Aaron Norris is joined again this week by John Arendsen. He is a licensed general contractor and manufactured home contractor, a licensed real estate broker and a manufactured home dealer. John has been in the industry in all kinds of facet as well as his entire family for a really long time. He was on the show back in January and February, and Aaron promised to have him back because he was awesome in helping The Norris Group build a chapter on accessory dwelling units. He brings a really interesting angle because he’s on the ground of helping homeowners and real estate investors decide what’s best for them.
- What are his thoughts on SB 13?
- What particular markets does he work in?
- What is the issue right now with SDG & E?
- What is a prefab versus manufactured home?
- What do Title 24 and Title 25 cover?
- What is a junior ADU?
- How can people get a hold of John and find out more about his book?
There are currently nine bills in some form in the State Senate and Assembly. Aaron just talked to Senator Bob Wieckowski about SB 13. He has been a cheerleader for the ADU movement since the beginning. There’s a lot of really interesting things, specifically for real estate investors. With the owner-occupancy rule, the state is trying to regulate the cities to not allow which is really interesting. Aaron asked John if he thinks that this is going to go through and if it is being received positively. He said he hasn’t seen any of the bills being received positively by any of the jurisdictions with which he works. It’s a tug of war. People are resising it, saying they are being bullied, and they are not embracing it anywhere near as much as they should.
SB 13 comes along at a very critical time. Aaron agreed and said he has a few friends in the planning community, and they really don’t like that the state is forcing their hands and reaching into the the municipality code. The truth of the matter is affordable housing is a multifaceted conversation, and there’s plenty of blame to go around. This is a very interesting way to solve it so much so that in SB 13, as he talked with Senator Bob Wieckowski about, he wanted to make sure the language is clear that ADUs do count towards cities’ affordable housing goals.
Aaron asked John what markets he works in, which he said San Diego. They mostly stay in the county and don’t venture out since they’re not huge contractors. They don’t have branch offices or franchises or anything like that. They’re one family-owned operation, and they keep it close to the vest.
Lynch Bracknell was the mastermind that hooked Aaron and John together. They worked on building the chapter in September, and now they’re working on the January 11th event with the San Diego creative Investors Association. That event is specifically aimed a little bit more towards owner occupants. The panel he is moderating is going to be the mayor of Encinitas as well as one of her planners, Jeff. Alson on the panel is Greg Nicholas with the California Department of Housing and Community Development. They have a few finance people there and a taxpayer’s rights advocate. Some of those topics seem pretty boring, but the target audience is owner-occupied. The reason that they are doing so much ADU focus is because he wants to make sure that the investors on the streets are getting the information that they need.
Aaron asked John where things are getting stuck right now in San Diego. He said overall things are moving along a lot better today than they were the last time they spoke. There is compliance starting to come about, and pretty much all the jurisdictions are taking their time and enacting a lot of them. Several of them are having a tough time trying to deal with waiving entitlement fees and developmental impact and environmental impact fees. A lot of the public utilities wish they could charge for new service and new meters. That stifles progress to some extent, but not to any major extent.
The biggest problem is with SDG & E. They are so backed up; they’re two months apart. He called the other day for a client to see if they needed to have a temporary deactivation in order to do a crane set on a manufactured home in their backyard. It’s less than 10 feet from the power line. SDG & E has to come out and disconnect it temporarily with a four man crew and be there on standby during the whole process before reconnecting it. That’s a three to five thousand dollar added cost, and they can’t always guarantee that they’re going to show up on time. Plus, it’s a 2 month wait to even get somebody to come out and evaluate the project.
They’re the biggest debacle that’s going on right now. He talked to them first, and there’s nothing they can do about it. They’re having manpower problems like everybody else in the state of California. They’re having their labor issues, and they’re having some turnover some advancements. It keeps the ball rolling just a little too fast, and they’re not connecting all the dots. This is costing homeowners a lot of money.
Aaron said one of the caveats of bill SB 13 is that the city has 60 days to approve the permit. The city could approve the permit pending utility sign off. Aaron has a family member in the utility business at Los Angeles Department of Water and Power, and he talked to their team over there. On their side, one of the issues is not necessarily a crane issue; but if you look overhead and there’s a power line and somebody wants to build an ADU under it, there’s a liability issue there. If it’s a public-owned utility, that means the liability would be to ultimately the rate payers. So if the power lines fell, a fire happened, and somebody got killed, the utility could get sued and the rates of the consumers might increase.In L.A., the conversation was between the mayor’s office and the utility. The mayor’s office wanted someone to sign a waiver, but Aaron said this is something with which he would also be uncomfortable. It’s all cute until somebody gets hurt, and then people are looking for money.
