30 Minutes with Spyglass Lending

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Seth Phillips

August 05, 202229 min read


Unknown Speaker 0:02
Hi everyone. Welcome to 30 minutes with Spyglass lending. It's been a few weeks since we've been here. Good to be back and today we have an amazing guest for the big return. Seth Phillips Mr. adu himself of adu gold. This is the guy. This is the expert here in California who is going to tell us all what is going on with AD use. Well, what is an adu? That is an accessory dwelling unit. They've been all the rage now for a couple of years. But everybody loves to talk about them. No one has any idea what to do with them. Except Mr. Seth Phillips. Seth, welcome to the show. Thanks for joining us.

Unknown Speaker 0:35
Oh, thank you so much, Aaron. It's a pleasure to be here. And I really appreciate the opportunity. This is This is now my calling in life is I'm spreading the word of ad use and now SB nine. And it's it's really, really exciting.

Unknown Speaker 0:52
The gospel is out. You've got the moniker. Mr. Edu. How did you earn the moniker by the way?

Unknown Speaker 1:00
Well, that's a good question. But you know, I remember when I started first hearing about the Mr. thing, a broker that I worked with, decided he was going to be Mr. Sherman Oaks. And it worked. I mean, he completely dominated the thing. And everywhere he would go, people would call him that not his real name. And I just watched that happen. I this is so corny. But it works. So this, this was just my opportunity to be a Mr. Something before anybody else. And I'm glad I did.

Unknown Speaker 1:41
Well done taking it, snatch it when you get it. So, you know, having that moniker of being mystery to you and having your company at you gold monitor, tell everybody a little bit about what you do. What is it exactly that you focus on?

Unknown Speaker 1:54
Great. Well, I'm, I'm originally from Minnesota. You betcha. You could still hear a little bit of that in my voice. But I've been a, I've lived in Los Angeles for 37 years now. And I've been a broker agent real estate for 33 years here. So I've got a really good, excellent real estate background, I don't really do much in the way of retail real estate business anymore. But when the market collapsed in 2008, I went from having a very good paying job to being unemployed, almost overnight. So I was looking around what I could do during that time, and I started to go into the house flipping business with a partner. And we were initially selling, buying houses on the court, courthouse steps that were typically in South Los Angeles, and we were buying them for 120,000. We were flipping them for 160 to 180,000. There wasn't a lot of margin in there. But one thing that was true was there was homeless, unlimited inventory, unfortunately. And so I learned a lot during that process of you know, the house flipping business, you know, what to look for, how to fix them up, figuring all that stuff out. And then as we got that figured out, then we realized that because those margins were so small, that the only way to make any real money at it would to scale it up was to do a lot of projects at the same time. So we had to learn another skill set of not only individually, but then managing multiple, multiple, multiple construction projects simultaneously. So

Unknown Speaker 3:53
if you don't mind, I want to pause there for a second because that's so big for real estate investors, right? I mean, it's one thing to do the one off and to make what you can out of that. But really, when you put in and you turn it into a volume business, even on the smaller margins, that's what everybody's looking for.

Unknown Speaker 4:09
Yeah, I mean, it's it's the only way because, you know, you've got partners, and you got all these people, everybody is getting paid. But you as Ron in the project, when a deal that size, when it's all said and done, you're maybe looking at maybe $15,000 or something like that, which is great. But obviously considering you know the time and effort involved in that there, you got to do it at scale to be able to make money. So we figured that out I think pretty effectively. And then as the market began to heal, we just started moving up the food chain and doing properties in more and more expensive neighborhoods. Till we got all the way to the top where we were doing ground up new luxury construction in Beverly Hills, Hollywood Hills Bel Air And that was yet another level of education because those projects are so complicated that from the time you start to the time you can just take it to market is like two years. And a lot can go wrong in two years. So although we were successful in that market, one thing everybody understands in real estate is things move in cycles. Sometimes it's going up, but sometimes it's going down. And, you know, obviously, trying to be aware of that is very important. So, we had already been in an upward appreciate it in market for quite some time. So I was just starting to get more concerned about that. So my story in the adu started right there, because my partner and I decided to kind of do the same thing we've been doing. But to scale it back a little bit into a, a safer price range, something in the $2 million range instead of $10 million range. Yeah,

Unknown Speaker 6:01
that's a big thing. I mean, you know, if you don't mind, just give us a quick timeframe of that. So really 2008 or call it 2009. You started with just 120 $150,000 properties, courthouse steps, all the way up to 10 million other properties. How long did it take you to get there? What was just it was only about five or six years, right?

