In this episode, we talked to John Arendsen, Founder and Owner of Crest Backyard Homes. We discussed the issues around ADU pricing, the first steps to building an ADU and how the ADU and manufactured homes landscape has changed over the decades.
*Header image credit: John Arendsen, Crest Backyard Homes
Full Transcript
Grace Mase: 00:07
Hello and welcome to the revivify podcast. I'm your host, Grace Mase. We're really fortunate we get to speak with John Arendsen of Crest Backyard Homes. He's a licensed general contractor and specialize in ADUs; Accessory Dwelling Units, as well as manufacturing home contractor, and a licensed real estate broker. You're effectively a renaissance man, John. Welcome back! That's awesome. So, let's get started. You clearly have enormous experience and I'm dying to learn more about your journey, how you got started with ADU?
John Arendsen: 00:45
Well, I started in the 80s; 86, to be exact, kind of backed into it by default. I had five kids and a mortgage, and I was out of work. So, I went to work for a contractor specialized in manufactured homes. Doing foundation systems and other types of related work in the manufactured housing industry. And there I worked for a while and eventually got my own license. I started out with the general contractor's license and then I got a manufacturer home license and then I had to get a manufacturer home dealer's license. And every single one of those were kind of out of necessity. I got my general contractor's license thinking that, all I would have to do because that covers all the bases, you got a general you can do everything. With a B-license except tunnels, skyscrapers and bridges, then you need an A-license for, which is an engineering license. Then I found out that no, that was inadequate. In order to install manufactured homes, you had to have a manufactured home contractor's license. So, a year later I got that. And then in Northridge, as we were discussing, after the earthquake, we had a facility but the only place in the whole area, in the whole San Fernando Valley. Where we could accept derelict manufactured homes that were totaled out in the earthquake. So, I started using that as a Boneyard insurance company started dumping them all on our 10-acre facility.
And then I started basically passing those along to brokers that would come up from Mexico. Take them back down, use them as dwellings down there for folks. Or ranchers in the San Joaquin Valley, who needed a house for their farmworkers. And then somebody found out I was selling those and they turned me in to the state. And so the state came out and reprimanded me and told me, I had to have a manufactured home dealer's license. So, I got the manufactured home dealer's license. And then when I started with that, I started selling manufactured homes. But then we started moving into the real estate end of it. And I found out that I could not sell manufactured homes, to people on real property. And so I had a real estate license. So, my real estate sales license and then I didn't want to be beholden to my broker because they were, you know, asking for too much of the pie. And I was doing all the work. So, then I got my own broker's license. And that's kind of how I did all that. So, it all came together pretty much out of necessity.
Grace Mase: 3:22
Wow, that truly is a renaissance man, you went from just building things before, you know, you’re licensed in many trades. That's awesome. I mean, that also gives you a vantage to understand not only how to build, but also how to evaluate the worthiness of the property value.
John Arendsen: 3:38
Exactly well, and we do a lot of investing of our own and development. So, we're always looking for properties that either have ADUs already on them, some of them permitted or non-permitted or non-conforming. And those, you can get sometimes at a pretty good deal because they're not permitted. So, that gives us an opportunity as an investor to get a better deal on the property. At which time we do whatever we have to do to bring that unpermitted structure up to code. And then we use that as an investment. We either turn around and sell it, or we just add it to our real estate portfolio for ongoing rental revenues. So, there's that. And then we also look for properties for folks that have ADUs on them or that are ADU viable.
Grace Mase: 4:30
What kind of homework would you recommend homeowners to do when they start planning on this ADU project?
John Arendsen: 4:36
Well, there's so much information on the internet. Everybody starts there anyway. I say 99% of the people that contact us got us on the internet. They got us by navigating and surfing various sites, and they contacted purveyors like myself. And some of them choose us, some of them don't; preferences. We provide a turnkey solution at every level, I mean, we can literally doesn't matter whether it's site-built, factory-built, panelized, kit, container, modular, manufactured, we offer the whole gamut of options. So, from that standpoint, we tend to get more than our share of qualified clients, if you will, because we can offer them just about anything they want.
Grace Mase: 5:28
That’s great.
John Arendsen: 5:29
So, we have a pretty broad array of selections, and we garner a really solid base of clientele.
Grace Mase: 5:36
Right and thank you. You just mentioned lists of all the different options, which is great. And some homeowners, a lot of times, they don't know what they don't know. Whether I mean, there's a built ADU, getting a pulling permit and that's one path. And there's modulars, there's panels and what are those differences? And what should homeowner consider which option may be better for them?
