Norris Bruce
May 31, 2019

ADUs, Prefabs, and Stick-Built Homes with John Arendsen #645


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.

Episode Highlights

  • Why has Amazon invested in a prefab plant?
  • What is the normal turnaround time for a prefab home?
  • Why is construction seeing higher demand amidst labor shortages?
  • What are the comparisons of cost savings when looking at the different onsite prep?
  • What is the construction timeline for a stick-built home compared to an ADU of the same size?
  • What route do they see 3D-printing going?
  • What are these tiny homes available to buy on Amazon?

Episode Notes

Last week, they started talking about a lot of updates when it came to SB 13 and accessory dwelling units. Aaron started by saying he was afraid he and John were both going to be troublemakers in the ADU space with everything they have found. Aaron has been exploring 3D printed housing, but he was also really interested in finding out that Amazon had made a little bit of an investment in a manufacturing plant where the office was based in Santa Monica, but the manufacturing plant was in Fontana. He wondered why Amazon would be investing in a prefab plant and what it was like touring the plant.

John said it was a pleasant experience. For every manufacturer he is a dealer, he has been to many many of their factory tours. He also visited many other factories that he was not necessarily a dealer for that had been interested in over the years. The prefab house is really a first class act and a nicely balanced and organized facility. Their production is just impeccable, and their quality is better than anything he had ever experienced in the field just because they used jigs and rigs and make everything fit the way it’s supposed to fit. In addition, their process makes it airtight, and there’s just so many advantages to going with modular or you know manufacturing versus site built.

Aaron said it’s interesting how that’s happening right here in California in our own backyard. The prefab plant has a beautiful web site. They currently have one ADU on their site, and its base price, not including the permit, is around $100 grand. Aaron asked John what he thought of that model, and he really liked it. It was very open and spacious, and it had a lot of windows in it. In fact, it had so many windows that he questioned the gentleman who showed him the factory about the title 24 earthquake He said they could always retrofit that back into it. They had been using that particular model as a model in shows and exhibits.

Aaron said it’s very modern. It’s only 400 square feet, and it says the base price is $99,000. It’s a one bedroom, one bathroom, and the completion estimates are at $160 grand. It’s pricey, but at the end of the day, it’s probably a lot less expensive than going with a site built and doesn’t take nearly as long to get put on your property and COd (Certificate of Occupancy). Then you can actually start using it for investors, especially where time is money. You want to go with the fastest way possible and certainly visit your cash.

Aaron asked what their turnaround times have been, which John said was 4-6 weeks. This is not bad at all. During the summer months, it could extend to six to eight weeks. That’s typical with most manufacturers who have it seasonally adjusted. Aaron has experienced this on his flips in California. It’s about finding skilled labor to do a lot of construction. Knowing that you’re in a plant where people are building the same thing over and over-assisted by machines, there’s something very exciting about that from a quality control perspective. That’s the way of the future.

Construction in general, both commercial or residential, is the way of the future. He has a good friend who lives right down the street from a Hallmark a property that’s all factory built. It’s all done in plants. This Hallmark is not the card store, it’s a manufactured home manufacturer. Aaron said he has been learning a lot through this process, and the offsite building makes a lot of sense to him. He doesn’t see it changing; if anything it’s going to be the wave of the future, especially here in the state of California. It’s seen as very green.

With the few stick homes they built, the attention to detail you have to have now about runoff and dust can make it very expensive. It will be interesting to see the cost of that when you’re not having to build like that on site. Aaron asked John if he has seen a comparison of the cost savings when you don’t have to do that kind of onsite prep. John said absolutely. If you have to do a slab on grater or a raised stem wall foundation, you’re talking in the neighborhood of $10-$25,000 depending on the type and style you use. That’s just for openers. You then start building from there, and that’s what makes on-site construction so expensive. Right now the rate is probably right around $350 per square foot.

That’s expensive, but as he said, there’s labor shortages and high demand right now for new construction. There’s more demand for rebuilding and remodeling room additions than for just about any other segment in construction. There is a lot of new construction, particularly a lot of rehab work and remodeling.

