Imagine adding a tiny home to your backyard and then carving off some land with that tiny home to sell separately from your main home.

Sound far-fetched and too good to be true? Well, it isn’t.

It’s called an ADU condominium or ADU Condo.

Some can now sell an ADU separately from the main house ... in San Jose, CA.

A groundbreaking law, Assembly Bill 1033 (AB 1033), made the concept of selling ADUs separately (sometimes called “condo-ization” of ADUs) possible.

But what exactly does AB 1033 mean for homeowners, real estate agents, and buyers, and how will it impact other parts of the US?

Let’s explore the exciting development of the option of selling a standalone ADU separately in California is transforming real estate.

AB 1033 and ADU condos

Disclosure: This post may contain affiliate links, meaning I can earn commissions. If you decide to purchase through my links, it is at no cost to you.

What is AB 1033?

Assembly Bill 1033 is a California law that allows homeowners to sell their Accessory Dwelling Units (ADUs) separately from their main house.

This legislation provides a framework for converting ADUs into condos, creating new opportunities for affordable housing and property investment.

The bill sets a stage but requires local governments to adopt ordinances facilitating these separate sales.

It is still a very gray area. Don’t expect it to be black and white anytime soon.

This changes everything we know about ADUs in real estate.

When does AB 1033 go into effect?

AB 1033 was passed and signed into law in 2023, and it went into effect on January 1, 2024.

So, theoretically, selling an ADU in California is possible. We all know nothing happens immediately.

What cities in California are participating in AB 1033?

So far, just one. San Jose, CA.

On June 11, 2024, the [San Jose, CA] City Council approved the Accessory Dwelling Unit (ADU) condominium ordinance that was a part of current Zoning Code update (File No. PP23-007).  This Ordinance is anticipated to be effective on July 18, 2024

AB 1033 allows an ADU to be sold separately – But how?

Under AB 1033, ADUs can be sold as standalone properties, similar to condos.

Here’s what you need to know:

  1. Separate Sale: Your ADU can be sold independently from your primary residence.
  2. Condo Conversion: Both the main house and ADU become part of a condo community.
  3. HOA Creation: A Homeowners Association (HOA) is typically set up to manage shared spaces and responsibilities.
  4. Local Implementation: While AB 1033 is a state law, its availability may vary as local governments must adopt ordinances to implement it.

I scoured the internet for more information but was only left with questions. We will have to follow the changing laws and ordinances on this one.

Compliance Requirements

Your ADU must meet all building codes and safety standards and have independent utility connections.

Lender Approval

If you have a mortgage, you’ll need your lender’s approval before converting your ADU to a condo.

Complex Process

Be prepared for a possible lengthy process, potentially taking up to a year or more. You’ll likely need help from professionals like lawyers or other professionals.

Setting up an HOA

Homeowners must create an HOA to manage shared spaces and responsibilities for the main and ADU condo properties.

Tax Considerations

Expect a new property tax assessment for the ADU condo. For specific advice, consult a local tax professional.

Most will wonder if the new creation of a separate property will trigger a reassessment of their current main home.

Main Home Value

Homeowners will be wondering how the value of their current home will change if they sell part of the land with the ADU.

Consulting a real estate professional to assist you.

New Market Segment

AB 1033 creates opportunities for real estate agents to specialize in ADU condo sales.

Education Needed

You’ll need to understand the unique aspects of ADU condo conversions and sales, including local ordinances and state laws.

Client Education

Many potential buyers and sellers may be unfamiliar with this new option, so you must explain AB 1033 and its implications. You need to be able to explain it to the following:

  • Homeowners
  • Property Buyers
  • Property Investors

Pricing Challenges

Determining fair market value for this new type of property could be tricky.

I anticipate having the standalone properties appraised, which will also be a topic of conversation.

Increased Listings

If the ADU can be sold as a standalone property, more listings can be obtained, and buyers will have more property options.

Home Affordability

ADU condos offer a potentially lower-cost entry into homeownership over the price of renting the same ADU space.

Buying an ADU condo instead of renting will increase access to affordable home ownership for those in need.

