How ADUs Could Help Californians Break Into Homeownership

Updated 1:21 p.m. Thursday

For years, Bob Hughes had been eyeing a corner lot just down the street from his San José office, where he runs a building firm.

The single-family property at Lantz and Foxworthy avenues — shrouded by trees and sitting on just under 12,000 square feet in a quiet residential neighborhood near Cambrian Park — seemed ripe for development. So when he got the opportunity to purchase it, Hughes immediately began thinking about how to split the lot.

“The original house here was just covered with foliage all across the front — large trees and plants,” he said. “You couldn’t even see the house.”

Now, nearly three years later, Hughes is a few weeks away from becoming the second developer in the state to successfully take advantage of a new law that allows homeowners to sell ADUs as condos.

The first, on Josefa Street near San José’s downtown by developer AlphaX RE Capital, got its official certification from the city in a public ceremony on Thursday. Standing in front of a white backyard cottage with a sloping roof, Mayor Matt Mahan said the home represented “history in the making.”

“ADUs are affordable by design and growing in popularity across the state. And now, they can offer the most accessible form of homeownership, as well,” he said. “We are offering a proof of concept for California and hope that other cities follow San José’s lead.”

The law, AB 1033 by former San Francisco Assemblymember Phil Ting, went into effect in 2024 and allows cities to opt into the new rules. San José became the first city last year to adopt them. Since then, at least a handful of other cities have followed, including Santa Monica, Santa Cruz, San Francisco and San Diego. Berkeley planning officials expect to put forward an ordinance in September to allow condo sales.

The goal, supporters say, is to encourage more affordable ownership opportunities in a state where just 15% of households could reasonably afford to purchase the median-priced single-family home, according to the California Association of Realtors.

Rafael Perez, board chair of the Casita Coalition, which championed the law, lauded California for making significant strides in permitting new ADUs — with over 30,000 permitted last year, representing a quarter of California’s projected housing stock.

But early iterations of the law had prohibited selling them as condos, with some exceptions. Two surveys, from UC Berkeley’s Terner Center for Housing Innovation and the South Bay Cities Council of Government, found that about 65% of ADUs are offered as long-term rentals, either on the private market or to family and friends for free.

“ADUs weren’t moving the needle on homeownership as much as we would like,” Perez said. “ADU condos open up that door of possibility.”

But so far, city officials in Santa Monica and Santa Cruz, which adopted their versions of the law in October and January, respectively, said they had not yet received any applications. In San José, just two developers have filed applications to convert ADUs to condos — though, on Thursday, AlphaX committed to completing dozens more.

The paucity of enthusiasm — either from other cities looking to implement it or other property owners hoping to take advantage of it — isn’t entirely surprising, several observers said.

For owners with mortgages, the conversion not only requires securing lenders’ approval but also potentially devaluing the existing home, since condos are typically valued less, said Martina Davis, a planning division manager for the city of San José.

“If you have a big mortgage, your bank might not be OK with that,” Davis said. “Or you may look at it and say, ‘Wait, hold on, I need to retain the full value of the house.’”

Anecdotally, Davis said most of the interest in converting ADUs to condos in San José has come from developers for whom those obstacles may not apply. Though Hughes said the newness of the law, along with some of its provisions, has presented its own challenges.

Unlike traditional condos, the law requires the ADU to receive a certificate of occupancy before undergoing condominium mapping — a process that’s taken Hughes about six months of precious time sitting on two vacant homes. And after San José officials certify the units as condos, they’ll need approval from the county, as well.

“I’ve got a lot of money tied up here,” he said. “I want to hurry this along.”

For AlphaX, the decision to use the law was more of an experiment to test whether it could work. The company had already purchased the lot and had renters living in both the main home and ADU.

“We are not afraid to be the pioneer,” said Jia Li, the company’s chief asset manager. “If you solve this problem, or we explore the options, then there’s all these other opportunities that could come.”

But Jane Lin, chief investment officer for AlphaX, said it’s a model they think has promise. “At the end of the day, it’s just providing more housing. It’s one possible solution to help create more housing.”

Her company on Thursday said it hoped to complete another 85 ADU condos over the next year, which could be built for existing homeowners on lots they already own, or on lots the company purchases. Once it secures the land, Lin said, “ADUs go up fast.”

In Seattle, about 60% of all ADUs were sold as condos in 2024, according to a city dashboard. Nick Welch, a senior planner at Seattle’s Office of Planning and Community Development, said those figures may be even higher this year because the share of ADU condos has been rising, indicating strong demand for more affordable homeownership options.

According to a city report analyzing data from 2023, the median ADU sold at about 60% of the price of the associated main home and about half as much as a new, detached home.

“Plenty of people want to buy homes and are priced out of the market,” Welch said. “ADUs — just by virtue of being smaller and having a smaller lot area — are obviously sold for less than a new 4,000 square-foot single-family home. And so there’s plenty of demand for that type of ownership housing.”

However, Perez sees scenarios where existing homeowners could also benefit from converting their home and backyard cottage into condominiums. The law makes it possible to access their home’s equity, without taking on additional debt, he said. “They can sell off the ADU and with the proceeds, pay off what was left of that mortgage and be mortgage-free, right?”

Or, they can sell to a family member. “For families that are seeing displacement, the ability to create an entry point in the backyard that’s more affordable than the homes they can’t afford is also a way that people are able to stay in the state.”

Hughes said he already has a buyer for the ADU he built in San José. The three-bedroom, two-bath, nearly 1,200 square-foot home will go for just under $1.6 million, as soon as the condominium map is approved.

The primary home, with five bedrooms, three bathrooms and nearly 2,900 square feet, is listed for more than $3 million.

While certainly not cheap, Hughes said, “No place in San José is, though. I mean, realistically, they are not.”

Hughes had the advantage of starting with a relatively big lot, which allowed him to build two units with separate entrances and utilities, making them more akin to single-family homes than condos.

“It’s unique because it’s on the corner, and the lot was big enough that I could build a 1,200 square-foot ADU,” Hughes said, noting that most lots will be smaller and have shared utilities. “It’s going to be down in a lower price range just by the size. So, therefore, it is creating that affordable home for somebody to go in there.”

More typical is the lot on Josefa Street, where AlphaX is recording the city’s first ADU-condominium-conversion map. The main home takes over most of the lot, with the ADU at the rear of the property. The two homes share a long driveway.

Lin said she wasn’t sure whether the company would ultimately sell the units as condos or continue to rent them out.

“It’s just the beginning,” she said. “So that’s why we’re all very happy and very excited to try.”