Can You Sell an ADU? Understanding the Sales Process for Accessory Dwelling Units

Last updated on January 24, 2024

Yes, you can sell an accessory dwelling unit (ADU) if it’s on a property you own.

Certainly! You can sell an ADU (Accessory Dwelling Unit), but the process isn’t as cut and dry as selling a standalone house. Generally speaking, an ADU cannot be sold independently from the primary residence because it is considered part of the same parcel or property. Nevertheless, with the right steps, options, and approaches, you can reap financial gains from your ADU investment, either directly or indirectly.

As you follow this article, you’ll uncover the different strategies to make your ADU saleable and profitable. Buckle up as we dive into the practical aspects and legal considerations of selling an ADU, aiming to provide a comprehensive guide that meets your needs.

Key takeaways:

  • ADUs are legally tied to the main dwelling and cannot be sold independently.
  • Zoning laws and CC&Rs may restrict the sale of ADUs.
  • Some jurisdictions require the owner of the main house to also own the ADU.
  • Selling an ADU may involve adjusting existing easements and right-of-way agreements.
  • Market trends show increasing demand for ADUs due to flexibility and affordability.

Table of Contents

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legal considerations for selling an adu

Before embarking on the sale of an Accessory Dwelling Unit (ADU), it’s crucial to acquaint oneself with the surrounding legal framework, which can significantly influence the process. Here are key points to consider:

1. Attachment to Primary Residence: Most ADUs are legally tied to the main dwelling. This means the sale of an ADU independently can be complex, if not impossible, without subdividing the property—subject to local regulations.

2. Zoning Laws: These dictate whether an ADU can be sold separately. Some areas may not permit the division of the property to allow for individual sale due to density or use regulations.

3. Covenants, Conditions & Restrictions (CC&Rs): Especially pertinent in planned communities, CC&Rs might restrict the ability to sell an ADU independently. Reviewing these documents is necessary to ensure compliance with community standards.

4. Owner-Occupancy Requirements: Certain jurisdictions require the owner of the main house to also own the ADU, potentially precluding a separate sale.

5. Right-of-Way and Easement Agreements: Selling an ADU may involve adjusting existing agreements to ensure both properties retain necessary access.

Navigating these legalities prior to listing an ADU for sale can streamline the process, avoid legal pitfalls and ensure the transaction aligns with both local laws and the rights of all parties involved.

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Understanding the ADU Ownership Structure

Navigating the intricacies of an Accessory Dwelling Unit (ADU) ownership structure is pivotal prior to considering a sale. Generally, ADUs are considered part of the primary residence’s property, meaning they are not separately titled.

Here are some key points to grasp:

  • Most ADUs are intrinsic to the main property, with ownership linked to the primary residence.
  • This setup means an ADU cannot typically be sold independently; the sale would include both the main home and the ADU.
  • In some regions, creating a separate title for an ADU is possible, effectively allowing it to be sold on its own. This process, known as condominiumization or lot splitting, involves a legal separation from the main property.
  • To pursue a separate title, approvals from local planning departments and compliance with zoning laws are necessary.
  • It’s also important to note that the feasibility of selling an ADU separately can be influenced by covenants, conditions, and restrictions (CC&Rs) if the property is part of a homeowners’ association (HOA).

Understanding this framework sets the stage for exploring the feasibility and implications of selling an ADU, as well as shaping strategies for maximizing its value.

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Local Zoning and Permitting Laws

Navigating local zoning and permitting laws is a crucial step before putting your accessory dwelling unit (ADU) on the market. These regulations vary widely depending on the municipality, so it’s important to:

  • Check Zoning Restrictions: Ensure that local zoning ordinances allow for the sale of ADUs as separate entities. Some areas may only permit ADUs to be rented, not sold.
  • Understand Permitting Requirements: Securing the proper permits can affect the legality of selling your ADU. Unpermitted units may face barriers to sale and could require retrofitting to meet current codes.
  • Review Density Regulations: Some local laws limit the number of dwellings on a single property. Be sure your property conforms to these density requirements after the ADU sale.
  • Assess ADU Specific Regulations: Certain jurisdictions have specific conditions for ADUs, such as owner-occupancy requirements, which may complicate or preclude the possibility of selling the ADU independently.
  • Consult with Local Authorities: Engage with your local planning department. They can provide guidance and clarity on the steps necessary to legally sell your ADU.

By understanding and adhering to the local zoning and permitting laws, you ensure a smoother selling process and avoid potential legal complications.

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Separation of Property Titles

When considering the sale of an Accessory Dwelling Unit (ADU), the existence of a separate property title becomes a key issue. ADUs typically do not have their own deed separate from the main residence, which can complicate the sales process. Here are important points to understand regarding titles and ADUs:

1. Single Parcel: ADUs and the primary dwelling usually reside on the same parcel of land, sharing a single legal description.

