California legislators are creating a Backyard Gold Rush.
California real estate has been making fortunes for hundreds of years. In fact, in just the past 20 years, the average California home value has increased over 775%, according to the St. Louis Fed, significantly outperforming the S&P 500. With the average single-family home value in major cities like San Diego and Los Angeles hitting $1.1mm, and $1.6mm in San Francisco (see Redfin), it’s no surprise homeowners across the state are sitting on record amounts of home equity – despite the Fed’s push to control prices with higher interest rates. California homeowners are richer than ever, and should be feeling flush; there’s just one problem – they’re all asking themselves:
What good is home equity if I can’t sell my house (or don’t want to), and can’t get (or don’t want) a home equity loan at today’s crazy-high interest rates?
Fortunately, California’s legislators have created a new way to access home equity that has the potential to help hundreds of thousands of homeowners across the state: You can now subdivide your lot, and sell a piece of your backyard. It’s certainly new and novel, and it might sound a bit out there, but it is a way to tap $100,000+ of home equity without debt and without selling your home. And it might just be what Californians need in today’s interest rate environment. So how does it work?
Subdividing your home’s lot and selling part of your yard – a look at California’s two backyard monetization laws, SB-9 and AB-1033.
California SB-9 (the “HOME Act”) went into effect on January 1st, 2022 and Governor Newsome signed AB-1033 into law on October 11th, 2023. Both laws allow homeowners to subdivide their lots and build (and sell) extra units, or even a portion of their land. They have the potential to unlock billions of dollars of value in CA. According to our analysis here at Yardsworth, this is a 750 billion dollar opportunity:
- Approximately 65,000 ADUs have been built to date in CA. Of course, each home’s value varies greatly depending on size, quality, and city/neighborhood (location, location, location!), but assuming $700,000 of potential sale value each, on average, AB1033 is potentially a $45.5 billion stimulus program for CA homeowners.
- SB9 can be even more impactful – Berkeley’s Terner Center estimates 700,000 homes in California are SB9 eligible – assuming a $1mm average value (SB9 is more valuable on a per-deal basis given lot dynamics and build potential), and SB-9 represents a $700bn+ stimulus program.
- Together SB9 and AB1033 create a market for approximately $750 billion of backyard value — land value that had been locked up for 80-100 years due to restrictive zoning.
That all sounds good, but if you’re not an experienced real estate developer, or even better, an accomplished real estate lawyer, it’s hard to understand the differences between AB1033 and SB9. Which law creates more value for homeowners? Which one should you use to split your lot, and sell a piece of your backyard?
The pros and cons of SB-9 vs. AB-1033:
In comparing SB-9 and AB-1033, both laws share a common goal of allowing homeowners to subdivide their lots, build additional units, and sell a portion of their land while retaining their primary residence. However, both laws necessitate compliance with the Subdivision Map Act, a complex and expensive process that involves obtaining approval for tentative and final parcel maps.
SB-9 and AB-1033 diverge in several key aspects:
- Number of Units & Unit Type Flexibility: SB-9 emerges as the winner, permitting homeowners to subdivide their lots and construct up to two units on each parcel, totaling four units. In contrast, AB-1033 aligns with existing ADU laws, allowing a maximum of three units on a given lot.
- Unit Size: SB-9 mandates municipalities to allow at least 800 sq ft per unit, with the possibility of uncapped sizes. AB-1033 follows existing ADU laws, capping ADUs at 1,200 sq ft and 500 sq ft for a JADU.
- Statewide Implementation Consistency: SB-9 is a statewide mandate, ensuring uniform guidelines across municipalities, albeit with some leeway. AB-1033, more of a recommendation than a requirement, raises uncertainties regarding widespread implementation.
- Implementation Cost: SB-9 incurs costs of $50-75k for lot subdivision. AB-1033, even more expensive, shares the same costs for lot subdivision and requires additional expenses for legal counsel to establish and maintain a homeowners association (HOA).
- Property Valuation / Profit Potential: SB-9 allows the creation of R-1 single-family homes, considered the gold standard for home values. In contrast, AB-1033 transforms ADUs and single-family homes into condominium units, potentially devaluing the property.
- Existing ADU Ownership: AB-1033 is advantageous for existing ADU owners, offering a way to sell the ADU and unlock home equity. SB-9, while allowing lot subdivision with an existing ADU, may provide limited upside due to space constraints.
- Building an ADU: SB-9 provides flexibility, allowing homeowners to build first and then subdivide, subdivide first and then build, or even subdivide and sell the newly created land without construction. AB-1033 is only viable for those with existing ADUs, which can be costly to build before using AB-1033.
- Zoning Flexibility: SB-9 is restricted to single-family-zoned lots (e.g., R-1), while AB-1033 potentially offers more flexibility by allowing municipalities to consider other lot types (e.g., R2/R3), though its ultimate implementation is yet to be seen.
A land grab gold rush
Both AB-1033 and SB-9 offer distinct opportunities for California homeowners looking to subdivide their properties and monetize equity – and welcome relief in today’s high-interest-rate mortgage environment. As we’ve seen above though, while AB-1033 may be suitable for those who have already invested in ADUs or own multi-family-zoned properties, it comes with the complexities of HOA formation and significant potential property value considerations. In contrast, SB-9 provides the clearest path toward maximizing property value for homeowners with single-family properties at a lower cost, and with universal implementation across the state.
Ultimately, the choice between these two laws depends on your specific circumstances and objectives. Before making a decision, it is advisable to consult with legal and real estate professionals to ensure you choose the path that best aligns with your goals and resources. As the real estate landscape continues to evolve, AB-1033 and SB-9 represent promising options for Californians seeking to maximize the value of their properties while maintaining their current residences.
If you’re a California homeowner interested in selling part of your yard or simply want to find out what your yard’s worth, give us a call or visit us at www.yardsworth.com. We’re happy to help.
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