John Arendsen: 6:01
Well, we always start out with a phone call, we have an intake form on our website, we ask folks to fill out and that gives us a general overview of what it is they're actually looking for. We ask them about their budget, we ask them about their method of financing. Because those are a lot of things that people oftentimes haven't really worked out. So, we don't have the time, unfortunately, to put into folks that haven't gotten that far down the road yet. And I learned that from real estate, as a real estate broker, the first question we ask a client, are you pre-qualified?
Grace Mase: 6:34
Right.
John Arendsen: 6: 35
Do you have proof of funds? You know and those are very basic questions. As a builder or contractor, we ask those same questions. We want to know who we're dealing with. If it's somebody that's just getting started, we don't want to lose anybody. We don't want anybody to fall through the cracks.
Grace Mase: 6:50
Right.
John Arendsen: 6: 51
Don't get me wrong. But if somebody just you know, says, well, I'm just getting started. I'm just starting to look. I really don't know how much I want to spend. I really don't know about my financing. Then we basically say, well, the best thing you can do at this point, is to take those few steps and find answers to those questions. And then revisit us when you're down the road a little further. Because we have to prioritize.
Grace Mase: 7:15
Of course.
John Arendsen: 7:16
If we don't prioritize, we're lost in the woods, we'd never get anything done. And so, what happens is, it's the low hanging fruit, if you will, the folks that are ready, they've done their research. They're not tire kickers or looky loos. They want to get it done. So, that's kind of where we're at when we go into this thing with a client. And they pretty much know what their budget is. They pretty much know how they're gonna finance it. And then we can help them determine the best method there is, for what to achieve their goal. And I would say 75% of it is based on price.
Grace Mase: 8:00
Yes.
John Arendsen: 8:01
You know, a lot of folks don't have deep pockets. They're on limited incomes, or they have limited equity in their homes, they have limited financial capability. They're being taken from their IRA or their 401k. Or their savings account, or they're leveraging equity on their home. There's all these variables. So, they've got to be more dollar conscious than the guy that's got the deep pockets that can just whip it out and get it paid. So, those are the folks that are usually in about the 125 to about 150 to $75,000 bracket. When you're in that price point. You're pretty much relegated by default to go with manufacturing because it's the least expensive.
John Arendsen: 8:50
Right!
John Arendsen: 8:51
Then you get into your modular, you get into your kit and your panelized options. You get into your containerize which is really becoming popular; the big shipping container thing. And then you get into your custom ground up; a Seiko which we also do. And then you get into your conversions, room additions, garage apartments, garage conversions, things like that. So, there's that very broad array of options to choose from. With price points attached to each one. You can pay as little as 200 bucks a square foot. You can pay as much as $350 to 500 a square foot depending on your appetite, your bite, and financial wherewithal.
Grace Mase: 9:43
So, it's interesting to talk about 75% of homeowners, very budget conscious. They focus on price. That's very consistent with what we've seen in our research as well. But there's obviously, there's you know, homeowner don't know what they don't know. They may say, even though an average should be 125 to 150 for modular or for manufactured units versus if their budgets hundreds, like we talked about before $100,000 per square foot. For it also regional is could be different due to price and labor and so forth or the cost of material and labor. But when it comes to helping homeowners to understand how to set their budget, what advice would you suggest for them?
John Arendsen: 10:25
Well, they have to know what their financial constraints are. You know, we can't really help them too much there. They tell us well; I've got a home that's worth $400,000. If I put an ADU on it, I'm going to spend another, let's say 150. So, now I've got a home that I've got, you know, $550,000 intrinsic value on. Then they need to find an appraiser, that's going to be able to come out and appraise that, after it's been done. And they can do that by gathering comps that are in the area, big challenge right now. And it's going to change soon, the landscape is changing drastically. Because you're seeing these ADUs start to dot the landscape everywhere. And so, there's a lot more out there for appraisers to draw from, for comps. A couple years ago, it was impossible.
Grace Mase: 11:22
That's true.
John Arendsen: 11:23
Years ago, there weren't enough out there. So, appraisers weren't able to gather comps, they weren't able to include the square foot again. So, here's somebody spent that 150 grand and they got the appraisal for the refi on their home to pay for it. And the appraiser says I can't give you any value for because I can't get any comps. And this went to go through that whole period. And still doing a lot of areas because there's so many areas that aren't up to snuff on comps. There's not that many going on yet.
