By Meghan Hall
Multifamily development has typically been viewed as the most efficient way to combat Seattle’s housing imbalance for the simple reasoning that density maximizes available land in ways that single-family development cannot. However, with so much of Seattle’s land area zoned for single-family use, Hatchback Cottages is looking to put the power of residential development back into the hands of local homeowners by making detached accessory dwelling units (DADUs) accessible. The Registry spoke with Shannon Loew, Hatchback Cottages’ CEO, on the company’s launch and its potential to impact the Seattle housing market.
Please tell The Registry a little bit about Hatchback Cottages’ beginnings. What led you to establish a company that specializes in detached accessory dwelling unit (DADU) production?
Hatchback Cottages is an incubation out of FIX Impact Development. We created the company after a five-year research project exploring innovative ways to stimulate housing supply within the private sector. It was one of several ideas we developed that rose to the top once we started socializing it with investors. Considering all development constraints – land, capital, construction costs and entitlements, to name just a few — the backyard cottage is the single fastest way for many cities nationally to increase density. It’s counterintuitive because the backyard cottage is effectively a single-family home, and we normally don’t think of that form when we contemplate sustainable urban growth. But consider that, in Seattle, 66 percent of our land area is Single Family zoned. That’s 135,000 lots – and 95,000 of them can host a cottage today by code. Our research has isolated the most ideal, cost-effective lots among those, and that’s still over 15,000. That’s a massive number of units and we’re going to build them without buying a single parcel of dirt or hosting a single design review meeting, all while bolstering the economics of middle-income families.
From your perspective, what is the housing market in Seattle currently like, and how is the market well-poised for disruption when it comes to innovative solutions like DADUs?
Housing development is ripe for disruption. I’m not referring to construction – we’ve all been chasing prefabrication since Buckminster Fuller, and Katerra is showing us just how complicated it is. I’m referring to who gets to participate in the housing economy. King County alone needs something like 244,000 units of affordable units over the next decade to bring supply in line with demand. Yet here we are as a culture with hundreds of thousands of backyards sitting fallow while we wag our finger at the public sector for not building faster. And then we shake our fists at big developers for earning market returns by “ruining” our neighborhoods with taller buildings. As the cost of housing increases, and as we grow more dissatisfied with working so hard every day, the concept of converting that fallow land into passive income with small tasteful DADUs is going to explode. AirBnB, no doubt, had its unintended consequences, but it showed the average homeowner a model for how they can participate in the hospitality industry. We intend to help homeowners participate in the housing economy. They will earn more, secure options for their future, and shape how their cities grow – rather than just watch it happen around them.
Although cottages have been allowed in Seattle for more than a decade—since 2009—only about 850 have been constructed. What barriers exist for homeowners wanting to finance and build their own cottage in Seattle?
Three things: Costs, lack of financing, project management. Code is not the issue, nor is this a technology problem: as an industry, we all know how to build small single-family homes.
First, for costs, a backyard cottage is a brand-new house built on a tight site — that’s not cheap. Hatchback addresses this by keeping costs in line and providing tailored economic analysis to every homeowner to identify how to make a comfortable return. Overall, we’re providing homeowners strong monthly returns with zero down, leveraging the existing equity in their property. When we demonstrate this kind of tailored pro forma for each homeowner, it puts the cost in perspective.
As for financing, slowly, the mortgage market is warming up to cottages, but it’s still challenging for the average homeowner to find a product that works for them. We have spent several years working with banks to identify a suite of loan products and develop a competitive environment to help our customers.
And lastly, for project management…If you’ve ever renovated a bathroom or kitchen, you can imagine how challenging it would be to manage the design and construction of a new DADU as a working individual not to mention parent. We take care of everything – from design to permits to third-party oversight of our vetted GC.
Can you talk about the economics of a DADU? How can property owners leverage equity in order to increase equity growth, rental income and property appreciation through the addition of a DADU?
