Which SB 9 Option is Best for You? Part 2

July 27, 2022

Part 2: How to Decide

In Part 1 of this article, we learned about the two provisions of Senate Bill 9 (lot split and two-unit development), as well as ADUs.

In Part 2, we'll guide you through the decision-making process to help you determine the best SB 9 development option for your property and needs.

We've broken the considerations up into three categories: project feasibility, desired outcome, and personal control over the decision-making process.

Feasibility considerations

The first step to planning your SB 9 project is evaluating your property's eligibility and development potential. The characteristics of your property and your jurisdiction's zoning requirements will help determine what, where, and how much you can build with SB 9.

This flowchart can help you get started:

Eligibility

First, you’ll want to make sure your property is eligible for Senate Bill 9. You can do this by searching your address in Homestead's property search tool. If you live in the City of Los Angeles, search address or AIN on ZIMAS for a free SB 9 Eligibility Checklist.

We recommend read this article on evaluating your property’s SB 9 potential for more in-depth information.

If you'd like a professional opinion, commission a Feasibility Study from Homestead.

Additional considerations

There are additional feasibility factors to consider beyond the property’s eligibility.

Is your lot 2,400 square feet or larger? Because lots must be split roughly in half and the minimum lot size is 1,200 square feet, lots under 2,400 square feet aren't eligible for lot splits. If your lot is too small to split, you could use SB 9 to build a second unit or ADU (if there’s room).

Could you split your property in half without running into a pool, house, garage, or other structure you wouldn’t want to demolish? If not, the two-unit provision (with no lot split) may be the best choice.

If you’re considering demolishing a house, it can’t be a rental (or previously rented within the last three years). Keep in mind that filling a pool or demolishing structures adds additional expense to your project, and the costs can be high depending on the scope of the demolition.

You'll also need to consider who will live in the resulting unit(s) or lot. State law requires 3-year owner occupancy for lot splits, enforced with a legally binding affidavit. If you don't plan to live on the property yourself, a two-unit development with no lot split is the option for you.

Be aware that some cities have owner occupancy requirements for two-unit development projects as well. If your jurisdiction has this requirement, you can only pursue SB 9 on your primary residence.

Desired outcome considerations

After determining your property’s feasibility, the next step is evaluating your goals. What are you hoping to achieve by utilizing SB 9?

Make money with SB 9

If your primary goal is to make money, would you rather have one large lump sum or an ongoing income stream?

If you want a lump sum, a lot split is your best bet. Sell the lot as-is or develop it first (developing the lot will result in a larger lump sum than selling it vacant, but development and permitting costs are higher, too).

If you don’t have $300k+ to develop the new lot, you can either sell it vacant, secure financing to develop it yourself (and keep the full profit), or partner with Homestead for zero-down financing (and keep 80% of the profit).

If you’d rather have a reliable ongoing income source, the two-unit provision is likely your best option. Build a second unit on your property (and up to two ADUs if you like) to rent out to tenants. Keep in mind that SB 9 units can only be used as long-term rentals with lease terms of 30 days or longer.

You could split pursue a lot split as well, but be aware that you’ll need to pay property taxes for both parcels if you own both. And Prop 13 only applies to the original lot; the newly created lot resets to the current property tax rate.

Build equity with SB 9

When your main concern is building equity in your property, a two-unit development is right for you. Splitting your lot will decrease your property value, while building a second unit on your parcel increases it.

If you keep your lot intact, adding a second unit won’t jeopardize your Prop 13 status. If you split your lot, one lot can keep the Prop 13 rate, while tax evaluation will be reset for the second lot.

Use SB 9 to build a home for family

Maybe you want to pursue SB 9 to build a home for your parents, adult children, or other relatives. If that’s the case, is helping the family member(s) build equity a concern?

If it is, you should split your lot and build one or more units on the new lot. That way, you can transfer ownership of the property over to the relative, who can then build equity.

If equity is not a concern, it would be simpler to pursue the two-unit provision of SB 9 without splitting your lot.

Personal control considerations

Do you want to decide what the new house looks like and who will live there?

If so, building a second unit with no lot split is probably the best choice.
That way, you can pick the style of the house and rent it out to whomever you choose.

You could split your lot, but consider this: when you sell a vacant lot, you’re giving up control over aesthetics and neighbors.

On the other hand, you could split your lot and develop it yourself before selling it. This would allow you to have control over the design of the house, and you could even pick the initial buyers! But if the buyers choose to sell or rent the house down the line, you won’t have any say over who your next-door neighbors are.

Of course, most people don’t get to pick their neighbors. But with SB 9, depending on the size of the lots and orientation of the houses, your neighbors might be pretty close.

You also could split and develop the other lot without selling it, and rent it out to friends, family, or other tenants. But as we mentioned before, you’ll need to pay property taxes on both lots, and the new lot will be taxed at the current rate (regardless of the original property’s Prop 13 status).

Conclusion

Senate Bill 9 has tremendous potential to help property owners build equity while adding new residential units to the state's housing stock. Every new unit added helps to alleviate California's affordable housing crisis.

There’s a lot to consider when it comes to pursuing SB 9 development, and deciding which provision(s) to utilize is just the beginning. If you’d like professional guidance, commission a Feasibility Study from Homestead. We also offer Lot Split services and Zero-Down Financing in certain areas.

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1423 Stanford Dr

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