Episode 5 - Steve Vallejos, PrefabADU
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Prefab Review (PR)
Hi, my name is Michael Frank, and this is the Prefab Pod presented by Prefab Review where we interview leading people and companies in the prefab and modular housing industry to learn about them and make it easier for you to make the best decisions about your next project. Today, we're interviewing Steve Vallejos. I hope I got the name right. The president at PrefabADU. Welcome, Steve.
PrefabADU
Hi.
PR
Well, anyway, thanks so much for joining and very excited to learn about your company and also to deep dive generally into ADUs in California. We get a lot of interest in them here. But first, I just wanted to learn a bit about you and how you got into this business.
PrefabADU
Well, we're kind of the old players at this base. We got introduced to the idea of accessory dwelling units back in 2005, when one of the modular factories I was working with tried to launch a product but wasn't really having any success. So they asked us to see if there's any way to get any traction with this. And so that was kind of our introduction to even understanding that there was legislation passed in 2003 allowing it everywhere in the state. So, yeah, that's that's when we got our start.
PR
Got it. Can you just tell me a little bit more about your company. What are you building at your core like? What are the varieties? What makes your product sort of different or better than others?
PrefabADU
So, I wear two hats, you know, I'm a general contractor and my company, Valley Home Development is where we really, really got our start in this. And then I'm running PrefabADU, which is essentially our panel, our panel production factory for ADU builds. But, you know, we've tried every mechanism and technique out there from conventional building through every type of prefab option. And we originally did a lot of little modular and manufactured homes when we got started in the space working in rural and suburban areas. But as we started to get a lot more requests in urban areas, we found that it was getting harder and harder to either roll-set or crane-set units in because there's no side access and lots of power lines overhead as well in urban areas. So it just led to a scenario where our choices were either go back to conventional building or take on some other type of prefab method. So we looked at SIPs and in Panelized products and in the end we went with panelized products, mainly because here in California at the time and I don't know if that's been resolved yet, but since we're in a seismic zone, the certification and of course, pretty much everything in California, is a seismic zone. So it led us down the path of, you know, working with outside panelized companies and then ultimately just deciding that it's just better if we just do this ourselves, since the panel companies are more catering towards larger single family homes. And also that was an issue with a lot of the mod and manufacturing companies as well. They just had big factories and they're not really designed to run smaller units down their production because their production line costs are much higher and there's kind of a sweet spot for them and it's usually a lot larger than some of the ideas we build.
PR
So just to understand when you say you're doing panelized - That means you're basically flat packing and then bring them to site that way and then kind of assembling the panels onsite. Is that right?
PrefabADU
Yeah. And we're going a little further than what the conventional panelized factories were doing. They would only build walls and occasionally throw in windows, things like that. We're taking them through sheathing and actually doing roofing. So our intent was to find ways to do this, but try and kind of come somewhere closer to what you get with a mod where you're cutting down a lot more of the skilled labor requirements in the field, which are very costly in California and finding ways to do more of that in a production way that makes it so.
PR
So in addition to doing sort of the prefabrication side, your company is then doing the kind of local services side as well in terms of like sitework and all that stuff.
PrefabADU
Yeah. Yeah. I mean that was the way to get it started was we were testing out the theory of this. Is this something that would work if we took over the panel production from the outside organizations and then last year we kind of came to the reality that, OK, well as we move into this year and next year, the demand is increasing greater than our contractor ability. So now we're now we're in the phase of forming relationships with a builder network.
PR
That makes sense. It's probably a good problem to have. So let's jump back in, then we'll jump into it. So let's go through on the prefab side. Basically, what are you building right now. Twelve hundred square feet is sort of the magic number and to some extent I think it's a thousand square feet depending on what laws you're sort of listening to. What are some of the configurations? How many models are you making? Mostly custom stuff and bigger to understand a bit more about your products.
