Last month saw four new legislative changes in the field of real estate. Two bills were enrolled, AB 1738 and AB 2817. AB 1738 goes into effect in 2025, and will require builders to install electric vehicle chargers in some types of buildings. This includes multi-family dwellings, hotels and motels, and some nonresidential parking facilities. AB 2817 establishes a rental aid grant program that will provide grants directly to homeless people as well as participating landlords. SB 1126 was passed in the Senate, requiring employers to set up a retirement program or CalSavers payroll deposit savings program by the end of 2025. There was an amendment to SB 897, which increases the maximum height of an ADU from 16 feet to 25 feet.
In addition, three bills were just enrolled first day of September, AB 2221, AB 2053, and SB 869. AB 2221 includes various changes to make ADUs easier to get approved. AB 2053 requires annual regional housing reports indicating progress on meeting housing needs. SB 869 requires at least 18 hours of training for managers and assistant managers of mobile home parks.
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The Biden administration recognizes that the best way out of the current housing crisis is to bolster supply through additional construction. In order to meet this goal, the new Housing Supply Action Plan was recently unveiled in a White House press release. The five-part plan is expected to solve the crisis within five years, and mostly addresses issues of financing.
The first part of the plan is aimed at directly assisting builders with increased resources and new programs. The plan also modifies federal grant prioritizations based on a new system of scoring for zoning and land use reform. Additional financing options will be provided for manufactured housing, ADUs, and smaller multifamily properties. In addition to new financing options, the plan expands existing Fannie Mae financing programs. The last part of the plan is unrelated to financing or construction; it prevents institutional investors from purchasing REO properties in favor of allowing them to be purchased by owners intending to occupy the property.
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With high interest rates, more and more buyers are beginning to realize they can no longer afford to buy, or would prefer to buy something less expensive. Sometimes this moment of realization hits them after they’ve already signed a purchase agreement, and now they want to back out. This is entirely legal, but does come with some potential costs.
When prices are increasing, breach of contract isn’t a huge deal, but can annoy sellers who have to delay their home’s sale. But when prices are decreasing, as is beginning to happen now, sellers have more to lose. Which is why they have a few different options to remedy the situation: they can enforce the purchase agreement, relist their property, or just withdraw the listing and wait for a better time. If the seller chooses to relist, they may be entitled to compensation from the buyer who breached contract. If the profit from the sale after relisting is less than what it would be given the original contract amount, the amount of the buyer’s deposit that would be returned to them is decreased by the amount of the seller’s losses. There may be cases in which there was an agreed-upon limit to this amount, in which case the agreed-upon limit is used, plus an interest rate of 10%.
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A certain element of the homebuying process that sometimes crops up, especially in competitive markets, is the homebuyer love letter. This isn’t actually a declaration of love, except possibly for the home they’re trying to buy. A love letter is simply a personalized note included with an offer in an attempt to connect to the seller on an emotional level. Sellers respond to this variously, and may simply ignore them if they’re receiving them constantly.
But the major issue with love letters isn’t the question of their effectiveness. The problem is why they have the ability to be effective. If a seller has a reaction to a love letter — whether positive or negative — and uses this in their decision of which offer to select, it means they’re biased based on some personal detail of the buyer. Most of the information a buyer would provide doesn’t have protected status, but if it does, the seller could be sued for discrimination. Of course, it’s very difficult to prove exactly why the seller accepted one offer over another, so this rarely actually happens even if the buyer suspects discrimination. But this is exactly why some states have banned love letters, or, in the case of Oregon, are trying to ban them.
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Accessory Dwelling Units (ADUs) have been contentious for a while, but SB 9 has passed recently, ostensibly making them easier to construct in California. Unfortunately, this hasn’t panned out as well as expected, as local governments aren’t entirely on board. They’re trying to sidestep the requirements by introducing zoning ordinances that effectively, but not explicitly, ban ADUs. Zoning restrictions have always been the largest obstacle to ADUs.
What clearly isn’t much of an obstacle is popular support. Particularly in California, major cities are seeing support of over 70%, even up to 80% in San Jose. But California isn’t the only state. Nationwide support is at 69%, with the remaining 31% split between opposing and indifferent. It’s no surprise that more renters than homeowners support it, since they’re more likely to be searching for housing. But both groups show strong support — 76% of renters and 66% of homeowners.
