ADU builder red flags, and what to do when a company fails

The biggest ADU builder red flags

ADU projects that go badly tend to share a pattern: the homeowner paid far more than the work was worth at the time, and the company failed before catching up. California law is built to stop that, but only if you hold the builder to it. If you're still comparing firms, read our guides on how to compare ADU companies and how to hire an ADU contractor first. This page is the checklist of what should make you stop.

Red flags before you sign

License problems

An ADU is built by a B general building contractor, or by a C-47 contractor if it's a manufactured home built off site, according to the state license board's ADU fact sheet. A specialty contractor such as an electrician or plumber can't generally manage the whole build. The board also warns that a license number on a business card, bid or contract doesn't prove the license is valid. Watch for:

• No license number in the company's ads or on its website.
• A license that's expired, suspended, or in a different company's name than the one on the contract.
• A salesperson who can't show a Home Improvement Salesperson registration card.
• No certificate of insurance. Workers' comp is required if the contractor has employees, and the contract has to disclose the company's insurance.
• A bond history showing canceled bonds. Nonna Homes' license was suspended after its bond was canceled.

You can check a contractor's license here or on the state's site; the record shows classification, bond and workers' comp history. Every builder in our list of verified ADU builders in San Diego is matched to an active B license with a bond on file.

Bids and references that don't add up

The same board page recommends at least three written bids on the same plans and scope, and warns that a bid far below the others can mean a mistake, missing work or corner-cutting. Vague estimates and “cash deals” are warning signs the board's ADU fact sheet singles out.

References are easy to fake; finished buildings aren't. Ask for the addresses of ADUs the company has completed in your city. In the City of San Diego, the city's Permit Finder lets you search permits by address, so you can see whether those jobs were permitted and finished. A builder who can't name any is a red flag on its own.

Read the exclusions as closely as the price. The board's ADU fact sheet tells owners to confirm who is handling underground utilities for plumbing and electrical, a common gap between bids. A low number that leaves out trenching, the sewer connection or city fees isn't a low number. For what those items typically cost, see what an ADU costs in San Diego.

Contract gaps and pressure to sign

An ADU is a home improvement project under state law, so it needs a written home improvement contract. The fact sheet says it should include the scope of work, timeline, payment schedule, materials and finishes, license number and your cancellation rights, and that verbal promises offer little protection. You have three days to cancel most home improvement contracts by written notice, or five days if you're 65 or older. A builder who pushes you to sign on the spot, or to waive that window, is telling you something. Our ADU contract checklist covers every clause to look for.

ADU deposit rules

This is the rule most failed ADU companies broke. California's home improvement law caps the down payment at $1,000 or 10% of the contract price, whichever is less, and bars a contractor from asking for or accepting payments that get ahead of the work. On any ADU, 10% is far more than $1,000, so the cap is effectively $1,000. On a $300,000 ADU, 10% would be $30,000; the legal limit is still $1,000. Breaking either rule is a misdemeanor.

The only exception is a contractor with a blanket performance and payment bond on file with the board, which the board calls rare. If a builder says they're exempt, ask for proof. On plans and permits, the board's advice is to ask for an accounting or call the architect or engineer to confirm what they were paid, check permit costs with the city, and not pay a contractor for plans unless you know they've paid for them. Its sample schedule spreads payments over 11 milestones, with the last 5% held until the final inspection and keys.

Common ADU scams

Builder-arranged financing that pays out early

This is the pattern behind San Diego's biggest ADU collapse. Nearly 100 county homeowners sued Chula Vista's Multitaskr, and NBC 7 reported that construction loans of about $15 million in total were taken out in the homeowners' names, with the company handling financing in-house. In most cases work never started, yet owners were making loan payments; one was paying about $4,000 a month for an ADU that didn't exist. The state later revoked the company's license. Pick your own lender, and make sure loan draws are released against completed, inspected work. Our ADU financing guide covers the loan types.

“Be your own owner-builder and save”

The license board warns about “consultants” or unlicensed individuals who talk homeowners into becoming owner-builders, adding that they're usually the ones who profit. As an owner-builder you're responsible for the work, the inspections and paying everyone. The City of San Diego warns owners they “may be held liable and subject to serious financial risk” for injuries to uninsured workers.

Unlicensed “handyman” ADUs

Since 2025, unlicensed workers can take jobs up to $1,000, but that exemption doesn't cover any work that needs a building permit or any job where they employ others. Every ADU needs a permit, so no part of building one fits the exemption.

“Pay now to lock in the price”

Requests to prepay for lumber, windows or a factory slot “before prices go up” are the most common way payments get ahead of the work. The deposit cap has no exception for special-order materials. If materials really are delivered to your site, paying for them is allowed; paying for materials that sit in the builder's name somewhere else isn't protection at all.

Prepaid units that never arrive

Prefab and tiny-home sellers carry the same risk. When Anchored Tiny Homes in Fair Oaks shut down in August 2024, its former chief operating officer said about 450 customers were left stranded; one teacher had paid $28,000 toward an ADU. If a factory-built ADU needs payments before delivery, see prefab ADUs in California for how those contracts work.

Warning signs during construction

Trouble usually shows months before a company closes. In the Nonna Homes case, NBC Bay Area reported that customers had paid large sums up front for little or no work, and subcontractors said they hadn't been paid for materials and labor. Watch for:

• Payment requests ahead of the schedule, often “to lock in materials” or cover a supplier.
• Crews that stop showing up and inspections that stop being booked.
• Preliminary notices from subcontractors followed by calls saying they haven't been paid. The board advises collecting conditional and unconditional lien releases with each payment.
• Change orders that aren't written down. Get every change in writing with its price.
• Repeated failed inspections on basic items. See our ADU inspection checklist for what each stage should look like.

If your ADU company went out of business

Act quickly; deadlines on bonds, liens and permits start running. These steps draw on the license board's consumer guidance:

1. Stop paying. Don't send another progress payment until you know where the project stands.
2. Document everything. The contract, change orders, every payment and receipt, photos of the site and the inspection record.
3. Check the license record. Note the license status and the bonding company listed in the bond history for the date you signed.
4. File a bond claim with the surety. The board doesn't process bond claims; you file directly with the bonding company, within its time limits. The bond is $25,000 and is shared among all claimants, so with many homeowners it may pay little.
5. File a complaint with the license board. The board can discipline the license and offers arbitration (mandatory for claims of $25,000 or less, voluntary up to $50,000), but says it can't guarantee you'll get money back. If a contractor ignores an arbitration award or bond payout, the board can suspend the license. For larger losses, it points owners to the courts.
6. Deal with the loan. If a lender paid the builder, contact it right away. NBC 7 reported some lenders worked with Multitaskr customers to cancel debts, and that complaints about lenders go to the state Department of Financial Protection and Innovation.
7. Protect against liens. Contact every subcontractor and supplier who sent you a preliminary notice and ask what they're owed before you pay a new builder.
8. Protect the permit. Ask the city about an extension before the 180-day inactivity clock runs out, and get a new licensed contractor onto the job.

For more on these collapses, see the “When ADU companies fail” section of our guide to hiring an ADU contractor. For liens, see mechanics liens in California.

Common questions