It sounds like a different issue for SDG & E. It just sounds like they can’t get people out on site to look at the project and whether it’s going to go forward or not. John said another reason for concern is if you’re paying ten thousand dollars a trip each way for a crane, and you’ve got a truck with a 600 square foot ADU sitting on a street somewhere. If they both show up and are there when they’re supposed to be with all the streets are blocked off and traffic control, what if all of a sudden you get a call from Rescue Committee saying it’s not going to be able to make it or they just don’t show up. You’re talking major problems. It’s thousands of dollars, it’s going to end up nasty and with a very unhappy client and a homeowner and probably end up in a lawsuit. These are real examples.
Aaron next asked John who is calling him the most, real estate investors or the consumer. John said he is getting it from all sides, and it is a good 50/50. He works with investors every day, and he is an investor himself and is looking at a property right now. It’s peach-colored and has an old 4 unit carport. There is also a duplex behind it that was built in the 70s. If he could make a play on it, he would tear down those old carports and replace them with the 4-car garage and a twelve hundred square foot granny flat on top of the garage part. That would increase the usability and revenue producing potential tremendously on that property.
Making an enclosed garage instead of open car ports is accommodating the city’s compliance because it’s adding an extra dwelling on the property where there’s already a duplex. Last week they covered how some real estate investors don’t understand that this is not just meant for single-family residents. You can build an ADU on a duplex, triplex, or a fourplex. It doesn’t matter. It’s a coastal area where they’re getting pretty reasonable rents, but it’s not spectacular. Even out here in the Inland Empire, there are a few cities where people are bringing in their permits and they’re just rolling their eyes because they didn’t create the local ordinance. They’re just having to sign off on it, but they’re able to build something for around $100 grand, and it rents for $1,500 a month.
One of the frustrations is, depending on which municipality you’re working with, the conversation can be really different. There’s some cities that are looking at tiny homes being able to fill this ADU concept, but that’s a municipality by municipality play. Tiny homes are regulated the same way an RV is, so it falls under DMV code and it would fall upon the different cities to make that allowable or not. As a real estate investor, that play is particularly interesting because an RV or a tiny home doesn’t trigger reassessment of the property.
They next went on to talk about Title 24 and 25. Title 24 is a California Building Code where the property is stick built. That’s something where it’s going to be on a pad and be a modular. Aaron asked if the modular is just where the walls are being built off site, but the rest of it is constructed like a regular house. However, this is actually a prefab. This is what they call a kit home or a flat stack with a series of floor, wall, and roofing components that are all flat stacked on a low bed trailer. They are then hauled to the job site and erected. A modular is much like the manufacturered except that it doesn’t have a frame under it and is not under the auspices of Title 25. With a modular home, though, it does fall under the same Title 24 performance as site built homes do.
Technically, a modular is a prefab. They’re all prefabricated in the sense that it’s offsite construction. That’s the big buzzword. It’s replacing factory-built housing. What’s confusing is the prefab can fall under Title 24 or 25; it just depends. Title 25 deals with manufactured housing. You can’t use the word mobile home anymore, it’s profanity. Aaron was attracted to Clayton Homes when he was out in Texas on a trip. They had a plant there, although he didn’t get to walk through it. Manufactured housing has definitely come a long way. It’s not what people think of when you think of manufactured homes in the 70s and 80s. Some of these just look like a stick built, you really wouldn’t know the difference. In the 60s, they used to call him wobbly boxes because they were really thin and light. They weigh about 10,000 pounds, or 5 tons, per section. In total, they could be over twenty five thousand pounds. That’s the difference in the construction.
Aaron and John next looked at the pros and cons of looking at something that is stick built. Aaron likes talking to John about this because he looks at each site as its own thing. He will tell the client whether it’s going to be more efficient, time effective, and save money as well. This is for manufactured. Aaron asked if you’re looking at an owner occupant and if they are leaning more towards the manufactured or the stick built. John said from a cost standpoint, they all are very hopeful about the manufactured element. It’s a lot less costlly. You can put in a 15 by 40, 600 square foot, ADU in somebody’s backyard completely for under $100,000.
This generally includes all the utility work. John uses generally very cautiously because there are some variables there that really do impact the overall cost of the overall project. He is talking $25-$45,000 dollars, which is a huge gap. When you’re talking about $100 grand, that’s a big spread.
John and his son are in the site-built business too, and they are as busy as they have ever been. His son is doing multiple ADU projects and is bringing some of the unpermitted, nonconforming ADUsp to code or just reconstituting them so they’re legally rentable. Either way, it’s a fast-moving businesses. Just the other day he had to tell a client the bad news that it wasn’t going to work. This was the same client with the SPG & E situation. There’s some cases where it just won’t work. If you can’t roll it in or crane it in, then you have to build it offsite. Or, you could do a prefab, or kit home, or a flat pack.
When it is a Title 25, or a manufactured home, Aaron asked if this triggers a reassessment of the primary residence. John said yes because it has to be placed on a foundation in order for it to be permitted and signed off. You have to have it on the approved manufactured home foundation, which is not an important place like a stem wall or slab on grade. It’s a mechanical and is an approved and engineer approved mechanical foundation system that goes underneath the home. John said he can then give you reassess.