PrefabADU
Yeah. So in order for most factories to succeed, you know, the key is sticking to the idea of standardizing. And that's really where economics plays in favor for the consumer. So along those lines, we started the organization with a long history of doing this. And so we launched with 10 models. And they range from 150 square feet, which is all the way down to the bare minimum of what the state will allow as what they call an efficiency unit. So it's a little studio on up to our biggest standardized plan is a thousand square feet and it can be bumped up to twelve hundred if people want it to be. But we have kind of, you know, in that 10 plan range, there's kind of everything all on that path. And so what we've got is we've got an array of plans that fit an array of budgets and properties in terms of what zoning will allow. And all of these are tried and tested products that we've done, you know, essentially for over the last 15 years that make sense.
PR
And then coming back in service. So in addition, it just sort of sounds like you guys are still doing the local building part on a lot of the areas. But you said, you're looking to expand. When you talk about services. Are you doing the permitting? Are you doing foundations? What part of this do you sort of buy?
PrefabADU
Well, when I'm wearing the prefabADU hat we're the let's call it design, permitting and the in the kit building. From that point on, it hands over to the contractor who is doing the foundation, the setup of the kit and then all the finished work necessary to take it to finish.
PR
OK. It sounds like you could be the contractor in that situation as well, but it could also be a whatever second party or third party. Yeah.
PrefabADU
We actually have a handful of contractors who are working under us right now getting training so that they can spin off and actually do direct, direct installations with the consumers. And we also have a team down in L.A., in San Diego who are working on getting to the finish line with us on our on what I guess we'll call it like a dealer network program so that we can launch into those areas.
PR
That's cool. And then what? So then it brings into question, what areas are you actually serving right now?
PrefabADU
We've been serving what's called the nine barrier counties for the San Francisco Bay Area. So it's like I don't know if anybody knows the area, but it's from, you know, from San Jose on up to Santa Rosa or beyond.
PR
Okay. So basically wine country.
PrefabADU
Yeah. Exactly. Exactly.
PR
And then on the East side, how far east?
PrefabADU
We traditionally work again. That brings us over into cities like Walnut Creek or Livermore and on up into where we actually reside now, which is, you know, Napa, Fairfield area. The truth is, that's where our general business is. We've worked up into Sacramento and up into the, you know, the the the mountain ranges of the Sierra. We've gone down into Santa Cruz and Monterey and and Morgan Hill. And so we're we're we're we're stretching out further and further. Demand has been great and all those areas and beyond. But we're, you know, as a contractor, we've got somewhat of limitations in terms of how far we go with, you know, with just being able to spread our manpower around.
PR
That makes sense. And then in terms of what is the average price point that you are dealing at on these different sizes and maybe you can add this as a question. So we get inquiries constantly about what's this actually going to cost. So maybe you can break that down. I know there's a bunch of different parts of this, which is why people have a hard time answering sometimes. In terms of like the panel costs and sort of. San Francisco probably has a slightly different cost profile than like even Napa or maybe it doesn't. But maybe you can kind of break down what we'd be looking at, kind of some local cost on these kinds of areas.
PrefabADU
Yeah. So I'm glad you brought that up because it is hard to just kind of generically price everything, especially if you've got a wide array of products. But generally speaking, the average product is right now it's running at about $400/square foot. A lot of small stuff because we're heavily, heavily doing work in urban areas. So on an average 400 square foot build, I think, ah, let me pull out my pricing thing so I don’t misquote myself here. So we're looking at something that's about a $145,000 build for the whole thing, all-in foundation up taking it to the finish line. But when we actually look at the panel kit, the panel kit is about $34,000 of that. So we represent as the kit manufacturer, we represent about twenty to twenty five percent of the overall build cost on average. And then it is tied to the foundation and then the full deliverable with all the finishes and everything.
PR
So you're saying that that would be like $250, a square foot sort of all in, right. For a hundred over a hundred thousand.
PrefabADU
No, it's at 145. We're aware of that.
PR
I'm sorry. I get it.
PrefabADU
In the Bay Area we're averaging about $365. Right now just kind of across the board. But as we get into the larger units the costs go down. There's a weird metric that plays in on the ADU a little bit differently than what people would expect. As we go down in size the cost per square foot goes up is essentially what you're doing. You still have a bathroom. We see that everywhere.