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Fannie Mae was sued back in 2016 under allegations of fair housing violations, and the organization decided to settle in February of this year. The settlement amount was $53 million. Fannie Mae had acquired a large number of properties in the wake of the subprime mortgage crisis, and thus became responsible for their maintenance until they were sold. But fair housing organizations started to notice a trend: only the ones in predominantly white neighborhoods were being adequately maintained.
The settlement agreement was the first to determine that foreclosed properties, like the ones Fannie Mae holds, are also subject to fair housing laws. This was not officially determined prior. Also, it’s possible that they were in worse conditions to begin with, but that doesn’t absolve Fannie Mae of their responsibilities. Their argument was that their intentions were not discriminatory. Perhaps they simply were not able to maintain the homes as well since they were in worse shape. But they were unable to reject the claim that regardless of their intentions, the impact was obvious. This is what led to Fannie Mae needing to settle.
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Under California’s Regional Housing Needs Allocation (RHNA) laws, each local government is required to work with the state government to establish what is called a housing element. The housing element identifies sites that can be redeveloped to meet regional housing needs, within an eight year timeframe. If the city can’t find a usable site under their current zoning laws, the zoning laws need to be modified. In Southern California, the housing element deadline was October 15, 2021. The deadline for Northern California is later this year.
Five cities — Bradbury, La Habra Heights, Laguna Hills, South Pasadena, and Vernon — failed to submit a housing element altogether prior to the deadline, and a sixth, Manhattan Beach, submitted a plan that indicated a site that could not be redeveloped in a reasonable timeframe. The site indicated was the Manhattan Country Club, which was purchased in 2017 and the City of Manhattan Beach cannot guarantee its availability by 2029. Without the 149 units provided by this redevelopment, Manhattan Beach fails to meet its regional housing needs. In response, the nonprofit organization Californians for Homeownership has sued all six of these cities.
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A California law allowing duplexes to be built on lots zoned for single-family residences, SB 9, passed in 2021. However, the law doesn’t have much in the way of enforcement. Cities are finding it relatively easy to avoid this with local ordinances that make it effectively impossible, since they can’t legally ban it. The same sort of thing happened with the struggles with building ADUs, which actually became legal nationwide in 1982, but weren’t feasible in most states prior to 2016.
One example is the town of Woodside claiming that the entire town is a mountain lion habitat, and is therefore excluded from the requirement because it’s a habitat for a protected species. Once this reached the news, Attorney General Rob Bonta got on their case and forced them to reverse the decision. All the AG’s office needs is proof that municipalities are attempting to skirt the requirement, and then they can take action. Without an enforcement agency, though, they’re reliant on the spread of information through media, including social media.
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Property management is a practical field to enter if you are worried about economic stability. It’s incredibly recession proof, as housing is a necessity and therefore people will be renting properties regardless of the economic conditions. But you can’t just decide on a whim to be a property manager — it has legal requirements and best practices.
In the vast majority of cases, being a property manager requires a broker’s license. There are certain cases in which it doesn’t, but they would not apply for rental properties, which are the bulk of managed properties. If you don’t want to get a broker’s license, though, you can consider managing commercial properties, but there would still be many restrictions.
First Tuesday, a real estate journal, has assembled a Property Management 101 infographic, complete with links to articles and PDFs for additional explication. This contains more specific details about the legal requirements, other applicable laws, and market information. You can find the infographic here: https://journal.firsttuesday.us/property-management-101/82682/
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Among the California State bills that the Assembly is voting on this week are four bills related to real estate. These are AB 2050, AB 2469, AB 2710, and AB 2053. Most of these bills are aimed at protecting tenant rights, while AB 2053 is designed to create revenue-neutral affordable housing. The voting will take place on April 19th and 20th.
AB 2050 modifies the Ellis Act, which allows landlords to evict tenants in order to stop renting the property altogether. AB 2050 would require a landlord to rent out their property for at least 5 years before invoking the Ellis Act. AB 2469 establishes a mandatory statewide rental registry, which prohibits landlords from raising rents or evicting tenants without submitting information to the registry each time the lease is initiated, altered, or terminated. AB 2710 establishes Right of First Offer legislation, requiring owners of currently tenant-occupied property to offer sale to certain qualified entities, including the tenants, before accepting an offer. The seller does not need to accept an offer from qualified entities, but must give them ten days to match any accepted offer. AB 2053 establishes the California Housing Authority, which is designed to build and acquire mixed-use affordable rental housing, which would be publicly owned.
