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Getting Smart on ADUs with Samara’s Mike McNamara

Written by Mike Simonsen | May 22, 2024 11:00:00 AM Z
In this episode of the Top of Mind podcast, Mike Simonsen sits down with Mike McNamara, co-founder and CEO of Samara, to talk about all things ADUs. ADUs, or accessory dwelling units, are small, self-contained residential units located on the same lot as an existing single-family home. You might know them as “granny flats” or “in-laws” or even “casitas.” And given the housing affordability crisis in our country, ADUs are starting to really gain traction as a potential solution for this. Mike gives us a primer on ADUs and why they hold so much promise for solving many of America’s housing challenges.

About Mike McNamara

Mike McNamara is the co-founder and CEO of Samara, a company that aims to improve the way we live, starting by holistically reimagining the home. Samara aspires to a brighter future through beautifully-designed products that balance comfort, sustainability, and simplicity.
 
In 2020, McNamara was tapped by Joe Gebbia to lead an innovation team inside Airbnb. In 2022, the innovation team was moved out of Airbnb and reborn as Samara.
 
Prior to Airbnb, McNamara spent 13 years as the CEO of Flex, a Fortune 500 company in the electronics manufacturing industry. Alongside the executive team, he grew the company to over 200,000 employees in 30 countries and generated over $25B in revenue.
 
McNamara served as a Board member of MEMC (energy), Delphi (automotive), Flex (manufacturing and technology) and Slack (enterprise software). He currently serves on two public boards - Carrier and Workday. He also serves as an advisor to New Legacy which operates multiple investment funds.
 
McNamara received a bachelor’s degree from the University of Cincinnati and a master’s degree in business administration from Santa Clara University.
 
 

Resources mentioned in this episode

About Altos Research

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Episode Transcript

Mike Simonson here. Thanks for joining me today. Welcome to the Top of Mind podcast. If you follow along with Altos Research, you're familiar with our weekly real estate market data video series With the top of mind podcast, we seek to add context to the discussion about what's happening in the market from leaders in the industry. Each week, Altos research tracks every home for sale in the country, all the pricing, all the supply and demand, all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's happening in the housing market right now. So if you need to communicate with people about what's happening, buyers and sellers, go to altos research.com and book a free consult with our team. We can review your local market and teach you how to use market data in your business.

Alright, let's get to the show. Today we are talking about all things ADUs, accessory dwelling units. ADUs are the small self-contained residential units located on the same lot as an existing single family home. You might know them as Granny Flats or in-Laws or even Casitas. Given the housing affordability crisis in our country, ADUs are starting to really gain traction as a potential solution for this. So what trends should we be aware of when it comes to ADUs? And my guest today is Mike McNamara. He's going to educate us on all things a DU. Mike is the CEO and Co-founder of Samara, a company that aims to take ADUs mainstream. So four years ago, Mike was leading an innovation team at Airbnb. Two years ago that team was reborn as Samara. Mike has a long career in manufacturing and technology. He spent 13 years as CEO of Flex, formerly Flextronics electronics manufacturer where he had 200,000 employees in 30 countries. And I'd love to talk about that. He's also had various leadership positions at Intel and worked even as a production foreman at Ford. And I can imagine that some of that manufacturing background goes into what you're doing with the adu. So let's dive into ADUs today. Mike, welcome to the show.

Well, thank you Mike. That was a great introduction. I appreciate that and excited to talk about some of the things going on in real estate.

Excellent, excellent. Okay, so what I want to do, what I like to do is get, I read a little bio for you, but tell us about how we got here, your background and Samara, and give us the origin story.

Yeah, I've always loved building things ever since I was very, very young and a lot of my jobs were actually in warehouses and factories. And when I was in high school, in fact, I was in the union at one point while I was going to high school, I was a teamster. So I've always been very interested in factories and heavy operations, those kinds of things. You mentioned the production foreman at Ford Motor Company. I was actually going to college. I went there for two or three years and then kind of ran out of money and got a job as a foreman when I was only 20 in a factory. I loved it. I loved the way it smelled and the way it worked and how cool it was when things just, everything ran together and in sync and it was just like a really fun experience.

So anyways, after I got out there, went to a variety of different manufacturing positions. Ended up as a startup company with Sequoia Kleiner backing, and I was CEO of a company in 1994, which was then acquired by Flex. And we became, flex is a very small company. We became the US and European and ultimately South American and a bunch of other stuff. Ran those parts of the business for Flex and ended up being chief operating officer and then was CEO for like 13 years. So when I was at Flex, and it's kind of a long story to get to where we are now, but I love building things and at Flex 200,000 people, you order to employ 200,000 people, you got to build a lot of things. So we were the fourth largest solar manufacturer in the world in terms of solar panels. We had multiple billion in the medical business, multiple billion in the automotive business.

We had four or 5 billion in data centers and consumer products and cell phones. And we built all the XX machines for many, many years that nobody even knows. But every one of 'em came out of a flex factory. So you fast forward that and I started getting interested in building construction. I was CEO of Flex for 13 years. We ended up, when I was there, we went from 120 million in sales all the way to 26, 20 7 billion. And I was interested in building a construction. It was like the only industry I didn't really get into. And I started dabbling in it, even started a little building a construction software company that managed materials and started dabbling in it. And anyways, I was at Flex for 13 years, so I do something different, started getting into venture capital and some of the passions I had because I started so many different companies at Flex as well, and ran across Joe Gaia at Airbnb.