2. Subdivision: Some jurisdictions may allow subdivision of the lot, which enables the creation of a separate title for the ADU. This process, however, is governed by strict local regulations and may not be viable in all areas.

3. Condominiumization: In certain cases, you might be able to convert the property into a form of condominium, with the ADU becoming a legally distinct unit. This requires a new survey, legal descriptions, and compliance with local condominium laws.

4. Easements: If a separate title is created, establishing easements will be necessary to ensure shared access to utilities and common areas.

5. Restrictions: Even if separation is possible, there may be restrictions that impact the use of the ADU, such as owner-occupancy requirements that must be disclosed to prospective buyers.

Understanding how your local government views ADU titles is essential for a smooth sales process, and consulting with a real estate attorney can help navigate these intricacies.

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Financing Challenges for Buyers

Securing funding for an Accessory Dwelling Unit (ADU) purchase can be more complex than arranging a traditional mortgage. Lenders often see ADUs as a higher risk, mainly because there may be less data on their resale value. To navigate these hurdles, prospective buyers should:

  • Research lenders who specialize in ADU financing and are familiar with their unique nature.
  • Explore government-backed loans or grants specifically aimed at ADU purchases, where available.
  • Understand that some lenders may require a higher down payment to mitigate risk.
  • Consider engaging in a detailed discussion with the lender about rental income potential, which can make the ADU a more attractive investment.
  • Evaluate personal loans or home equity lines of credit as alternative financing options, especially for smaller or less expensive ADUs.

By being well-informed about these challenges, buyers can better prepare for the financial aspect of purchasing an ADU.

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Potential Tax Implications

When you decide to sell your ADU, it’s essential to consider how this transaction may affect your taxes. The sale can result in capital gains, which are the profits made from selling a property for more than its purchase price.

Keep in mind:

  • Capital Gains Tax: If you’ve owned the ADU for more than a year, it falls under long-term capital gains, which are taxed at a different rate than ordinary income.
  • Depreciation Recapture: If you’ve claimed depreciation on the ADU, you may have to pay back some of those tax benefits upon sale.
  • Primary Residence Exclusion: Your ADU might qualify for the primary residence exclusion if it’s within the same property as your main home. This means up to $250,000 of capital gains ($500,000 for married couples filing jointly) may be exempt from taxes if certain conditions are met.
  • 1031 Exchange: In some cases, you could defer capital gains taxes through a 1031 exchange by reinvesting the proceeds into another investment property.

Always consult with a tax professional to understand the specific implications for your situation and explore all the avenues to optimize your tax outcomes.

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Market trends show an increasing demand for Accessory Dwelling Units (ADUs) due to their flexibility and affordability, especially in urban areas where housing shortages are common. Rising costs of traditional homes push buyers toward alternative housing options like ADUs. Consequently, properties with existing ADUs are often seen as more attractive to potential buyers, leading to potentially higher property values and quicker sales.

Investors and homeowners alike recognize ADUs as a source of passive income, given their rentability. This aspect has led to an uptick in ADU constructions, further fueled by relaxed zoning laws in many municipalities. However, it’s important to note that the market’s enthusiasm for ADUs can vary significantly by location and the current state of the housing market.

Eco-consciousness also plays a role, with many buyers attracted to ADUs for their potential sustainability features and smaller environmental footprints compared to larger, standalone homes. Advances in green building technology are making ADUs even more appealing, especially among environmentally-minded consumers.

While ADUs represent a burgeoning market segment, sellers should be aware of regional trends and real estate cycles which can impact the liquidity and value of these unique property features. Always staying informed about local housing demands, regulations, and buyer preferences is crucial to capitalizing on the growing interest in ADUs.

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Preparing the ADU for Sale

To ensure your accessory dwelling unit (ADU) attracts serious buyers and secures a good market value, consider these practical steps:

  • Inspect and Repair: Conduct a thorough inspection to identify any maintenance issues. Address repairs promptly to present the space in its best condition.
  • Upgrade for Efficiency: Energy-efficient installations appeal to environmentally conscious buyers and can improve the unit’s overall appeal.
  • Staging the Space: A well-staged ADU helps potential buyers envision themselves living in the space. Opt for a clean, clutter-free environment with neutral decor.
  • Gather Documentation: Assemble all necessary documents, including building plans, permits, and warranties, to provide transparency and trust.
  • Compliance Check: Ensure the unit meets all the current building codes and housing standards to avoid legal complications during the sale process.

Taking these steps not only helps streamline the sale process but also potentially increases the ADU’s value and marketability.

