What if you could build a small house and pay nothing for land? Of course you need to have real cash, as “paying nothing” means that you simply don’t borrow from the bank, therefore don’t pay any interest rate and don’t buy land. Just imagine if you have $150 -200K in cash, you can really build an ADU on someone else’s land without purchasing its single square feet.
There is almost no available and useful land left in the Bay Area. And the price of the plot of undeveloped land will start at $300K. In Los Altos or Palo Alto any property with the shed or house-to-be-demolished will start at $2.5M. In San Jose near good schools you would pay at least $1.5M for a decent size old house with 6000 sq.ft. of land. Besides, not everyone, not even working in high tech, can afford to pay a mortgage of that amount. Especially with the current interest rate.
But there is a possibility to make an agreement with a relative or a friend who owns a house in Bay Area to allow you to use their backyard and build a small house , organize separate entry and live there paying only utility bills. Does that sound like a crazy idea? I don’t think so.
Here are some of the legal instruments that would allow a person to build an ADU on someone else’s property and make an agreement with the property owner to use that land for a fee or for free for a number of years, or possibly to hold a promissory note that would allow them to return at least their investment made to build the ADU:
- Lease agreement: A lease agreement is a contract between a landlord and a tenant that outlines the terms of the rental property, including the rent amount, the length of the lease, and the rights and responsibilities of both parties. In the case of an ADU, the landlord would be the property owner and the tenant would be the person who builds the ADU. The lease agreement would need to specify that the tenant is allowed to build the ADU on the landlord’s property and that they will have the right to use it for a certain number of years. The lease agreement could also include a rent payment that the tenant would make to the landlord in exchange for the right to use the ADU.
- Ground lease agreement: A ground lease agreement is a type of lease agreement that gives the tenant the right to use the land for a certain number of years, but does not give them ownership of the land. In the case of an ADU, the ground lease agreement would need to specify that the tenant is allowed to build the ADU on the landlord’s property and that they will have the right to use it for a certain number of years. The ground lease agreement could also include a rent payment that the tenant would make to the landlord in exchange for the right to use the ADU.
- Promissory note: A promissory note is a written agreement between a borrower and a lender that outlines the terms of a loan. In the case of an ADU, the borrower would be the property owner and the lender is a person who is paying for an ADU construction. A promissory note would need to specify the amount of the loan, the interest rate, and the repayment terms. The promissory note could also include a clause that gives the lender the right to foreclose on the ADU if the borrower defaults on the loan.
- SB-9: Under SB-9 the property owner can split the existing lot onto 2 separate parcels with a minimum size of 3000 sq.ft. and the maximum ratio 60/40. Newly created property then can be sold and you will be allowed to build an ADU.
The terms of the promissory note would be negotiated between the two parties and would depend on a variety of factors, such as the cost of construction, the creditworthiness of the borrower, and the risk involved in the project.
It is important to note that there are risks involved in either being the borrower or the lender in a promissory note. The borrower could default on the loan, which could result in financial loss for the lender. The lender could also lose money if the value of the ADU decreases or if the property owner is unable to repay the loan.
It is also important to note that the specific legal instruments that will be used will vary depending on the specific circumstances of the situation. It is always advisable to consult with an attorney before entering into any legal agreements.
When you are investing $150-200K to build an ADU on someone else’s property you may need to keep calm about property that may be sold without your consent. In this case, just calculate for yourself a number of years to spend in that ADU that would be sufficient to cover the cost of initial investment. For example: Rent of 500 sq.ft. ADU in Palo Alto would cost at least $3000/a month. If you invest in construction today for $160K, it will take just 53 month to recover its cost. But if the goal is to stay at least 10 years and the property owner sells the house along with your ADU, you would then be able to live for free a number of years and recover your investment, but also collect on a promissory note.
Here are some additional things to consider when entering into an agreement to build an ADU on someone else’s property:
- The cost of building the ADU: The cost of building an ADU can vary depending on the size and complexity of the unit. It is important to factor in the cost of construction when negotiating the terms of the agreement.
- The terms of the agreement: The terms of the agreement should be clearly defined and in writing. This will help to avoid any misunderstandings or disputes down the road.
- The risks involved: There are some risks involved in building an ADU on someone else’s property. For example, if the property owner sells the property, the new owner may not be willing to honor the terms of the agreement. It is important to be aware of these risks before entering into an agreement.
By carefully considering all of these factors, you can help to ensure that your agreement to build an ADU on someone else’s property is fair and beneficial to both parties involved.
This is just and idea, not the advice.
If you want to save bucks on your ADU construction, I can help. Let talk and discuss options.