And it was like, that's pretty cool. So anyways, I started working with Joe and Joe and I hit it off right away. Joe's this incredible visionary and design has this amazing passion for design and I'm the hardcore operator industry vet who's built and done anything and everything in every country in the world. And it was just a really nice match. So I started working with Joe, and Joe said, why don't you come and run Samara, which was just this little tiny r and d startup within Airbnb, kind of off to the side. And anyways, I started working with Joe, we had a great relationship and after a while we just said, and this was one of the projects, so just to back up a little bit, Joe started Samara in 2016, not as it exists today as a separate company, but as this researcher, I'm thinking about the future of living and how it might affect Airbnb, how they might think about how living involves and changes and how they need to be ready for it.

And so we created this research arm that kind of worked up to the side. I started working on that with Joe. Then Covid hit, and then we just kind of said, we said together, it's like this really needs to get spun off. So Airbnb is this 85% gross margin software company that has 5 million hosts. And gee, should they work on building a $300,000, 25% gross margin product, hardware product, or should they figure out how to go from 5 million hosts to 6 million hosts? It gets kind of like in their real good and managing hosts and being able to drive that growth. So we just kind of said, this needs to be its own separate company and then it can really thrive on its own. So Joe and I, co-founded what is today, Samara, and spun it off. So it was kind of a long journey on how I ended up getting into building houses, but the passion for building and how to build things like insanely efficiently and using the world as using all the world's resource to be able to get to where we could build something that was really great at a really good price, that passion's never been away from me.

That's terrific. And you said a bunch of things that are really interesting. So first of all, a couple of things that I think are fun. I have a history with Flextronics with Flex. Before I started, I started Altos Research almost 18 years ago now, 18 years ago now. But before that I was building network security systems, Silicon Valley network security systems. And so we were, they'd come off the flex lines. And 20, 25 years ago I was a customer. And then I also had an advisor investor in a company that Airbnb bought 14 years ago. So I was along the Airbnb journey a little bit too with some of that share. So we have a little bit of that background together, just sort of maybe by nature of being in Silicon Valley long enough you get with that overlap. So that's great. You said one thing that Joe had described, and he called it the future of living, exploring the Future of living. We're talking about ADUs. Do you feel like our ADUs, do you see them as the future of living or as an element in the future of living? Tell me how we think about it.

Yeah, yeah. We were looking, when we were doing the research lab at Airbnb, we had a number of different products in an upper different initiatives. And when we really looked at what has links, what has scale, what has applicability in the world, and you go start a company, you have to go solve a real problem. So it's just like, I want to do this. There's a million other people building houses. It's like you really want to be able to solve a real problem. And if you look at, so we thought ADUs were a future of living. It's a different way of living. And when I say that, it's like having this amazing space in your backyard that you can now use in many different ways. So it's about the use case, it's about the financial return that you can get from an A DU. It's how to live life better.

The home is an amazing place. It's where your memories are. It's where you live life, it's where you bring up your family. It's the most important part of who you are. And it's also surprisingly enough, if you look across the country, it's probably the largest source of financial value that you have in your portfolio. If you think about your own balance sheet, so to speak, I mean usually the home is the number one part of that balance sheet. So it's important economically, and it's also important just in how we live life. So we looked at a DU and we just said, wow, people have to be able to live their life. We're in California, I think you're in California as well. And if you look at the cost of housing and the difficulty and the amount of starter homes that are available, all these things didn't exist.

And if you look at how people live life, to be able to have a utility space in your backyard that you could use over and over again in many different environments or many different stages of your life could be really interesting. So we actually did view it as a different way of living. There's an interesting stat in California, the average person is in his backyard or in his house for 17 years. So you just think about yourself, Mike, what happens over the course of 17 years? You have two kids, you send 'em off to college, you need to bring grandma in because she needs a place to live. You start up a business, you have work from home. I mean you never even know there might even be an epidemic someday. And we might all be stuck in our homes and need more space. So we kind of viewed this as this is a way of life.

So think about having this in the backyard and over the course of 17 years you use it. You might use it in all those different ways. I remember I had almost like had an A DU myself. I mean it wasn't such a thing as an A DU, but when I was in my twenties, I was living in a two bedroom house. I had a baby, my wife was working, I was working. We didn't have a lot of money. My wife went and started her own design business. I took the garage and converted it into a studio and it was really cool. It provided a place for her to be able to work, but it was just 10 steps from the house. So it was really kind of cool. We had our friends come over, we were still in our twenties. We had our friends come over, family come over, they come to stay with us.

It wasn't in a two bedroom house. They didn't get to have to stay on the couch. They could actually, we threw a airbed in the studio and they loved it. They thought it was an amazing experience. They had this big garage and I made full high ceiling, ceiling and things like that. So it wasn't an A DU back then, but it was this flex space. And by the way, when I sold it, I'm pretty sure my equity value in my house, I lived in that house for eight years, I sold it. I'm sure the equity value in my house was appreciated as a result of having this really cool look in flex space, which was formally a two car garage unattached that allowed to do it. So this idea of having a flex space, particularly in today's market, there's other stresses we can talk about in terms of the cost of housing, things like that.

But to be able to use this so many different ways to help yourself financially, to help your experiences, to help you start up businesses, to help grandma out, all these kinds of things. And maybe there's more to helping our grandma. Maybe the cost of putting her in a assisted living is through the roof maybe. And by the way, she can't take her dog there and maybe it's like a great babysitter to have in the backyard. So you think about the dwindling size of families over time, part of that is the cost of raising children and maybe that eases some of that pain. So there's just so many different use cases that we actually believed in A DU is a way to change how we live, to have a richer life and to have more financial security. We fully expect these to appreciate at the same rate the front of your house appreciates.

That's great. So just to be clear, we're talking about a standalone, when you call it the product that Smar is designing is a standalone, I think you said is like 300 K construction. So it's a unit. And tell us about that product.

