Monday Market Update: San Jose Allows Selling ADUs As Condos

Accessory Dwelling Units (ADUs), also called in-law or ‘granny’ units have been growing in popularity as a way for homeowners to supplement their income and to increase inventory. Since 2015, San Jose has been tracking the permit issuance and construction of ADUs, easing requirements, streamlining permitting and creating an entire process dedicated to preapproved ADUs. Now this high-cost Silicon Valley city has made a controversial and almost immediate move to allow these units to be sold as condos, separate from the primary residence!

This ordinance takes effect on July 18, 2024, and is allowed by California Assembly Bill 1033 passed last year which allows cities and counties to permit these types of sales if they choose. San Jose is the first city in California to move forward with this option, as Mayor Matt Mahan calls ADUs “…arguably the most accessible form of home ownership available.”

Below are some key considerations:

1)     Homeowners will have to establish an HOA since the unit must be sold as a condo. Assessing dues, maintaining exterior areas, creating governing documents… the process will require all of these legal requirements and more.

2)     Each owner (the primary home and ADU owner) will need to pay their own property taxes and utilities; thus, the county and utility company must be notified and have a way to handle the split.

3)     It still needs to be determined how lenders will handle one part of the property being sold off before the entire mortgage balance is paid in full.

4)     Resale value could be impacted as typically buyers seeking SFRs are not seeking to live on a multi-family lot and may have issues with safety and sharing space.

5)     Many investment experts are advising homeowners to keep the ADU option as a rental rather than condo sale, as you have greater control over your investment and who is “…25 feet away from your living room.”

Advocates of this ordinance believe it will open up more affordable housing stock for entry level buyers, help resolve some inventory issues and allow some homeowners to make money that may be used to stay in their primary home or support the high cost of living in the Bay Area.

NBC reports that a second reading of this bill is still required in San Jose before the bill actually takes effect on July 18, 2024. This will be an interesting process to watch and even more interesting to see how the outcomes unfold.

Enjoy your week,

Bobbi

Resources Used: San Jose Now Allows Homeowners To Sell Their ADUs—Will the Rest of the Nation Follow? ; San Jose to allow property owners to sell ADUs

Bobbi Decker
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Broker Associate, Bobbi Decker & Associates
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