Sell my garage?
I have had many homeowners ask me about turning their garages into ADU’s (Accessory Dwelling Unit aka mother-in-law suite or guest house) and renting them out. Now the questions surround the new bill AB 1033 that basically says that a homeowner can SELL that ADU as a separate property with its own address and tax assessment. I did a lot of research and found a great article that sums up the details into a quick and easy read with added resources included as links. I have not sold any ADU's yet. It seems crazy to me but lets see how it all pans out!
Here's How AB 1033 Works
The bill was signed in October 2023 and was enacted on Jan. 1, 2024.
The new concept is converting an SFR (Single Family Residence) and ADU (Additional Dwelling Unit aka garage conversion or guest house) into a condominium (ownership interest), creating an HOA, and allowing for either of the two units to be sold separately.
Note: Homeowners with ADUs, garage conversions, or large lots are a matter of public record and have already received advertising from contractors promoting this get-rich scheme.
What could possibly go wrong?
The first 150 words is an L.A. Times post (below) that outlines the issue in an easy-to-understand style.
By Karen Garcia, Staff Writer
Assembly Bill 1033 allows Californians to buy and sell ADUs as condominiums on Jan 1. Under the new law, all local governments must "opt-in" to the ADU-as-condominium approach for it to be an option in their cities.
How do the cities benefit?
Sacramento is using the power of legal action to pressure every city and county government to build affordable housing, and ADU conversions count towards the goals. The new conversions will count toward the state's mandates.
“This satisfies the affordable housing element,” according to Al Salguero, a real property manager at the Orange County Assessor's Office.
Here's how the new rules will work:
1) 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.
2) Each property will then have to form a HOA (Home Owners 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 standard roof.
3) Like condominiums on one property, the home and the ADU will have two different property taxes.
Sound Simple? It Won't Be!
According to the article by Dan Dobbs, there are three glaring (financing) issues with AB 1033.
1) Violation of the "Due on Sale Clause"
When any lender lends on a home, "ownership Interest" and property type are primary components of underwriting standards and interest rate pricing.
Converting or selling off any part of the property (without a legit lot split) MAY cause the lender to "call the loan." Let's set this issue aside and let legal depts. figure it out later.
2) Zoning: Fannie, Freddie FHA, and V.A. took five years to adjust appraisal standards to accommodate ADU additions and allow increased appraisal values to the property. (The ADUs did not trigger "zoning issues for purposes of lending).
However, creating an ownership interest in property that's now a "two-unit condominium" in an SFR neighborhood will conflict with Fannies's zoning restrictions.
It's unlikely that this property will be eligible for Freddie /VA or FHA anytime before the next asteroid strike. It is that much of a game-changer!
3) Future Lending is Virtually Impossible.
What is indisputable (from a lending perspective) is that changing the "ownership interest " from SFR residence into a " shared ownership" will preclude the owners (and future buyers) from obtaining VA/FHA/Fannie-Freddie financing.
The properties will become "unwarrantable" until the ownership interest is reversed. If that is even possible? Will it be possible to "un-ring" the bell? Being "Unwarrantable" Is a Value Killer.
For the owners who say, "I'm never selling the home" (ever?) I respond:
"But your heirs will." or their heirs may! Or the current owner will most likely want to refi or add a second T.D. at some point in the future.
If future buyers can't get typical financing programs, the property's value will decline as only cash buyers or those who can obtain
"Non-warrantable financing" will be able to purchase.
In comparison, if the condo is "warrantable," the ((current) rate for a Fannie / Freddie /FHA or V.A. loan is 6.5% at no points for a 30-year fixed.
The (current) "unwarrantable rate" is 9.5% (rate) at 3-4 points for a five-year fixed rate with a two-year pre-payment penalty.
WHAT DO YOU THINK?
I would love to hear what you think. Would you sell your garage and continue to live in your home?