Yeah, we have four different products. We have a studio, a one bedroom, one bath, a two bedroom, one bath, and a two bedroom, two bath. Which by the way, Mike just hit the website yesterday. Yesterday afternoon. You get the exclusive launch. Yeah, it's actually not announced. So you get the exclusive. So anyways, so we have this full range. So you can take anywhere from 420 feet all the way to 800 and you pick what works in your backyard or what fits in your backyard. It's an amazing product. Of course I'm biased as you know, but we started with this real design ethos. So Joe is in his co-founders. In fact, Brian Chesky who's current CEO of Airbnb are both from Risley School of Design. So these guys are design people. They started with every product should have design a real design feel. I mean a design properly designed product can really make the difference between success and failure.

So we have this heavy duty design ethos. We designed it to be, we just obsessed over every detail. So we obsessed over the colors, the corners, the edges, what are the materials? So we use all modern materials. We use heat pump to heat it just because it's all electric, it has very high installation values, typically uses about half the energy of the house in front. We have high solar generation that you can put up. We can kind of generate using our system by maybe up to three x because we can put so much solar generation on the roof that it can actually feed the front of the, we use all modern materials. We use a metal roof, we have metal insulated panels on the outside, or if you wanted something different, you can have a different external cladding. But everything is designed to be perfect and it's all around a steel frame.

So this thing is highly precision engineered. So every single hole was put there, excuse me, was put there by a machine because we rolled these through automation through a machine and we put 'em up and construct them perfectly. So you've got an amazing precision in your, and the last thing I might mention is HVAC. We have a ducted system that's insanely quiet, but kind of more importantly, it all has very high filtration. So we filter particles down where we can actually capture some of the bacteria and also some of the things like wildfire smoke, things like that. So as you get small and smarter particle size, it gets harder and harder to filter those out. So we've put in a system that's very California ready, we want to make sure we helped out with the cleanliness of the air people breathe and be able to think about wildfire smoke or anything else coming at us. So it's just like an amazing product. And of course we think it's really beautiful and made it so that we can manufacture it as cost effectively as possible.

Okay. So I love that context about what we're actually building. And it's funny because the houses that I've owned in California are not precision manufactured and they are old and gap gappy and they're uninsulated and all those things. So it's really fascinating thinking about dropping in the additional unit. That's the one where the quality is in this space. Are you finding that that's true with your customers? Are you dropping in where folks are they going in and what's that customer experience look like right now?

Yeah, yeah, it's a great question. So we're focusing on the California market. We just launched this company at started marketing about a year and a half ago. So we want to make sure we establish a foothold and win in a market that makes the most sense. So California makes the most sense because it probably has the most housing stress in the entire nation. And it also, if you rent these, a lot of these things, I mentioned all the use cases before. One of the use cases I didn't mention is just income on demand. So you now have, I mentioned equity appreciation in terms of financial security, but with income on demand, you can rent it for one month this summer, you can run it for three months this year. You can rent it for six months next year. You can rent it this year, but not next year.

You can at your convenience be able to dial the amount of income that you can bring in. But getting back to why we're launched in California, we think about it as being very focused on you got high rents, you got probably more multi-generational living going on in California than anywhere else. So you have people that need homes and it's just really expensive. There's some other stuff maybe we talk about later in terms of the lock-in effect and that sort of thing with interest rates. But we just decided, so we're launching in California, we've just had a big article in some of the government officials in a Sacramento launch two weeks ago. So it's the first time we moved into the Sacramento marketplace, but we're heavily focused on that. And as far as an experience, think about this, think about your construction project. Almost everybody's done a construction project.

Almost everybody who's done a construction project never wants to do a construction project. Again, the average residential construction projects, a good date on this too is like 30% over budget. So when you think something's going to cost you $200,000, it's probably going to cost you $300,000. And it's very consistent because there's so much variability and unpredictability when you're doing a construction project in your backyard, have weather, you have unknown issues that pop up. You have guys rolling in and rolling out and maybe they came in that day and you're managing all these subs and you're trying to coordinate subs. I've got my electrical sub and my plumbing sub and my foundation sub and my drywall sub and my painter sub. And I'm got all these guys and I'm trying to coordinate all these people that don't actually work for me. And so it's hard now.

So to put up an A DU, it's probably going to take a year, a year and a quarter, and that's a lot of pounding for the neighbors and everything else. Think about us going into your backyard and 30 days later handing you some keys and that's kind of amazing. So we would go into the backend. So what's the experience like? We'll be building this in the factory somewhere, which is no one's looking at. And then we get your ground prepped. So we go get your foundation in, we go dig the trenches to 18 inches deep, whatever it is for, we've got three utility connections. We have to do, do electrical, we have to do wastewater, we have to do water, we don't need gas, we're all electric.

And we do those things. So it's putting in the foundation which has some digging and such to it. And then we go and we take this and we just pick it up with the crane. We drive it in with a semi, we pick it up with a crane. Once it's picked up, it literally takes 10 minutes to get to the site. Literally this thing is flying through the air 10 minutes. You drop it on our one bedroom, one bath has eight bolts. So you drop it on, we bolt it in and it's done in two hours. It is mechanically and physically sound in a two hour process. So we go from just like a foundation that's sticking up this far in your backyard to having an actual house on there. And the whole process we think is going to take, it takes a little bit different, every lot's a little different, but we would expect our average that the first time that shovel hits the dirt to when we turn over the keys, we actually expect that easily by the end of this year.

