Aaron Norris is joined again this week by John Arendsen. He is a licensed General Contractor and manufactured home contractor as well as a licensed real estate broker and manufactured home dealer. This week, Aaron is continuing his conversation around accessory dwelling units.
One of the things Aaron forgot to mention in the last show was that some people think this is only for single-family residences. However, it is not. Rather, it is from 1-4. If you have a fourplex, you can build an ADU on your property. Aaron asked John if he has seen a lot of people understand this and take advantage of it? John said he has not had one person call him addressing a multiplex home. Aaron said he has had a lot of conversations, but they were always surprised because they did not know they could do that according to the new regulation.
Aaron last talked about the appraisal piece. He has had flippers who have had some challenges and concerns about the ADUs. Aaron thinks this is a risk. He gets more excited about real estate investors who are looking to add an ADU. The problem is this is going to be regulated more because of the short-term rental conversation. He has seen cities start to regulate it saying it has to be an owner-occupied property to do the ADU and rent out the unit. You cannot be a non-owner occupant and rent out both. Aaron asked John if he is seeing this trend. John said it is, and it is jurisdiction by jurisdiction. Some local jurisdictions do not have a problem with a property owner not being on the property. They can rent out both units. The short-term rental thing is a really huge issue with most jurisdictions. They do not want Airbnb’s or VRBO type activity in a lot of these neighborhoods.
Aaron asked which cities have completely banned the short-term rental and/or made the owner-occupied covenant to where you have to live there to be able to do it. John said there are both. They lean more towards having to live on the property in order to be able to rent one out than not. He only knows of a handful of cities where that is not necessarily mandated. Aaron has had investors go into a market like Palm Springs don’t know the licensee regulations. Several markets have limits on how many weeks out of the year or contracts you can have. It really messes with your numbers. If you are buying a property thinking it will be a sure-shot and basing it on the rental income you hope to get from a short-term rental, that is a bummer.
You have to do your homework here. You have to find out what jurisdictions are GOT friendly and looking for that added formula. One example is Oceanside who loves and embraces their GOT investment type properties. However, they have certain areas like the downtown pier district where they favor it. The areas they do not favor it and don’t allow less than 30-day rentals is in more of the residential communities. In the downtown areas and urban type settings, they embrace it. You just have to know which is which.
Aaron worked a lot with the state on the chapter that covers this discussion, and they created this big list of all the development departments. Aaron thinks there was over 400, and a very large portion of them had 0 ordinances. Their websites were terrible, but HUD did not have the most up to date information. It makes sense because a lot of the cities are still working on their ordinances. You really have to go to the development department, specifically ask, and get it by email. Just because they send you a specific thing does not mean there is not something else on the city council’s agenda. For example, the city of Riverside has a committee that looks at everything before it is approved. A lot of this could be in process, and you want to be talking to the person who actually knows what is happening.
Several times, John has made a phone call through the local ordinance on a specific point, gotten down to the permit counter, and it was totally contradictory. Aaron asked if there was any way to fight this. John said the issue is you do not always get the email, and this is why it is important to stress the point that you need that email. It’s important you can show them something in writing and show them the time you emailing and phoning these folks and showing them the results. This brings a person a little more acquiescence.
One of the interesting things Aaron talked about in his interview with Senator Wieckowski was they seemed very irritated that the cities keep layering on fees and trying to figure out ways to make money off of this. It got to the point where it almost seemed to suggest that tiny homes and RVs are not titled 24 or 25 but are under the DMV. He did not seem opposed to new regulation coming up to consider those things. His whole point was we need affordable housing units. Aaron asked if he could see this becoming a thing, to which he said he never understood why park models have been acceptable. They are built the same way as a manufactured home and are a little lighter. They do not use the 2 x 6 walls, but rather 2 x 4 and 2 x 3 interior. There is no reason why they could not go larger by special request.