Condo Financing Options

Buyers can typically get conventional loans for condos. Loans on Condos are usually less straightforward.

FHA loans may also be available, especially for fully detached ADUs with separate entrances.

Unique Living Situation

Buyers will want to understand the dynamics of ADU condo communities, including shared spaces and HOA responsibilities.

Parking Impact

Parking allocation can significantly affect an ADU condo’s value and livability.

Units with fewer or no parking spaces may be more affordable but potentially less desirable to some buyers.

More Options and Potential Income Strategies

Converting and selling an ADU as a separate condo presents real estate investors with a unique opportunity to diversify their property portfolios.

By leveraging AB 1033, investors can unlock new income streams and maximize the value of their investments.

Increased Property Options

Selling an ADU separately allows investors to offer a wider range of property types within a single investment.

The ability to market the ADU and primary residence individually increases the overall appeal and marketability of the property.

Enhanced Income Strategies

Investors might also consider selling the ADU while retaining ownership of the primary residence, balancing short-term gains with long-term asset retention.

Investors can explore various income strategies by separating the ADU from the main property. The ADU can be sold outright for immediate profit or rented out to generate ongoing rental income.

Analyzing the Deal for Maximum Benefit

Real estate investors must conduct a thorough deal analysis when considering converting an ADU into a condo and selling it separately.

This involves evaluating the financial implications, market conditions, and potential returns.

Here are key points to consider:

Financial Analysis

Understanding the costs associated with converting and selling the ADU is crucial.

Investors should account for legal fees, construction or renovation costs, the establishment of an HOA, and compliance with local regulations.

Comparing these costs against the projected sale price or rental income will help determine the feasibility and profitability of the investment.

Market Research

Conducting market research to gauge demand for ADU condos in the area is essential.

Investors should analyze local housing trends, property values, and rental rates to make informed decisions.

This research can reveal the optimal pricing strategy and highlight any potential challenges or opportunities in the market.

Flexibility in Investment Strategies

Converting an ADU into a condo provides investors greater flexibility in their investment strategies.

By having the option to sell or rent the ADU, investors can adapt to changing market conditions and personal financial goals.

This flexibility allows for a more dynamic and responsive investment approach.

Potential for Increased Property Value

The separate sale of an ADU can significantly enhance the property’s overall value.

Investors can capitalize on this by strategically marketing the ADU as an attractive, standalone living space.

Highlighting independent utilities, compliance with building codes, and desirable amenities can further boost the property’s appeal and value.

There will undoubtedly be challenges and concerns. Here are just a few that will come up:

Local Variations

Check local ordinances and regulations, as implementation of AB 1033 may vary by location.

Zoning Requirements

Ensure compliance with local zoning laws. Every jurisdiction could be different.

Market Demand and Home Prices

Understand local demand for ADUs to price effectively. How will the value of the main home be impacted?

Community Impact

What will the neighbors say? Consider potential neighborhood feedback to ADU sales. I expect the conversation to get heated.

Final Thoughts

AB 1033 represents a significant shift in California’s housing landscape, offering new opportunities for homeowners, real estate professionals, and potential buyers. Not to mention the entire US.

While it opens up exciting possibilities, navigating the complexities of this new law requires careful consideration and often professional guidance.

As this trend evolves, it can potentially create more diverse and affordable housing options across the state.

Whether you’re a homeowner, real estate agent, or potential buyer, staying informed about AB 1033 and its local implementation can help you make the most of this new housing frontier.

Disclaimer: This is not legal advice. It is general information only. This is an evolving topic, and you should speak to licensed experts about your specific situation.

  • Erin Hybart

    Meet Erin, a real estate enthusiast with a wealth of knowledge and an insatiable curiosity for all things Real Estate and living with intention. She passionately advocates for alternative, affordable, and eco-friendly housing solutions. She believes in pushing the industry's innovation boundaries and thinking outside the box. As a licensed real estate agent in Louisiana, Erin dedicates herself to assisting clients in buying and selling properties and mentoring fellow agents to succeed in their own Real Estate businesses. In addition to her professional pursuits, Erin channels her expertise into captivating house-flipping adventures.

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