Aaron has never really been through that process before; so looking at stick built compared to a manufactured home, Aaron asked how the tax assessor looks at that. Is one more valuable than the other, or is it just price per square foot? Aaron asked if they look at the estimated primary and just carry it over to either the manufactured or stick built. John said he really doesn’t know how they assess that or how they come to terms with it. It’s all so new, and there’s very few manufacturers ADUs that he is aware of that are even going in because of some of the issues on site.
He imagines that if it’s on a foundation system, it would be assessed the same way as real estate would. One of the individuals who is going to be on the panel is an expert in that particular issue of appraisals and assessments. It will be interesting to get his take on the 11th, but his feeling is it will be assessed as an improvement and be assessed in the same way that a site built structure would be assessed. It’s only assessed on the added square footage, it’s not retroactive to the entire home. It’s just the improvement, so it doesn’t trigger a reassessment for tax purposes for the entire property.
This is really important, especially for owner occupants who have been sitting on a home for 40 years and the play is that they want to build one of these. They opened up the last call to SDCIA members as well as the members of The Norris Group subscription, and there was a lady that called after who was concerned about it. She was having problems in San Diego getting a bill as they were saying that she couldn’t do it and she was frustrated. But, they’re trying to be as most cost efficient as possible because they want to age in place. She was debating whether or not to live in the ADU in the back and rent out the primary. There’s so many different options, which is really cool.
Aaron and John next went on to talk about financing. Aaron has only seen stick-built homes and has not seen a problem with the appraisal coming back. It seems like the appraisal is just coming back based on a price per square foot. They just carried over into the back; and even when there’s not a lot of comps in the area, the appraisals are coming back as expected. It’s the financing that’s become an issue even if it’s to a primary with a stick-built ADU. A lot of lenders are looking at it like a duplex. If it’s an owner-occupant who wants to come in, they’re wanting a significant amount down. For the first time homebuyer, it kicks them out unfortunately.
Aaron thinks that will work itself out in time. He thinks lenders just have to get used to seeing this and see the opportunity that’s ahead. But when it comes to manufactured home, he almost wants to warn investors they have to see it coming. Some lenders just don’t like mixed inventory. John said that is an issue; appraisals are an issue and always have been. Funding is an issue with some lenders, while with some lenders it isn’t. It just depends on the situation. It applies to site-built ADUs as well. Until there’s enough of them out there for four people to come up with, it’s really a crap shoot. However, he likes that appraisers are wrapping their arms around the fact that there’s that improvement involved and they’re giving added value. That should help with the lending aspect.
Aaron knows people who are building junior ADUs. Aaron asked if this is when you’re converting a garage into a living unit. Specifically, if it’s an attached attached garage, then it is a junior accessory dwelling unit. If it is detached, then it is an ADU. Aaron had not seen an appraisal on that because technically you’re also getting rid of, possibly, an asset to the building that people would want to buy. He doesn’t know how an appraiser will view that. Aaron asked if you were to get rid of the garage and convert it into a junior living unit whether that would affect the appraisal to the negative. It seems you are getting rid of a selling point of the property.
It’s like a swimming pool. Sometimes there’s value added for a pool, other times there’s value deducted. It’s the same way for an ADU right now until we get enough of the amount there where lenders and appraisers can have substantial comps to choose from. Unfortunately, even if there’s a lot of ADUs in a given area, if it was 20 years since they built the ADU, they can’t count that.
Aaron ended by asking how people can get ahold of John and learn more about his book. If you go to his website www.crestbackyardhomes.com, open up any page and there’s a red tab on the right that says ADU guide. Download that guide through a step by step process. It shows everything he does when I go out to analyze or evaluate a property to build an ADU. There’s a certain protocol he uses to determine what it’s going to cost to do it, and this ADU guide is that step by step process. If a person was a real handy person, they could go through that every step of the way and would probably end up saving themselves about $5,000 on a lot of the upfront fees that you either pay a contractor, consultant, or an architect to do.
This really gives you a great starting point of walking you through the process if you’re new to it, especially for an owner-occupant. It’s easy on the eyes, and it’s not difficult to understand. John will be back on the radio show next week to discuss a prefab plant and a lot more.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
More on Hard Money Loans
- Florida hard money loans or call (407) 706-9700
- California hard money loans or call (951) 780-5856
Information on Note Investing
- Florida mortgage investing or call (407) 706-9700
- California trust deed investing call (951) 780-5856
Real Estate Investor Education & Resources
- Upcoming real estate investor speaking engagements and training
- Real Estate radio show and podcast
- Weekly news and videos
- Free Investor Roadmap – How to get started in real estate investing
- Free access to our web portal for real estate investors