Grace Mase: 11:56
Right.
John Arendsen: 11:57
So, that has to be factored into the equation. We work with a bank that provides that type of financing. They do what they call ‘after improvement valuation’. So, they will give a homeowner, if they qualify. And if their home appraises, they will give them a full construction loan, based on whatever it is that we estimate it will be.
Grace Mase: 12:23
Right!
John Arendsen: 12:24
We build it out, then they come in and fund it, they'll take the construction loan out. And then they'll put in long term financing at competitive interest rates. So, you know, there is that type of financing out there. So, that way the homeowner knows going in? Well, I've already pre-approved. The banks already said that this is going to be worth X, once it's been installed. I'm good to go. We go in, we do the improvement. The bank comes in, the final inspection takes place. The bank takes out the construction loan, comes in and funds it with a long-term mortgage rather painlessly in those areas.
Grace Mase: 13:05
Right.
John Arendsen: 13:06
And we have that available for both site-built and manufactured.
Grace Mase: 13:09
So, just out of curiosity, as you described the custom site-built to the manufacturer, what kind of value does it add to these units, to a home? Obviously, price is very different. Just out of curiosity, is percentage or dollar amount? What is it? What do you usually see? And I'm sure that's a factor into the homeowners’ decision on which path to take.
John Arendsen: 13:30
It's a fair question and it does pose some challenges. But it's not supposed to, buyer under the banking like Fannie Mae and Freddie Mac. They say that appraisers and banks are supposed to give the same value for a manufactured home, as they do for a site-built. But they don't always see eye to eye. So, those stars don't always align. And there tends to be a gap there. Over time, that will probably take care of itself. Because the Fannie Mae and Freddie Mac are slowly coming around to the realization that manufactured homes are here to stay. And that they're built the same way. A site-built home, there's no difference in the quality at all. And we do both; married to one or the other. Whatever my client wants, I'll build for him or offer them. But I can tell you firsthand, I've been through hundreds of factories 1000s of times over the years. I mean, we've worked all over California, Arizona, Washington, Nevada, Florida. I've been licensed in all those states. And we've done projects in all those states. And I've been through a lot of those factories and today's standards. They're building standards. It's under the HUD mandate.
Grace Mase: 14:56
Right.
John Arendsen: 14:57
I was in urban development so they have to comply with UCB and ICBO standards. Which are your uniform building code, which is kind of the Bible for construction. So, from that standpoint, there's no reason why they shouldn't have the same value. It's just that stigma.
Grace Mase: 15:16
Right?
John Arendsen: 15:17
What people had for manufactured homes, they started out as trailers. I remember back in the early days when they were, pre HUD, before HUD came into picture. We used to call them wobbly boxes, like little tin shacks.
Grace Mase: 15:34
Right.
John Arendsen: 15:35
Were built the same way trailers were built. Well, that's what created that stigma. Because you had all these 1000s of manufactured homes. Going in, all these hundreds of parks all over the country, which are still there today. And for some reason, God puts mobile home parks, right in the path of destruction. Wherever there's a hurricane, a tornado, an earthquake, a fire, flood, there's a mobile home park.
Grace Mase: 16:01
Because the land is the cheapest, right?
John Arendsen: 16:02
Well, the land is the cheapest. And the Army Corps of Engineers has deemed it not suitable for conventional construction.
Grace Mase: 16:10
Exactly. That’s your reason?
John Arendsen: 16:11
For manufactured home parks.
Grace Mase: 16:13
Right.
John Arendsen: 16:14
All figured. So, you know, you have that, right, that long term history. In fact, I'll guarantee you, there's mobile home parks that felt the effects of that hurricane down in Louisiana. And there's probably mobile home parks that are feeling the effects of the fires that are up in Northern California right now. So, you're gonna start seeing all these TV, guys getting out there saying, ‘these trailer parks’. And therein lies the stigma. Those are old trailer parks, old mobile home parks, for the most part, that frankly, should go away anyway, because they're too old. And they need to be reconstituted. In fact, you know, most disasters we've ever worked. And we've done a lot of disasters, people end up coming out way ahead.
After a phase it's tragic to have to go through that, especially if somebody loses a life or gets injured or something like that. That's tragedy in its purest form. But when the dust all settles in, they end up with a brand-new home. And they usually do with the combination of insurance and FEMA and the occupational emergency services, people that is run by the state of California. I mean, you get all these freebies, these grants and you getting insurance payoffs and FEMA money. I mean, you end up with a new home. I've seen it happen 1000s of times. So anyway, back to your question, I kind of veered off. Manufactured homes today are built a whole lot different than wobbly boxes were in the 60s and 70s.
