Thanksgiving recipe

 

Sellers Market is Back On

 There has been a lot of news demonstrating the challenges of navigating this market between the banking system as well as interest rates. It can make it challenging to determine which way is up versus down and what the issues/concerns are. Here is what matters and what is defining our market:

Really Low Inventory

Low Rate of New Construction and Additional Volume

Buyer Demand is Persistent

Mortgage Forbearance Decreases Despite the End of Covid Assistance

This all adds up to a roaring sellers market once again. With that, we expect a repeat of multiple offers again and prices to increase. 

Are You Leaving Money on the Table?

With the combination of California's rent cap addendum laws and Covid rent surges, you very well could be leaving money on the table because you couldn't keep pace with the rent growth. 

I have a client who leased a property in the spring of 2019 for a fair market price of $4500/month. My client enjoys the income, but isn't dying to max out the rent. As a result, my client has increased the tenants' rent, but marginally every year. The problem now is that the rent at the subject property is at least 25-40% below market post Covid and marginal rent increases. Given that my client legally can't increase the tenants' rent anywhere close to market rent, what are the options in order to not be taking "a loss"?

According to California, the options are to remodel the property, remove the property from the market by not renting it, moving a family member in to the property, or selling the property. Sometimes the best solution is to sell the property and give yourself the opportunity to start over. 

This particular subject property has a fair market value of about $1,750,000. Whereas comparably valued properties generate closer to $10,000/month with no HOA, affording greater netting opportunity. This would more than double my client's income nearly overnight. Who wouldn't want to consider an overnight raise?

Proposition 19-Save on your property taxes

For many years, if you had lived in your home for many years and had a very low property tax base, you were disincentivized to move and pay significantly more in property taxes often by 10 fold. The only way you could keep your property taxes if you found a cooperating county and you purchased a home of equal or lesser value. Oftentimes that was very limiting. 

Enter Prop 19 which is the new and improved version. Here are the important notes of Proposition 19:

1. Statewide participation-you no longer need to be concerned about ensuring that your county or the county you're looking to move to, participates in this exchange.

2. If you are staying in California and over 55, you're allowed to exercise Proposition 19 up to three times.

3. The equation is as follows: (Purchase Price of New Home) - (Sale Price of Old Home). Apply the existing property tax rate to the net difference. This amount is added to your existing property taxes on your old home for the current rate that you would pay. 

For example, potential sellers are considering a change. Sale of their house for $10,000,000 and a purchase for $13,500,000. They are currently paying $57,000 in property taxes. The math is as follows:

$13,500,000-$10,000,000 = $3,500,000

$3,500,000 (.0115) = $40,250

$40,250 + $57,000 = $97,250 New Yearly Property Tax Rate on Home Purchased for $13,500,000

Property Tax Rate without Proposition 19 would have been $155,250 per year.

This works out to be a savings of $58,000. Proposition 19 has had a significant improvement on the mobility of long time property owners and have enabled more mobility. 

Los Angeles Mansion Tax and Side Effects

 The Documentary Transfer Tax (DTT) or Mansion Tax will make sales in Los Angeles County far more costly. The purpose is to combat the homelessness that Los Angeles is currently battling and they opted for these taxes through sales transactions as their solution. To see how costly this will be to buyers and sellers, take a look at the example below:

Orange County DTT Tax is $10,470,000 x .0011 = $11,517.

 Under current law, in addition to the statewide DTT of .0011%, the city of Los

Angeles previously had imposed a separate DTT of .0045%, for a total DTT

imposed when a deed is recorded of .0056% of the consideration for the

property transferred.

 DTT Tax in the city of Los Angeles $10,470,000 x .0056 = $58,632

 Under the recently approved ULA, effective on transactions closing after April

1, 2023, in addition to the statewide DTT of .0011% and the previously

imposed .0045%, the voters have approved an additional 5.5% tax for

properties that sell over $10 Million, for a DTT of 6.06%.

 DTT Tax in the city of Los Angeles as of April 1, 2023, $10,470,000 x .0606 =

$634,482.

This would mean that if you are paying for the transfer tax on a house for $10,470,000, you would be paying a one time tax of $634,482. This wouldn't go towards your property taxes. It's just the DTT. Not exactly a drop in the bucket. If people weren't already cautious when purchasing real estate, they certainly will be now. 

The side effects are expected to be fewer flippers in Los Angeles. In general, it could mean less activity for the Los Angeles market as a whole as people are more cautious or calculated when making transactions in Los Angeles. There is some expectation that these flippers could end up coming down to Orange County as well as additional buyers and more transactions. This means that the Orange County market is likely to be better protected or has better resistance to any stress than the Los Angeles market has. Translation, if you think we're coming into a correction, Orange County will be protected. If you don't expect a correction, Orange County has better opportunity for appreciation without the mansion tax. 

Value of a Buyer's Agent

 Real estate can sometimes function like a sports match with one team versus another. With that, you need someone who will keep your best interests in mind and to heart. 

Sometimes it can be about selecting the right property and the right neighborhood. Other times it can come up in the midst of negotiating. There are so many steps to both shopping for a home and purchasing a home that it's important to have a teammate in the process. 

Lastly, the experience of your buyer's agent can help you with what to expect through a transaction and help combat potential surprises and make for as smooth a transaction as possible. 

When will the day come that there is no available inventory under a million, beach side of the 405

My dad and I were recently chatting about the magic of inflation and time. He purchased an oceanfront property many years ago for under a million dollars. At this point, that feels like an impossibility even historically. However, it's real.

We were chatting about what the future is for upcoming generations of first time home buyers and what their potential future will look like. What's comical, but so real and what he and I specifically talked about was how much longer will buyers be able to find any property for under a million dollars beach side of the 405. Ironically, less than a week later, our office posted this on the office instagram account. 

The lowest sale over the course of the last year between Newport Beach, Laguna Beach, Eastside Costa Mesa, Corona del Mar, Newport Coast and Crystal Cove was a one bedroom condo that sold for $460,000. Using this math, assuming that the appreciation is linear, this property will have appreciated to a value over a million dollars in less than 15 years or year 2038. Assuming our growth is linear, it means that this condo would be worth more than $500,000 in less than 10 years. By the year 2038, you would not be able to purchase any property in these areas for less than 1 million dollars. I think so often, people can be concerned about catching the market at just the right time and people are often less focussed on the bigger picture which is overall wealth production.