With the type of financing we’re helping customers access through our vetted lenders, homeowners with good credit and three years of equity are seeing loans with zero down and rates between 2.75 percent and 3.875 percent. Given rental rates, this translates into a net positive monthly cashflow (vs their current mortgage payment) of $500 and $1,000/month. That’s new passive income, all while growing equity at about 50 percent faster.
That being said, not all of our customers want to rent their cottage full-time. Many are interested in using their cottage to age in place, create a place for mom, or to start a business, so we work with homeowners to understand their goals. As an alternative to a senior living facility, for example, we show the homeowner how an increase in mortgage payments compares with the average cost of similarly sized Independent Living. In most instances, we’re about 25 percent more affordable.
In Seattle, by how much can a DADU increase a property’s value, on average?
This is the million-dollar question. Honest answer: We don’t know. There just isn’t the sale data yet on properties with newly constructed cottages. That said, there are ways to estimate this, and we believe a home with a well-constructed, well-designed backyard cottage will appreciate about 15 percent faster than a comparable home without a cottage.
Currently, Hatchback features six different DADU designs. How did you work to design the various cottage layouts? What factors were most important in informing your designs?
The first thing we did was hire fantastic partners in our two award-winning architect and interior design firms. Robert Hutchinson Architecture and Alexandra Loew are responsible for our tasteful and inspired designs. The brief we gave them prioritized three things: diversity of style across a family, healthy and sustainable construction, and lots of storage. We worked intensely to create lovely spaces that people want to spend time in despite their relatively efficient size. Everyone on our team has their favorite, and we couldn’t be more excited with the results.
Hatchback’s motto is “House your future.” [S1] How does this relate to the cottages designs and the options they provide homeowners?
In order to provide options for homeowners as their needs evolve and their families grow, we created flexible designs that can accommodate different needs over time. Our DADUs are great rental units that can easily be converted into a home office with a guest house for hosting grandma or a short-term rental. One demographic we are proud to be supporting is the single parent who wants to raise their kids in the same home but needs the flexibility to either work from home or have family stay regularly for childcare, while also making supplemental income. Our cottages can accommodate all of that.
What feature of Hatchback’s DADUs would you most like to highlight, or that you think will be most appealing to homeowners? Why?
I’m pleased that we’ve committed to a slab-on-grade foundation system. It’s not the cheapest foundation, but it aligns with our mission to build 75-year construction quality and allow for long-term adaptability. With a slab-on-grade, our ability to convert our units to be fully accessible for aging-in-place is a huge selling point for our customers. And you get taller ceilings. You don’t get that with a cheaper raised floor over a crawl space.
Hatchback Cottages is looking to have a big impact not just in Seattle, but beyond. What are Hatchback Cottages’ plans for growth?
One of the keys to our business is the web technology we built to support our analysis of the single-family rental and mortgage market. This has been crucial to driving down our cost of sale while providing enormous value to homeowners by giving them commercial-grade real estate intelligence. We’d like to think this could have significant market applications nationally beyond backyard cottages. I feel very lucky to have a fantastic Board consisting of some pretty influential real estate minds. And we all agree there’s exciting opportunity ahead with the software we’ve developed. But right now, we’re focused on building our pipeline and creating a strong base of happy homeowners in the Seattle region.
What are some of the challenges you think the firm will face as it expands, and how will Hatchback overcome them?
The cost of sale and the cost of construction are challenges for everyone in this market. We’ve done a good job on the cost of sale by building our back-end technology and listening to what customers truly need. And we have a great partner in our general contractor who is working creatively with us to create high-quality product at competitive rates. But if we’re going to have greater reach to a wider demographic and truly put a dent in housing, we’re going to need to figure out how to build more economically without foregoing sustainability, building health and quality of design.
Moving ahead, what is Hatchback Cottages most excited about? Why?
This might sound trite but, one of our customers is a couple, who love that their yard is the epicenter of their block. When you ask this question, I immediately imagine all of their neighbors and their respective kids all running around at the opening party, when we’re done with construction. We see backyard cottages as a magnet for community, and I’m really looking forward to seeing how we help this couple grow that in their backyard.