Grace Mase: 17:46
Yeah, in fact, I've seen a friend, your website, you can tell the difference which one's manufacturer, which one's custom built from ground up. They're just stunning and really comfortable. It feels like it's a place you want to just hang out.
John Arendsen: 18:01
Well, when will you come down here, you walk through my little model. And I think you'll have a very good feeling about it.
Grace Mase: 18:07
Good. I look forward to that.
John Arendsen: 18:09
Alright.
Grace Mase: 18:11
And just out of curiosity, I see you talked about this different sigma, the homeowner have these pre perceived, you know, association to manufacturer homes. What other unique difficulties or challenges that you run into when you building, you know, ADU units, whether it's custom built or manufactured homes?
John Arendsen: 18:28
Well, you know, you deal a lot with economies of scale of which there isn't with ADUs. Unfortunately, it doesn't matter whether you're building a 300 square foot studio or a 5000 square foot home. There's no economies of scale in there, you still have the same amount of work going in, it's what folks just can't wrap their arms around. They're going ,‘Jesus little 300 square foot’. They envision, ‘gosh, this is gonna cost me 30, 50 grand.
Grace Mase: 19:01
Right.
John Arendsen: 19:02
Well, unfortunately, that's not the way it works, because you still have to go through the same protocol. There's still site development. There's site evaluation, there's site preparation, there's grading, there's excavation. There's retainer wall systems that may need to be addressed, depending on the slope of the property. There's utility connections. There's utility trenching, getting everything from your grid, to the grid of the ADU. And the whole idea with ADU just veer off a bit is to pull from your grid on your property from the city grid.
Grace Mase: 19:45
Right.
John Arendsen: 19:46
Many are pulling from the city grid, then you're paying your developmental and environmental impact fees.
Grace Mase: 19:54
Yeah.
John Arendsen: 19:55
And those are expensive. Those can be 10s of 1000s of dollars. They've been deal breakers in the past. That's why the ADU business never really got teeth.
Grace Mase: 20:04
Right.
John Arendsen: 20:05
It was just too expensive, uses county San Diego used to cost $40,000 to get a permit for a 500 square foot ADU, just for permits. Doesn't count the engineering, doesn't count the site preparation, doesn't count the build out. So, people were stifled. Now County, San Diego, because of all the new laws that have gone in, at the state level, they're down around eight to 10 grand for a permit. Which is where it really should be. And there's some cities in San Diego that have waived all their permit and grading fees, school fees for ADUs under 500 square feet. So, you know, different jurisdictions have different laws and ordinances that apply and different price points. But it is a lot more convenient nowadays to do it than it ever has been.
Grace Mase: 20:56
That's true. But you also think as from the homeowner perspective, doing addition of front existing units, while you're living there, having this independent unit separately in the backyard is far easier and faster too.
John Arendsen: 21:09
Yeah, but getting back to economies of scale, people have to realize that they're going to spend a certain amount of money, regardless of the size of the home to get started. The site preparation, if it's a nice downtown San Diego city site, that has water instead of septic, that has gas instead of propane. That has all the utilities close by, that can be drawn from the main grid of the home to the what we call the pedestal or the stub outs of the ADU. We've got that down to about 20 grand.
Grace Mase: 21:45
Yes!
John Arendsen: 21:46
Under normal circumstances, you know, and therein lies a lot of the challenges. I mean, that's the most perplexing part, we can give a cost per square foot on a site-built unit for the structure itself. We can give the overall cost for a manufactured or a modular component delivered and installed. When I say install, I mean just set up.
Grace Mase: 22:10
Right.
John Arendsen: 22:11
Not connected to the grid. That's all part of the site preparation and the site development and all those other little rudiments that I discussed. So, you know, at the end of the day, when the dust all settles, you can have one for as little as 110 grand. We just did one for a 100 grand. It was an easy in, easy out. It was a project turned around in about 30 days. Projects that we've done for two years. Yeah. Then there's projects we've been on for two years.
Grace Mase: 22:42
Right. I know a lot of ADUs are averaged between nine months to twelve months. That's not a trivial effort. But having in and out in 30 days. That's remarkable.
John Arendsen: 22:52
Yeah, well, all the stars align.
Grace Mase: 22:56
Right.
