California is facing a housing shrtage estimated at 2.5 and 3.5 million homes. America is short around six million homes, which is a big reason why home prices are still high. California is one of the most housing-constrained markets for years. Bay Area listings in 2023 were below historical norms. There’s no reason to think that will change in 2024. California is known to build 250,000 homes per year, which has exceedingly fallen short of demand. Last year, there were only 70,000 single-family home permits issued throughout California. Sellers keep the upper hand.

Today, nearly 20% of housing units built in California are accessory dwelling units (“ ADUs ”). According to the California Association of Realtors Housing Affordability Index, only 17% of households can afford a single-family home, less than half of the national average. In many States across the country, ADU condo conversion projects are re-enabling a generation of home buyers to live in the communities of their choice near work and family. The State of Washington recently required all local agencies to allow conversions of a primary unit and ADU to condominiums for sale. Consequently, in Seattle and Portland 40% to 50% of ADUs constructed are sold as condominiums to new homebuyers, where they are bought for approximately half the value of a stand-alone single-family home. Such ADU condo conversion purchases are eligible for federally guaranteed mortgages, making them easy to finance for ordinary homebuyers. The California State Legislature recently adopted a new law, AB1033, AB1033 removes the previous State law prohibition against mapping and selling a single-family home and its ADU as condominiums. Even though this prohibition on condo conversion has been eliminated, it is up to Local Agencies to amend their codes to allow these entry-level home ownership opportunities. WHAT NEEDS TO BE DONE TO ALLOW SALE OF ADUS? Respecting local control, the Legislature left it up to Local Agencies to amend their municipal code(s) to allow these entry-level home ownership opportunities through the sale of ADUs. The Casita Coalition and Reuben, Junius, and Rose, LLP have developed this guidance to encourage your Local Agency to make the following changes to your code(s), procedures and policies to re-enable Californians priced out of many of our communities to once again have a dream of buying a home by enabling more naturally-affordable condominiums for sale. RECOMMENDED STEPS TO IMPLEMENT SALE OF ADUS 1. Eliminate Sale Restrictions. Remove all provisions in your municipal code that prohibits the sale or other conveyance of an ADU. These restrictions are typically included in local Condominium Codes and Zoning Codes. 2. Adopt Legislation Expressly Allowing ADU Sales. To align local rules with State law, adopt changes to the municipal code that allow conversion of a home and its ADU into condominiums subject to the requirements of the Davis- Stirling Common Interest Development Act (Cal. Civ. Code Sec. 4400-6150.) Appropriate amendment text will differ depending on the existing municipal code, but AB1033 requires a list of express provisions be included in such local ordinance, attached at the end of this document. 3. Publish ADU Checklists. Provide a comprehensive checklist for any ADU building permit and for ADU condominium/subdivision projects, indicating Subdivision Map Act compliance and lender subordination information. 4. First Right of Offer to Owner Occupants. To further encourage new homeownership, consider including a condition of approval for establishing condominiums of a primary unit and ADU giving a first right of offer for a period of 45 days on publicly accessible databases, e.g., MLS, to buyers indicating an intent to live in the property (either themselves or their immediate family). To avoid issues with lenders, however, do not require owner occupancy. 5. Create “Grow Homeownership” Program . Establish a program with dedicated staff that expedites ADU condominium processing with first comments to be issued within 45 days of submission of a complete application. Consider waiving or reducing application and impact fees otherwise applied to condominiums. The Grow Homeownership Program could be paired with other funding programs your jurisdiction may have, e.g., through SB2 (2017) funds. If you have any questions or would like to discuss any of the above, please do not hesitate to reach out to Justin A. Zucker from Reuben, Junius & Rose, LLP at 415.656.6489 or jzucker@reubenlaw.com . AB1033 – Required Text in ADU Condominium Ordinances – Cal. Govt. Code Sec. 65852.2(a)(10) (A) The condominiums shall be created pursuant to the Davis-Stirling Common Interest Development Act (Part 5 (commencing with Section 4000) of Division 4 of the Civil Code). (B) The condominiums shall be created in conformance with all applicable objective requirements of the Subdivision Map Act (Division 2 (commencing with Section 66410)) and all objective requirements of a local subdivision ordinance. (C) Before recordation of the condominium plan, a safety inspection of the accessory dwelling unit shall be conducted as evidenced either through a certificate of occupancy from the local agency or a housing quality standards report from a building inspector certified by the United States Department of Housing and Urban Development. (D) (i) Neither a subdivision map nor a condominium plan shall be recorded with the county recorder in the county where the real property is located without each lienholder’s consent. The following shall apply to the consent of a lienholder: (I) A lienholder may refuse to give consent. (II) A lienholder may consent provided that any terms and conditions required by the lienholder are satisfied. (ii) Prior to recordation of the initial or any subsequent modifications to the condominium plan, written evidence of the lienholder’s consent shall be provided to the county recorder along with a signed statement from each lienholder that states as follows: “(Name of lienholder) hereby consents to the recording of this condominium plan in their sole and absolute discretion and the borrower has or will satisfy any additional terms and conditions the lienholder may have.” (iii) The lienholder’s consent shall be included on the condominium plan or a separate form attached to the condominium plan that includes the following information: (I) The lienholder’s signature. (II) The name of the record owner or ground lessee. (III) The legal description of the real property. (IV) The identities of all parties with an interest in the real property as reflected in the real property records. (iv) The lienholder’s consent shall be recorded in the office of the county recorder of the county in which the real property is located. (E) The local agency shall include the following notice to consumers on any accessory dwelling or junior accessory dwelling unit submittal checklist or public information issued describing requirements and permitting for accessory dwelling units, including as standard condition of any accessory dwelling unit building permit or condominium plan approval: “NOTICE: If you are considering establishing your primary dwelling unit and accessory dwelling unit as a condominium, please ensure that your building permitting agency allows this practice. If you decide to establish your primary dwelling unit and accessory dwelling unit as a condominium, your condominium plan or any future modifications to the condominium plan must be recorded with the County Recorder. Prior to recordation or modification of your subdivision map and condominium plan, any lienholder with a lien on your title must provide a form of written consent either on the condominium plan, or on the lienholder’s consent form attached to the condominium plan, with text that clearly states that the lender approves recordation of the condominium plan and that you have satisfied their terms and conditions, if any. In order to secure lender consent, you may be required to follow additional lender requirements, which may include, but are not limited to, one or more of the following: (a) Paying off your current lender. You may pay off your mortgage and any liens through a refinance or a new loan. Be aware that refinancing or using a new loan may result in changes to your interest rate or tax basis. Also, be aware that any subsequent modification to your subdivision map or condominium plan must also be consented to by your lender, which consent may be denied. (b) Securing your lender’s approval of a modification to their loan collateral due to the change of your current property legal description into one or more condominium parcels. (c) Securing your lender’s consent to the details of any construction loan or ground lease. This may include a copy of the improvement contract entered in good faith with a licensed contractor, evidence that the record owner or ground lessee has the funds to complete the work, and a signed statement made by the record owner or ground lessor that the information in the consent above is true and correct.” (F) If an accessory dwelling unit is established as a condominium, the local government shall require the homeowner to notify providers of utilities, including water, sewer, gas, and electricity, of the condominium creation and separate conveyance. (G) (i) The owner of a property or a separate interest within an existing planned development that has an existing association, as defined in Section 4080 of the Civil Code, shall not record a condominium plan to create a common interest development under Section 4100 of the Civil Code without the express written authorization by the existing association. (ii) For purposes of this subparagraph, written authorization by the existing association means approval by the board at a duly noticed board meeting, as defined in Section 4090 of the Civil Code, and if needed pursuant to the existing association’s governing documents, membership approval of the existing association. (H) An accessory dwelling unit shall be sold or otherwise conveyed separate from the primary residence only under the conditions outlined in this paragraph or pursuant to Section 65852.26.

