On June 11, the town of San Jose grew to become the primary municipality to replace its zoning code in accordance with California Meeting Invoice 1033, which went into impact initially of the 12 months. The legislation permits for native ordinances that let householders to promote accent dwelling models (ADUs) as condominiums, however cities should choose in.
AB 1033 is certainly one of many state insurance policies geared toward encouraging reasonably priced housing growth which were enacted in California since 2017, a lot of which deal with growing ADU manufacturing. Because the state eliminated obstacles and closed native loopholes that impeded new building, ADU manufacturing exploded in California, growing by greater than 15,000% between 2016 and 2022, in keeping with analysis from the California YIMBY Training Fund. Final 12 months, ADUs accounted for about one in 5 newly created housing models within the state.
Thus far, most householders are constructing ADUs to deal with relations or generate rental revenue. About 27% of the ADUs accomplished since 2018 are thought-about reasonably priced to households incomes under 120% of the realm median revenue.
However, AB 1033, if adopted by extra cities, has the potential to impression homeownership charges in California by growing the availability of reasonably priced starter properties. At the moment, the median family revenue within the state is not sufficient to fulfill lender necessities for a mortgage on a bottom-tier house.
The reform additionally offers alternatives for buyers and present California householders since ADUs are typically cheaper to construct than single-family properties and have the potential to be very worthwhile. Nonetheless, there could also be challenges to promoting an ADU as a rental in California, and it’s unclear whether or not the technique will take off now that the state has lifted restrictions.
An Alternative for California Property House owners and Potential Homebuyers
San Jose’s new ordinance, which is able to take impact July 18, permits native householders to promote their ADUs and first residences individually as condos that share the identical property. Beforehand, the sale of ADUs as rental models was solely permitted underneath restricted circumstances.
Whereas San Jose is the one metropolis that has modified its zoning code because the state lifted restrictions, different cities are prone to observe—the Berkeley Metropolis Council has already voted to undertake AB 1033 in 2025.
A earlier legislation, SB-9, allowed householders to separate their heaps and construct further single-family properties, however the reform had restricted impression. Cities had been given the liberty to set their personal pointers for SB-9 tasks, which had been typically burdensome, and the method was pricey. Authorized challenges had been additionally an impediment in lots of cities.
A number of earlier modifications to state legislation additionally made it simpler to construct and lease an ADU, and new financing choices allowed householders to qualify for a building mortgage utilizing the projected rental revenue. That technique has develop into extra standard than lot splits, however not all householders are eager about changing into landlords.
AB 1033 offers one other avenue for householders to money in on their properties whereas additionally permitting for the development of extra reasonably priced properties. For instance, retirees may construct ADUs and use the cash from the sale to help growing old in place, whereas first-time homebuyers snug with much less sq. footage may have a greater shot at qualifying for a mortgage. Current householders wouldn’t be required to promote their main residences with a view to money in, doubtlessly eradicating the lock-in impact of excessive mortgage charges and growing housing stock.
To legally promote an ADU, property homeowners would wish to ascertain a householders affiliation (HOA) to supervise the upkeep of shared exterior areas, comparable to a driveway or a shared roof if the ADU is connected to the first residence. House owners would additionally must notify native utility firms that they plan to convey the 2 models individually. Property taxes can be assessed on every unit individually, however it’s unclear whether or not that will result in a internet improve in metropolis income.
Property homeowners in search of a separate conveyance for an ADU should additionally get consent from their mortgage lender and another lien holder. That might impression any property proprietor who doesn’t personal their house outright, and the mortgage lending business’s response may decide the extent of the invoice’s impression on housing affordability.
AB 1033 provides municipalities some flexibility when opting in, so the necessities and evaluation course of could differ throughout cities that select to amend their zoning codes.
Obstacles Could Intervene with the Objective of AB 1033
Typically, AB 1033 makes it simpler for householders to acquire ADU building permits and promote ADUs individually from their main residence. Nonetheless, there are nonetheless just a few hurdles that would forestall householders from making the most of the reform.
