California’s Best Real Estate Play? AB 1033 ADU Condos Explained With Dave Simmons

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Show Summary

In this conversation, Dylan Silver interviews Dave Simmons, a California-based real estate developer specializing in Accessory Dwelling Units (ADUs). They discuss the growing demand for affordable housing in California, the legislative changes that allow ADUs to be sold as condos, and the construction process involved in building these units. Dave shares insights on the financial benefits of ADUs, the challenges of navigating regulations, and the future of real estate investment in California. The discussion highlights the potential of ADUs as a solution to the housing crisis and the opportunities they present for homeowners and investors alike.

Resources and Links from this show:

• • • Investor Fuel Real Estate Mastermind
    • Investor Machine Real Estate Lead Generation
    • Mike on Facebook
    • Mike on Instagram
    • Mike on LinkedIn
    • Dave Simmons’ Website

  Listen to the Audio Version of this Episode

  Investor Fuel Show Transcript:

  Dave Simmons (00:00)
  So this is so early that you and I having this conversation is probably one of the only times that this has even been released. The very first deal that I just spoke of that sold for 1.6 million, that recorded two weeks ago. That’s one of one in the state of California. So when people like this by you and I creating this podcast and sharing this information with community,

  This is the best real estate investment opportunity probably in the last 10 years.

  Dylan Silver (02:03)
  Hey folks, welcome back to the show. Today’s guest Dave Simmons is a California based real estate developer specializing in innovative housing solutions like ADUs. Dave, welcome to show.

  Dave Simmons (02:18)
  Pleasure to meet you, Dylan. Thanks for having me on.

  Dylan Silver (02:21)
  Great to have you here, Dave. I know that there’s a lot going on in California specifically surrounding some of these, you know, alternative housing ⁓ options for people. But before we get into that, how’d you get into real estate?

  Dave Simmons (02:36)
  Sure. ⁓ I was originally in a vertical construction lender for a long time and I owned a company and did that for a while. And then it was a great business, did very well and then COVID hit and then it stopped all construction lending. So forced me to kind of recreate myself, figure out another avenue and then my ADU business was born. during the COVID, we put the package together and

  and launched that about three years ago. And then we became one of the most successful ADU companies in the state of California.

  Dylan Silver (03:13)
  ADUs are really big in California, which shocked me because I kind of assumed that, it’s not going to be easy to put properties up in California. That’s what an ADU is, right? It’s a dwelling unit on the property. But I’ve spoken with so many investors in Los Angeles specifically who are telling me that, I guess, is it a World Cup that’s coming or some big event that’s coming to that area? There’s all this demand for housing, but not just that, affordable housing for the people that are currently living there.

  Dave Simmons (03:24)
  Mm-hmm.

  Mm-hmm.

  Yeah.

  Yeah, so, know, in the state of California, never before has it been more expensive for a young family to buy and own a house where real estate prices are. ⁓ And considering where interest rates are right now, it’s never been more unaffordable. So we got into that game and I was watching some legislation go through the White House for about a year, and it’s called AB 1033.

  So what that legislation does is it lets you build a condo and then be able to sell it as an excuse me, build an ADU and then be able to sell it as a condo. So you’re actually able to record a condo map, add an H away to your ADU and then sell it as a condo. So when the light bulb goes off to people and they realize that they can create 500, 600, $700,000 worth of equity in their backyard,

  it’s being going to be a massive movement. There was a deal in San Jose that just happened. The very first 801033 condo deal went from A to Z. So I watched it very closely. I know the assemblyman who was managing it. ⁓ Everything went great. So they built the ADU, was an 8,000 square foot lot in the back right corner of this house. The condo mappers recorded, they got their parcel number, which was awesome.

  Now, the other thing that I wanted to see what lender is going to pick it up on the resale. So when a family goes to buy this condo in someone’s backyard, it’s a brand new thing. What bank is going to finance it? Wells Fargo decided that they want to spearhead this situation. So. The cost of the ADU to build in the backyard of this San Jose property was roughly 450 grand. was an 1150 square foot, three bedroom, two bath ADU.

