A homeowner I''d worked with on an ADU permit called me last month, after construction had started, with a problem that wasn't really mine to solve. But the situation she described keeps coming up, so it's worth writing down.
Her construction loan was originated based on an appraisal that happened in early November 2025. The appraisal valued the proposed ADU at $185,000 "as-built per the proposed plans." The loan amount was set at $185,000 minus a 20% LTV reserve — so $148,000.
Plan-check returned her permit with corrections on November 18. The corrections required dropping the square footage from 850 to 720 (height-envelope issue I''ve written about before), and the redesigned ADU as-built was now valued at about $172,000 — $13,000 less than the original appraisal.
The lender did not re-appraise. The loan amount stayed at $148,000 — based on the now-defunct $185,000 appraisal. Construction proceeded. Costs ran on the original budget for a 720-square-foot build. By the time she was 60% of the way through construction, she'd realized she'd be short about $14,000 to finish, because the loan was sized for an 850-square-foot project that no longer existed.
Where did the $14,000 difference go? It went into her cash flow. She made it up out of savings. She wasn't happy about it.
Why this happens
Construction-loan appraisals for ADUs are typically done at one of three points:
- After permit issuance, before construction starts. (Slowest, but most accurate.)
- Before permit issuance, while plan-check is in progress. (Common.)
- Before plans are submitted, based on schematic. (Most common, fastest, least accurate.)
Most ADU lenders do option 2 or 3 — appraisal before permit issuance. The reason is timing. Lenders want to close the construction loan and start collecting interest as quickly as possible. Waiting for plan-check (which can take 30-90 days) costs them weeks of carry. Appraisers will appraise on schematic or proposed plans. So lenders go ahead.
The trap: if plan-check changes the project (redesign, square-footage reduction, code-required modifications), the appraisal doesn't get updated unless the homeowner asks. And the homeowner usually doesn't know to ask, because nobody told them the appraisal was done on a project that didn't yet exist.
What to ask your lender
Three questions, before you sign loan documents:
- "Was the appraisal done before or after permit issuance?" If before, you're in option 2 or 3 above.
- "What happens if plan-check requires the project to be redesigned at smaller square footage?" The answer should include either a re-appraisal at no cost, or an adjustment formula. If neither, that's the gap risk you're carrying.
- "What are the consequences of a re-appraisal showing lower value?" Some lenders will let you draw less; some will not adjust the loan amount but will require a larger borrower equity contribution; some will simply void the loan and require re-application. Get this in writing.
What to do if you're in plan-check now
If your loan is already closed and your permit is still in plan-check, ask your lender now whether they will re-appraise if plan-check requires redesign. If yes, get it in writing. If no, plan for the possibility you'll be making up a gap from cash. Build that into your cash-flow plan now, not in month four when construction is mid-stream.
If you have flexibility on lender choice, look for an ADU lender that does the appraisal *after* permit issuance. Roundpoint, Aven, and a few credit unions in California offer this structure. They charge a slightly higher rate or origination fee in exchange for the timing flexibility — but the gap risk is theirs, not yours.
What we tell ADU clients now
On every ADU project we take on, we ask the homeowner who their lender is and when the appraisal happened (or will happen). If the answer is "before permit issuance," we flag the gap risk in writing.
We also try to reduce the chance of plan-check forcing a redesign in the first place — that's our actual job, and the reason most of our ADU permits clear without square-footage reductions. But the gap risk exists whether or not we cause it. Plan-check can require redesign for reasons that have nothing to do with the drafter (zoning interpretation, AHJ change-of-policy, neighbor objections during notification period). Even on a clean set, this can happen.
Construction-loan appraisals for ADUs almost always happen before permit issuance. If plan-check forces a redesign, you carry the gap. Ask your lender what happens before you sign. Don't trust silence.
The homeowner I mentioned at the top of this post asked me to share her story (anonymized). She finished her ADU. It rents for $1,800/month, which makes the $14,000 cash gap manageable in retrospect. But she said "if anyone had told me the appraisal was on a different project than the one I was building, I would've asked the lender about it. Nobody mentioned it." That's why I''m writing it down here.