Our average will be 30 days, which is an amazing thing for the neighbors, for yourself, just think about if you are putting it up for rent and your average rent that you can get for these just in San Jose is probably $2,800 a month. If you were able to do that in a month instead of in a year. I mean all that rental income accrues to you and you do the discounted cash flow on near term cash income as opposed to income from 30 years away from now. It's really valuable income. So it's really interesting. So the experience and we take care of everything. We take care of the permits, the soil surveys, the management of anything that needs to be done, the installation, scheduling the product to be built in the offsite factory. There's pretty much nothing you need to do. And you can also imagine, yeah, it takes a year to do it with a contractor. You're probably for sure going to have a variance, but you also have to go manage it for a year. That's like, and you have to go manage your neighbors for a year. They're not going to like this. Well, that actually gets

To another part of the question here is the community and the state and the acceptance and desire here and the policy. What's going on there? I know there's some new, I find it optimistic that the state governments, not just in California, but generally around the country, are starting to be more aware of the need for density to help solve our affordability crisis. And so some of those restrictions are loosening up. What are you finding at the local level and what's going on there?

Well, I'll start with the state of California. They have a real housing problem. They think they have a housing problem and they want to go fix it. And they actually view ADUs as one of the primary ways to help fix this housing problem. In fact, roughly 25,000 permits last year in California where they're putting in maybe a hundred thousand units, 25,000 or ADUs. So this is the largest permit form factor that is going on in California right now. So they view this as a huge way to solve their housing problems.

25,000 A DU permits in California.

Why? And here's some great data and talk about how passing laws and being in pro housing actually makes a difference. In 2016, nobody even knew what a DU was, I don't think. I'm not sure I ever heard the term in 2016 you did hear granny flats and things like that, but a DU is a thing now. I mean it's actually a term and in two, so between 2016 and 2022, which is the last complete data that we've seen, the building permits have gone up by 20 x for a DU. So think about it going from roughly 2000 a year to 25,000 a year. I mean, wow, that's like huge. And why is that? It's because California is becoming very pro-housing. So it's done, it's passed bill after bill after bill that are very pro-housing. So have it an A DU today is kind of like a right, I mean it's like you put a four feet from the fence from the neighbor's fence and you keep it less than 16 feet high, you have a right to put one in the backyard.

You don't need customer or the neighbors to approve, which I'll get back to in a minute. But you're able to slot these things into the backyard and it's kind of a cool way to add capacity because you're almost like crowdsourcing where individual people are making their own decisions to either be entrepreneurs and rent it out or to be able to use it however they want to use it for gran in and all those other reasons. It is just a cool way to add capacity because you don't have to put up these great big three story ugly developments that nobody likes. So people think about traffic impacts and all that. Instead you take all these things and you pop 'em in the backyard where people put fences and trees and all this kind of stuff around and they kind of disappear. So it's a really crowdsourcing way almost of adding capacity without going the normal developer route and waiting for developers to have a return on investment that is appropriate for them.

So what California's done is they passed a whole slew of laws, it created an enormous amount of demand and they continued to do that. Now that's at the California level. Now at the individual jurisdictions, you also have like 400 jurisdictions in California that set housing policy and those kinds of things. And a lot of 'em have to, there's flood zones, there's earthquake zones, there's all kinds of things going on that really matter. And then you also have the cities that don't want to densify. So what California has done with those, so some of these laws you can opt into and some of these laws you can, and when I say laws, I mentioned having a right to put in A DU, but there's also laws going on the books for splitting your lot that if you did put up an A DU in the backyard, could you split it out and essentially turn your single family home into a condo where there's two individual units or taking a single family home and creating more densification is another bill where you can put a condo basically next to each other.

And because you have a two unit condo in the front, you could put an EDU attached to each of the condo. So you can turn a single family home lot into four units. Again, a very easy way to ease into more density, solve some of the problems without destroying the character of the neighborhood by going into all these multi-story, big ugly development. I'm not saying they're all ugly, but big developments that a lot of people don't want. So, and what California is doing with the jurisdictions is they want to add over 400,000 new units to the California stock by 2030, or maybe it's 2031. So what they've done is they've gone out to all these jurisdiction, they gave 'em an allocation and they say, given the size of your city, you got to add 182 units and another city has to add 4 22 units and you have to add 1100 units.

And if you don't do it, you lose the rights to control the permitting process. So it's like you have to add all these units, so they've distributed this demand and either you comply or you lose the ability to do it. So people are taking this thing really seriously and some of these communities are actually going out and saying, so they have to go back to California with their actual plan. I'm going to do so many single family homes. I'm going to do so many du, I'm going to do so many three story condo complexes and it has to add up to their number. And if not, they're out of compliance. And some of these jurisdictions are actually only submitting ADUs as the loan solution because they think they can get people to go put these in and they want to do this. They don't want to change the character of their neighborhood. You still have people that are anti densification and this is a way to appease some of those people. I mean, our units are beautiful, I think. I mean they're good looking. They'll make the backyard and they'll make that neighborhood actually look better. I mean genuinely we've tried to design them to be beautiful. We think about 'em as architecture. Architecture you have to look at for a hundred years and our units are, we expect 'em the last a hundred years. These are real units, these are not shits. These are real things. And

If you're going to look at it for a hundred years, boy, you better be good looking.

Yeah, I like that. I like that design ethos. And I didn't realize it was the California plan was 400,000 more units. That's a great data point. The question that I have for you is when we think about affordability, we think about housing affordability in the US and California in particular, is it better to look at these as density another, is one more unit you can rent for 2,500 bucks in San Jose, or is it better to think of them as income? Now I can offset my 7% mortgage rate with 2,500 bucks a month of income. Walk me through the math on how you think about the affordability impact of what you're building.

