They buy land, permit it, and sell it.

Zoning concerns, legal/permit costs? 

The realtor was quick to tell me that it was done "to code" but that it was done with no permits so not listed in the total square footage.When I went outside, I noticed that the add-on outer wall was 3 feet from the property fence on the side of the home.  

Hire out the major work if you're not qualified and/or it requires permits, but little things like cosmetic upgrades are pretty easy with youtube instructional videos. 

That number also includes all utilities (which the water is very expensive for me because we couldn't dig a well), county permit fees, and financing costs.But like @Rob Beland said, every project is completely unique and the numbers can be drastically different. 

I do like that I can now easily go pull permits and simply tell the building department who my subs will be.

The solution typically requires removal down to a solid base but I usually end up having to remove old stucco, re-wrap wire and paper after pulling permits, then scratch coat, brown fiat and color coats are applied. 

I am going to add a living room to my house and just got the owner permit in CA.

One of the things the city is allowing is to defer up to half of permit and impact fees till final inspection, so at least if I will save some up front money. 

Permits, zoning, lot allotment, etc are all things you are possibly facing in this deal.