Why are 75% of Permitted ADUs Never Built?

Building an Accessory Dwelling Unit (ADU) is an exciting way to increase your property’s value, generate rental income, or create multi-generational living space. But one of the most common mistakes homeowners make is starting design and permitting before knowing how much financing they qualify for. I call it designing a Champagne Castle only to find out later that you’re on a Beer Budget. It’s wasted money and frustration.

In fact, 75% of ADUs that are permitted never get built – and financing may be why.

Here’s why loan pre-approval should be the very first step in your ADU journey before you do anything else.

1. Avoid Wasting Money on Designs and Permits

Hiring architects, designers, or paying permit fees before securing financing can be costly: - Design costs: Custom plans can range from several thousand to tens of thousands of dollars. - Permit fees: Fees vary by city, and submitting plans before knowing your budget risks non-refundable costs. - Scope changes: If your pre-approved loan is smaller than your intended design, you may have to redesign or scale back.

Pre-approval ensures your ADU plans match what you can realistically fund.

Also, what design would optimize your return on investment? Most clients believe they need to build and expensive 3-bedroom ADU to maximize their rental income, but really they’re maximizing the number of kids in their backyard. A good lender should review the potential rental income in different configurations, calculate rent vs. sell, and consider future uses to identity your optimal ADU design.

2. Set Realistic Expectations for Your ADU

Loan pre-approval lets you: - Know your maximum budget upfront. - Design an ADU that fits both your property and your finances. - Avoid the disappointment of falling in love with a design you can’t afford.

This upfront clarity allows you to plan strategically, ensuring your project is feasible from day one.

3. Determine Your Maximum Loan Amount

1.      How do you know how much you’re qualified for? Get pre-approved through an ADU-focused lender (like ADUloans.net). They evaluate:

o   Home equity

o   Creditworthiness

o   Debt-to-income ratio

o   As-completed ADU valuation assumptions

2.      What loan is right for you?

o   Construction-to-permanent loans are mortgages based on future values and future rental income.

o   Renovation loans might work if you recently purchased your property.

o   HELOCs are 2^nd mortgage lines of credit if you have some equity but don’t want to refinance.

o   Cash-out refinance if you have sufficient equity

3.      Include ALL project costs:

o   Construction

o   Permits and design fees

o   Utility connections

o   Extras like appliances, sidewalks, driveway and landscaping

o   Contingency for unexpected costs (recommend 10%

Knowing the maximum loan amount ensures you plan a financially realistic ADU.

4. Integrating Pre-Approval into Your ADU Workflow

A smarter, step-by-step approach:

1.      Check zoning & property feasibility – Make sure your lot and local codes allow the ADU you want.

2.      Get loan pre-approval – Determine your maximum budget before investing in design or permits.

3.      THEN Engage a designer or architect – Design your ADU within the pre-approved budget.

4.      Submit permits – Lock in funding and secure city approvals.

5.      Start Construction

6.      Rent or sell, checking in with your lender to re-check the optimal ROI and next steps.

This workflow ensures every dollar you spend aligns with your financial reality.

✅ Bottom Line

Start with loan pre-approval before paying for designs or permits.

It’s the most practical way to avoid wasted money, design frustration, and delays. Pre-approval gives you a clear budget, aligns your design with what’s possible, and makes your ADU project more likely to succeed.

Planning your ADU this way sets you up for a smoother, stress-free experience from concept to completion.