John said he can understand tiny homes by themselves apart from park models. Tiny homes are not regulated. Anybody can build a tiny home in their backyard, and they are not following any particular code. The recreational vehicle goes under the Recreational Vehicle Industry Association (RVIA) and regulated by another. There is no tiny home manufacturer; but if there were, they would be park model manufacturers. A tiny home by definition is from a backyard hobbyist who wants a place in which to live. You cannot get them permitted; so if code enforcement wants to red tag them and make you remove them, they have the right.
Aaron said the JADU is smaller, and the tiny homes meet the definition by health and safety code as far as providing permanent provisions for living, sleeping, eating, cooking, and sanitation. Aaron wondered if the state is so desperate for inventory that they might end up pushing that through as being the state coming down and telling the cities they have to permit it. John said he hopes so and would love to see that. John has dealt with park models before, and you cannot tell them apart. He owns a HUD manufactured, 12×36 ADU that sits in a mobile home park. It sits right to a park model that is a 12×36, and you cannot tell them apart by looking at them. He sees no reason why they should not be allowed.
He understands why they do not allow tiny homes. If you do not know how they are built, you do not get permits for them, and they show up in somebody’s backyard without any regulation, then he could understand this. Aaron wondered what a park model is. John said it looks like a manufactured home. It is built to almost the same code, maybe a little bit lighter, as HUD would require for a manufactured home. However, John said they would have to make some alterations if they were to allow park models to be installed on the property. They would likely have to jump through a few hoops in order to make them more HUD compliant as opposed to RVIA compliant. The plumbing and electrical standards do not always apply to park models as do manufactured.
Aaron said one of the reasons he is spending so much time on the manufactured housing piece is he does not think a lot of people realize that they count as part of this regulation. You do not have to stick build anything. If you have a stick built in the front, you can get a manufactured house and put it in the back and it will count. Aaron wondered if there is nothing the cities can do about this at this point. John said yes and there is no legislation. Back in the 1980s, they made it a Federal law that you cannot show any discrimination against manufactured housing. It is legal as long as it is permitted and inspected properly and signed off. This is at the state level, so there should be no issue with the local jurisdiction as far as getting it through the permitting process.
The only other thing that would be an impediment to a manufactured home or any ADU is with an HOA or other things that prohibit ADUs. Both the state and Federal government do not have any jurisdiction over a private entity. An HOA, by definition, is a private entity. They are allowed to regulate themselves and eliminate or prohibit certain things. The state does not really have much traction.
Aaron is part of several HOAs, and one of them is financially not doing as well as it could. There was some extra land, so he pitched to them the idea of building some new homes. He had not thought of the manufactured home piece and did not think it would be well-received. Where he got stuck was when he contacted the city and asked them who to talk to about using some of the public spaces that are large and not green-friendly and whether they could even build something there. The response from the city has been strange since they said they did not know and he needs to go to the state, despite the fact that they handle zoning. Aaron thinks there is room for 6 more houses. If the community built them and sold them, we could do everything we want to do in the community. This includes bringing it back into the black and being fully upgraded.
John said one of the main reasons HOAs are so tight-fisted about their policies, especially with reference to manufactured housing, is because they all looked at it as wobbly boxes and trailers. They think they will be an eye sore to the community. They do not realize a manufactured home or modular can be build to the same standards as what is already existing on the property. If you have a stucco sided home with a red tile pitch, you can have a manufactured or modular component built to those same standards. You can have them shipped and delivered stucco and tile ready to the property. You do not ship them out with tile and stucco already on them because of the added weight and damage potential to both the roof tiles and stucco. There would be a lot of cracking and breakage involved. You can still factory build the component itself, you would just do the finished work on site.
Aaron and John next went on to talk about time frames. Aaron knew they were more popular and there was a lack of skilled labor these days on both sides of the aisle. John had seen both stick-built versus manufactured at this point. Aaron asked what the timeframes are to complete a project from start to finish. John used the city of Encinitas as an example to answer this since they are the most progressive jurisdiction in California. They just waived about $3,000 in entitlement fees and environmental fees. They have the cost of a permit down pretty low. You could go in for $5,000 and pull a permit for an ADU.