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Many people are still delinquent on rent payments as a result of the recent recession. Some relief came in the form of emergency rental assistance (ERA), which also required landlords take additional steps before being able to evict for nonpayment. The additional protections were set to expire on March 31st, but there was a last minute change to the law.
Under the new regulations, while the protection will still only apply to delinquencies on rent payments owed before March 31st, it will now continue to apply to those delinquencies through July 30th if the ERA application is still being processed. Tenants will still owe rent for April and subsequent months, even if their ERA application for earlier payments is still being processed.
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In response to the pandemic, California launched a program to help a segment of the homeless population acquire temporary housing via hotel conversions. This initial project, called Project Roomkey, applied only to those 65 or older or who had underlying conditions, and would only be active during the pandemic. Seeing its success, California has launched a new, more expansive project, which they’ve called Project Homekey.
Project Homekey seeks to expand conversions to include several different types of properties, not just hotels. In addition, the project is designed to create both temporary and permanent homeless housing. This is made possible by the recent changes to zoning and land use laws, and currently has an $846 million acquisition budget. Unfortunately, managing such large projects requires specialized knowledge that isn’t in large supply. In addition, there has been pushback from local opposition that doesn’t want to see low-density housing converted into high-density homeless housing.
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The Homeowner’s Exemption is a method of property tax savings that has been in place since 1974. It allows any homeowner who has owned their home since January 1st of the year to apply a reduction of up to $7000 to their home’s assessed value for property tax purposes. The full $7000 reduction will only be applied if the homeowner applies for the Homeowner’s Exemption between January 1st and February 15th, otherwise the amount will be prorated. In addition, parent-to-child transfer benefits from Prop 19 also require the child to apply for a Homeowner’s Exemption within 12 months of the transfer.
Despite the fact that the majority of homeowners qualify for the Homeowner’s Exemption, almost a third of homeowners in Los Angeles County don’t apply for it. This accounts for about $30 million in unclaimed exemptions each year. If you are in LA county, in order to apply, fill out the application at www.assessor.lacounty.gov/hox. It can be printed and mailed to the LA County Assessor’s Office, or emailed to HOX@assessor.lacounty.gov. Currently, there is no fully online application, but there are plans for one soon.
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With government support having ended, this may prompt people to think the economy has stabilized and recovery is imminent. But this is just the precursor to a stable market. The market needs time to adapt under normal conditions, and probably won’t become stable again until 2024. The main factor in overall recovery is the job market, which has yet to fully recover, and a stable real estate market requires construction to catch up to demand.
Some policies remain from government actions during the recession, though. Three laws — SB 10, AB 345, and AB 571 — will help out in construction efforts. SB 10 allows more areas to be zoned for up to 10 units, AB 345 allows ADUs to be sold separately from the primary residence, and AB 571 prohibits impact fees on affordable housing. Two more laws, SB 263 and AB 948, reformed bias training for real estate professionals. This legislation should have lasting impact in making the recovery more comfortable.
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Interest rates are by no means high right now, but they’ve been steadily rising and can no longer be considered low. Prices have also been high, but they’re predicted to drop dramatically, for a couple of reasons. First, inventory is opening up as foreclosure moratoriums and forbearance programs are ending. The other reason is that the Fed has been reducing their mortgage-backed bond (MBB) purchases. Tapering back MBB purchases will both lower prices and increase interest rates.
The Fed had previously announced plans to keep the Federal Funds Rate at its current value of zero through 2023. However, they’ve now decided that 2022 the year to begin returning to normalcy. With scaled back MBB purchases, the zero benchmark rate is the only remaining factor in economic stability that isn’t transitory. Increasing the benchmark rate will further increase interest rates, though, so 2022 is going to be a year of higher interest rates, but lower home prices.
