Real Estate

Are granny units the next big thing in housing?

Palo Alto startups help homeowners navigate financing and building challenges

Terri Brown never thought much about "granny units" until she purchased a home that came with one on the property in 1987. Now, the Palo Alto real estate associate said she's a big fan of the small accessory dwelling units, known as ADUs, that often are used as rental units, guest houses, offices or art studios.

By renting out the space, she was able to offset the cost of her mortgage.

"I wouldn't have been able to afford my home at that time with a 12% interest rate on the mortgage if it wasn't for the rental income," said Brown, who recently hosted an educational seminar for Palo Alto residents looking to add these units on their properties.

Since Palo Alto loosened its ADU restrictions nearly two years ago, interest in these units has surged, but financial roadblocks and a general lack of awareness on how to navigate the process have kept the construction of new units to a minimum, according to local housing experts, who like Brown, hope to kick-start what they see as an ADU building boom on the horizon.

"Before ... you couldn't get 10 people in a room to talk about ADUs," said Eoin Matthews, who co-founded the Palo Alto startup Point, which provides financing options for home improvement projects, including ADUs.

In recent years, that's changed, Matthews said.

Following the passing of Senate Bill 1069 in 2016, which loosened land-use restrictions around ADUs, the entire state saw an uptick in homeowners interested in building ADUs on their properties, Matthews said. On a local level, Palo Alto started seeing interest grow in 2017 after the city council changed its policies to align with the state's, adopting a new ADU ordinance that relaxed zoning standards and eliminated the minimum lot size regulation of 5,000 square feet.

According to the Department of Planning and Community Environment, the city received 54 permit applications from residents for new ADUs in 2018, up from 28 in 2017. To date, planning manager Russ Reich said the department has received a total of 133 applications since Jan. 1, 2017, when the state's new law became effective.

Brown, whose May seminar attracted approximately 100 people, said ADUs are appealing for many reasons, especially the multigenerational use that owners can leverage. She said 50% of the people who come to her to inquire about ADUs express interest in using them to house adult children, aging parents or relatives with young families.

Tony Chan, founder of the Palo Alto startup ADU Builder, a full-service real estate company that helps clients navigate the entire ADU process, from filing paperwork with the city to installing turn-key granny units on the property, said most of his clients fit into this demographic.

Caitlin Bigelow, founder of San Diego-based ADU resource and consulting firm Maxable who spoke at Brown's seminar last month, told the Weekly that there also tends to be much less community pushback against ADUs than other types of multifamily housing projects. They are a middle ground that allows for "more single-family housing in established neighborhoods without changing the character of the neighborhood in any way," she added.

Despite the benefits of having an ADU, building one can be quite expensive, and complicated, for many homeowners, Matthews said.

"You actually are just building another house, but it's small," Matthews said, noting that building an ADU requires the same construction work as building a regular home, including laying the foundation and installing plumbing.

On average, building an ADU can cost between $400-$550 per square foot. The amount varies based on the method of construction the homeowner plans to use, Bigelow said. Certain methods can help cut down costs such as panelized modular construction, which is when the framing is done in a factory and shipped to the project site to be assembled on a built foundation.

Securing financing is another challenge, Matthews said.

"I think banks don't like doing construction in general, and so these types of projects are scary. What we're seeing is that banks don't really want to finance the homeowners until the job is complete," Matthews said.

Additionally, projected rental income is not considered when a homeowner applies for a loan to build an ADU.

"Banks don't factor in that income until a tenant has been in the unit for about six months or maybe even a year or two years," Matthews said.

Matthews hopes to make the financial side of the ADU building process a bit easier with his company Point, which offers homeowners flexibility in how they finance their projects, he said. The 4-year-old startup, which is backed by angel investors, including Menlo Park-based venture capital firm Andreessen Horowitz, provides financing to homeowners in return for an investment in the ADU.

For a share in their home's equity, Point gives homeowners cash that they can use for various purposes, including making home improvements. Unlike traditional loans, the cost is tied to how a home is appreciating or depreciating. The cash amounts that Point loans — up to $250,000 — fit with what homeowners are typically looking to spend on ADUs, according to Matthews.

"Our program allows homeowners to use our money without a monthly payment and they can wipe us out in the form of a normal cash-out refinance, but at the end of the project as opposed to the start," he said.

Similarly, Chan is working to ease some of the building barriers associated with ADUs through his startup, which he founded in 2017. He helps clients install units on their properties from start to finish for no down cost. According to the company, homeowners pay a portion of the rental income from the ADU to the company over a set number of years.