PR
Right. You have a right. Kitchens and stuff are expensive.
PrefabADU
Yeah, but you know, what's funny is I get the question about cost per square foot a lot. But that's not where we really talk about economics when we're working with our homeowners. What we're really focused on is what does this really cost you? It's like it's like when you go look at a car and you say, oh, I want that new Ford truck. And you're like, wow, that's a $70,000 truck. But then the dealer tells you, yeah. But that translates to about, you know, five, six hundred dollars a month. And then that's really where the economics play in helping them understand how it fits for them and what's important for our customers. And this is really a crucial thing is that we weigh what the average costs would be. Once it's mortgaged into your property versus what the market rate rent would be. So, for instance, that same product in San Jose, let's say, which is one of our, you know, busy areas down there, that product would rent for about 18, almost 19 hundred dollars a month. But mortgaged rolled into your first mortgage. It's only about six hundred ninety dollars a month in terms of added to your mortgage. So there's about a sixty three percent return monthly on your investment. And so that's where we spend a lot of our time educating the consumer about, you know, how this works for them, as opposed to just constantly talking about cost per square foot, which really doesn't measure anything other than just giving you something that frightens you without understanding the value of what you're doing.
PR
That makes a ton of sense. So I do want to ask another cost question, but I agree with you completely that there certainly is a lot of depth from adding value, dropping cash in a home opens a lot of opportunities with ADUs. So let's just jump back to cost one second. If we think what the bigger ADU just because. Right. We sort of started with a smaller example. Let's let's take your thousand square foot ADU. And let's say something. You guys do something like Oakland or Berkeley or San Francisco, like an expensive area. Right. What are we looking at for the cost of like a thousand square foot, assuming we have a place we could put it?
PrefabADU
So you're probably going to come in at maybe$300, $320 , $340, you know, for the total build cost for something like that. And then that unit, that unit, again, I'm looking at a cost chart right now that shows me that that unit would rent for about almost $3,200 a month. So mortgage that particular product would be about 70% of your mortgage. So again, you're making a forty five percent over your you know, your monthly cost on this.
PR
If you're if you're renting it out at a market rate, you know.
PrefabADU
Can I share something with you too? Because this is an interesting thing. There's a lot of confusion about the idea industry and everybody thinks about it as economics returns and profitability. The truth is, as somebody who's been doing this for 15 years and our business still remains, 80 percent of our customers are people who are doing this for family so that we would be doing it for aging parent or kids who were, you know, what we call the boomerang situation where they'd launched, but then come back because it's hard to find housing. So with that, we're not really dealing with people who are trying to find ways to make income as much as we're trying to find ways to offset and get below market rate rents. So what that does is it puts us in a situation where we're constantly monitoring what's called AMI, which is, you know, how does this represent area meeting median income in terms of housing? And that puts our products anywhere between 15 percent on the AMI to fifty five percent on the AMI. And this is the group that is the most at risk of being homeless or actually is homeless right now in the state. This is what the ADU was designed to help solve. And so we don't focus so much on selling the super sexy products to the affluent. We focus on addressing how we can provide affordability to people who need it the most.
PR
So we see this a lot, at least in the Bay Area, which is something where you guys operate is we're seeing an increasing number of I guess this is sort of the affluent, people who own their homes like their neighborhoods and have had their kids graduated. And now. Right. Like, you know, they have made a decent size lot in Mill Valley or somewhere in the peninsula. And actually they want to live in the thousand square foot ADU there, they’re like “I'm sixty five. It's just me and my wife. My wife and I are, you know, the area, my husband and I. And we actually want to rent out the main house.” So we've actually seen that increasing. I'm not sure if that's something you get. It sounds like it's not something you see a ton.