Unknown Speaker 6:18
Yeah, exactly. Because the you know, once we hit that bottom in the market, it actually did recover pretty quickly. I mean, when you look at that, from a historical perspective, it really surprised a lot of people. So that was good. But now we decided to dial it back. So we found a probate property in Culver City. And we purchased that for 735,000 with the intention of doing what we have been doing, which was just to knock it down because it was basically a teardown house, and then just building the biggest two storey modern box on it, but something more modest, as I said, so we bought it. We hired the architect, we've just finished the plaza actually, when I first heard about this adu thing, and I, I remember this moment, and I will always remember this moment because something about that my partner that is working with the time told me about it just struck me so hard. I remember we were driving in a car driving up to Santa Barbara area to look at some other properties. I remember what I was looking at outside of the car, remember the dashboard, I remember everything it was so profound. So I immediately deep dived into it really researched it. And the more I looked at it, the more I just came to believe this was going to be the future of real estate. And so we completely switch gears instead of knocking the house down. We just completely remodeled it. And then built in the backyard, the first two storey luxury adu with rooftop deck in the city of Los Angeles. And Aaron knows all about this because he did the financing on that project.

Unknown Speaker 8:11
Definitely did I remember it? Well, I remember switching midstream, as you discussed. I mean, like we first talked about what we were doing and you know, on, it's a lot easier from a hard money, private money perspective to give you the loan based on you know, keeping it SFR or turning it into a duplex and knowing what those comps are but doing it as you said and turning it into adu without those comps very, very difficult to make that switch and give that type of financing because you're taking that huge leap of faith as you just said, you were the first to do you know, a luxury second unit like you did in the entire city. That was amazing. It was it was such a cool thing to be a part of. But please continue the story and tell us how you did on it.

Unknown Speaker 8:51
So we we built it. And then right as we were finishing it. This I don't know why I didn't think this before but now I had the switch hat from being developer to be in real estate agent because I was going to be the agent that sold it. And as soon as I did that, I realized I had to develop a whole new language to sell this because this was a brand new product that never had existed before. So there's so much things different about it from just a standard single family home or even multifamily stuff out there. It's this hybrid between them. So I decided that I would form a meetup group and it's called adu development and I had never had running a meetup group before. And within seven days I have 100 people sign up so i Whoa. There's people that are like thirsty for this knowledge right now. And so every weekend on Saturday and Sunday, I would hold it the traditional open house but before Are those open houses, I would have a meetup group every Saturday and Sunday. So over the course of me marketing this property, I got an opportunity to probably run 1000 plus people through this property. And I did that, because I wanted to hear the questions and the thoughts from the people from the people that were buyers for this kind of product to really understand how the public was going to react to this product. And it was, it was a really amazing experience.

Unknown Speaker 10:35
Yeah, that's incredible. Yeah. And you, obviously you did very well on selling in the back end. But tell us a little bit about ultimately, the appraisal process on the back end. Because, again, you know, ultimately, when you sold it, as you said it was a hybrid. So the appraiser went out there to the end buyer and really couldn't use duplex comps, right, they had to kind of set a new part of the market in what the valuation was.

