193 – Everything You Need To Know About ADUs in The Bay Area with Erik Preston

Synopsis

Erik is part of the leadership team at Habitat ADU, which is being rebranded to Throve ADU. He handles business development and deals with homeowners and investors looking to add accessory dwelling units (ADU). Most of their projects are spread in the Bay Area and Southern California. Today, Erik gives us all the information you need to know about adding ADUs in the Bay Area.

Key points

With new legislation that started on January 1, 2020, it has become more feasible for investors and homeowners within California to add ADUs. This legislation is not available nationwide.

Previously, local counties and municipalities made it difficult to get approvals. Neighbors and homeowners’ associations (HOAs) would also get in the way. Compared to Vancouver, Canada which had 30% of homes with ADUs, in our country, only 1% of homes have these.

With current mandates to build more housing and a statewide failure to make enough housing for the demand, the new legislation means that as long as you check the right boxes, the state will give you ministerial approval within a maximum of 60 days.

Benefits Of The New Legislation

Now, adding an ADU is a lot less difficult. There has been some loosening in the restrictions on size requirements, parking requirements, and owner-occupancy requirements. HOAs have also been limited in their powers to interfere.

As long as there is an existing public transit within a half-mile, parking can be converted into an ADU. Setback requirements have been standardized as well. Before, the requirements asked for 40 feet from property lines, but now only 4 feet for the rear and side and 10 feet from the front of residence are needed.

What Is An ADU?

Usually called accessory dwelling units or ADUs, they are known also as second units, granny flats, in-law units, or casitas. They are basically secondary dwelling that exists on a single parcel.

Detached or stand-alone units could be on a side yard or backyard. Or they could be attached, like garage or basement conversions.

Single-family homes have the right to add 1 detached ADU and 1 junior ADU. This means that every single-family home can become a 3-plex. A junior ADU, however, has some differences because it should be less than 500 square feet And it still requires owner occupancy to be rented out.

For multifamily properties, you can build 2 detached ADUs.

The main requirements for an ADU include having its own entrance, food preparation or cooking space, living space, bedroom, and bathroom. For junior ADUs, the bathroom can be shared with the primary residence. You can also submeter the utilities and have a separate address for the ADU.

The Process Of Getting An ADU

Before anything, you need to look at your property to decide what options fit your needs. Research and get a sense of the options available to you.

Once you’re ready, a site feasibility assessment will be done, which is now done remotely and virtually by an ADU specific provider or architect. They’ll look at how much space you have, the things that need to be removed such as trees, and measure the slope of the area.

After that will be the design session when sighting and a more detailed scoping of the feasibility of your space are done. You can either choose to do a stick build from the ground up or get a prefab.

Once you’ve decided, you will be signing a contract, putting down a deposit and getting permits. Zoning, building, fire department permits would take around 60-90 days. Then the construction process starts.

Stick-Built ADUs Vs Prefab ADUs

The process for constructing a stick-built ADU is longer as you need to follow the timeline For prefabs, you have the power to control the timeline since site work and factory construction can be concurrent.

On-going inspections will usually last for 5-7 months for prefab and 12-14 months for stick-built after which you’ll get a certificate of occupancy and can lease out the unit.

Because of the shorter time needed for prefab, you can complete the process from permits to installation in as fast as 3 months. Plus, there will be reduced scheduling conflicts, you won’t have to worry about having a ton of people on the property.

What To Look Out For When Getting An ADU

Look at the city and how ADU friendly they are. Having an ADU friendly jurisdiction won’t hurt. Check the lot size or backyard to make sure that it is big enough. Lots that are 5000-6000 square feet tend to be able to support an ADU.

Next, see how flat the background is. Is there any sloping or grading which can add to the cost. It’s also better if the area is clear as needing to remove trees, power lines, and easements also add to the cost. Power lines in the front line is a real blocker to the project.

The Costs Of An ADU

For a Tier 1 property that has none of the possible issues listed above with 14-15 feet of side access, the process will be affordable and cheap. It can cost around $15,000-30,000 for foundations. Adding site-specific electrical panels can cost between $5,000-10,000.

Utilities trenching is one area that could potentially add more to the cost, but Habitat ADU budgets 50 feet into their baseline trenching. But nobody can know for sure until they’ve submitted the permits. The best is still to build the ADU as far away from the primary residence as possible.

For any Tier 4 property that has any of the items as an issue, around $5,000-10,000 can be added per item. Different companies have different pricing models and a different likelihood of budget overruns.

Stick-Built ADU Costs

A ground-up, stick-built ADU can be quite expensive needing $5,000-15,000 for the architect, another for the structural engineer, and around $10,000-20,000 for permits. Because of that, stick-built ADUs could cost $500,000 all-in, but mostly it costs $600,000-700,000 for a standard, 800 square feet ADU.

Just be careful as people like to quote low, but a lot of things are not included. It’s better to quadruple check every single item as more likely it will have overruns.

For those making garage or basement conversions, because you are able to leverage the existing foundation and walls, costs will be lower.

Modular ADU Costs

More certainty upfront is possible for modular ADUs which could cost around $350,000-400,000 for a detached ADU. But since site work and construction is managed by a general contractor with subcontractors, expect a lot of delays.

Habitat’s HUD Code Manufactured Home ADUs

Habitat’s units are $50,000 less expensive than other modular ADUs. They are listed as the general contractor on record, so they are able to manage the price upfront. Plus, they give a  guarantee, so if the costs end up being higher, they’ll either eat the cost or the customer can get a full refund.

All-in, their ADUs are priced between $179,000-275,000 including permits, finishes, appliances, and foundation for a 1000-1200 square feet unit.

The Current Financing Environment

Banks have been slow and conservative when it comes to ADUs. Even with the new legislation, lenders are still behind. But there are still financing options available.

One way is to borrow against your 401(k) account for an amount between $200,000-250,000.

There are also loan products like home equity lines of credit (HELOCs) or you can do a cash-out refinance. This will be pretty straightforward for people with existing equity in their homes.

Another way is to get construction loans or renovation loans by borrowing on the future value of the home. Personal loans are also an option where you borrow against your credit score or income. Or you can get a home equity co-investment.

The last option is to get smaller loans collateralized by personal property like auto loans or solar loans.

Client Profile

There are two buckets that separate the clients for ADUs. The first bucket are those using it for family or personal use such as an older family member moving in, kids coming back home, or a  pandemic-oriented detached home office.

The second bucket are the investors looking to get a high yield rental stream at a discount. With ADUs, they can get 16-17% cash on cash return.

Is An ADU Worth It?

ADUs provide valuable utility for a family. It allows them to bring a family member home.

For investors, holding an ADU for 5-7 years will net them a profitable yield and the longer they hold on to it, the more value it will have.

There is also a community benefit as people are able to cut down on commute times and provide housing for medium or lower-income tenants. Overall, ADUs are environmentally and socially conscious investments.

Two Things To Know About Habitat ADU

They will not lose on price. You will spend $50,000-100,000 less on their ADUs compared to their modular competitors. Since they are turnkey, Habitat provides everything for you. You get full accurate quotes and a guarantee of their prices.

This means that you’ll have more control over the timeline and experience fewer delays.

References

More from our guest

• You can contact Erik at (510) 318-1005 or email him at erik@habitatadu.com
• Check out their website at https://aduhabitat.com