The new ADU law leaves agents with more questions than answers

There could be gold in your backyard, but real estate professionals have a lot of questions about how to get there — and how it could change the housing market.

AB 1033, a new state law, allows the sale of accessory dwelling units, “granny flats” built behind or next to single-family homes.

The law, which will take effect on January 1, allows California residents to buy and sell ADUs separately from the associated principal residences. Previously, only an ADU could be rented. The new law was sponsored by State Assemblyman Phil Ting of San Francisco.

The new ADU law leaves agents with more questions than answers
Wilson Leung of OWN Real Estate (Wilson Leong)

Lawmakers believe condominiums will help solve the housing crisis because people can develop new homes in their backyards. For agents, the law could open the doors to a new wave of inventory in a market where homes for sale are scarce. But the new law also leaves many questions on the table.

Wilson Leong, a San Francisco Bay Area agent and founder of OWN Real Estate at Keller Williams, wonders how to handle transactions for ADUs. Will they be treated like condominiums and townhomes? Can it be dealt with through a joint tenant agreement, where two or more parties share ownership of the property? Or will they be treated like single-family homes? Lenders treat categories differently, Leung noted.

“Because the roles are not clearly defined, consumers, buyers and sellers will not know exactly what they are buying and selling yet,” Leung said. “It’s not something we’re actively selling yet.”

The new ADU law leaves agents with more questions than answers
Steve Clark of Back Pet Homes (Steve Clark)

Omar Abish, founder of Simple Mortgage in Pasadena, expects social housing units will be treated like single-family homes.

“You’re transferring real estate here. They’ll have their own addresses and their own gas and power meters. They’re essentially a single-family residence,” he said.

Steve Clark, founder of Backbeat Homes agency in Pasadena, predicts that AB 1033 could change neighborhoods — and perhaps cause discontent.

“Let’s say my wife and I keep our house and sell our ADU at a reasonable price. Aside from the obvious increase in traffic — since we’ll likely double the neighborhood’s population — that could change the dynamics of the entire neighborhood. People don’t buy with the expectation that it will end They have doubled the number of people crammed into their buildings.

Serial legislation

AB 1033 is the latest state law aimed at developing a market for ADUs, thus alleviating California’s crushing housing crisis. However, previous legislative attempts have had little success.

In 2021, the Legislature passed SB 9, which allowed homeowners to divide their lot into two lots and build up to two units on each lot. It entered into force in January 2022.

Earlier this year, UC Berkeley Turner Centerthe Housing Policy Research Group released a study tracking the progress of ADU development after the passage of SB 9. It looked at 13 cities where ADU development appears to make the most financial sense for property owners and “I found SB 9 activity to be limited or nonexistent in these 13 cities.

The new ADU law leaves agents with more questions than answers
ADU Gould’s Seth Phillips (Seth Phillips)

However, Los Angeles residents showed the most interest by a wide margin Requests to build 211 units and 28 divided plots.

But now the market is ready for change, according to Seth Phillips, founder of Los Angeles-based ADU Gold, a consulting firm that works with realtors and agents to build and sell ADUs.

With increases in interest rates and mortgage rates in the past year, there are fewer opportunities to develop revenue streams from homeowners. Phillips said ADU development is one of the most painless, market-based ways for Californians to emerge from the housing crisis.

“People are looking for things that give them more economic certainty. This is a good option to invest in properties they already own,” he said.

Financial options

Last month, the Federal Housing Authority announced a new policy to make it easier to purchase or refinance a home with a condominium unit. According to media reports, previous rules for FHA-backed loans allowed lenders to consider rental income from duplexes but not ADUs. The new policy allows ADU income to be counted when underwriting a mortgage.

“Finance is constantly improving,” ADU Gold’s Phillips said.

Tom Arnold, assistant professor of real estate at Chapman University in Orange, believes the new legislation will attract capital into the ADU market and stimulate increased housing supply.

But he added that there is not much legal precedent to determine the appropriate rights, restrictions and levels of cooperation between a homeowner and the owner of a separate, distinct ADU located in the middle of the primary homeowner’s lot.

The new ADU law leaves agents with more questions than answers
Colton Bullhus of Small Moored Houses (Colton Bullhus)

“This is the creation of a new divisible property right,” Arnold said. “There are still a lot of questions about exclusive possession, use and enjoyment. What easements are necessary to possess an ADU? How is access granted? Are there restrictive covenants blocking the ADU? Can an ADU owner install a chain-link fence? Where can an ADU owner park Vehicles?Does the ADU owner have to maintain the exterior of the ADU and related reasons?

Meanwhile, entrepreneurs see a bright future in ADUs. Colton Paulhus founded Anchored Tiny Homes in 2020 to build ADUs in the Sacramento market. Paulhus said the company generated revenue of $49 million last year. He expects revenues to at least double this year.

He also expects social housing units to take hold in every sector of the residential market, but his company does most of its work in middle-class neighbourhoods.

“If people don’t use their backyards, they can sell a piece of land for a huge multiple of return on investment,” Paulhus said.

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