Unknown Speaker 10:59
Yeah, this is this is probably one of the most asked questions that I have about AD use. And it's the simplest one, how much value does an adu actually add to a property. Now, when the dust all settles, I am 100% confident of this very simple look at it. Whatever your single family home is worth per square foot in that location, is exactly what the adu should add per square foot in that location. That said, I mean, that totally obviously makes sense. But because this is once again, a brand new product, it's very, very, really hard to predict. And unfortunately, this is the way it works. You know, an appraiser actually has a very simple job, they get a they get a new assignment, they got a property, they draw a circle half mile around it, they find all the comparable properties in there the even at offer plus minus these little differences. They have, boom, they've got their value. It's very simple. However, when they go in to appraise a property with an edu, the chances of them there being a another property that has an adu within that proximity was very low. It's getting better now because there's so many more of them. But still, that's a challenge. So if there are no properties with AD use to do, what happens? Well, this is where it gets dangerous, because now the appraiser has to think you never want an appraiser to think too much. No, no, because unfortunately, you know, since the market collapse, there's so much pressure now a regulatory things in place in terms of appraisals. And for good reason, obviously, because he totally got a Buse, which is why we have that huge, one of the main reasons we had that huge market collapse. So they're, they're basically incentivized to be very conservative, because they can't ever get in trouble for coming in too low. They, there's people that might not like it, but they're not going to get in trouble. But on the other side of that, if they come in too high, they can actually get in big time trouble for that. So the whole incentive is for them to be conservative. And this project is like maybe one of the most ultimate examples of that because the appraiser that we brought out for the financing through you came in, and his appraisal came in exactly at the number that basically we ultimately sold for which was exactly the number that I have predicted that it would sell for when I was penciling it out in the beginning. However, when we got our buyer in for the property, he came in and we had it listed at 1,000,008. We sold it for 1,805,000. And when the appraiser came out, they appraised it at 1,000,006. So I mean it was huge, huge, huge, huge difference. Now fortunately, he was putting down so much money, that the bank was fine, they were still well within their margins. But you know, that was the real true test because the buyer had to move forward buying a property that according to the appraisal was worth $200,000 less than what he had just agreed to paid for it. And much to our our happiness. He didn't even come back and try to renegotiate the deal because he understood exactly Guess what that property represented to him as a fire because he could have said no to it and walked away it was within his financial contingency. But that's exactly the kind of property that he wanted to buy. He wanted something that he could live in. That was beautiful. And he could ran out another part of it to help pay for that property. And the only way you really get that, in that way is in this exact same kind of a setup. So he stuck with us and went through. And big surprise, he moved into the adu because it's just tacular and rented out the front house and he rented the front house for $4,500 a month. I have projected that

Unknown Speaker 15:48
tell us again, what was the year at that time? Hmm, what year was that again?

Unknown Speaker 15:53
That was and the beginning of 2019. Yeah. So I predicted and projected that the back unit would rent for $5,500 a month, even though it was technically almost identical in size. But it was just so spectacular. And with the rooftop deck and everything. So he moved out of the property, I think about two and a half three years later. And then he did in fact, and now continues to rent out the adu for $5,500 a month and the front house for $4,500 a month. So financially, that project just made sense for everybody in every way.

Unknown Speaker 16:39
No doubt. And I'm sure if he and it sounds like he does still owns it. The difference between the one six and the one eight back then he's very happy with that now, because it's certainly well into the twos.

Unknown Speaker 16:51
Yeah, I mean, according to Redfin, which keeps sending me like, I'm the owner of it, which is cool. And it tells me it's two six now. So think about

Unknown Speaker 17:02
that. Yeah, I'm sure I'm sure he is thrilled. And interestingly enough, you know, going back to the audio, so when we're going going back to the board, sorry,

Unknown Speaker 17:13
I'm sorry, sorry. I'm sorry. That's, that's me. Oops. Okay. All right,

Unknown Speaker 17:20
talking about the appraisal, the and going back to how the appraisers have to do this and okay, that a particular appraiser came out at one six, you know, valued really one eight and all of that. But interestingly enough, the appraisers on the back end because as you said, there are more now but still not enough at us and every within a mile because appraisers use within a mile comps, they're allowed to go outside of a mile now to find another adu to put in their appraisal to help substantiate those values. And it seems to be that they should because you know, these at us really are adding the value that everybody expects, right, even if it's not creating a duplex or triplex or, or even four Plex. But let's talk a little bit about that for one second, because you would mention SB nine and I think a lot of people really want to know, you know, some of the rules and regulations. It is about, you know, having one single family home and putting an adu on there, or putting an adu and adding a JD Jr. at you or these this notion of multifamily at us or specifically what's going on with SP nine. So let's let you run with that for a little bit and break it down for us, please.