  That’s what it’s sold for.

  Dylan Silver (06:29)
  $1.2 million.

  Dave Simmons (06:31)
  sold for 1.6 million dollars. So there was 1.1 million dollars of gross equity created in someone’s backyard. The reason why those deals are so amazing is because because you already own the primary residence of your house, the land is for free on the condo. The only thing you pay for is the vertical construction. So there are 120,000 edu that’s been built in the last five years.

  and none of them have a resale exit strategy. So that’s what my company does. My company creates the AB 1033 resource to where all of these NDUs will have an exit strategy. We do the condo map. We give them the APNs. We do all the planning, permitting, and engineering to facilitate that process. So we’re looking for a major paradigm swing in the Silicon Valley in real estate. Since San Jose,

  past that, there’s been a lot of other major, major metropolis cities that have put their own hat in the ring to get the same, the same legislation through. So you have Los Angeles, San Diego, San Francisco, Berkeley, Sacramento, Santa Cruz, Pacific Palisades. So all these companies are, excuse me, all these cities are, applying for the same approvals. So there’s a massive tidal wave that we’re way in front of.

  to turn these ADUs into sellable properties.

  Dylan Silver (08:01)
  Now, couple granular questions for folks who have the opportunity to do this. So if you’re maybe not familiar with ⁓ building and you’re not a contractor yourself, right? I’m imagining that as soon as people start to see, there’s this huge margin here that we might start to see people charge more for the construction of these ADUs. Are you already seeing that trend happening?

  Dave Simmons (08:04)
  Mm-hmm.

  Mm-hmm.

  Actually, it’s the contrary. There’s so many people, so many contractors ⁓ that have seen the gold mine of ADUs. It used to be just a couple big companies that really cornered the market share of the ADUs. But since everyone’s seen that, lot of father, son, pop companies, they can build it for $50 the square foot cheaper because they have no overhead or jumping off the porch and doing this. So it’s actually driven pricing down, not up.

  Dylan Silver (08:58)
  So when we talk about building these out in someone’s backyard, ⁓ I’m imagining there’s not necessarily always easy to make a new development in California, but what’s the process like for putting one in your backyard? How much permitting and approvals do need to get one in a backyard?

  Dave Simmons (09:02)
  Mm-hmm.

  Yeah.

  Yeah, sure. So the permitting process for a company like us, we do all of our planning, permitting and engineering in-house. So that gives us a a big leg up because most of the time when someone’s doing a construction project, they’ll have an engineer in San Diego, their architect will be in San Francisco and their permitting girl is in Santa Cruz. So you try to get all those people on the same sheet of music and that’s what draws up the planning and permitting process.

  So we can do knock that out in about 60 to 90 days and then we can be done with construction construction and another 91 20. So for us, it’s a six to seven month process. But I’ve seen it go as long as a year year and a half for people that are trying to do it. You know, like I said previously.

  Dylan Silver (10:39)
  Now, as far as the restrictions and I think zoning might be the wrong word, but who can occupy these ADUs? I mean, this is still a relatively newer thing. Are you seeing a lot of long-term rentals? Are you seeing a lot of short-term Airbnb type of guests that are inhabiting the ADUs? Is it a mix of both?

  Dave Simmons (10:47)
  Yeah.

  Yeah, so that’s a great question. you’re very correct. So they are cashflow monsters as far as in the rental space, right, with short-term Airbnb and even long-term rental. But there’s another system that is being very utilized for it, and that’s like for senior care. So instead of putting a family member into a long-term senior care facility, they’ll build grandma or grandpa and ADU in the backyard.

  and be able to share space with them while they’re still here instead of paying 15 grand, 20 grand a month to keep them in a senior care facility. So those are the majority of our customers is the retirement vehicle and cashflow for rental.

