A startup has a plan to solve the housing crisis with cheap backyard ‘granny flats'

A startup out of Los Angeles, California, wants to bring small, pre-fabricated living spaces into the backyards of the country's hottest real estate markets.

The homes range in size from 300 to 1,200 square feet — but don't call them tiny homes.

"When you think of tiny homes, a very specific image comes to mind," says Alexis Rivas, the 23-year-old CEO and cofounder of Cover. "A tiny home is just one category of what a Cover unit can be."

Cover, founded in 2014, is a technology company disguised as a residential architecture firm. The company plans, designs, and manufactures backyard studios, in-law units, home offices, and guest rooms — collectively known as accessory dwelling units (ADU) — using machine learning and methods borrowed from the aerospace and automotive industries.

The long-term goal, according to Rivas, is to increase the housing supply in cities where the cost of living has become prohibitive, in the hopes of driving market prices down.

In January, legislation went into effect in California that makes it easier and cheaper for homeowners to build ADUs. The state hopes to see the housing stock climb as a result.

If a homeowner is interested in putting an ADU on their property, they can fill out a survey of 50 to 100 questions, which covers everything from land type to cabinet finishes. For a one-time fee of $250, an algorithm gathers information on zoning and build codes in the area and returns multiple design options that meet the needs of the owner as well as city requirements.

Once a design has been selected, Cover works on behalf of the buyer to gather the necessary permits, which takes up to 12 weeks. It charges a $20,000 deposit.

In a typical home build, construction crews take measurements and cut many materials on-site. Cover aims to make the fabrication process quicker and more precise by building parts of the house in a factory, where the company uses automated cutting tools and design software. Homes arrive on the property as giant slabs, already fit with electrical wiring, plumbing, and finishes. They can essentially be assembled like IKEA furniture.

This spring, Cover wrapped construction on its first pre-fab home. There are about a dozen more projects in the pipeline, ranging from a $90,000 backyard office to a $300,000 one-bedroom with a full kitchen. Structures start at $250 per square foot.

RELATED: Here are the 10 US cities that were at risk of a housing bubble:

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10 US cities at risk of a housing bubble
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10 US cities at risk of a housing bubble

#10: Portland, Oregon

Median list price: $428,600
Bubble index compared with 2001: +6%
Bubble index compared with market peak: -26%

Photo credit: Getty

#9: Charleston, South Carolina 

Median list price: $322,300
Bubble index compared with 2001: +7%
Bubble index compared with market peak: -20%

Photo credit: Getty

#8: Buffalo, New York

Median list price: $159,900
Bubble index compared with 2001: +7%
Bubble index compared with market peak: -1%

Photo credit: Getty

#7: Fresno, California

Median list price: $272,100
Bubble index compared with 2001: +9%
Bubble index compared with market peak: -31%

Photo credit: Getty

#6: Los Angeles, California

Median list price: $690,000
Bubble index compared with 2001: +10%
Bubble index compared with market peak: -35%

Photo credit: Shutterstock

#5: Dallas, Texas

Median list price: $335,000
Bubble index compared with 2001: +13%
Bubble index compared with market peak: -2%

Photo credit: Getty

#4: Salt Lake City, Utah

Median list price: $347,200
Bubble index compared with 2001: +14%
Bubble index compared with market peak: -20%

Photo credit: Getty

#3: Austin, Texas

Median list price: $400,000
Bubble index compared with 2001: +17%
Bubble index compared with market peak: -1%

Photo credit: Getty

#2: San Francisco, California 

Median list price: $855,000
Bubble index compared with 2001: +19%
Bubble index compared with market peak: -26%

Photo credit: Getty

#1: San Jose, California 

Median list price: $981,500
Bubble index compared with 2001: +19%
Bubble index compared with market peak: -18%

Photo credit: Getty

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Rivas says a majority of customers want to build ADUs to shelter aging parents and in-laws, with about 30% of customers interested in renting the studio to make a little side income.

Cover will focus on the Los Angeles market through 2017 and is eyeing an expansion to other expensive California cities like San Jose, San Francisco, and San Diego in the future. Rivas hopes that young people saddled with student debt and retirees will now be able to afford living in single-family home neighborhoods, which may also become more diverse as a result.

"A 400-square-foot backyard accessory dwelling unit is going to rent out for less than a $3,000-square foot home in that neighborhood," Rivas says.

The company raised $1.6 million in financing from top Silicon Valley firms General Catalyst and Khosla Venturesin March. The money will help Cover grow its team, Rivas says.

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