PrefabADU
Oh, no, it's we see we see a lot of that. I mean, it's in you know, the first choice in those scenarios is always family members because as you talk about seniors who want to age in place, they're always constantly concerned about their, you know, the potential of risk and danger for them. So even having, you know, a non family member renter in the main house, well, it sounds very attractive for income opportunities. It's also risky for them. So whenever they can, you know, the decision is often made that, you know, all move into the of you and, you know, son daughters are or somebody takes over the main house. We've also seen siblings do it where we've seen people who are aging and they've decided that, you know, I've got a sister or brother who is also aging as well. And, you know, and that person may move into the main house and go into the ADU or something like that. So. So it still, like I said, remains only 20 percent of the deals that we do are people who are looking at it strictly for an income somewhere where it's not tied to family in the short term.
PR
One or two more questions before our fire around. And that is like what's kind of scale you guys? Like how many houses, I guess, ADUs or homes have you built so far? What are your plans going forward?
PrefabADU
I think last year we topped out on our own with our total production. To date it was like over two hundred. We've got I think we've got like 15 or so running right now with about 30 going through design review. And that's the numbers kind of fluctuate. We're anywhere between 15 and 25. In actual build and then anywhere between 20 to upwards of 60 going through the entitlement process. So it's kind of an ebb and flow thing. Demand may increase, though. Without a doubt.
PR
So getting into that process. So I have two questions. I guess the first one is what is the timing sort of from beginning a project to end of the project. The typical area and I understand this may vary depending a little bit on that kind of permit process at the county or city or whatever.
PrefabADU
It's got a lot more uniform kind of across the whole Bay Area. We had a huge flux. Is on the designing and permitting process. So in the early days, we used to quote that as it can be anywhere between 2 months to six months, you know, getting entitlement. But on average now, especially with new state laws that we've been pushing, you know, there's a 60 day requirement to issue permits now. So what we've been seeing is, well, a lot of players want to see players. I mean, cities and counties do their best to make that a reality. There's just still situations where ebb and flow pushes it beyond that. So it's still on average, it can be between two to the worst case scenario, four months on from the time they say they want to go forward and do a plan and submit it to getting a permit. Generally speaking, the build process from breaking ground to handing over the keys is about a 90 day window.
PR
And then that's awesome. So you're basically in and out in six months for the most part. And then in terms of the new laws. So there are a bunch of them. We're still trying to get our head around them. All of these were passed, I guess late last fall. But I think most of that went into effect in January. Yeah. Right. Like, what are the key things that people should understand? Are you guys actively building towards that? I know some of the details in terms of what you need like four feet next to the property line, which is pretty different than state laws. No HoA review stuff like that. But be great to understand what the lay person a project could understand well.
PrefabADU
So I could do a whole interview strictly on legislation because we're actively involved in everything legislation. So there were six bills passed and there was actually 13 that we were working on from the beginning of the year. And I was shocked that actually six of them went through. But, you know, the best way to describe it was that, you know, for the most part, the people, the people who see this industry think it started in 2017. And that was based on stuff that we started back in 2015 in terms of trying to address major barriers. And we walked it all the way through the legislative process in 2016. And it went into effect January 1st, 2017. So if you measure activity and growth in this market and everything, it happened back then and I talked to a lot of people who tell me, oh, I've been in this since the beginning and I think, wow, I've never I've never run into you. So you really you've been back at this since 2003. And the answer is no, no, no. 2017. And so we do have a lot of people who came in at that time. But this year, last year was a big year to tackle just a lot of the little oddities in terms of barriers. There were timing constraints that we wanted to try and remove. There's this constant issue with impact fees coming in from, you know, from not from the city themselves, but, you know, third party entities like, you know, Sanitation District, Water District, Parks and Rec.
PR
You're referring to a law that waives them for 750 square feet or less? Yeah.