For more information on building an ADU, visit cityofpaloalto.org

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Comments

14 people like this
Posted by Resident
a resident of Another Palo Alto neighborhood
on Jun 28, 2019 at 8:26 pm

We still do not have rules about the extra offstreet parking these granny units will require. What about garbage, utilities, mail deliveries? Are these treated as one address or a secondary address? What happens when the original owner of the main property decides to move, must the granny flat be unoccupied at the time of the sale? What sort of pressures will this put on infrastructure, on our water, sewers, power grid, etc.? And then of course the question of what types of pressures will this put on schools?

I know of one of these done and the owners moved into the granny unit and the main house was where the adult child and family now occupy. This is not in Palo Alto, but it could be the start of a trend that becomes popular here. This would definitely affect our schools.


3 people like this
Posted by Don't be a NIMBY
a resident of Triple El
on Jul 26, 2019 at 8:50 pm

The 133 applications in 30 months averages to fewer than 60 small units added per year - many housing elderly parents and renters without any children. Despite the scare tactics employed in another post, the trickle of students added to the schools and the small impact to water, sewer, etc., can easily be absorbed by our thoughtfully-run city.
If this weren't the case, we would be in dire need of screening the hundreds of home sales each year to ensure that the incoming occupants wouldn't use additional city services or (heaven forbid!) send children to our schools.
The fact is, they do bring their resource-using families and educate their children here - and Palo Alto handles it just fine.
Unclutch the pearls, people.


1 person likes this
Posted by eileen
a resident of College Terrace
on Jul 27, 2019 at 12:29 am

eileen is a registered user.

If homeowners decide to build ADU's please build high quality
housing just like the main house. You spend millions on your house,
so do not cheap out on the ADU!


17 people like this
Posted by Another Misnomer/Another Dollar
a resident of Crescent Park
on Jul 27, 2019 at 9:56 am

'Granny Units' is a misnomer as these are proposed rentals (aka a revenue-generating opportunity/resource).

If a 'granny' isn't actually living in one, these units should be taxed heavily unless they are being used to provide housing for a neer-do-well adult offspring returning home to live with his/her parents. After all, one never ceases being a parent regardless of their children's ages.

As for providing housing to accommodate the increase in PA-based employees, this is not acceptable unless a private garage or carport is also included by the landlord in the rental agreement.

Better yet, just rent out a room in the house to an outsider & prohibit any additional cars unless willing to have them clog up the driveway of the residence itself.

And stop calling them 'granny units'...chances are granny is is an assisted-care facility having been deprived of her original home.

With predatory elder conservatorships running rampant & unaccounted for, that's how it's done these days.











25 people like this
Posted by The Palo Alto Way
a resident of Old Palo Alto
on Jul 27, 2019 at 1:26 pm

Having an older PA home, we're renting out the basement of our house for $1000/month + utilities. It's like a small studio but with no windows and the family that rents it from us is not allowed to prepare cooked meals due to the lack of proper ventilation & exhaust measures. We installed a small bathroom with a shower stall & that's about it. Entrance to the basement is separate & from the outdoors so our privacy is ensured.

Due to the current concerns over deportation, we have had no problem renting it & currently have a wait list in the event this family decides to vacate the premises & move elsewhere.

The other advantages include the adult family members working for us as a gardener/handyman, cook/housekeeper & periodic babysitter. For these services we reduce the monthly rent and so we not only have paying tenants but regular domestic help as well.

The family parks their mini-van on various streets in the neighborhood & so it is never there in one particular place at any given time. We have tried to encourage them to have it registered & insured but there are currently encumbrances based on their citizenship factors and being open-minded Palo Altans, we have opted to look the other way.






20 people like this
Posted by Seeking Cost-Effective Domestic Help As Well
a resident of Embarcadero Oaks/Leland
on Jul 27, 2019 at 3:24 pm

Curious. If you hire non-citizens who work & live on your property (for both practical & humanitarian reasons) then you don't have to cover healthcare, Social Security, Workman's Comp, State Disability & Federal/State income tax withdrawals because they are not legally here or allowed to file for those programs anyway?

Palo Alto being a liberal community that supports the concept of sanctuary cities (in general), we might consider a similar approach in terms of procuring domestic services in exchange for housing + a small living stipend.

This is how it was done in the old days before the laws got complicated & major issues pertaining to illegal immigration arose.






4 people like this
Posted by Resident
a resident of Barron Park
on Jul 27, 2019 at 4:05 pm

The 13th Amendment, passed in the wake of the American Civil War, made indentured servitude illegal in the United States.

Just sayin'

Oh yeah, I forgot, it is the Palo Alto way.


