On June 11, San Jose became the first city to update its zoning code in line with California Assembly Bill 1033, which went into effect at the beginning of the year. This law allows homeowners to sell accessory dwelling units (ADUs) as condominiums, but cities have to opt in.
AB 1033 is just one of many state policies aimed at encouraging affordable housing development in California since 2017, with a big focus on increasing ADU production. As the state removed obstacles and closed local loopholes that blocked new construction, ADU production skyrocketed in California, increasing by more than 15,000% between 2016 and 2022, according to the California YIMBY Education Fund. Last year, ADUs made up about one in five new housing units in the state.
So far, most homeowners are building ADUs to house family members or generate rental income. About 27% of the ADUs completed since 2018 are considered affordable for families earning below 120% of the area median income.
If more cities adopt AB 1033, it could increase homeownership rates in California by boosting the supply of affordable starter homes. Currently, the median household income in the state isn’t enough to qualify for a mortgage on a bottom-tier home.
The reform also opens up opportunities for investors and existing homeowners since ADUs are generally cheaper to build than single-family homes and can be very profitable. However, there may be challenges to selling an ADU as a condo in California, and it’s unclear if this strategy will take off now that the state has lifted restrictions.
An Opportunity for California Property Owners and Prospective Homebuyers San Jose’s new ordinance, effective July 18, allows homeowners to sell their ADUs and primary residences separately as condos on the same property. Previously, selling ADUs as condos was only allowed under limited circumstances.
While San Jose is the first to change its zoning code, other cities are likely to follow. The Berkeley City Council has already voted to adopt AB 1033 in 2025.
A previous law, SB-9, allowed homeowners to split their lots and build additional single-family homes, but it had limited impact due to burdensome guidelines, high costs, and legal challenges.
Several earlier changes to state law made it easier to build and rent ADUs, and new financing options allowed homeowners to qualify for construction loans using projected rental income. This strategy has become more popular than lot splits, but not all homeowners want to become landlords.
AB 1033 offers another way for homeowners to cash in on their properties while allowing for more affordable home construction. Retirees could build ADUs and use the sale money to support aging in place, while first-time homebuyers might find it easier to qualify for a mortgage with less square footage. Existing homeowners wouldn’t need to sell their primary residences to cash in, potentially increasing housing inventory.
To legally sell an ADU, property owners must establish a homeowners association (HOA) to manage shared exterior spaces, like a driveway or a shared roof if the ADU is attached to the primary residence. They also need to notify local utility companies about the separate conveyance. Property taxes would be assessed individually on each unit, but it’s unclear if this would lead to a net increase in city revenue.
Property owners seeking separate conveyance for an ADU must also get consent from their mortgage lender and any other lienholder, which impacts any owner who doesn’t own their home outright. The mortgage lending industry’s response will significantly influence the bill’s impact on housing affordability.
AB 1033 gives municipalities some flexibility when opting in, so the requirements and review process may vary across cities that amend their zoning codes.
Obstacles May Interfere with the Goal of AB 1033 While AB 1033 makes it easier for homeowners to get ADU construction permits and sell ADUs separately from their primary residence, there are still a few hurdles. Homeowners with mortgages need to get their lender’s consent, protecting them from triggering the due-on-sale clause in their home loan agreement.
It’s uncertain if mortgage lenders will authorize these transactions. AB 1033 states homeowners may need to meet additional requirements to get lender consent, which could be as simple as changing the legal description of the property or as challenging as paying off the mortgage entirely.
Lenders typically charge higher interest rates for condos due to the unknown variables of other unit owners and the HOA, making it unlikely that a lender would allow a borrower to sell part of their property while keeping the rate and terms of their single-family mortgage. Property owners wanting to build and sell an ADU have options like refinancing with a loan product such as the CHOICERenovation mortgage or the HomeStyle Renovation mortgage.
However, the lock-in effect of today’s high mortgage rates may deter homeowners. Borrowers with low rates on their current mortgages would need to weigh the investment benefits against the higher interest rate on a new loan. Adding an ADU as a rental property can significantly increase the value of the original home, but selling a portion of the land and re-categorizing the home as a condo might decrease the original home’s value. Homeowners would likely need professional advice before attempting a sale due to the many trade-offs and potential legal issues.
With these concerns, AB 1033 might not provide much additional incentive for ADU construction in cities that opt into the measure. Critics question whether it will increase affordable housing supply or impede other, more effective programs. AB 1033 doesn’t require developers to ensure affordability, and city housing staff would need to implement the new rules, potentially delaying other housing priorities.
Relaxed zoning rules in cities like Seattle, which also allow ADUs to be sold as condos, have increased ADU permits, but there’s little evidence about their impact on affordable housing. Only a small share of Seattle’s ADUs are on condo parcels, and while those units sell at a lower price, the sample size is small.
If ADU condos take off, investors could enter sought-after California markets at a lower price point and have multiple options for returns on ADU construction. Research shows that ADUs increase a home’s value by an average of 35% in large cities, which could make flipping a successful strategy, though there’s no data yet on how conveying the units as separate condos would impact total property value compared to selling both units together. Rental restrictions and owner-occupancy requirements vary by municipality in California, and cities adopting AB 1033 have flexibility with these requirements when issuing permits.
Investors could rent one or both units, or sell one as a condo and rent the other. Having options is great, but choosing the right strategy requires careful analysis of individual factors like the lot, neighborhood, and local laws.