Yeah, so let's just take a cost. So one of these reasons, these are attractive, particularly in California. Let's take San Jose as an example. Very modest. You live in California, where do you live? I

Live in San Francisco. Yeah.

Yeah. So you know what the costs are like around here. San Jose's a very modest place, I think from a housing standpoint. It's not Palo Paloalto, it's not Mountain U, it's not Atherton, it's not Mill Valley. To me. It's a very modest place and the average single family home is 1.6 million. Last I looked in San Jose and it's only like 1400 square feet. It's not like it's big, it's kind of small or maybe 1600 square feet I think is the average, maybe, I dunno, you read all kinds of different data points on that, but it's modest is my point. You could probably put a one bedroom, one bath in the marketplace in a reasonable, maybe not everywhere in San Jose, but in a lot of places and make $2,800 a month, maybe $2,500 a month. If you think about buying a unit for $300,000, if you fully financed it at today's at a six and a half percent rate or so, you're looking at $1,600 a month in cost.

So in addition to 1600 a month in cost, you have to do some taxes, call that $1,900 a month in with taxes, but you get to depreciate it because it's rental income. You get to maybe write off the heat pump, you maybe get to write off some of the solar. You get tax credits, you get everybody's tax situation's a little bit different. But the government has always, since the fifties, have stimulated real estate by allowing you tax deductions, the most obvious example. And if you have an interest payment, you can write that off if you're going to write it out. So because you've already paid for the land, the cashflow, the ability to immediately cashflow these in California is extremely high. You should be able to cashflow in the next month. And that's untypical for real estate. A lot of times it takes time and you have to get your depreciation, all your allowances before you start building up into your cashflow.

So you already paid for the land. And the thing we think about when we think about the economics and whether it's right for income, everybody has to decide do they want income on demand, which the cashflow is fantastic or do they want to use it for their home office, which might also be a way of being able to focus on your business that allows you to be able to, maybe that has a return on investment as well. So I think everybody has to make their own individual decisions. I think over the course of 17 years, you might use it in many different ways. I mean, if you're a new homeowner, I'm going to put up an A DU immediately and I'm going to have it help me pay for the rent in the front yard or help me pay the mortgage in the front yard because when I buy that front yard, I pay for all the land.

And unless you put something on the land's, kind of a cost center, I think about land being a cost center. You got to mow the grass, you got to water it, you got to plant plants, you got to pay taxes on it. It's like a cost center. Why not turn that amazingly expensive real estate in San Jose and some that returns out investment and this thing costs 300 grand, whether it's in, you're in San Jose, whether you're in Palo Alto, if you put this in Palo Alto, you'll probably get $4,000 a month and it costs you the same,

It costs you the same. Well, and that actually goes to the density demand issue. People have the demand for living in Palo Alto and it's closer in and therefore it maybe incentivizes more construction of that.

So just getting to the density issue, there are school teachers in Palo Alto, and I don't think they're living in Palo Alto. Everybody always picks or talks about the school teachers. But it's a good example. The school teachers might be living in Morgan Hill and they're teaching in Palo Alto. And every day when that person goes to work, they're like, man, I got to find a job closer to home. It's a way for people to live in the communities where they work and be part of those communities in a very noninvasive way. It doesn't have those three story condos that are intrusive or maybe not in the character of the neighborhood like we talked about, but it's a way to add additional density which has real value. And once you start living in Palo Alto working in Palo Alto, you obviously don't have as much emissions from your car.

You don't have all that wasted time. You start living a better way. I mean, it's just a way to live better. So some people, so all this density and from a city and a jurisdictional standpoint, they kind of love it. I mean, if they put more density in the backyard, they've already paid for the police force, they've already got the fire department figured out. The roads were already paved, the sewer main goes across the front of the house. That's very different than adding another suburb on the outskirts of South San Jose or Morgan Hill where you actually have to put in all the street infrastructure and figure out how you're going to service it from a fire and a emergency vehicle and a police and all that kind of stuff. So the cost for the city go way down as a result of this ification. So you got city benefits, the people living there obviously have a benefit. And the people, if they're doing it for income, the nicer or closer they are at the city, the more income they get. It's classic real estate. It's all about location. So it could be any of those things. And I've been through more cycles than a lot in terms of kids and grandkids and all this kind of stuff and seeing how life has changed and evolved. And all I got to say is you are going to use it in every one of these different ways.

That's terrific. I love that background. And so let's shift then to longer term demographic. You're obviously well researched in your planning here. And if you think about the next decade, so California wants to add 400,000 homes in the next five or six years, but what do you see longer term trends, ebbs and flows. We have boomers who suddenly are maybe finally retiring. Tell me what your thought pattern is there. What are the things we should be paying attention to? Is this a 2020 problem and all of a sudden in 2030 we're like uhoh stuck with all these whatever, these ADUs back here, tell us what we're thinking about here.

Yeah, yeah. I love the demographics as it relates to ADUs. So let's talk about a number of different trends. One, let's just talk about the demographics of the Bay Area as an example. I mean you have a lot of multi-generational living is actually cultural. So to be able to house a bigger family longer for the kids, but certainly having the parents come co-locate is a huge trend just culturally just not because they can't live in their own place because maybe they don't want to live in their own place. They actually want to live with the kids. And if you were going to put your parents, you don't want 'em in the third bedroom. Maybe you do at your house or maybe your wife's parents in your third bedroom, but wouldn't it be great to have 'em in your backyard? And then all of a sudden you have an instant babysitter and all that. And I can tell you as you get older, you start thinking about where you're going to spend your final days. There's no better place than the backyard of your kid. There was a really good study out. The number one fear of aging people is not death. That's actually number two. The number one fear is going to a nursing home.