PrefabADU
The goal was to wave them across the board. But the compromise was under 750 really should get waived and above seven. It should be according to rights in proportion to it regularly. And so those were some of the barriers. There's constantly a little confusion about parking. So there was a smart clean up on that. There's the issue of if you're you know, if you're converting a garage, what does a garage conversion mean? Did it mean tear down the garage or did you just mean converting it, meaning that the garage still has to stand? So there's just a lot of effort to clean up legislation so that we can get a little bit more consistency city to city rather than have each city have their own interpretation. One of the big things that I think was a big deal this year was the fact that every city had to turn in their local ordinance changes to HCD. HCD has the right to review all that and make sure it's in compliance with the state code and if not, give the city an opportunity to make corrections. If the city chooses to stand their ground and say, no, we're not going to make the corrections, then HCD now has the right to turn it over to the state, another division with the state to basically go after a decision whether this is a prosecutable offense. So what's really happened is it's an effort to get everybody on board with the idea that we need to solve this housing problem and we need everybody basically acting the same way. So there's a lot of things that are behind the scenes that are a little less apparent to the consumer when we talk about legislation, but they're more geared towards leveling the playing field. You know, across all jurisdictions and that's some of the bigger things that I like, that, you know, that a lot of people just don't understand. Even people in this industry, quite honestly. And with that, we know, we've already started tackling some issues where we're running into cities who haven't, you know, had their interpretation of the state regulations. That doesn't really comply with our views. So we run it by HCD. And HCD kind of intervened and said, you know, they're either they're either OK with that or no. We think that those positions don't align well with state regulations. So there's a time when you get six bills passed, there's a ton a little buried in each of those bills. But they're all they're all worth reading. And they've all the way, I tell people, is that each of those bills has the opportunity to be equal to what happened in 2017. So basically, you can say we've had literally six times the barrier reform than what we had in 2017. And I think that's just wonderful for an opportunity to make a real viable solution to helping solve the housing crisis.
PR
Yeah. I mean we're seeing a lot of I guess I would say the setback one in particular feels like it said it at least on the urban lots is enabling a lot of leverage with water.
PrefabADU
One lot coverage was one where there's no firm. Exactly. Yeah. And so that you know, that we have about 13 projects that we submitted over the last five or six years that were denied that we've had those customers come back to us and say, can I do it now? And so they're back in the loop for projects being submitted now and have already been run by the cities to verify that the new regulations will allow it now. And so, you know, that's to me, that's proof that, you know, all of this work is worth the effort.
PR
That's awesome. So this sort of second to last section and we've got a little longer in this than normal because the content’s been awesome is what we call fire around. So a bunch of quick questions and then do your best to answer them in one minute or less. All right. So question number one, and this is a little meaty. What are the ways that people finance ADUs?
PrefabADU
A majority of the people out there right now, it's really we still call it an affluent product because it really comes down to cash on hand or equity or something.So one. Yeah, I mean we're still seeing that a majority of the customer base out there right now would be considerate. We consider that affluent because they have the resources available. We are seeing more and more players come to the table now in the banking industry with creative funding sources. And I think that will continue to expand. It just needed an opportunity to see the market grow for them to realize that they needed to cut. Stick their stake in the ground and say, we want a piece of this. So, yeah. We're seeing much, much more new funding scenarios come to play. And I think this year will be a whole new array of products from what we're seeing behind the scenes that I can't necessarily talk about right now, because we do a lot of one on one conversations with big and small banks on prepping and launching products. But we will definitely see a lot more funding solutions.
PR
Yeah, unfortunately, I'm involved with a few things as well here. Most of the stuff I've seen, which has been some form of like equity share and unfortunately farther away from like a construction loan, I haven't really seen it get to scale, unfortunately. , that would be awesome if that stuff did.
PrefabADU
I'm going to say that's going to piss those guys off because we do a lot of talking with them and working things out. But there's a couple of companies that I really like and we're doing business with right now. But I'll tell you that they run a high risk of being predatory. And so we've kind of steered clear from a lot of potential relationships with organizations doing that, because we just don't want to be participating in something that could evolve into that. But to answer your question, there are a lot of scenarios that we're working on now that our equity share scenarios, this could have been.
PR
OK, so site assessment. So what are the things you look at to try to understand feasibility? Right. And if I'm an extremely slow plod and say Mill Valley and Marin or, you know, Berkeley or Oakland can work with you. Well, how do you evaluate that?