Unknown Speaker 18:29
Yeah, the, the you're exactly right. And in all which we knew I mean, the because it was a brand new product. It's been a learning curve for every parts of the financing, the appraisals, the public knowledge of it, you know, it's growing, but it is getting a little bit more established. And by the way, there's over 20,000 adu permits that have been pulled in the city of Los Angeles. I don't know the percentage of them that has already been completed. But it's a lot. And

Unknown Speaker 19:01
we're all the way since when do we know since when the 20,000 went since since since it went into effect? Yeah, tremendous. Yeah.

Unknown Speaker 19:08
So it's actually accomplishing the overall goal of this whole thing, which is to create more housing. And that's actually starting to hit a kind of a number where that actually it could be making a small dent in our housing crisis, which is great, which is what really helps to motivate me every day. Because, you know, there's one thing when you talk about a housing crisis, and a lot of people don't really, is there really a housing shortage? At Well, one of the most obvious things that you can do to substantiate that is drive anywhere in the city of Los Angeles, and under almost every freeway, Overpass is a homeless encampment. What's the number one cause for homelessness, the cost of housing, the cost of housing just keeps going up, up, up, up, up. I'm here in California. And because our supply and demand formula is just out of whack, so it absolutely has to be done. So based on the success of the adu program, the state looked at that they added the multifamily element into it in 2018. So now you can also do that with multifamily buildings. And you can add a lot more of those ad use, which is now probably 85% of our business it with AD uses in the multifamily thing. But then they also went even further with this SP nine. And you'll probably be the first anybody out there to hear this because this is a nuance to the SP nine that is specific to the city of Los Angeles. And under the basic SP nine rule is is that any single family, and that's important. At this point, it only applies to single family properties. But he used it initially. And then a couple years later, based on the success, they expanded it, maybe that'll happen with SB nine, maybe not, but for right now, single family only. But single family lots now in anywhere basically in the state of California virtually can subdivide their single family lot into two separate legal parcels. And on each one of those parcels, they can have two units. So now you can have four units, where there was just a single family house on a single family lot before no zoning has changed, it's still our one, but they've changed the use of it. And that obviously is a huge, huge difference all by itself

Unknown Speaker 21:49
a huge so let's let's let's give an example. If we can't, I mean, let's say somebody's got a 12,000 on our one right resident is zoned residential one. So that usually signifies just one single family home I call it a 12,000 square foot lot, you've got a 2500 square foot house and a 12,000 square foot lot. You're saying easily now you can parse off a portion of that 12,500 build another unit on what was existing on the first parcel, right? And then the new parser. That was great. And I mean, let's say you just split that in half. So you got 6250 on each one. And on the on the original 60 to 50. You got a 2500 square foot house, and you could put another adu there. And then on the new parcel of 6250, you can put two units on there.

Unknown Speaker 22:34
Correct? Exactly. And they did leave a lot of leeway with the individual municipalities, the cities or whatever to kind of dictate some of the parameters of that. But regardless of and they took a lot of the adu law into SB nine. So regardless of any floor, your ratios open space or any of that stuff in either adu or an sp nine, they have to allow you to build a minimum of 800 square foot units, but potentially up to unlimited. So that there's that they also brought in the same thing in regards to parking. That's true of ad use. And that is if your property is within one half mile of mass transit, which includes a bus stop, then there is no parking requirement. And that's also true of SB nine. They also brought in the setback requirements for me to you which is four feet side and back. And that also applies to SP nine. And the division part of it is really it just because people go is there like a minimum lot size there is. But this is just like up just silly almost that they even put this in there. If you subdivide your property into two, each subdivided lot must be a minimum of 1200 square feet. So that means you could literally subdivide a 2400 square foot live into two separate legal lots in each one of those lines. You could put two units directly fitting that on there that might be a little bit more challenging. But still,

