Collins: Building ADUs in Santa Clara County

Since 2016, several significant pieces of legislation have passed in California, removing regulatory barriers that created obstacles to building accessory dwelling units, commonly known as ADUs. As a result, permits for ADUs have increased more than tenfold from 1,269 in 2016 to 14,702 in 2019.

With the popularity of ADUs on the rise, I want to highlight the journey of two homeowners in building their own ADUs and explore the lessons they learned along the way.

A homeowner in Gilroy named Juanita shared her journey with me. Juanita decided to build an ADU on her property to create a residence for her sister. She conducted her own research, seeking out a reputable company that had experience building ADUs locally. Juanita set aside a budget of $255,000, funding the project from her savings and retirement fund, and found a builder to handle all details from start to finish.

Based on Juanita’s budget, the builder designed a beautiful 850-square-foot, one-bedroom, one-bath unit. From start to finish, the project took six months to complete. Overall, she said Gilroy was very easy to work with. However, there were a couple of curveballs along the way, the biggest of which was a requirement that the ADU have solar panels. Fortunately, Juanita was able to find a company that installed the solar panels for free in exchange for a portion of the extra energy generated.

Tragically, during the construction period, Juanita’s sister fell ill and passed away. Juanita still forged ahead to complete the ADU and ultimately was able to rent out her new unit to a nurse that works nearby. They have since become great friends.

Another homeowner named Gary from Morgan Hill also shared his journey of building an ADU on his property. He had two objectives for his build: have a landing place for his boys if they ever needed one, and his long-term motivation to build an ADU to provide a consistent cash flow as a rental in his retirement. He first met with an architect about a year and a half ago. The firm designed a two-story ADU, but when Gary took those plans to a custom home builder, he learned it was not going to be economically feasible.

From November 2020 when the plans were originally drafted to last April when the project was planned to commence, Gary’s lumber estimates alone jumped from $47,000 to $78,000. So he evaluated his goals and decided to start all over.

He contacted three different builders that specialize in ADUs and received bids from $400,000 to $600,000. The new design was a 990-square-foot, single-story home that blended into the existing property better than the original two-story design. Gary hopes the two-bedroom ADU will provide a rental income of $2,500 per month to meet his objectives.

If you are thinking about building an ADU, there are several things to consider. The first consideration is whether you want to build a detached or attached ADU. Both of the examples above were detached designs. Next, you have to consider if not only is your lot large enough, but is it laid out in such a way that building an ADU would even be feasible.

As I mentioned earlier, many of the regulatory barriers have been removed over the last several years, but financing remains a challenge. If you don’t have the cash available to construct your ADU, financing opinions are limited. Since an ADU is classified as an “accessory” unit to the main house, it is difficult to get a standalone loan that would use the ADU as collateral. A more common approach to secure funding is to take a Home Equity Line of Credit that leverages the equity in the primary residence.

Choosing a construction company that specializes in ADU construction is highly recommended. Traditional “stick built” and “modular prefab” panel construction are the two most popular construction styles. Gary first started with a custom home builder and quickly learned that using a specialist streamlines the process.

There are also additional considerations, such as finishing touches. Building an ADU does not follow the same process as building a small house. In Juanita’s case, the construction company built her a closet per her request, but nothing more. The “closet” was a box; there was no organizer or clothes rod. Be prepared for cost overruns and extended timelines due to labor, supply chain and permit issues.

If you are considering building an ADU, the Santa Clara County Association of Realtors has built out a great ADU resource page. San Jose also has several pre-approved ADU designs from multiple vendors that will save you both time and money when constructing an ADU.

San José Spotlight columnist Neil Collins is CEO of the Santa Clara County Association of Realtors, a trade association representing more than 6,000 real estate professionals in Santa Clara County and surrounding areas. His column appears every fourth Thursday of the month. Contact Neil at [email protected] or follow @neilvcollins on Twitter.