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While it’s now legal to build multiple units on land previously zoned for single-family residences (SFRs), the cost of construction is still high. The costs of acquiring a site, making sure to conform to environmental codes, and building from scratch definitely add up. Builders aren’t able to work out a positive return on investment for new constructions.
They can cut a lot of the costs by using existing structures and renovating them. But, many of these structures are zoned for commercial use only. There are certainly zones that can be commercial or residential as needed, but not nearly enough to satisfy buyer demand. New zoning laws in the Los Angeles metro area and in the San Francisco Bay Area have facilitated conversions from commercial to residential, but even that isn’t enough. And in areas without these new policies, such as the San Diego and Sacramento metro areas, conversion rates are dramatically lower.
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The most commonly used benchmark rate to determine mortgage rates has long been the LIBOR, or London Inter-Bank Offered Rate. However, this has some issues. The LIBOR is not tied to actual transactions. Because of this, bankers that have influence on the LIBOR can simply manipulate the rate to their benefit. This occurred in the 2008 recession, where the LIBOR was kept artificially low to encourage people to borrow money. The financial world has finally decided LIBOR won’t cut it as a benchmark, and it’s being phased out.
Financial institutions won’t be forced to stop using the LIBOR, but if they do use it, they will be required to include at least one rate that isn’t LIBOR-based as a backup. They will have until the end of 2021 to comply. The front runner for a backup rate in the US is the SOFR, or Secured Overnight Financing Rate. This rate is administered by the New York Fed. It’s not subject to the same manipulation that LIBOR is because it does take into account actual completed transactions. Fannie Mae and Freddie Mac already swapped from LIBOR to SOFR in 2020.
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Rent control is highly contentious. Certainly many of its opponents are landlords who stand to lose the most financially. But even among those who agree that something needs to be done to help tenants, rent control isn’t a popular answer, since it seems to do more harm than good in practice by encouraging landlords to exploit legal loopholes to evict tenants — or even just evict them illegally, which is rarely contested in court.
It’s no surprise, then, that the vote to enact rent control in Santa Ana was hotly debated. The final vote was 4-3 in favor, but even the four council members that approved it all admitted it isn’t an optimal solution. The saving grace is that the measure also includes tenant protections. The opposition’s primary contention was that the measures aren’t too different from the existing statewide regulations, making it a largely redundant venture whose implementation and enforcement would be a waste of city and taxpayer money.
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Almost 30 bills affecting real estate law either are being considered or have passed over the the past year. Among them, a few important ones passed just in the last couple months. We’ve mentioned SB 10 before; that’s the one that allows some areas to be rezoned for up to 10 units. Other important bills passed in September and October are AB 948, SB 263, and AB 345.
AB 948 and SB 263 are similar, but aimed at different groups. Both require anti-bias training for real estate professionals. The difference is that AB 948 applies to appraisers, while SB 263 applies to agents and agent applicants. AB 948 also makes discrimination by appraisers by protected groups illegal, and SB 263 establishes 45-hour long renewal courses. SB 263 goes into effect January 2023. AB 345 makes accessory dwelling units (ADUs) more similar to individual properties. It allows them to be sold separately from the primary residence.
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Gov. Gavin Newsom recently signed two housing bills into law, SB 9 and SB 10. SB 9 modifies areas zoned for 1 unit to also allow duplexes. However, it isn’t without restrictions — it also limits the construction that would convert a single home into a duplex to homes that have not been rented out in the past 3 years, and only allows 25% of the external walls to be demolished if it is a conversion and not a new construction. SB 10 is aimed at helping local governments to streamline processes for allowing up to ten units on lots formerly zoned for SFRs, but only if the lot is over 8000 square feet.
One region in which these bills were highly contentious is Long Beach, which has 59,803 single-family lots. But the laws aren’t likely to change things as much as people think, especially SB 10. Only 4,609 are eligible for the provisions under SB 10, due to the lot size restriction. Moreover, the City of Long Beach is under no obligation to allow up to ten units at all — the bill merely streamlines the approval process, should they choose to. A significantly larger number of units could be affected by SB 9, but city officials expect that between 17000 and 28000 units would be ineligible due to the rental restrictions, and there’s no guarantee that the eligible units would be converted. In addition, ADUs are already allowed, and the biggest difference between an SFR-plus-ADU combination and a duplex is the size of the units.
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