Unknown Speaker 24:21
that's you know, you talk about density, they're really turning la into a city with that if that's if you're building up or you're putting that amount of units on that small amount of lots of footage, very different look and feel to La if enough you and you said 20,000 permits have now been pulled since this has gone through?

Unknown Speaker 24:40
Yes, yeah. On the adu side. So how long does

Unknown Speaker 24:43
it take to stamp by the way over at La DBS? How long until you know start to finish it somebody puts in the architecture and architecture and engineering and is actually able to build

Unknown Speaker 24:55
well under the adu part. You know, unfortunately The COVID thing just slowed everything down in the in the city bureaucracy big surprise because they sent everybody home. So when we very first started, we were able to get a typical adu permit in about three months. And then once COVID had added another two months onto that process, and then it just also seemed to slow down even more. So unfortunately, it was typically taking us somewhere between on the the fast side five months to a maybe even eight months just to get the permit. Now they've re brought the guys back, and so it's starting to speed up again. And they put in some more electronic submittal processes that we can utilize now. So for a standard construction new Adu, I think I can realistically say now that the permitting process should be somewhere between three to five months, if you're just doing a simple garage conversion with no expansion to it whatsoever that we can do in two months. So they it is getting faster, construction time hasn't really changed too much other than you have to make sure that you're working with a good contractor that is aware of all the most likely supply chain constraints that everybody has to deal with. They just have to order stuff way further in front than they normally did before. Before when you want a Windows. Okay, it's time for the windows, you went to the store and pick them up the same day and boom, no more. No that because some of those things, you have to order three, four months out in advance now.

Unknown Speaker 26:55
Yeah, really, really need to plan now and know what you're getting into for sure. Well, let's talk very quickly, I want to I want to mention something about the financing of this, that it's important for everybody to understand on the back end the back, you know, it's one thing to finance the project itself, right. I mean, that's, hey, I love doing that stuff. It's what you and I did the first time around for your very first project, the private the hard money, real estate investors, yes, there's always money for that, you know, depending on on the experience of the investor, and the leverage, they're willing to come in themselves, but it's the back end that's important, meaning once the project is done, what are you getting financed and for anybody listening out there? Please understand that right now sanctioned by Fannie Mae and Freddie Mac, you know, whether it's a conventional loan or what's known as a DSCR loan where you're just getting a loan based on the the cash flow out of it, and you don't have to show financials personally, you're just doing the cash flow. There's still saying that you're allowed one single family and one adu on a parcel. That's it. That's what should be financed. You cannot have anything on top of that because a lot of people say well, I'm going to do an adu and then a JD your junior at you with it guess what you're not going to get that financed on the back end whether that's DSCR or conventional or others are allowed you know because again part of these rules and you'll talk about it are they're allowing multifamily you can have two three or four at use on the personal if you have enough space and all that but you're gonna have trouble financing that on the back end unless you make them multifamily and that is possible I have seen people doing the to us and putting separate meters on there and then getting them rezone with title as duplex triplex that sorry, not rezone, but reissued as duplex triplex then you can get the financing on the back end. So that's important to know. But bring us up to speed exactly. I want to ask two questions. One, how many you know ad use are allowed on one parcel, especially with between single family and multifamily and then tell us a little bit more about adu golden exactly what you do for everyone.