If you’re comparing timelines right now, the planned prefab turnaround time of four to six weeks is really amazing. Aaron asked how the manufacturer builders are doing, whether they are behind or of a similar timeframe. John said they are pretty much getting caught up. They have had that run of bad luck with all the crises that were happening up and down the state, including the fires and the floods. They were also in high demand. John bought his first ADU at the end of 2016, and he did not receive it until April of 2017. This was right in the midst of all the other crises that were happening. He had been a dealer for this particular company for 22 years, and they still couldn’t do anything about it. They have caught up now, and they’re getting normalized and are back to a 4-6 week period.

John had just spent a day at Silvercrest getting re-indoctrinated with several new dealers, old dealers, and personnel from Silvercrest. He was brought up to date on their inventory and where they are in production. He left feeling pretty good that they can deliver in four to six weeks. Hallmark was recently acquired by a Canadian company. He is one of their dealers, although he is not entirely sure what is happening. The sales manager for Hallmark said that they probably weren’t going to continue making ADUs because the demand for what they do is significantly on the higher end, both multi-sectional, multi-story, and multi-dimensional site projects. The ADU thing was almost a thorn in their side, so he was glad to see prefab houses come along.

Aaron said at the builders show in Vegas, he talked to several people about ADUs, and it was not on their radar. If it does get big in California, he thinks that could very much change. Aaron next asked what the timeline is with stick built for an ADU of the same size. John said it’s not even comparable. You do a site build project, and it’s going to take you anywhere from six months to a year no matter how you cut it. You have so many trades involved, and you have so many scheduling issues happening. You also have change orders going on as well as site preparation. Sometimes you run into obstacles there. Also, the waste factor is unbelievable. The amount of waste on a site built structure is almost shameful.

Aaron asked if Clayton Homes is wholly owned by Berkshire Hathaway. John said he knows Buffet has the majority of it, and he remembered when that transaction took place. It’s been over 10 years now. When they first started, it was a little more low key. It was right after Hurricane Charley in 2004. He remembered taking a lot of people back there and helping them set up a bunch of homes that got blown down, or he had to put new ones in. He spent over a year back there, and that was in 2004/2005. This was right when Clayton Homes was being acquired by Buffet, so he has had it a while now. Now he’s on a roll. John wasn’t sure about it at first because he didn’t hear a whole lot about Clayton Homes when they first acquired the company. Now it’s pretty much a known factor that Buffet’s a major player.

Aaron said he doesn’t see anything under 750 square feet. It looks like the smallest thing that they have, at least on their Web site, is called the VAO, and it looks like a wobbly box. It’s $80,000, 920 square feet. As of now, they’re not going to play the ADU game. They’re also not in California, they’re located in Tennessee. They have a whole different demographic, and they have a whole different appetite or lack thereof for ADUs. It’s not as big a deal back there because it isn’t a law yet. Maybe at some point it will be, but right now there’s really no major incentive to start delving into the world of ADUs for a lot of manufacturers that are out of state. Almost all of your manufacturers that are here in the state, or even in Arizona, are into the whole ADU thing and almost all of them are coming up with some type of an ADU product. He just saw a very nice ADU brochure with some really good pricing. They’re leading the field to be perfectly honest.

Aaron next asked what it looks like and the size of it. John said they go anywhere from 400 to 840 square feet. In their brochure, they have eight different models. Those are the ones that he was talking about earlier that could be purchased for under $100,000 and installed. If you stay within the Florida 5600 foot square foot range of one bedroom, one bath, and then you start adding bedrooms and bathrooms, then your costs start going up almost exponentially.

Mighty builder is a 3D printed builder that, rumor has it, will be out this year with the under 400 square foot 3D printed home. He does not know the details on how long that will take from them vetting the site to actually 3D printing the outside structure. It’s such a new process. A lot of these 3D printed home manufacturers are saying things like, “Oh, we can print the structure in 48 hours or less.” Well, what does that mean? Is that just the core structure, and before that you have to pour the pad? After that, it’s got to dry for a week, and then all the insides are going to take another couple of months. He doesn’t have an exact timeframe, but it’s great in theory.

