This article is part 2 in a multi-part series, please refer to the previous publication for an introduction to Tiny Homes
Bad actors make an already tough situation more difficult
A large amount of any new technology’s success relies heavily on its early implementors behaving in an ethical manner. Recent missteps in the medical technology community have highlighted just how dangerous an unethical operator can be[1], and real estate technology is no different. Unfortunately, the lightly regulated start of the tiny home industry allowed a proliferation of disreputable behavior and dangerous construction that still threatens to cause irreparable harm to the perception of these homes.
Much of this behavior was not necessarily deviant in nature, but more a symptom of the lack of regulation. Since quite literally anyone could become a “tiny home builder” when the trend first became popular, many people with limited experience did just that. These early homes hit the market and it was difficult, particularly for an unsophisticated home buyer, to distinguish between a safe legal structure and one made by an unlicensed amateur. While the Pacific Northwest has not yet seen a large-scale catastrophe or loss of life because of this poor quality control, that doesn’t mean it won’t. And it has already caused damage to the industry—much like how the early days of manufactured housing caused damage to the reputation of mobile homes that still exists today[2].
Even with the increased regulation and code enforcement, there still exists numerous methods by which a tiny home can be constructed without any permits. For example, any individual can purchase a used trailer or RV (really anything that has a DMV-issued title), build a tiny home on top of this trailer, and legally sell up to five of these structures per year. And even though these structures must legally be sold as trailers and not tiny homes, it doesn’t stop the sales process, nor the obvious reality that these will be sold for residential use.[3] Such under-the-table dealings are difficult for the state to effectively patrol as they fall under existing laws. Indeed, the only way to effectively prevent the large-scale sale of unlicensed structures is to ensure a robust pipeline of safe legal homes that can be consistently and rapidly placed into developments specifically built to accommodate this home type.
Public perception is an uphill battle
As of today, the public perception of tiny homes is very understandably mixed. In one camp, you have early adopters and zealots who swear by the utility and revolutionary quality of these homes, and in the other are opponents who dislike the very existence of these homes. Given their already misunderstood and muddled history, it is unlikely that tiny homes can get a fresh start in the public eye.
The most judicious path forward for any investor, developer, or individual who wants to see the advancement of these homes into the greater pantheon of housing must simply accept the mixed response that will likely always be present when it comes to tiny homes. They must also understand the importance of an integrated approach to success—a complete pathway from home manufacture, to transport, to placement, and to final sale to a homeowner must be established with reputable and linked partners in order to maintain a high degree of quality control and ensure these homes actually get placed into productive and safe use.
Challenges facing the current tiny home market
Numerous new tiny home companies have emerged alongside new code adoptions. There are too many to list, and they’ve received a diverse range of public attention, but there has yet to be a breakthrough company that has taken any sort of significant market share. This is due to several factors:
- Technology focus: So far, most new home builders advertise tiny homes as a technology breakthrough, but don’t provide a clear path to a legal dwelling. Instead, they focus their marketing efforts on opaque, less regulated market segments like accessory units for existing homes or temporary vacation units[4]. While many offer promising new technologies, none of these companies offer any sort of fully permitted option. To make things more complicated, these companies may also state that they can‘t comply with all the different state regulations, requiring individual customers to figure out their own permitting processes. This is a little like selling someone a kit with all the building materials for a house and saying figure it out. (There are certainly a handful of customers that are up to the task, but as a percentage of the greater housing market it is clear that this segment is vanishingly small.)
- Lack of development partnerships: Like the lack of viable pathways towards a fully permitted residence, these new companies also lack any sort of partnerships with an experienced developer who can develop land, place these structures, and sell them to eventual residents. Instead, these companies prefer to focus on the niche market of customers who have the interest and resources to perform this development work directly. Without a commercial developer to harness economies of scale, these structures have consistently failed to reach the greater housing market in any meaningful way.
- Sales, not assets: These new companies also seem to embrace a more venture capital-style of operation by focusing on sales and marketing in the hopes of a downstream acquisition rather than the comprehensive development of an asset base that can be organically grown over time. The reason for this is obvious: A rapid sales onslaught can generate significant demand and hype while never having to deliver an actual product at a meaningful scale. While this may be a viable means of operation in some industries, housing is not one of them. Housing is, and always will be, one of the most regulated industries in the county. Moreover, the pervasive housing crisis in the Pacific Northwest all but guarantees a heavy degree of public and political scrutiny, particularly when it comes to new technologies.
- Building code understanding: Building any new type of housing product requires a basic respect and understanding for building codes, but many of these companies seem to lack such an understanding. This is evident from the homes being marketed that lack, in many cases, simple safety and livability standards such as minimum square footage, secondary egress, heat systems, and utility connections. Without these basic items in place, it requires a tremendous amount of retrofits and upgrades (and cost) to bring such a structure into code compliance.
- Imported products: A large number of the new players entering the tiny home space are either foreign-owned businesses or use substantially foreign made materials for their products. While this is not inherently bad, it does pose an additional risk to expansion, especially with the ever-growing threat of trade tariffs and import restrictions that could derail any large operation that is dependent upon import goods. American-made products and manufacturing in the residential housing industry has been a particularly sensitive area for both political parties recently, creating even more risk to these foreign builders[5]. One viable risk-mitigation strategy for this would be to develop methods by which a substantial amount of the assembly and/or manufacture of the homes takes place in the United States; the importation of what can be defined as raw materials versus finished goods is often much easier to navigate and less subject to aggressive trade tariffs[6].
[1] Theranos - Wikipedia
[2] Pleas see my article on the history of mobile homes for a more detailed analysis
[3] https://apps.leg.wa.gov/rcw/default.aspx?cite=46.16A.450
[4] Even these markets are increasingly regulated in most areas of the country, making the “un-permitted structure” possibility almost entirely an entity of the past
[5] How New Trade Tariffs Can Affect Your House Construction Cost | Remodel Works
[6] The Supply Chain: From Raw Materials to Order Fulfillment (investopedia.com)