Unknown Speaker 28:51
Well, there's some important nuances in here and this is evolving still, under the the original adu laws, you're on a single family property, you're allowed one new detached adu. And in addition to that now, you're also allowed a second aid you called the junior Adu, which has to be the conversion of the original prison principal residence, but that could also include a garage. So what's kind of funny about that is that you actually could, for instance, add a family room to a single family home and then convert that into a junior at you after the fat. But there is one thing that was in the original law that's still there is that if you have irregular Adu, there is no owner occupancy requirement. But if you have a junior Adu, then that does require the owner order to occupy one of the units and it's not only that owner, but it actually goes on to the deed as a deed restriction. So it's every future owner of that property to

Unknown Speaker 30:14
know I appreciate you bringing it up that Yeah, that's very important and and quickly and because we're pressed for time, tell us real quickly about multifamily and how many of you use it to do and then tell us about adu gold and then we've got to go.

Unknown Speaker 30:25
Cool. Well, multifamily adu allows any multifamily property to add two new detached ad use. And then in addition to that, or, or, and this depends on the community is that they can convert up to 25%, create 25% new units based on the existing unit count. So for instance, if you had a four Plex, you could add 25%, which would be one, eight units, two, so forth, and so on. The interesting part about that was there's no limit on it. If you had 100 unit building, you could potentially add 25 new units to it under that 25% conversion rule. But that only applies to the conversion of existing non living space. But that does include parking. So our huge number of our customers are converting tuck under parking into 80 units adu units now, and a lot of them we have several that are like doing 13 of them on one property. So that's pretty ground changing under the SP nine, I want to quickly get in here because there is a potential now, if you do not do the lat split, you can develop SP nine called the single lat two unit development. And under that you take your property and he can now build two units on it. That could be you know, divvying up existing single family home into two units, adding to it, divvied it up into two units or knocking it down building two new units, but he can build two units on it. Once you've done that, it has to be a two part process. Now because you did that the city of Los Angeles is going to look at that as being a multifamily property. And because of that, they're going to allow you to develop it with at use under the existing multifamily rules, which is you can add to buy right once plus a conversion one. So under SB nine, you can actually produce five units on that single family property. And because you did not do the lot split part, there is no owner occupancy requirement. So

Unknown Speaker 32:43
I want to say this right now. You're not reading off a teleprompter. I don't even see you looking at notes. This is all off the top of your head. And you're this is how much you know, this is how the in depth knowledge is off of Seth, Seth Phillips head. So tell us about why I do. Yeah, tell us about DTU gold and why everybody needs you if they're attempting or even thinking about doing an adu.

Unknown Speaker 33:06
Well, we, this is what we specialize in now, as I said, and now the SP nine opportunity which is all kind of like adu on steroids sort of thing. And, you know, a cool concept of SB nine is is that as a homeowner, and I know this is going to apply many times there's there are people that own homes that are never going to sell them. They they're planning on owning them until they pass and then they're going to pass it on to the heirs. So they there's as a real estate agent. There's nothing you could do with that client, really. But now there is because now those people can sell their backyard, they don't have to do any development. They can just do the subdivision process, sell the backyard, somebody else can develop it. And this is the magic part. In the city of Los Angeles, any legal buildable lot right now, almost virtually anywhere in the city is worth a minimum of a half a million dollars. So there's going to be people cashing in on that so we can help with whatever prior to the process you need. We are officially a consultancy, but 85% of our clients, we handle everything from the beginning to hand him the keys at the end we architectural engineering, expediting construction services, all of it and whichever part of it that you want. We're there to help people, you know, accomplish this.

Unknown Speaker 34:33
Tremendous Seth, I can't thank you enough for joining us today on 30 minutes with Spyglass learning. This is Seth Phillips Mr. adu of adu gold a consultancy and I'm telling you get in touch with this guy. If you're even thinking about doing an adu that questions about an ad you wonder how this all works. This man knows it all and his firm's incredible he really has helped a tremendous amount of clients do it right and as you said, and I'm going to reiterate 20,000 permits Already I've been pulled since this has been in existence so many more coming there's just a lot to be done here a lot to uncover so thank you very much for joining us today hopefully deeper your your way this was really enlightening really appreciate the time thanks

Unknown Speaker 35:12
thank you everybody

Aaron Pfeffer

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