California reinstates ADU sales separate from primary home

Legally converting the home and the other living unit(s) to a two-unit or three-unit condo, for example, is now on the table

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | October 24, 2023

Article originally posted in Orange County Register on October 19, 2023.

For renters hindered by unaffordable housing in California, a new avenue has opened.

Gov. Gavin Newsom signed Assembly Bill 1033 into law on Oct. 14, repealing an earlier ban on the sale of accessory dwelling units or ADUs separate from a primary residence.

This could be a backyard cottage or a converted garage, for example. Whether it’s attached or detached from the primary residence is a non-starter. Legally converting the home and the other living unit(s) to a two-unit or three-unit condo, for example, is now on the table.

Can you say mini condo?

Unlike a series of 2020 state laws fast-tracking ADU construction, specific rules on how to convert an ADU into a condo are being left up to each municipality.

Will local officials participate, knowing the state is facing a housing shortage and affordability crisis? Only time will tell.

“This satisfies the affordable housing element,” said Al Salguero, real property division manager at the Orange County Assessor’s Office.

Assuming all the local condo conversion compliance boxes are checked, homeowners with ADUs can keep, rent one or all the units or sell one or all the units.

California is home to 10,623,720 residential housing units, according to data from the California Department of Housing and Community Development. Residential housing is defined as one to four housing units. That’s single-family, condos and townhouses, duplexes, triplexes and fourplexes. Five or more units are considered commercial housing, aka apartments.

But few ADUs exist.

The number of building permits for ADUs has risen from 2020 through 2022, according to the most current data available.

Statewide there were 44,532 ADU building permits issued during the three-year period. Of that total, Los Angeles County issued 26,351, Orange County issued 3,539, Riverside County issued 1,136, San Bernardino County issued 1,531 and San Diego County issued 5,120 permits for ADUs, according to the California Department of Housing and Community Development.

 To be clear, permits don’t necessarily mean the ADU was completed or even started for that matter.

It’s a big question mark whether property owners with previously built ADUs see any added financial potential or have the motivation to go through the condo conversion process. If your granny is living in her granny flat and she’s happy, what’s the point of a condo conversion?

Clearly, opportunity is knocking for property owners and would-be owners who want to capitalize on the demand for homeownership.

“California is a few million housing units short,” said Jordan Levine, chief economist for the California Association of Realtors.

The timing could not be better for anyone wanting to purchase or refinance in order to build an ADU.

On Oct. 16, the U.S. Department of Housing and Urban Development announced updates to its FHA 203(k) property rehabilitation financing program. In part, financing for ADU construction, conversion and rehabilitation is allowable for units attached and detached from the primary residence.

And, for mortgage approval qualifying purposes, FHA underwriting will now recognize existing and anticipated ADU rental income.

There’s also an array of other more expensive construction loans available in addition to the FHA 203(k) product.

Next week I’ll write about financing construction for small condos.

Freddie Mac rate news: The 30-year fixed rate averaged 7.63%, 6 basis points higher than last week. The 15-year fixed rate averaged 6.92%, 3 basis points higher than last week.

The Mortgage Bankers Association reported a 6.9% mortgage application decrease compared with last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $340 less than this week’s payment of $5,143.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 7.125%, a 15-year conventional at 7.125%, a 30-year conventional at 7.625%, a 30-year conventional high balance at 7.99% ($726,201 to $1,089,300), and a jumbo 30-year fixed at 7.75%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year adjustable, interest-only and fixed for the first five years, rate at 7.375% with 1 point cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.