 

[C-mac]

So wait - it sounds like the best strategy here is to not buy houses and pay $100k granny flat, but rather buying houses that already have an old rundown granny flat on it; for cheaper; then spend $10k tarting it back up. You'd still achieve maximum rental return whilst paying less entry cost, no? You could even spend money on internal fencing, driveways etc. Toake both dwellings more distinctive and keep rental return strongest.

Anyone done this plan? There's a lot of old unrenovated granny flat properties in great suburbs out there.

 

[RetireRich101]

So wait - it sounds like the best strategy here is to not buy houses and pay $100k granny flat, but rather buying houses that already have an old rundown granny flat on it; for cheaper; then spend $10k tarting it back up. You'd still achieve maximum rental return whilst paying less entry cost, no? You could even spend money on internal fencing, driveways etc. Toake both dwellings more distinctive and keep rental return strongest.

Anyone done this plan? There's a lot of old unrenovated granny flat properties in great suburbs out there.

Most of these are really studios and not granny flats, and shouldn't be separately tenanted. Council seem to give a blind eye especially if owner lives in the main house and rents out the studio. Note if your neighbor complains, council have to investigate. Further spending on fencing etc might be compromised if council investigation confirms unlawful use of the studio.

Also Agents are now aware the studio can attract investor seeking yield hence the price reflects on sell price now.

If the studio already satisfied by council as class 1a and final OC given many years ago, then converting to a secondary dwelling/granny flat under SEPP isn't a problem, but you will need to paid S94 contribution fees along with other cost which could eat into your profit margin.

 

[julie]

wow-the granny flat here sent price through the roof.

Looking at the potential value add of granny flats does anyone have some experience on valuation issues for granny flats.

Eg lets say you buy a house for $400k that normally rents for $400 a week, you spend $100k to add a granny flat that rents for $200 a week. Your spend is $500k and your rent is $600 a week. But will a bank give you a $500k valuation for the property, some people have told me banks are very consertative and may only give you say a $60k val for the granny flat being a $460k val for the whole place?

The valuation issues obviously makes it more difficult to access further capital as needed to grow a portfolio, any thoughts?

Two weeks ago my neighbours put their house on market. They had a nice granny flat built a year ago. Now their main house was a typical weather board place and they have recently been selling for $580-$600k. here in Holsworthy. So I thought with the Granny they would get about $660k. I went down to the first open. There were about 40 people having a gander. The Granny was only one metre from main house. I went into the main house. It was unrenovated. I walked into the lounge and there were five people gagging to secure it. (yes they were chinese-good luck to them) and a lady wrote a deposit cheque on the spot. It sold for $740k. Spare me.
Well I just thought some real data out here in suburbia might interest people. And the selling point was the Granny Flat. I should say the agent was quoting the most ridiculous rent but then I guess people can easily check real rental data.

 

[Biz]

Im seeing the same thing. I think the valuers are just playing catch up. The ones that are properly done i am seeing go for well above replacement value. Its not just investors buying them, a lot of people are happy to live in the house or granny flat and have a tenant to help pay the loan.

Its not 400k house + 100k granny flat = 500k

In the real world it is 400k house + 100k granny flat = 550k or more.

 

[Dianab]

I have a friend who recently did a granny flat and needed to take out the equity. Some banks would not touch a house with a granny flat (small lenders). Anz only offered 70% because of granny flat.

 

[moridog]

There is an article on the Sydney granny flat boom on mobile news .com, sorry I struggle to cut and paste it and the kid is not here.