A new law allows homeowners to sell ADUs like condos, boosting homeownership. Here’s how AB 1033 works: Accessory dwelling units, also referred to as ADUs and “granny flats,” have been available in California only as rentals. But a new law, Assembly Bill 1033, is giving Californians the opportunity to buy and sell them as condominiums. ADUs come in all shapes and sizes — for example, a converted garage, a small home in the backyard, or, as often seen in San Francisco, an unused portion of the main house, said Assemblyman Phil Ting (D-San Francisco), who drafted the legislation. Under AB 1033, which was signed into law this week, property owners in participating cities will be able to construct an ADU on their land and sell it separately, following the same rules that apply to condominiums. It gives homeowners more options for building on their property, and “the hope is, it would create more homeownership,”said Ting. Under the new law, local governments need to opt in to the ADU-as-condominium approach for it to be an option in their cities.  Here’s how the new rules will work in participating cities: As with new condominiums, homeowners building ADUs must notify the local utilities, including water, sewer, gas and electric, of the creation and separate conveyance of the unit. Each property will also have to form a homeowners association to assess dues to cover the cost of caring for the property’s exterior and shared spaces, such as the driveway, a pool or a common roof. Similar to condominiums on one property, the home and the ADU will have two different property taxes, Ting said. He says he believes that many of the initial ADUs going through this process will be sold to the family members or close friends of the homeowner. “And then as people are more comfortable with this and you see more ADUs being sold, and it’s more prevalent, then I could see this being more of a traditional real estate transaction,” he said. Meredith Stowers, a loan officer at CrossCountry Mortgage in San Diego who specializes in ADUs, said AB 1033 benefits both homeowners and new buyers. “The typical homeowners we see are retirees who have long since paid off their mortgage, but are maybe living on a pittance of Social Security and meager retirement funds,” she said. Under this law, the retirees can earn supplemental income and young families can buy an affordable starter home. Stowers said the problem that retirees are facing is that, “after so many years of loan modifications in high rates, it doesn’t make financial sense for the retiree to move out of their home.” She argues it’s more expensive for them to downsize to a smaller house, and this new piece of legislation opens opportunities for retirees to leverage the equity they’ve built up in their homes while also creating affordable housing. “We’re even seeing some retirees add ADUs in their backyard that they then move into and potentially selling off their home,” she said. Selling ADUs as condominiums is having success in places such as Oregon, Texas and Seattle. When Seattle removed regulatory barriers that discouraged property owners from constructing ADUs in 2019, the city issued nearly 1,000 ADU permits, more than four times the number permitted in 2018, according to a report released in March. The report also found that in 2022, the city permitted 437 attached ADUs and 551 detached ADUs, which it referred to as backyard cottages. Just under half were on sites with multiple ADUs and one-third were part of a development that included a new single-family residence. Included in the report were sample sales for neighbor residential parcels with detached ADUs, reporting that a unit of more than 1,000 square feet sold for an average of anywhere between $500,000 to $800,000.

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Deciding between a guest House and an Accessory Dwelling Unit depends on your specific needs and reasons. A Guest House offers separate accommodation on your property, suitable for visitors or potential rental income. It provides privacy but may have regulations and construction cost limitations. On the other hand, an ADU refers to a self-contained living space within your existing home or attached to it. ADUs offer versatility and can serve as a rental unit, home office, or additional living space. They often have more streamlined regulations and might be more cost-effective than building a separate Guest House. However, the choice depends on your budget, space availability, and long-term plans. option.