  Dylan Silver (11:47)
  So then another granular question, and this is coming from my background as a realtor. So then when you go to sell the property, are you selling both of those joined effectively or can you sell one without selling the other? I imagine you couldn’t do that.

  Dave Simmons (11:49)
  Bye now.

  So that’s the catch 22 of AB 1033, right? So let’s say that you are getting ready to retire and you have a house in the front yard that’s a million dollar house. And you also own an ADU. You built an ADU in your backyard. Right now, currently, you cannot sell your property without including both of them. Your ADU counts as new square footage on the house of your primary home. So if you had a 2,500 square foot house,

  You build a thousand square feet ADU on county records, it’s 3,500 square feet. Now with AB 1033, you’re able to record a condo map, install an HOA, sell just your main house, keep all that equity and live in just the ADU if you want, or vice versa. So you can sell each one individually now, which is humongous. That’s a huge thing.

  Dylan Silver (12:56)
  What would be the, again, another specific question here. Thank you for providing some feedback here. What would be the difference between doing that and just subdividing it into two separate plots? Because that seems similar to that at that point, if it’s being able to be sold separately.

  Dave Simmons (13:00)
  Mm-hmm.

  Sure, time and money, right? So what you’re talking about is SB9, okay? So SB9 is where you have a decent sized lot, you create a lot split, then you have the thing about SB9 that a lot of people don’t know, it sounds really cool, but SB9 in the state of California has a primary restriction to where you have to live in the primary residence for three years. And then you’ll have the ability to sell the external lot to your right.

  So there are some stipulations to that. you have to go through the piece of, and that SB9 loss split is about 12 to 18 months, and it’s more expensive. And with the primary residence restriction, and you have to build two vertical houses, it’s much, much more cash intensive, and it’s more difficult.

  Dylan Silver (14:01)
  Pivoting a bit here, Dave, California as a whole, right? So I’m imagining, you you might see a lot of these strategies happening in several different metros in California. Is the process generally the same ⁓ in each city or is it vastly different in Los Angeles versus San Francisco versus Sacramento?

  Dave Simmons (14:22)
  Yeah, so that’s that is a really good question. So the AB 1033 process is the same from from a statewide mandate. There is no variance from, you know, creating a condo map, creating an HOA and then recording that condo map once their their house is vertical and complete. So that’s the only that’s the real, you know, soup to nuts play it is. And it doesn’t vary from city to city. It’s the same.

  Dylan Silver (14:49)
  Are you are you seeing their interest in folks who may not have previously thought about like being a real estate investor, but now they’re like, hey, I bought this property, I don’t have another, you know, 1.6 million or $1.2 million to go buy another property, but I’ve got, you know, $400,000 in an IRA or something like this. And I also have this need for you mentioned aging family. Are people now looking at this who might not

  Dave Simmons (15:09)
  huh.

  Dylan Silver (15:15)
  come from the background of real estate investors as a potential other source of revenue.

  Dave Simmons (16:01)
  So this is so early that you and I having this conversation is probably one of the only times that this has even been released. The very first deal that I just spoke of that sold for 1.6 million, that recorded two weeks ago. That’s one of one in the state of California. So when people like this by you and I creating this podcast and sharing this information with community,

  This is the best real estate investment opportunity probably in the last 10 years.

  In no way could you build a three or $400,000 ADU in your backyard and then be able to sell it for a million, one, two, one, three. That does not exist. You have a real estate background. If you go build a million dollar house, you might make 20 or 30 % on it and that’s killing it, right?

  and it took you a year, 12, 14, 15 months with all the carrying costs. This is crazy that this is gonna be a big one. Yeah.

  Dylan Silver (17:03)
  When you’re looking at real estate trends and you’re seeing, hey, there’s now this huge opportunity for folks who have property in California to put an ADU on their property, but you’re also seeing, you mentioned this big investment opportunity. Are they gonna, or do you know if there’s chatter about them limiting this to folks who reside in California? And I think you mentioned that earlier.