So you think about that. So anyways, so you've got the demographics of California, which it's culturally more necessary. So I think that's a big trend. Obviously on a more national basis, you've got boomers that are looking for a place, and like I said, part of it's staying in your house as long as you can. You've obviously heard that as much as you can, but part of it's also living out the last days in a very secure place, which is great to be in your backyard. We had one of the people that wanted to buy one of our units and the whole strategy was very successful, wealthy in fact, lived in a really nice home. His whole strategy is move the A DU but only be there six months and then travel for six months. He wanted to go all Europe and all this stuff. He worked hard all his life, worked 60 hours a week.

His entire life was 63. He was going to run out the front of the house because the front of the house worth a really lot of money. So he was going to live in the back of the house, but only planned to be there half the time at his convenience if he chose. And he wanted to go do that for years. And his convenience wanted to change his mind. Just the rental lease goes away in the front of the house. He moves back in. But his whole plan was to move back there and have his daughter and their and son, son lawn their two kids move into the front of the house. So he's like, I'm locking on my spot for the future, which is a really cool thing. So you've got the boomer effect, you've got the demographics and some of the cultural effects and you just got pure cost. It's just when Johnny gets out of college, it's really expensive to go try to get your own place and China doesn't want to be in your third bedroom either. I don't know how long.

I love that. That's really fascinating. So the boomers with the fear of nursing home and an ultra low mortgage locked in forever and the boomers own all the real estate. So rather than building an in-law or a granny flat for granny, you're like, I'm granny, you have the rest of that. I could imagine that is a shift that starts to take, we start to imagine we shift from imagining we're going to put granny there to realizing granny owns all the land in this country. So maybe granny puts herself there so that she can bring the family in. That's a fascinating shift in frame.

I'll even give you something that's super real. My son has a extra house on his where he lives, the main house. He has three kids. There's an extra lot, there's a lot extra house on the property and it's like 1100 square feet. I am planning on which fruit trees I want to be there in 20 years and I'm planting 'em now. I literally have three different kinds of apple trees grown right now that are only two and a half feet high. And I'm going to design the backyard of the little backyard home and I'm going to make sure that the fruit trees there are the ones that I like and the varieties I like because it takes 10 years for food trees to go. And I'm not that old, but I'm just like, this is my backup plan. It's just like a backup plan. I don't know if we'll ever go there, but if I do, I'm going to have all the fruit I want. I like fresh orange juice in the morning. I like fresh chicken eggs. I like apples. I like apple juice.

Amazing.

It's a backup plan. Best

Time to plant a tree. The best time to plant a tree was 20 years ago. You're planning it now. I love it. That's really great. And it's a fascinating trend as we think about the shifting country and as we track the housing market this, we've been expecting for years that boomers were going to sell their homes and they just keep not, and you can understand because you have such a good deal on a mortgage that you want to hold this house forever. And so one way to do that is to put yourself in the granny flat. I think that's really terrific. Let's shift to construction. So you talked a little bit about how the stuff is built or the quality and the design thinking. Are there other technical innovations that had to happen to make this happen now? Why now can we do this?

So I've always been fascinated by manufacturing and maybe because I've just got a productivity gene in me that just, I like everything to be productive and that extends across into my personal life and everything else. But in a factory you can do different things. So in a factory, everybody shows up at a seven o'clock. If their shift starts at seven o'clock, they don't show up at 7 0 5, they don't show up at seven 10 because they have to work on a line and there's a flow to a line and it's a system and you can't have people rolling in at different times that you might see on a construction site. In a factory, you have no impact from the elements outside. So it doesn't matter if it's raining, it's storming, it's snowing, it's whatever it is. In a factory, you have a very controlled environment and it also means you can have exactly the environment you want.

You could tell people wear these kind of gloves so you don't nick the product or scratch it or don't wear belt buckles or don't. I mean you end up with a very, very controlled environment for all the people working there. And in a factory you're allowed to learn. So because you don't have all these outside impacts, every single time you build something, you can learn, you can make it bigger. You can what's called pokey oaking it, which just means you're able to eliminate. You can have fixtures and tools that allow you to eliminate variation and you can implement those things. You keep implementing 'em. As you build more and more and more, you get better and better and better. So it tends to eliminate the scrap and eliminate waste, and there's more precision. And when there's more precision, there's less things that can go wrong.

You have what's called in manufacturing a process capability window that you can keep driving bigger and bigger, which just means if you're in your window, hey, your screw needs to go in within plus or minus quarter inch and it's still a good product, you can have a wider and wider process characterization. We put it in all our screws perfectly, so it comes across the computer, it comes across using software where that hole is punched perfectly, and the length of that two by four is precise. So this allows you to really do precision engineering. It allows you to eliminate waste. It allows you to learn in a controlled environment. It allows higher productivity because those workers are in this controlled environment. So from a manufacturing worker standpoint, it's really interesting. Now the second thing that's really interesting about a manufacturing compared to a more typical construction is you can optimize materials in a better way.

So at a job site, I talked about being in the backyard for 30 days. You think about what happens if you build it, if you still build it with a general contractor, they're bringing all their two by fours and they're dumping 'em somewhere, I'm pretty sure it's going to be on your property, good luck with the plants. But you've got all this stuff that comes in that's purchased for that use case. Now, if you're in a factory, you now have the option to say, Hey, because I've got a factory that I've got a warehouse, I can say buy 10 sets of windows. Don't buy one set of windows and drop ship one set, buy 10 sets of windows. And that allows me to achieve what's we call economic order quantities where you can achieve higher and higher levels of efficiency, where you may be able to buy bulk in repeatable items.

