Accessory Dwelling Units (ADUs)

What is an ADU?

An accessory dwelling unit (ADU) is a smaller, independent residential dwelling unit located on the same lot as a single-family home. There are three primary types of ADUs, but can be in many configurations as shown in the illustration.

• Detached: The unit is separated from the primary residential structure
• Attached: The unit is attached to the primary residential structure
• Repurposed Existing Space: Space (e.g., master bedroom or garage) within the primary residence is converted into an independent living unit

You may have seen some sort of this recently within your own neighborhood or when staying at an Airbnb while traveling. Many states across the country are adopting policies that are allowing for greater flexibility for what is allowed to be developed on a homeowner’s lot, with the most notable being California adopting Senate Bill 9 (SB9) back in 2021 that enables homeowners to split their single-family lot into two separate lots and build up to two new housing units. My home state of North Carolina, one of the fastest-growing states in the U.S., has seen an influx of over 1 million new residents since 2010, 70% of who are newcomers from other states (the most popular being California, New York, and Florida) has also adopted local ordinances in order to service the influx. The city council of Raleigh adopted ordinance (TC-16–19) in July of 2020 to allow ADUs.

Historical Outlook of Housing Shortage

There are various reasons why the housing supply has not been able to meet the demands including the lack of construction laborers, land use regulations, zoning restrictions, lack of land developers, lack of land in popular areas, and cost of raw materials (freddiemac). The biggest area where this has impacted is within entry-level homes (which Freddie Mac defines as homes 1,400 sq ft or less), where most of the demand exists. We can see the drop in the build of these homes below. In the 1970s, entry-level homes being developed averaged 418,000 per year or 34% of all new homes, while in 2020, an estimated 65,000 entry-level homes were completed, less than one-fifth in comparison to the 1970s.

Why are states focusing on ADUs?

A Freddie Mac report released in 2021 stated that the nation had a shortage of over 3.8 million housing units in 2020, up from 2.8 million in 2018. NPR did a great deep dive into the housing shortage on the local level that I recommend checking out. Using data from the past decade from the nonprofit research group Up for Growth which is focused on housing development and affordable housing, you are able to search the housing shortage status from 2012–2014 in comparison to 2017–2019 along with the estimated number of units short. When looking at my home state of North Carolina, specifically the larger Triangle area, I found that the shortage has worsened and there are over 14,000 units short.

NPR

Regulators are turning towards ADUs to be *hopefully* a short-term solution with benefits such as:

• Provides a source of rental income, especially as rental prices increase
• Provides more affordable housing options for homeowners and tenants
• Provides flexibility in shared living for multi-generational families
• Provide an affordable construction option in expanding an existing home (e.g converting a garage)
• Adds greater long-term value to your property

Players in the Space

Cottage — Cottage is solving housing affordability by making it easy to build an Accessory Dwelling Unit (ADU)

• Developed software and a marketplace that connects homeowners that want an ADU with contractors who can build them.
• They currently service San Diego, San Francisco Bay Area, and LA
• Digitizing the design-build process, Cottage says it saves homeowners months of time and thousands of dollars, while providing its contractors a “predictable pipeline of projects and time-saving tools.”
• They charge fixed fees on the project, which is nontraditional in the industry

Founded: 2019

Founder(s): Alex Czarnecki

Total Funding: $18.5M, Series A

Key Investors: Fifth Wall, 1Sharpe Ventures, Susa Ventures, Base10 Partners

Adobu — Abodu builds no-compromise backyard homes that expand a property’s livable space.

• “one-stop shop” for building prefabricated ADUs
• What sets the company apart from others in the space, its execs claim, is that it not only builds and installs the units, it helps homeowners with the painful process of getting permits.
• A typical project takes 4–12 weeks for permitting, and around 6 months to complete.
• They are currently operating all throughout California and Seattle.

Founded: 2018

Founder(s): Eric McInerney, John Geary

Total Funding: $23.5M, Series A

Key Investors: Norwest Venture Partners, Initialized Capital,

Cover — Cover is a technology company that designs, manufactures, and installs custom Backyard Studios.

• Modular design. It manufactures fully complete wall, floor and roof panels in its factory, then transports them on a standard truck and assembles them on site — without a crane.
• The materials it is using are lightweight steel for the building frame and aluminum for the ceilings. The panels are made of a rubber composite. This is as opposed to drywall which would be too brittle to transport.
• The team looks like they serve the Greater LA market

Founded: 2014

Founder(s): Alexis Xavier Rivas, Jemuel Joseph

Total Funding: $73.3M, Series B

Key Investors: General Catalyst, Khosla Ventures, Founders Fund, Lennar Corporation, Gigafund

Homestead — Homestead helps homeowners turn their equity into wealth and new housing

• Changed business models recently. Split off ADU portion to Otto, a sister company of Homestead focused on designing, permitting, and building ADUs across the LA area.‍
• Homestead is now focused on helping homeowners subdivide their lots under California’s new Senate Bill 9.
• Conduct feasibility on the lot to either sell or develop
• The team coordinates with subcontractors to ensure a comprehensive and complete lot split application
• They help with all the permits for the city

Founded: 2019

Founder(s): Samuel Schneider, Isaac Schneider, Ian Janicki, Sean Phillips

Total Funding: $1.7M, Pre-seed

Key Investors: YC, Luca Ventures, Foundation Capital, The E14 Fund, MAGIC Fund

United Dwelling — United Dwelling creates workforce housing using data, creativity, and underutilized garages, backyards and multifamily-zoned real estate

• Unlike other prefabricated or modular home ADU companies, the focus for United Dwelling is on the middle-class .
• Homeowners can either lease the studio home to United Dwelling and receive a few hundred dollars a month for the property, or buy out the company for $87,900 and have United Dwelling manage the property.
• United Dwelling makes money on the sale of the house, managing the rental and connecting homeowners to a lender that will give them money to acquire the rental property.

Founded: 2018

Founder(s): Steven Dietz

Total Funding: $34.4M, Series B

Key Investors: Lightspeed Venture Partners, Alumni Ventures, Alpha Edison

Samara — Samara is a home services company that provides customized ADUs.

• The prefab houses will measure between 430 and 550 square feet and will start at $289,000 for studios and $329,000 for one-bedrooms. The first product is called “Backyard” which is a studio or one-bedroom ADU.
• Takes around 7 months, which typically covers unit permitting, manufacturing, and installation.
• Samara works with multiple financing providers to help you secure financing for your Backyard. These are typically done through one of the following methods: cash-out refinance, home equity line of credit, home equity loan, renovation or construction loan.

Founded: 2022

Founder(s): Joe Gebbia

Total Funding: N/A

Key Investors: N/A

Conclusion

There are several players in the space ever since the passing of SB9 in California with the majority focused on markets in the SF Bay Area and/or Greater LA. How they all differ is either through prefabrication, modular, or on-site construction for the ADUs. Most of the players seem to help with permits which is the initial challenge for attracting customers and others have a stronger emphasis on design within their platform. The costs associated with ADUs is not relatively affordable with most of these players falling in between the $150k — $350k+ range depending on the size, which could be a down payment or an entire home itself within different states. This opens the conversation too if these players are actually contributing towards the home shortage issue or if the success of these companies will be the wealthy willing to spend towards extending their homes for personal usage or obtaining additional rental income. It will be interesting to follow how they will all compete within the California market to find product market fit and if and when incumbents will spin off within other markets such as the east coast.