John Arendsen: 22:57
Because what happened is once we got the permit issued, we ordered the home, took about four to six weeks to build the home. Took about four weeks to do the site prep. So, together, simultaneously and miraculously, the house showed up just about the time it was ready to be installed.
Grace Mase: 23:15
That's brilliant. I mean, like you said, dovetail or parallel pathing, through the site-build or site prep plus the construction or actually constructing the home myself.
John Arendsen: 23:26
simultaneously.
Grace Mase: 23:27
That is brilliant.
John Arendsen: 23:27
That's the perfect world.
Grace Mase: 23:29
It is.
John Arendsen: 23:30
Unfortunately, right now, I mean, even factory-built, we're backlog to January.
Grace Mase: 23:35
I can imagine. Yes.
John Arendsen: 23:36
So, you know, in permits, same thing with the COVID, months sometimes. It's really exacerbated the time it takes to get permitted.
Grace Mase: 23:46
Yeah, I can imagine the homeowner, gotta be thrilled just when they see their home come together in a month. Really?
John Arendsen: 23:53
Probably more like six weeks.
Grace Mase: 23:55
Right. But still, I mean bathrooms and building a pool.
John Arendsen: 23:58
Yeah, it was and a pool is a lot more complicated. I know I just had one foot in my yard. And that took us almost eight months to do that.
Grace Mase: 24:09
Wow!
John Arendsen: 24:10
Yeah, from beginning to end and it was just a spool, wasn't a huge pool. It was a little 30 foot long, shallow in you know, built-in pool with a little spot, nothing really big. It still took about eight months.
Grace Mase: 24:24
So, did you build your own pool too?
John Arendsen: 24:27
My son did. He's also a contractor.
Grace Mase: 24:29
Very nice. It’s always satisfying to create something, build something of the space that you actually occupy?
John Arendsen: 24:36
Oh, yeah, definitely.
Grace Mase: 24:39
Well, this has been awesome, John. First of all, I do want to ask you, I'm just listening to you, taking notes. You have so much to offer. And I bet there are tons of homeowners who are dying to understand or get you. So, what's the best way for them to get in touch with you?
John Arendsen: 24:53
Well, they can call or email. The name of the website is Crestbackyardhomes.com And they could just start there. We kind of recommend that everybody start there, because eventually, they're going to have to do that at some point. Then we have a bit of an overview, the intake form is self-explanatory. It gives us the contact information for the client. And it also gives us kind of a brief overview of what their project goals are. And then it gives us an opportunity to call them back with a brief phone chat, which is free. And we go over line item by line item, the answers that they gave us. And that helps us start to build a dossier. And then from there, we go the next step, if they want to go the next step, which is to do our due diligence with the local jurisdiction. And there's a small fee involved for that. But that gives us all the information and them all the information about what the current codes are. It gives them the beginning of a plot plan, because we pull a topo. And then we go through the process of placing the home based on the setbacks, the boundaries, trees, power lines, things like that. Gives us an opportunity to know all about that. And to see if it's even viable or feasible.
A lot of projects just plain aren't feasible. So, we have to kind of stop right there. And we don't want people to get in over their head or spend a lot of money needlessly without knowing that. And then the next step, if it's a go from there, then we do our site evaluation, which is pretty comprehensive. And involved, we spend a good part of the day out there. Will spend two to three hours out there doing what we need to do just gathering that information. We find out where all the utilities are, we do withdraw measuring tapes. I oftentimes use a drone to do that.
As we can take the drone up, and we can get a bird's eye view of the home, the footprint of the home. Also, a footprint of the perspective location for the ADU. And then we color code with different colored organic spray paints, all utility lines leading from the point of origin on the property. Like, where the electric is, where the gas is, where the sewer is, where the water is, where the CATV is, all that. And then we draw that to where, what we call the pedestal or the location of all ideally, all utilities are going to come up at the ADU. And so all that's done and then we're able to get back to the client with a solid price. Based on our field evaluation, our due diligence with the city, we can give him a formal bid for the project.
Grace Mase: 27:51
Very nice. Well, thank you so much, John for taking your time educating all of us about ADU. And how to go about it and how to go through the process with you.
John Arendsen: 27:59
Anybody can call us anytime. I would prefer they go through the website but if they want to call us, they can call us at 760-815-6977
Grace Mase: 28:11
Thank you, John. Thanks for listening to this episode with revivify podcast where we're speaking with John Arendsen of Crest Backyard Homes. I hope you enjoy learning from John as much as I do about ADUs. We're committed to support you through your home improvement journey. Thanks again for listening and we'll see you next time.