California Reinstates ADU Sales Separate from Primary Home

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Legally converting the home and the other living unit(s) to a two-unit or three-unit condo, for example, is now on the table.

California has reinstated a law that allows homeowners to sell an additional dwelling unit separate from the primary residence. 

For renters hindered by unaffordable housing in California, a new avenue has opened.

Gov. Gavin Newsom signed Assembly Bill 1033 into law on Oct. 14, repealing an earlier ban on the sale of accessory dwelling units or ADUs separate from a primary residence.

This could be a backyard cottage or a converted garage, for example. Whether it’s attached or detached from the primary residence is a non-starter. Legally converting the home and the other living unit(s) to a two-unit or three-unit condo, for example, is now on the table.

Can you say mini condo?

Unlike a series of 2020 state laws fast-tracking ADU construction, specific rules on how to convert an ADU into a condo are being left up to each municipality.

Will local officials participate, knowing the state is facing a housing shortage and affordability crisis? Only time will tell.

“This satisfies the affordable housing element,” said Al Salguero, real property division manager at the Orange County Assessor’s Office.

Assuming all the local condo conversion compliance boxes are checked, homeowners with ADUs can keep, rent one or all the units or sell one or all the units.

California is home to 10,623,720 residential housing units, according to data from the California Department of Housing and Community Development. Residential housing is defined as one to four housing units. That’s single-family, condos and townhouses, duplexes, triplexes and fourplexes. Five or more units are considered commercial housing, aka apartments.

But few ADUs exist.

The number of building permits for ADUs has risen from 2020 through 2022, according to the most current data available.

Statewide there were 44,532 ADU building permits issued during the three-year period. Of that total, Los Angeles County issued 26,351, Orange County issued 3,539, Riverside County issued 1,136, San Bernardino County issued 1,531 and San Diego County issued 5,120 permits for ADUs, according to the California Department of Housing and Community Development.

To be clear, permits don’t necessarily mean the ADU was completed or even started for that matter.

It’s a big question mark whether property owners with previously built ADUs see any added financial potential or have the motivation to go through the condo conversion process. If your granny is living in her granny flat and she’s happy, what’s the point of a condo conversion?

Clearly, opportunity is knocking for property owners and would-be owners who want to capitalize on the demand for homeownership.

“California is a few million housing units short,” said Jordan Levine, chief economist for the California Association of Realtors.

The timing could not be better for anyone wanting to purchase or refinance in order to build an ADU.

On Oct. 16, the U.S. Department of Housing and Urban Development announced updates to its FHA 203(k) property rehabilitation financing program. In part, financing for ADU construction, conversion and rehabilitation is allowable for units attached and detached from the primary residence.

And, for mortgage approval qualifying purposes, FHA underwriting will now recognize existing and anticipated ADU rental income.

There’s also an array of other more expensive construction loans available in addition to the FHA 203(k) product.

Source: Orange County Register