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

9 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.


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