Posted by Name hidden
a resident of Palo Alto Hills

on Jul 27, 2019 at 6:43 pm

Due to repeated violations of our Terms of Use, comments from this poster are automatically removed. Why?


2 people like this
Posted by Resident
a resident of Old Palo Alto
on Jul 27, 2019 at 8:39 pm

[Post removed.]


8 people like this
Posted by PA Way Revisited
a resident of Community Center
on Jul 28, 2019 at 12:16 pm

> The 13th Amendment, passed in the wake of the American Civil War, made indentured servitude illegal in the United States.

The 13th Amendment states...“Neither slavery nor INVOLUNTARY servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”

^^^ So if an undocumented immigrant family wishes to exchange domestic services for lodging + a small stipend or discount on lodging, that is permissible by law depending upon the jurisdiction's position on sanctuary protections.

Thus the PA Way is OK depending on mutual agreement. It's a win-win for those with a 'granny unit' & needing some extra help around the house.

Just don't tell anyone or broadcast the arrangements.


Like this comment
Posted by Resident
a resident of Barron Park
on Jul 29, 2019 at 10:00 pm

@ PA Way revisited

You can justify your stance on undocumented workers anyway you like.
It still does not make it right.


2 people like this
Posted by PA Way Revisited
a resident of Community Center
on Jul 30, 2019 at 11:36 am

It's not a matter of what is right or what is wrong...strictly an individual call given the laws, loopholes & actual practices.

Providing reasonable housing + employment opportunities for undocumented immigrants is providing a humanitarian service in itself.

As far as approving or providing social services & entitlement benefits for undocumented immigrants, that is strictly out of our hands.

Why collect/pay deductions for & to a government bureaucracy that does not acknowledge certain individuals as eligible for them?

Being 'off the grid' has its advantages...wishing I had some of those options myself!


Like this comment
Posted by PA Grandma
a resident of Community Center
on Aug 22, 2019 at 6:20 pm

If these units are rented out as temporary rental units etc. on a regular basis, the homeowner is effectively running a hotel on the property.

Have the neighbors been notified?

Do they provide parking or does the neighborhood take up the slack? Do they remit a hotel tax to the city?

A hotel is a commercial enterprise . . . is that allowed in a residential neighborhood?


2 people like this
Posted by No Room At This PA Inn
a resident of Old Palo Alto
on Aug 22, 2019 at 6:33 pm

> If these units are rented out as temporary rental units etc. on a regular basis, the homeowner is effectively running a hotel on the property.

^^^I imagine it depends on the short-term/long-term timeframe as PA has hotel taxes that are applied for short-term stays (i.e. motels, hotels etc.).

We have a granny unit that we rent for short periods of time & refer to as a suburban Palo Alto 'bed & breakfast inn" *LOL*

A couple of individually packaged Svensons breakfast rolls + a small bottle of Tropicana orange juice & a coupon to Peets. Done deal.

No parking allowed...guests use Uber/Lyft.

An easy way to pick up $250.00 per night. We're booked solid Monday through Thursdays so 16 times $250.00...well you do the math + we rent out TWO rooms with private baths... all unreported income as well & we only accept CASH.

That's around $90K+ per year as we are closed for the Xmas/New Years holiday season.


Like this comment
Posted by Antifa
a resident of another community
on Aug 22, 2019 at 6:46 pm

Suburbia is the root of all evil in society. Racism, misogyny, homophobia, homelessness, and wealth inequality. If suburbia is to be destroyed we must seize any and every opportunity, large or small, to dismantle it piece by piece. In this way, before they even realize what is happening, it will be gone.


2 people like this
Posted by No Room At This PA Inn
a resident of Old Palo Alto
on Aug 22, 2019 at 8:12 pm

Just finished having dinner with a very wealthy Chinese entrepreneur who owns several successful manufacturing facilities in China (aka high-tech sweatshops).

He & his wife own three vacant houses in Palo Alto (for investment purposes) & he liked the idea of what I'm currently pulling off. He figured he might as well make some additional money off his houses before liquidating them so he decided over dinner to create 'bed & breakfast' houses of his own for visiting Chinese workers/students.

He's going to hire a 'housemother' for each dwelling and charge $200 per night (including three 'cost-effective' meals). It's actually going to be more along the lines of a traditional boarding house.

Clever guy...no wonder he is so rich.

Let's see now. What's 4 bedrooms times 30 days times $200 per day times 3 houses? That's going to be his 'tax-free' booty...$72K per month!

Good lord (doing the math), that's well over $850K per year.

Not bad for a recently arrived immigrant.



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