And because the factory schedule and because you've dialed it in, you're able to run it at a certain pace. You don't have to have a lot of excess inventory. You know what the pace of the line is. So you time this materials coming in. So what that does is it allows you to buy economically in terms of quantities that make sense instead of one-off in one single drops, but it also allows you to source more flexibly. So now I don't have to source it from Ferguson's down the street. I can source it from, maybe I can bypass the distributor and source it directly from the manufacturer because I'm now buying an economic order quantities and it's now efficient for that manufacturer to ship it to me directly. So you've got these factory efficiencies, you've got these materials efficiencies, and then that gives you all kinds of degrees of freedom because you're sourcing anywhere in the world that is the most optimal way to source.

You have more choice of what kind of products to source because you have a wider lens. You don't have to source it from the distributor in the Bay area. You now can source it from wherever you want. So what you're trying to do is there's just these tremendous amount of efficiencies that you're able to put to use that a general contractor stick building in a site just can't get to. And the other thing is you control the resources in a factory. One last thing, I'll just talk about the control in the subs. A general contractor, even a large one or deer horton and all that, very often they do a project, they sub out the electrical, they sub out the plumbing, they sub out the foundation, they sub the framing, they sub out the planning, they sub out the drywall. None of these people work for 'em.

So they got to coordinate all this stuff and you're subject to whatever team they give you. And sometimes they can make it that day, sometimes they can't. Sometimes it rains, so they can't get there at all, and it's just hard. So to be able to achieve the efficiencies that you can in the factory just doesn't happen in the field. It's just a different way of operating it. It doesn't mean it's bad. They're good at it. That's what they do. They're good at managing all those subs. But I really like the factory concept and I've been doing it my entire life putting up factories and optimizing 'em. And besides it being fun, it's really efficient.

That's great. So where are you doing the manufacturing?

We're doing it in Mex Kelly.

Okay, so just over the border?

Yeah, so it's like five miles from the border and it's kind of closer to Arizona, California border. The biggest a DU market in the country by far is la. So it's very close to la. So you can easily service the California market from that factory can easily service the Phoenix area marketplace. And we even think you can service the Texas marketplace.

Okay, cool. I know that I've seen data where we actually have fewer manufactured homes happening now than we did say in the nineties because, and I think one of the reasons is because the factories for those manufactured homes were in the northeast and in the nineties we were still building homes in the northeast and now we're building homes in the south and the southwest. And so the factories are further away from the homes, and so we're actually doing fewer of them. Is your experience say the same or do I have that right?

I think it's difficult to make a lot of the US factories work, so you want to get the trade off of being close to where your market is. But you also want to think about cost. And this is where I'm kind of bullish on Mexico. I think a lot of those manufacturers don't have a history with Mexico, and I think it's a big jump for them to head to Mexico. When I left Flex, I think we probably had 40 to 45,000 people in Mexico. We were probably maybe the third largest international company in terms of size in Mexico. And some of those, I literally picked out the cornfields and started from scratch. We had one operation on there that was like 23,000 people. And I literally went down with a couple other that my team from flexing, we picked out a cornfield that we were going to develop on.

And to see it 20 years later is just amazing. So some people don't have, you have to know how to run. It's a technology to know how to run factories, to know where to run factories and how to run factories that are international, and then how to actually manage a supply chain that feeds international factories. That's not trivial. A lot of the traditional manufacturers don't do that, are nervous about it, and I think it's hard to get to the cost that you really need. Our objective is to have the most amazing designs in the world with high-end materials and be able to build them as cost effectively as you possibly can. I think a lot of times it's going to make real hard to do in the northeast. I think even in some places in the south, it's kind of hard for sure. It's hard in California.

I think even though there's a number of different factories, I actually think we have the right strategy. We'll see how that plays out. But I'm a bull in Mexico, the more we can drive the cost of manufacturing down the nicer the materials can be. So you go into our units, our one bedroom, our two bedroom, one bathroom studio, they're all pocket doors and we have high-end hinges holding those pocket doors. And these are all solid core pocket doors. A lot of people think that pocket doors are cheap, they're not in our units. And what allows us to be able to put really nice materials into our units is the fact that we're extremely driven. We might be obsessed by design, but we're also obsessed about driving to the lowest possible cost we can so that we can bring amazing designs and very affordable pricing. And that's something that we think we do across the board when we think about every single element, whether it's insulation or we put five eight plywood or five eights in drywall, everybody else uses a half inch.

We put an inch and eighth on the floorboard. Everybody else does three quarters standard production techniques. Our insulation values are higher. We use metal insulated panels on the outside to drive up that insulation. We have oak baseboards. No one else has oak baseboards. We have an unlimited warranty on our floor. We've got so many different things that we try to take every single element and figure out how do we have amazing materials that has no maintenance, but at the same time we can build cost effectively and be as cost effective as anybody else. That's terrific. I'm going to give you one other, Mike. Sorry. I know you want to ask the question. I want to give you one other benefit. I firmly believe that our costs actually go down over time. There is no contractor that are saying his costs are going down over time.

Just pure inflation means that a general contractor working in the field who has to bid a project now and then go find labor a year and a half from now, once all his permits and approvals, all that kind of stuff, he has to dip into the unknown of what that market is like, the availability of electricians a year and a half from now, the availability of plumbers, all those kinds of things. But one thing you can be sure of with inflation, you're going to have 5% cost increase every year, both of the input materials and as well the labor in a factory you would expect, I would expect that the factory learns. It's continually learning. It's continually value engineering. It's continually eliminating waste and finding fixtures and materials and things that drive the efficiency that I would expect any inflationary increases of labor and materials to be offset by efficiencies and learnings and you can't achieve that. So I think that's one of the other benefits that I did mention earlier. When you get into a factory, you get into a way of operating that can actually beat inflation. So when I think about where we are going to be three years from now, I actually hope we're going to be at the same price we are now and none of the other, no one else is.