PrefabADU
We've over the years, we've drifted further and further away from that and really have been, you know, going down the path of we really have to focus on who we are and who we serve. And when we get into those scenarios, those are scenarios that fit best, mostly with working with an architect and doing a creative one off solution. So unless it can be graded to a flat location for the ADU to reside, or sloped well enough that we can do it as foundation simply. We tend to steer clear of those. They're just they end up running into the more higher dollar and higher end solutions. And there's just a there's another there's another resource pool who caters to that much better than we do in terms of higher volume, high production product.
PR
One of the things that we get a lot of interest in, I think is mandatory on single family homes is sort of solar in zero net energy solutions. Do you do many of these zero net energy? By these I mean, it is we I we played on this on both sides.
PrefabADU
I do big modular homes. And right now I'm doing a four thousand plus square foot home on top of a mountain in New Almaden that is completely off the grid. So, yeah, I mean, to us, it's never been a scary topic. Now it's just a code requirement under Title 24. So it's just another component of the process for efficiency, energy efficiency that, you know, people are going to have to adapt to. But it's not anything new or scary to us.
PR
Is that true for ADUs? Only for single family homes?
PrefabADU
It's too for ADUs. But there's a question of interpretation and a to use are are really technically by by how it's been interpreted by the energy code considered to be single new single family homes under the guidelines, if they are detached units, new construction attached, new attach units, new construction still fall under that that perception of being an addition. So under those guidelines, the junior ADU to you or say 50/50, carve out where you're carving out space from the house and then adding on, those are still considered additions and they're not triggering the same requirement coming out of the title 24 calculations.
PR
So it sounds like you're doing solar with everything that's here.
PrefabADU
It's I mean, we can't we can't we can do it with whatever with whatever people want. But in terms of mandatory, it's the detached units. And we do both attach and detach. So it's we do them both.
PR
So I didn' realize,. you are doing additions as well. Got it. That's awesome. And then from a code perspective, do you end up ever doing these sort of smaller homes as primary residences?
PrefabADU
That's an interesting question. We we because we do what we do and we've been doing it for so long. We get a lot of people who approach us with the idea that the spatial layouts and the efficiency that we have is somewhat unmatched by anything else they see. So as they think about building a house in a smaller scale, And so we actually do build smaller homes for people that fit under the guidelines of everything we do with an ADU but it actually is the primary residence
PR
But it actually is the primary residence and is the permit process for that very different?
PrefabADU
It is. I mean it when we're not doing an ADU application, you fall under the guidelines of just a conventional new single family home application. So it opens up the door for a lot more discretionary review and things associated with that. But then again, the size and the cities and the counties knowledge of to use now make it a lot easier than what it would have been, you know, five or even 10 years ago doing that same exact thing. So it's everything kind of across the board has gotten a little bit more efficient in terms of streamlining through municipalities.
PR
Awesome. Thank you so much for answering these questions. Final question. I ask this everyone at the entities. What are you most excited about for your company or for the industry in the near future?
PrefabADU
I touched lightly on it. We're not focused on, you know, at this point, catering to the affluent and their and their desires for super opulent sexy products, we are focusing on how do we help solve the housing problem. And so the more production we're doing and the more interaction we're having with cities are allowing us to have a greater reach into that area. So it feels good to be doing something that is desperately needed. And the idea of maybe someday evolving into being the answer to the housing crisis is something that we're striving for. So that's what keeps me plugging away with everything that we're doing legislative wise and casita coalition and on and on and on and on. But every day we get to see how that impacts people and that and that feels really, really good. And so that's that's what we enjoy the most.
PR
Great, that's definitely laudable and definitely something we're very supportive of. Thanks again, Steve. For more information about PrefabADU, PrefabADU.com, I guess is the best place to go.And to read about all sorts of companies in the space. You know, you can always visit us at PrefabReview.com
PrefabADU
Thank you for the opportunity to answer questions.
PR
Thanks again.