Unlocking Home Equity Potential: Two Strategies for Californians

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With mortgage rates skyrocketing up to 8%, it’s been a tough year for real estate. Many people have resigned to staying put in their current homes, especially those who have locked in lower mortgage interest rates and more built-up equity. Those homeowners may want to improve their current homes, instead of moving and taking on a new, higher-interest mortgage, but tapping into their home equity for improvement projects could create a financial hole that many are trying to avoid. 

Now, the state of California, which is infamous for having some of the highest home prices in the United States, is offering homeowners a way to make money on their properties without high-interest rate loans or tapping into their precious home equity. Governor Gavin Newsome recently signed two bills — AB1033 and SB9 — into law, both of which give homeowners more options to make money on their homes and address California’s housing crisis. 

How AB1033 impacts ADUs in California

Accessory dwelling units (ADUs) — sometimes called “granny flats” — have traditionally been available as rental units in California, giving homeowners an option for a second income stream. The new law, AB1033, allows California homeowners to buy and sell those ADUs as condominiums. 

ADUs vary in size, shape, and type, and can range from a backyard pool house, a casita, or a converted garage unit. The new bill also includes unused portions of a person’s main dwelling, giving homeowners a wide range of options for making money on their homes. 

Through this new bill, homeowners can build ADUs in their yards and then subdivide their lots into two condominium units — one unit being their main residence and the other being the ADU. They can then sell off the ADU, making a good amount of money off the ADU investment. 

AB1033 provides homeowners with more options for making money through their real estate, while simultaneously allowing homeownership opportunities for other state residents. Many of these initial ADU units constructed or sold through this new bill are being sold to family members or friends of the homeowner, but experts are hopeful that once people become more comfortable with the new real estate option, it’ll grow in popularity outside of family and friend arrangements. 

This new bill could especially help retirees who have long since paid off their mortgages, but are having trouble existing on social security payments alone with the rising cost of living, as well as first-time homeowners having trouble getting a foothold in California’s housing market. AB1033 also helps people who have already built an ADU, but do not want to go through the headache of renting the unit and being a landlord. 

How SB9 impacts California homeowners

The SB9 bill was introduced in 2022 as the California HOME Act, allowing homeowners to split off and sell part of their backyard so that a new home (or duplex) can be built on underutilized yard space. When the law was passed, it was welcomed as innovative zoning reform and a way for Californians to gain access to smaller-scale housing options. 

The law effectively allows CA homeowners to unlock value trapped in backyard land — value that has been locked up for the last 80 to 100 years due to restrictive zoning. Now, homeowners can tap into that value with minimal impact on the value of their homes. 

The value of a yard 

Following the introduction of these bills, numerous enterprises have sprung up to assist homeowners in capitalizing on this substantial real estate boom. Many California homeowners may still be unaware of the true value of the land their main dwelling sits upon, and what their options may be for accessing the potential capital from maximizing usage of their yards through AB1033 and SB9. 

Historically, there have only been two ways for homeowners to tap into their built-up equity: either sell their homes and move, which is not an appealing option given today’s interest rates, or borrow against their home with a second mortgage, which is also an untenable solution given interest rates. Now, low-to-middle-income Californians — who may have owned their own homes for decades — have been able to build ADUs in their backyards or sell off pieces of their yards in a once-in-a-generation opportunity to maximize the money-making possibilities of their land.

These two bills allow people to use the equity built up in their land without sky-high interest rates or debt accumulation. By parting with just a fraction of one’s yard space, homeowners can tap into equity without high-interest mortgage debt and without having to move. 

While AB1033 is not yet implemented (and may not be implemented across the entire state of California), it’s still a step forward in this age of an unprecedented housing crisis and rising costs. SB9 is available across California and is already helping homeowners in the state leverage their real estate investments. 

Though parts of both bills may be cost-prohibitive for some — given the cost to build ADUs or subdivide land — both are opportunities for those with the funds to cover the expenses or those who have already built ADUs. In addition, it creates more housing options for those negatively affected by the California housing crisis

Governor Gavin Newsome said that California was in need of 3.5 million new homes by 2025. These two bills offer options for meeting that goal. 

California homeowners are sitting on near-record home equity, as the value of California homes has risen exponentially in the last decade. With these two new bills, however, California homeowners now have a compelling alternative to accessing that equity and riding this wave of rising housing prices and interest rates. 

By: Matt Lucido from Yardsworth

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