John did a couple of inspections for them down in San Diego not too long ago, and it’s an interesting company. It’s a great concept, and he hopes it works. It would be fantastic if they can start printing these things out. They had to marry up with a modular manufacturer near them in order to get their product out because they’re not licensed modular builders. In order for them to really expedite and facilitate any of their projects, they had to marry in with an existing builder manufacturer. There was a couple of issues there, it wasn’t all printed, and it had to be part printed and part modular. There was a question as to how they were going to integrate that. He thinks they did get a little bit ahead of themselves and retreated back to the drawing board.

Aaron said they are still heavily advertising, at least on his Instagram. He hopes to get them on the radio show at some point, and he actually invited Icon, a 3D-printed home manufacturer who he met at the builder show. He reached out to the CEO, Jason, and his PR team, and they said they would pass for now as they’re not ready to talk. They’re based out in Austin, and it is his goal to be able to print a structure for ten thousand dollars. That’s probably going to be a few years away.

It’s a substrate that they’re printing out, and from what he gathered the copyright is actually on the substrate with which they’re printing. Aaron wondered all along where this fits into the code and how long it will take. He still doesn’t have a lot of answers, but he is interested in the price point because if you could really print something for under $50 grand that fell under Title 25, that would be pretty exciting if you could rent it out for $1,500. That would make a big difference and would be huge.

This seems to be going the way of solar. When they first came out with solar and started experimenting with photovoltaic, it was taken from the 70s from the first energy crunch when they started developing and became serious about solar. That’s when they started with the photovoltaic solution, and they’re still working on that today. They just haven’t been able to really get that thing under wraps. It’s still macro technology, and they need micro technology to make it all work. He doesn’t think they’ve found that silicon chip yet, but he thinks that 3D printing will go that same route, although hopefully not as long. Aaron does not think it will take as long either. It’s going to take them some ramp up, and everyone’s trying to be real quiet to do the stealth attack. It would be really interesting to see how that could really help the housing issue that we’re having here.

Aaron and John next went on to talk about another factor with prefabs. John sent Aaron an e-mail with some structures that he could buy on Amazon, and he laughed because it was $8,000. Aaron asked if they were positioning themselves as a granny flat. John said it came across that way. His wife laughed at it too, and she’s the one that showed it to him because she’s an Amazon jockey. There’s not a day that goes by where they don’t get a package from Amazon where she looked at it and asked if she should order on.

If you go on Amazon and type in “tiny home,” there are these beautiful structures, but they’re basically glorified tree houses or playhouses because the base prices obviously do not include the pad, plumbing, or air conditioning. So we’re not comparing apples to apples here. This one is labeled a cabin kit garden house and is 209 square feet. It’s not like a habitable dwelling. Kids will probably go spend the night out there, and so will mom and dad if it’s next to the pool and it’s hot out. But as far as making it an actual legitimate dwelling structure or a property permitted and positioned on a parcel, they’ve got a long way to go. This is not going to pass the code enforcement.

They would never issue a permit. The first thing you would have to do when you pull a permit is take in your plans and specifications for the project or the model of the manufacturer on your venues. They couldn’t do it because they would not be approved drawings. In SB 13, there is a notice of correction for ADUs. If somebody had illegally converted a granny flat outside a detached structure or even the garage which was attached, as long as it doesn’t have health and safety issues, there’s going to be a 10-year hiatus for the owner to have time to fix it. This definitely wouldn’t fall under that, so Aaron didn’t want anybody thinking they were gonna be really cute, go to Amazon, and buy something for $8,000. Health and safety are definitely going to be an issue there.

John said after reviewing SB 13, it had redlined for 10 years, and then there were 5 years next to it. Aaron had not seen that, so he doesn’t it’s in its final stages and doesn’t know when it will go up for a vote. Aaron is sending out an email next week for Senator Wieckowski’s team because I think they really need to hear from the investor community, especially horror stories. He thinks they’ve been really good so far in working with him and telling him to send any horror stories he might have into them because they need real examples of some of the nonsense that’s going on and the park fees. They were trying to charge a $20,000 park fee in some city in Southern California. Like really.