  Dave Simmons (17:18)
  Bye.

  Dylan Silver (17:27)
  You know, meaning if you’re an out of state investor, you can’t just come buy a property and then put an ADU on it. Or are they saying they’re we’re agnostic to it? Wherever you are, you can put an ADU on this property.

  Dave Simmons (17:29)
  Mm-hmm.

  Yeah, so California, ⁓ exclusively the city of San Jose, that this is where this is started. So I, I, I think in my mind is like, as the rest of the state see how attractive this is, it’s just going to start to roll forward, you know, it’ll roll north, it’ll roll east. And it’s such a cool thing, you know, with the economy, the way it is and how stressed everybody is to

  figure out a way to have money for retirement, right? ⁓ It’s an incredible tool. And I think that any city ⁓ would be crazy not to look at it to try to help their own community create more cash in that system.

  Dylan Silver (18:20)
  I want to pivot a bit here, David, and ask you about some of the processes which people who may not be familiar with ADUs, what they might be looking at. You might be able to build a whole other home. You might be able to put an air conditioned ⁓ shed effectively, and you put some plumbing in there, and now you’ve got a livable unit in there, and it can be nice.

  Dave Simmons (18:39)
  Mm-mm.

  Okay.

  Dylan Silver (18:44)
  Is there like a wide range of what is considered an AEDU and also too, you I don’t know how big like HOAs and the like are in California, but are there some limitations as far as that goes?

  Dave Simmons (18:56)
  So yeah, that, know, 80 years are a couple different things, right? There, there are custom stick built 80 years, which are the same construction as your main front house, right? Slap foundation framing the normal classic American construction. But there has been a lot of prefab construction to where the units are built inside a factory. They’re dropped on your house by a crane. You pour foundation and it’s put up like boxable to where they

  put that stuff together like a Lego in a couple days. So there are a couple different situations of that material option to where you can go the really fast route or you can do typical modern construction. really, from an appraisal standpoint, I wouldn’t recommend ⁓ doing the prefab construction when you’re trying to build a ⁓ condo AB1033.

  There’s going to be some appraisal restrictions. And when you go to resell that on the MLS, you have to say that it’s prefab, it’s modular, and that will hurt your appraisal.

  Dylan Silver (20:01)
  Interesting. I’ve heard a number of different things about modular and it seems interesting because some of them look identical to stick-built homes, but then you do kind of get that connotation which is still there.

  Dave Simmons (20:05)
  Thanks man.

  Yeah.

  Yeah.

  Yeah, I think, I think it’s really cool. Like modular construction is awesome, but there still is that that weird stigma, right? In in community to be like, okay, if even if I do this modular unit, is it going to be worth the same? And then you also have to be look at it from a buyer’s perspective, right? Like, okay, I got this box that was put together in a backyard.

  Or I have a custom built ADU with stick frame construction for the same price. Which one would you buy? Yeah. You know what I mean? Yeah. Yeah. I mean, just from a stability standpoint, you know what you’re getting and then, you know, so, yeah.

  Dylan Silver (20:46)
  Yeah, I mean, which would be the better investment and it’s going to be the same.

  Now we are coming up on time here Dave, where can folks go if they’re in California, they’d like to reach out to you, they’d like to explore ADU options or maybe they’re thinking about, ⁓ hey, I’ve got this property, I’ve never really thought about ADUs but now you’ve got me thinking, how can folks reach out to you?

  Dave Simmons (21:13)
  Sure, our company is called Strata X Dev. That’s S-T-R-A-T-A, big letter X, D-E-V dot com. ⁓ And we are the only company in the state of California that does AB 1033 from A to B. There is no other company that does it. So we’ve got an incredible team of architects and engineers and design people. And we were really focusing on helping as many ADU owners as we can.

  Dylan Silver (21:41)
  Dave, thank you so much for coming on the show here today.