June 11, our city saint joseph Becomes the first city to update its zoning code under the City Planning Act California Assembly Bill 1033, which came into effect earlier this year. The law allows local ordinances to allow homeowners to sell their homes accessory dwelling unit (ADU) as an apartment, but the city must opt in.
AB 1033 is one of many products National policy California has enacted bills since 2017 aimed at encouraging affordable housing development, many of which focus on increasing ADU production. California’s ADU production is exploding as the state removes barriers to new construction and closes local loopholes, Increase According to statistics, it will grow by more than 15,000% between 2016 and 2022 Research From the California YIMBY Education Fund. Last year, ADUs accounted for approximately one fifth Newly constructed housing units in the state.
By far, most homeowners are building ADUs to house family members or generate rental income. about 27% of ADUs Has been completed since 2018 after consideration Affordable to households earning less than 120 percent of the area median income.
but, AB 1033, if adopted by more cities, has the potential to impact homeownership rates in California by increasing the supply of affordable housing. at present, The state’s median household income yes not enough to meet lender requirements mortgage In the ground floor house.
This reform also provides opportunities for investors and existing California homeowners, as ADUs are typically Cheaper to build More profit potential than a single family home. Still, selling ADUs as condominiums in California can be challenging, and it’s unclear whether that strategy will take off once the state lifts restrictions.
Opportunities for California Homeowners and Potential Home Buyers
San Jose’s new ordinance, which takes effect July 18, allows local homeowners to sell their ADUs and primary residences separately as condominiums sharing the same property. Before, promotion of ADU as an apartment unit only allowed In limited circumstances.
While San Jose is the only city to change its zoning code since the state lifted restrictions, other cities may follow — the Berkeley City Council has voted Adopt AB 1033 in 2025.
previous law, SB-9allowing homeowners to subdivide their land and build more single-family homes, but reforms once limited Influence. city is give freedom set their my own SB-9 project guidelines, often onerous, and the cost of this process is very high. Legal challenges are also an obstacle in many cities.
Several previous changes to state law were also made Building and renting ADUs easierand new Financing options Allows homeowners to use projected rental income to obtain a construction loan. This strategy is more popular than lot subdivision, but not all homeowners are interested in becoming landlords.
AB 1033 gives homeowners another way to make money on their properties also Allow more affordable housing to be built. For example, a retiree could build an ADU and use the proceeds from the sale to support aging in placealthough First-time homebuyers who fit into a smaller home may have a better chance of getting a mortgage. Existing homeowners do not need to sell their primary residence for Cash out, potentially eliminating the lock-in effects of high mortgage rates and rising housing inventory.
To legally sell an ADU, owners need to establish a Homeowners Association (HOA) to oversee the maintenance of a shared exterior space, such as a driveway or a shared roof (if the ADU is attached to the primary residence). owner still need Notify the local utility company that they plan to ship the two units separately. property tax Each unit will be assessed individually, but it’s unclear whether this will result in a net increase in city revenue.
An owner seeking a separate transfer of an ADU must also obtain consent from the mortgage lender and any other lien holders. This would affect any homeowner who doesn’t own a home outright, and the mortgage industry’s response could determine how much of an impact the bill has on housing affordability.
AB 1033 provides municipalities with some flexibility in opting in, so the requirements and review process may vary from city to city choose Modify their zoning code.
Obstacles could interfere with AB 1033’s goals
Generally speaking, AB 1033 makes it easier for homeowners to obtain an ADU construction permit and sell the ADU separately from the primary residence. However, There are still Several barriers may prevent homeowners from taking advantage of the reforms.
The most obvious problem is for homeowners with mortgages need Obtain lender’s consent. by requesting this step Before When ADU is sold, law protects homeowners from inadvertently triggering due on sale clause in their home loan agreement.
But it’s unclear whether mortgage lenders will be willing to authorize the deals. AB 1033 states that homeowners may need to meet additional requirements to obtain a lender’s consent, which may be as simple as changing the property’s legal description or as infeasible as paying off the mortgage in full.
Lenders tend to charge slightly higher interest rates on condos because the unknown variables of other unit owners and HOAs increase loan risk, so it seems unlikely that lenders will be willing to allow borrowers to sell part of their condos. Mortgage interest rates and terms. That said, property owners who want to build and sell ADUs have the following options: They can Refinance Loan products such as CHOICE Renovation Mortgage or Home Improvement Mortgage.
but Obtaining financing may not overcome the lock-in effect of today’s high mortgage rates. Borrowers with current lower mortgage rates will need to weigh the benefits of their investment against the higher interest rates on a new loan. and While adding an ADU to a primary residence as a rental property can significantly increase the value of the original home when sold to the right buyer, selling off a portion of the lot and reclassifying a single-family home as a condo may decrease the value of the original Home. The many trade-offs and potential legal issues will likely require the homeowner to obtain professional advice before attempting to sell.
Given these issues, AB 1033 may no supply a lot of Provide additional incentives for ADU construction in cities that choose to adopt this measure. Critics of the legislation also question Will it increase the supply of affordable housing or hinder other, more effective programs. AB 1033 does not include any affordability requirements for developers, and city housing staff will need to take time to implement the new rules, which could delay other established housing priorities.
While it’s clear that cities like this have relaxed zoning rules seattlewhich also allows the ADU being sold As an apartment, there are lead to increase ADUs are allowed, but there is little evidence of their impact on affordable housing. only one small share ADU in Seattle Located on condominium plots, although these units sell for less, the sample size is small.
If ADU apartments do take off, available to investors Opportunity to enter the popular California market at a lower price. Investors will also have a variety of options get payback ADU construction.
Research programme In large cities, ADUs can increase home value by an average of 35%, which can make flip A potentially successful strategyalthough There is no data yet on how transferring two units as separate condos will affect the total value of the property compared to selling both units in the same transaction. Rental restrictions and owner-occupancy requirements vary across California municipalities, and cities adopting AB 1033 have some flexibility with these requirements when issuing permits.
but one Investors can potentially Rent one or two units, or Sell one as an apartment and rent the other. It’s nice to have choices, but Choose the right strategy Individual factors such as location, community and local laws require careful analysis.
bottom line
ADU reforms in California, Seattle and Portland lead to ADU construction boomingany effort that can have a positive impact on local government housing supply at relatively low cost is worthwhile. Dozens of cities have approved ADU reforms in recent yearsaccording to the University of California, Berkeley Zoning Reform Trackerthe impact of these changes may be meaningful.
But it’s unclear whether AB 1033 will meaningfully increase ADU licenses in California above and That’s in addition to the state’s huge gains in removing barriers to ADU construction and whether cities that opt in will see an increase in affordable housing. A major obstacle may be discretion The mortgage lender “co-locates” the borrower’s property.
If the legislation does lead to more ADU sales, it could lower the barrier to entry for investors looking to tap into California’s high-priced market. Those who want to purchase a single-family home and add an ADU also have financing options and may profit in a variety of ways, with AB 1033 providing additional avenues for investment.
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