These are all ridiculous entitlement fees. Looking over SB 13, John said he could see where if it does pass, it’s going to really tighten the noose around their necks to start complying with some of these issues and reduce some of these costs. It’s changing the rules and regulations, and it’s almost like they’re doing it as often as you change your sheets on your bed. Aaron said it’s a moving target, and he thinks what some investors don’t appreciate is that if they get in early and we give them case studies of things that they’re experiencing, sometimes those legitimate case studies could end up working their way into the bill, which is really exciting. He is going to send out a sample letter and write one himself, which he will take care of next week. This way, they get as much feedback from investors as possible.

Something that worries him about the panel that he and Bruce will be on is if the audience is full of owner-occupants, it’s going to be interesting since they will be creating a pool of new landlords who are inexperienced. Aaron loves that SDCIA has decided they really want that to be the audience because they’re going to need a resource when they get sued and have to evict people. Aaron wondered how you would even evict people from an ADU and if it is the same as if it is a regular single-family residence. John said they’re going to be writing books about this for a year. There’s a whole floor of obstacles and challenges out there that they haven’t even been able to address yet, one being insurance.

Aaron asked John what issue he is seeing right now with insurance. John said mainly he’s sure how they’re going to address it in many cases. He has been reaching out to a few insurance companies. He has been with AAA for 25 years, and they have insured everything he owns practically. But they said that they have to take it on a case by case basis. The first thing they will want to know is whether it will be an A or B unit or a one-half type unit with a separate address. That may you know impose certain standards by which they evaluate the insurance. It’s treated as its own single unit.

Then there’s the manufactured housing element. There’s only about two companies in the United States, Foremost being one of them and the other one being American Modern, that even insure manufactured homes. Unfortunately, the first one he mentioned is owned by Farmers Insurance. They won’t have anything to do with manufactured homes. So there’s at least one purveyor in the United States that will write it and that’s American Modern and that’s why I have the manufacturers the homes that I own now are all insured by American Modern.

They seem to be about the only game in town. They will have to write two separate policies: a homeowner’s policy and an American Modern to cover the manufacturing part of it. There’s so much going on that you can’t wrap your arms around it, and it makes him feel a little reticent to really start pushing too hard with folks on manufactured homes, although he will and he does. He also disclosed to everything he is disclosing to Aaron on this show. He doesn’t want them coming back to him later and saying he didn’t tell them about something, or they can’t get insurance, or the bank won’t let them fund it because it’s manufactured. He tells them upfront they could have these issues, and he probably turns away a lot of business that way or converted it over to a site built for which the people had to budget it. In short, he turned away a deal but also a lawsuit.

For real estate investors who are looking at this as an opportunity, it is an opportunity but it is also a moving target, and unfortunately every municipality is dealing with it differently. Now the state’s trying to come in and throw their weight around. Last week they covered Senator Wieckowski the specific city that one of the investors said they decided that there was a moratorium so they could study parking. Wieckowski said that’s not allowed.

As an investor, you have to decide to go ahead and move forward, but the city could make your life very miserable. At the end of the day, if you tried to sue the city, it’s going to take a lot of time, a lot of money, and at the end of the day you’re going to be a case study on whether it would even work or not. Be very careful as you approach this.

Stay tuned as The Norris Group will keep covering this in many interesting ways. If you can join us and you’re close to San Diego June 11th, you’d be able to be around some experts including John to ask questions personally. If you want to get a hold of John, the best way to reach him is online at www.crestbackyardhomes.com. There’s a lot of good information there, and they’re actually redesigning the Web site as we speak, so there will be a lot of new forthcoming information. You can also download their guide, which you will see on the right hand side of every page. It will say ADU Guide in red. Download that, and you’ll learn everything you need to know about what to do prior to even hiring a contractor if you follow the eight steps in there.

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.

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