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RED OAK BLOG

The shortage of places to rent in the East Bay area is not news to anybody who’s lived here for long — while buying is also an obvious challenge, the lack of affordable rental housing stock in particular is increasing commute time and making it difficult for renters living on service-worker income to find housing.

That’s one reason why the state of California relaxed its laws regarding accessory dwelling units (ADUs) earlier this year, easing parking and utility regulations and restrictions for where and how homeowners can build these units.

But homeowners should realize that despite less stringent rules, the ADU world is far from a free-for-all. If you live in the San Francisco East Bay area and you have (or want to build) an ADU to rent out and make some extra cash — or provide an extra “bedroom” of sorts for your family — then you need to know what’s likely (and unlikely) to get you into trouble.

‘Legal’ and ‘illegal’ ADUs

With the right permits, a property owner can add a wide range of dwelling units on his or her land, and they’ll all be perfectly compliant with the law — until that property owner tries to rent the unit out.

That’s the real difference between a “legal” and “illegal” ADU, according to experts: How it’s being used and how the owner is being paid (if at all) for its use.

“If someone builds a new property, the city will come in and certify the number of lawful residential units within that structure,” explained local attorney Steven Williams. “Let’s say it’s a four-residential-unit building. The certificate of occupancy will specify exactly that — four dwellings.”

So if you’re adding an ADU to your property, which is likely certified for single-family residential occupancy, then there are legal implications for renting that unit out to another household or family. Suddenly, your single-family property is hosting two families or households.

“That second space — while it may be a separate structure and may have all appearances of a separate unit — is an extra bedroom or room associated with the home, not a separate dwelling,” Williams noted.

So how do you rent out your ADU?

If you’ve got an ADU that you’re hoping to leverage for some additional monthly cash, all is not lost. There are ways to house humans in your ADU and get paid for doing so, even if it’s not certified as its own separate dwelling. Here are

1. Be aware that although it’s probably an attractive option, Airbnb or other vacation rental platforms could get you into trouble. In Berkeley, for example, using an ADU as a vacation rental space is strictly prohibited — the city wanted to keep those units open to residents instead of visitors — but for now, it’s still OK to list your ADU on Airbnb in Oakland.

2. Whether or not your ADU has its own meters for water and utilities, as well as private kitchen and bath space, can influence how you’re legally allowed to rent it, Williams noted.

“Usually dwelling units that are lawful have separate meters,” he said. “If they don’t, that’s usually an indication that it’s some illegal use. When you have a shared arrangement like that, it gets really tricky; there are some regulations under state law that specify how to allocate a share, and it has to be in writing, approved in the rental agreements — and Oakland has some laws to the contrary that utilities cannot be shared.”

On the other hand, installing a kitchen with a stove in an ADU to make it a “true mother-in-law” unit needs to be done with permits, so depending on what your municipality’s specific laws say, you might or might not want to go that route.

“A lot of times those in-law units are permitted to have a bathroom, a sink or a wet bar,” noted Williams. “You still need to pull permits for installing plumbing in a bathroom, but the city may grant that more easily or it may already be part of that in-law unit.”

3. If you as the homeowner live in the unit that you plan to rent out — whether that’s the main part of the house or the one-bedroom dwelling outside — and you’ve lived there for at least two years, then your property is exempt from rent control regulations. “The owner can set the rent and increase the rent in any amounts under law,” explained Williams. A pending legal case in Southern California may change that, but “assuming that that argument is not made or not successful, technically a landlord in that situation could set the rent and raise it any amounts that they want, and it doesn’t have to be subject to the rent ordinance,” he said.

But if you don’t live there or haven’t lived there for two continuous years, you still need to follow the minimal increases under the rental ordinance, he noted.

And if the agreement with your renters goes south and you live in the unit, you also have more options when it comes to eviction, he added. “Ideally the landlord is also living in the unit, because if that’s the case and things end up not working out, if the landlord lives at the property too and it contains three or fewer units, the landlord could potentially evict the tenants without complying with the just cause for eviction clause,” Williams said.

4. Renting out an ADU illegally — without a certificate of occupancy — is risky. If a tenant were to sue you after occupying the ADU for a few months, for example, “it could be found that the rental agreement is void and the tenant could demand all the rent back,” Williams noted.

5. That said, there are ways you can mitigate that risk as a homeowner — and things you should keep in mind as a legal landlord occupying the same property as your tenants, too. Most homeowners have owner-occupant homeowners’ insurance on their homes, and they might want to consider changing that policy to a hybrid policy for an owner-occupied rental property.

“Once they rent, they’re landlords,” noted Williams. “It’s technically a landlord-tenant situation, and you should have coverage for that, especially if you’re renting an illegal unit.” Those policies can mitigate or minimize legal claims against homeowners if they ever do get sued. “If they have the right policy and certain claims are made by the tenant, the insurance company will defend those claims as well as pay any liability for the tenants,” he added.

6. If you are going to rent an ADU illegally despite knowing the risks, then disclose it to your tenant, Williams advises.

“Then the tenant can’t say, ‘I didn’t know it was an illegal unit,'” he explained. “It works both ways — the tenant could use that against the landlord — but what the tenant can’t do is claim that the landlord misled them or fraudulently misrepresented the livability of the unit. That removes at least one claim that I often see tenants make — it gets rid of the misrepresentation and fraud claims.”

7. It’s always smart to conduct some kind of tenant screening. “The first defense to an adverse tenant-landlord relationship is the application process and vetting tenants — following up with their employers and credit report, prior landlords, seeing if these tenants, if you can, have been involved with prior litigation,” suggested Williams. “Sometimes tenants are career tenants and move in with the sole purpose of extorting the landlord. Being diligent at the very beginning is one of the best things a landlord can do.”

That also means being wary of tenants who seem too good to be true. “I’ve seen so many times the landlord is deceived by someone who offered to pay cash and they didn’t even bother to follow up with some of the basics — employment and references and credit screenings — because they thought this person represented that they were very wealthy and have all this money and are paying cash upfront,” he said. “They didn’t do their due diligence, and that may come back to bite them.”

8. Finally, if you’re renting an ADU and you know it’s not entirely legal, it’d be smart to be as “good” a landlord as possible, Williams noted.

“Usually these adverse situations arise when there’s some dispute between the landlord and tenant — maybe the tenant requests a repair that the landlord hasn’t done, or some rift arises,” he noted. “Treat the unit as if it’s a lawful unit; make sure you’re on top of the repairs, and keep the tenant happy. Make sure they have a habitable premises and that you respond to complaints. Give only rent increases that are permitted under the law.”

In other words: “Don’t do anything that would cause an adverse reaction from the tenant.”