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Valuation of an ADU

Determining the fair market value of an ADU involves a mix of appraisal techniques and market research, reflecting both its income-generating potential and the value it adds to the primary residence:

  • Comparative Market Analysis (CMA): Assess similar properties with ADUs in your area to establish baseline value.
  • Income Approach: Calculate potential rental income and apply a cap rate to estimate value for investors.
  • Cost Approach: Consider the cost of construction, less depreciation, especially if the ADU is newly built.
  • Adjust for Unique Features: Account for factors such as high-end finishes or eco-friendly technologies that might affect the ADU’s desirability.
  • Professional Appraisal: A licensed appraiser can provide the most accurate valuation, considering all unique aspects of the ADU and local market conditions.
  • Impact on Main Residence: Recognize how the presence of an ADU might influence your primary home’s value, either positively or negatively, to inform the overall pricing strategy.
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ADU Sale Transaction Process

Navigating the actual process of selling an accessory dwelling unit (ADU) involves several key steps to ensure a smooth transaction:

1. Due Diligence: Verify that the ADU complies with all local codes and that any necessary permits or inspections are current. This reassures potential buyers and prevents legal issues.

2. Appraisal: Secure a professional appraisal specific to the ADU. This establishes a fair market value and informs the pricing strategy.

3. Listing and Marketing: Engage a real estate agent experienced with ADUs or market the property yourself to reach potential buyers who understand the value of an ADU.

4. Disclosure: Provide full disclosure of the ADU’s condition and any restrictions to buyers to avoid future disputes and foster a transparent selling environment.

5. Financing Assistance: Offer guidance on specialized financing options available for ADUs, as traditional mortgages may not always apply.

6. Contract Negotiations: Carefully negotiate contract terms that address the unique aspects of transferring ADU ownership, such as shared utilities or access rights.

7. Escrow and Closing: Work with a title company or attorney who can navigate the complexities of closing the sale of an ADU, ensuring all legal documents are correctly executed.

These points are vital in creating a legally sound and successful sale, providing both seller and buyer with confidence throughout the transaction.

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Post-Sale Considerations for Main Property Owners

Once the ADU changes hands, primary homeowners should consider the impact of the sale on their property. It’s important to establish clear boundaries with the new owners to prevent disputes. This might involve setting up agreements regarding shared spaces, utility costs, and property maintenance responsibilities.

Adjusting insurance policies is also key. Verify that the correct coverage is in place to reflect the new ownership status of the ADU while maintaining ample protection for the main residence.

Don’t overlook the potential change in property value. An ADU sale can affect the overall market value of the primary property, so it’s wise to have the property reassessed for accurate tax and insurance purposes.

Lastly, familiarize yourself with any new obligations. This might include understanding easements or right-of-way arrangements that could allow the ADU owner access through your property. Ensuring a harmonious relationship with the ADU owner will help maintain a peaceful living environment for both parties.

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Benefits of Selling an ADU

Unlocking Equity: Homeowners sell an ADU to access equity without having to sell their main home, providing financial flexibility for investments, debt pay-offs, or lifestyle enhancements.

Income Stream: Selling an auxiliary dwelling unit may present a quicker return on investment compared to traditional renting, appealing to those looking for immediate capital.

Simplifying Property Management: For those not interested in the responsibilities of being a landlord, selling an ADU reduces managerial duties while still reaping financial benefits.

Enhancing Property Appeal: An ADU can increase the overall value and attractiveness of the property, potentially leading to a higher resale value for the main home in the future.

Generating Community Value: ADUs often provide affordable housing options, contributing positively to community dynamics and meeting increasing urban housing demands.

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FAQ

Can ADU be sold separately in California?

In California, Accessory Dwelling Units (ADUs) can potentially be sold separately, provided local government has passed an ordinance under the provisions of legislation AB 1033 allowing such condominium conversions.

How much does an ADU increase property value?

An accessory dwelling unit (ADU) in California can potentially increase a property’s value by $200,000 to $500,000.

Can you sell your ADU in Los Angeles?

In Los Angeles, homeowners are allowed to sell accessory dwelling units (ADUs) on their properties under guidelines that resemble those of a condominium sale, according to the recently passed Assembly Bill 1033.

What is the new ADU bill in California 2023?

The new ADU bill in California 2023, AB 2221, mandates all cities to permit a minimum 16 ft height for accessory dwelling units (ADUs) while also including provisions for certain scenarios where cities must allow higher constructions.

What are the legal requirements for selling an ADU in San Francisco?

When selling an accessory dwelling unit (ADU) in San Francisco, one must adhere to local and state laws, which require the property and the unit to be inspected and approved for occupancy by the city, the property to be under one ownership, and the unit not to be sold separately from the main dwelling.

How does an ADU impact the overall real estate market in California?

An Accessory Dwelling Unit (ADU) heightens the overall real estate market value in California by providing additional housing options and enhancing property utilization.

How does the construction of an ADU influence the potential for future property sales?

The construction of an ADU (Accessory Dwelling Unit) can enhance future property sales by providing additional rental income potential, increasing the overall property value.

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