Right. That sounds like your expertise is valuable in that angle. Do you have a view on manufactured homes in general? Does your thinking apply broader than the ADUs that you're working on?

Well, every A DU is a little different. So when you talk about manufactured homes, a lot of 'em are built to a HUD standard. And that standard is some of the lower specs that I just mentioned a moment ago. Things like thinner plywood or thinner plywood building it or different specs. We use two by six metal steel frame. I mean nothing's getting better than that. And so they build the different standards. And it's why I think also one of the challenges that we have with ADUs is people think they're a level down in of quality. And it's because a lot of the manufacturing homes we're a level down in quality and still are built a level down in quality today. We don't build our homes to that. We build our home is usually better than the front of the house and most often better and higher quality than the front of the house in addition, then it comes with a big warranty and all that kind of stuff.

And it's brand new, but we don't design earth. So one of the challenges we actually have with 80 years is an 80 U could be anything. I mean, my years taken my garage, I did it myself back when I was in my twenties. I put up the plywood, I ran the electrical I could, and all of a sudden it's an A DU. It wasn't an A DU because I didn't have a kitchen in it, but of official A DU. But you can have any standard Home Depot, you can buy a kit for like $49,000. It's not what we sell. And some of the manufacturing home standards that have been traditional, because these things have been around for 50 years, this is not a new thing. But usually those standards were often a lower level spec. So it had a reputation of not being as good. And that's actually something we have to fight now because A DU could be anything from a shed to what we're selling, which is a challenge. Anything in the front of the house to be as good as our house. So you've got this rage and what we're trying to do is charge what a manufactured home costs, but have our quality of materials and our precision engineering system and our tightness around the energy efficiency and all those of things.

But yeah, you can make 'em any standard you want. It's just like your house. I mean, how much do you pay for? You can build a home for $2,000 a square foot and have a really nice home. Or you can build it for $300 a square foot and have a really two by four home. You can have any standards.

This has really been a great tour of the ADUs and what you're building specifically at Samara. Let's wrap up just, I'd like to let people know how to find, well Samara find the units you a discount code.

We can talk about that. That's right. Not to all your listeners though. No, you go to www.samarasamar.com. We have a showroom in Redwood City, which is indoor. And what I can tell you is people come in here and they love it. They come in here and you can't feel kind of the quality that I'm talking about. And we've got cathedral ceilings that are over 10 feet. You can't feel that in pictures. You have to experience it. And usually when people come in they go, wow, this is way nicer. And I thought, and it's like, you got to work on your pictures. And it's like, well, we just can't get our pictures to feel like the real thing. But anyways, we have an indoor showroom in Redwood City that's open anytime people want to come, love to have you come down. Mike and I can give you a tour and show you this stuff in detail. And we also have an outdoor showroom in Thousand Oaks, California. And by an outdoor showroom, we actually put it in a place which is outdoors and you can actually come see it in an outdoor setting and we'll have more locations over time. But love to get any of your readers in. Just come into wws smart.com and we will set you up with a private tour.

I love it. I love it. I will swing by Redwood City. That will be terrific. And so you're shipping, people are buying, they're installing them now. How's 2024 looking

24. So like I said, we just recently started marketing. It takes time, permits and all those kind of things. It takes like six months to ramp up. We're cranking, I would say, and different than the interest rates, we talked much about interest rates, but I would expect we have double digit increases literally every single quarter this year. I mean, not double digit, I mean high double digits. So that compounds very rapidly as if it's, I mean, real high double digits. So I would expect mean our leads are extremely high. Interest is very high. We're booking a lot of units. We're filling up our factory. We're very happy about how things are turning out.

I

Was always worried that with the interest rates, everything would come to a crash. Turns out a lot of people have cash.

Yeah. Well that's fascinating. And one of you mentioned the 17 years in California, the average stay in houses across the country is growing over 10, 11 years. It used to be like seven. And people have cash, they have low housing expense if they're locked in on the mortgage rate, which everybody is. And so it is fascinating, but I think coupled with the fact that, as you pointed out, if I want to add square footage to my house, I can go up and battle with all the neighbors, or I could drop a thing like this in and get instant square footage. I could see the appeal for a lot of folks, especially in a high interest rate environment when my current cost is low, but my expansion cost is high.

You got your locked in interest rates and you also have Prop 17. Remember where you're paying the tax rate on whenever you bought the property? Prop

13. Yes. California Prop 13.

Yep. Yeah. So if you put a 500 square foot edition on your house, you're going to revalue the whole house. If you put a separate a DU in the back, you only pay tax on the A incremental cost of the EDU. Holy. Right. So you get locked in not only by interest, but also by taxes.

Yeah. Well I talk about that a lot at California Prop 13, and it's one of the reasons our state has chronic shortage of inventory is because our property taxes are so low and we hoard real estate in California. We keep it for longer. And as you pointed out, 17 years. And so I didn't realize that it's actually tax advantaged to put it in as an A DU rather than extending the house. It's fascinating. Wow. So many great things that I learned today. Mike. I really appreciate the tour of the ADUs and your technology and your approach to it. Let's wrap it up there though, everybody, this is the top of mind podcast. Thank you so much for listening. I hope you got a lot out of this concept. And as we think about, we talk about affordability a lot here in, and I am fascinated by the potential density and this kind of innovation to help solve some of our crisis in the whole country, not just California. If you like the podcast, please appreciate a review. Give us some stars on your podcast app that helps other people find us and we will be back again next time with another interview. Alright, thanks everybody. Thanks Mike.