The obvious drawback is that householders with mortgages would wish to get hold of their lender’s consent. By requiring this step previous to an ADU sale, the legislation protects householders from unwittingly triggering the due-on-sale clause of their house mortgage settlement.
But it surely’s not clear whether or not mortgage lenders can be prepared to authorize these transactions. AB 1033 states that householders might have to fulfill further necessities to get lender consent, which might be so simple as altering the authorized description of the property or as infeasible as paying off the mortgage fully.
Lenders are inclined to cost barely larger rates of interest for condos as a result of the unknown variables of the opposite unit homeowners and the HOA improve the danger of lending, so it doesn’t appear possible {that a} lender can be prepared to permit a borrower to promote a portion of their property whereas conserving the speed and phrases of their single-family mortgage. That mentioned, property homeowners who wish to construct and promote an ADU have choices: They will refinance with a mortgage product such because the CHOICERenovation mortgage or the HomeStyle Renovation mortgage.
However entry to financing could not override the lock-in impact of at the moment’s excessive mortgage charges. Debtors with low charges on their present mortgages would wish to weigh the advantages of the funding in opposition to the upper rate of interest on the brand new mortgage. And whereas including an ADU to a main residence as a rental property can considerably improve the worth of the unique house when bought to the precise purchaser, promoting off a portion of a land parcel and re-categorizing the single-family house as a rental may lower the worth of the unique house. The various trade-offs and potential authorized points would almost definitely require that householders get skilled recommendation earlier than trying the sale.
With these considerations in thoughts, AB 1033 could not present a lot further incentive for ADU building within the cities that choose into the measure. Critics of the laws additionally query whether or not it would improve the availability of reasonably priced housing or impede different, simpler packages. AB 1033 doesn’t comprise any affordability necessities for builders, and metropolis housing workers would wish to commit time to implementing the brand new guidelines, doubtlessly delaying different established housing priorities.
Whereas it’s clear that relaxed zoning guidelines in cities like Seattle, which additionally permit ADUs to be bought as condos, have resulted in a rise in ADU permits, there’s little proof about their impression on reasonably priced housing. Solely a small share of Seattle’s ADUs are on rental parcels, and whereas these models promote at a cheaper price, the pattern dimension is small.
If ADU condos do take off, that would provide buyers the possibility to enter sought-after California markets at a cheaper price level. Traders would even have a number of choices for getting a return from ADU building.
Analysis reveals that ADUs improve a house’s worth by a median of 35% in massive cities, which may make flipping a doubtlessly profitable technique, although there isn’t but knowledge on how conveying the 2 models as separate condos would impression the full worth of the property when in comparison with promoting each models in the identical deal. Rental restrictions and owner-occupancy necessities differ by municipality in California, and cities that undertake AB 1033 have some flexibility with these necessities when issuing permits.
However an investor may doubtlessly lease out one or each models, or promote one as a rental and lease the opposite. It’s good to have choices, however choosing the proper technique requires cautious evaluation of particular person components, such because the lot, the neighborhood, and native legal guidelines.
The Backside Line
ADU reforms in California, Seattle, and Portland have led to booming ADU building, and any endeavor that may positively impression the availability of properties at a comparatively low value to native governments might be worthwhile. Dozens of cities have permitted ADU reforms lately, in keeping with the U.C. Berkeley Zoning Reform Tracker, and the impression of those modifications might be significant.
But it surely’s nonetheless unclear whether or not AB 1033 will meaningfully improve ADU permits in California above and past the good outcomes the state has seen from eradicating boundaries to ADU building and whether or not cities that choose in will see a rise in reasonably priced housing. A significant impediment might be the discretion of mortgage lenders in “condoizing” a borrower’s property.
If the laws does result in extra ADU gross sales, that would decrease the barrier to entry for buyers trying to break into high-priced California markets. These trying to purchase a single-family house and add an ADU even have financing choices and will doubtlessly revenue in a number of methods, with AB 1033 offering further avenues for funding.
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Word By BiggerPockets: These are opinions written by the writer and don’t essentially characterize the opinions of BiggerPockets.