Another thing they did that John helped them with was develop an RFP (Request For Proposal) from architects in the area to come up with different types of floor plans and elevations that they could approve and met all their requirements. A resident should be able to go to the counter and tell them to go through the pre-approved plans from which they can then draw. They can walk out with a counter permit within a couple hours. The city of San Diego is looking at the same type of approach. If you can get more jurisdictions during that, theoretically the time it takes to go through that permit process is about the same timeframe it takes to build an ADU on an assembly line. In a perfect world, you can come out at the end of 4-6 weeks, turn key, and have Certificate Occupancy for your ADU. With a modular, there are a few additional steps involved such as the foundation. However, with the manufactured, you can do it in the same time frame.
Aaron asked what the realistic time frame is in most cities he is seeing. John said if you are dealing in the county of San Diego, they take the longest. It could be anywhere from as little as three to as much as a year. The county is the most difficult jurisdiction with which to deal. You still walk out of there at the end of the day spending $8-$12 grand. However, this is the good news since before the counties used to charge up to $40,000 for a permit. This is why the state keeps regulating this since they are trying to grease the wheel. ADUs are not something new as they have been around for 32 years, although they are new on the public front.
The biggest thing that has stifled most people and lost the most deals on ADUs is the front-end cost, time involved, and complications. Aaron has told investors to send him case studies that he has then sent along to the state. The case studies they have asked for were things that did not work. Aaron was really surprised how open the state was to receiving feedback. Senators Wieckowski and Nicholas are very in the trenches on this, and John is pleased with what they are doing. He has even hosted them a couple times. They have even given the jurisdictions 120 days to comply or issue a permit. John has still not been able to get an answer from the state on who is going to issue the permit and how.
The law basically says if the city cannot produce the permit in a specific amount of time, it defaults to the state and is considered approved. However, there is still the question of who is responsible for the permit. John deals with the state all the time since they deal with a lot of manufactured home developments, including park developments. They also do a lot of private parcel type work as well, so they are always dealing with the state. By comparison, they are much easier to get along with than other jurisdictions since they have a standard operating procedure for manufactured. However, they do not get involved with modular since that is up to the local jurisdictions. They have never gotten involved with a site build either. If somebody wants to build either of these on their property and are stifled in excess of that 120-day window, then the question is how the state forces them to issue a permit. There are still a lot of dangling participles.
Aaron is communicating with different counties on this as well. He hopes to interview the economic development director for the unincorporated Riverside County and talk to them about this. San Diego County is very different from Riverside County. The price point is a low lower, so the strategies may be different. Aaron knows one investor who is taking free and clear rentals. They are doing hard money and taking it out on the primary structure to be able to build an ADU. One investor in Victorville built the same size house on a very large lot, so now she basically has a duplex.
Aaron asked how the financing world is looking, especially when it comes to stick-built and manufactured. John said this can be a problem. It primarily goes back to being able to fund the loan based on comps. The biggest problem you can run into is if you put a HUD manufacturer ADU on a property with a stick-built home. The ball is then in the court of the appraiser. If there is not another HUD manufactured home within a reasonable distance from the subject ADU, sometimes they are left going to the nearest mobile home park. This could include the rent park or a downtrodden park. The ones that have been severely neglected are the derelicts, so good luck trying to pull a comp from this. If you just spent $200K putting an ADU on your property, it wouldn’t make sense to get a comp from a mobile home park where it may only come out at $50 grand.
This is the worst-case scenario. By and large, they are actually becoming more sophisticated. The best-case scenario is that they are slowly leaning more towards allowing them and not having to go to the next mobile home on the block. You may want to look at them more as an acceptable and viable addition to the property that they can count as additional square footage. It has been a slow process and is very jurisdictional. It all comes down to how it impacts the neighborhood in which you are working.
If you go to www.crestbackyardhomes.com, you can find out more about John. He has an ADU guide, about 15 pages. If you want to give him a call, his number is (760) 815-6977.