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 Real Estate e-Newsletter
Coldwell Banker  Residential Brokerage
Beverly Hills CA 90210
by Cynthia S. Radom Award-winning Certified Seniors Specialist REALTOR ®
                                Specializing in Trust Sales        Since 1994
              NEWS & ISSUES for BABY BOOMERS to GOLDEN-AGERS
    July-September 2018   ·   Cynthia@RealtorRadom.com   ·   (310) 288-0479  CalRE #01184864

                                     ** Writer and Publisher since October 1999 **

 Tax Reform Effect in CA
Love It or Hate It
Love it or hate it, the new tax laws have a definite impact  on CA housing. The effect of tax reform on property sales is greater  on higher priced properties above $1M in 2018. According to an article in CA Real Estate magazine, here are some major provisions for the statewide market: 
- Mortgage interest deductions: allowed on  loans capped at $750K (formerly $1M), which were acquired after Dec. 14, 2017.
- Home equity loans: deductible interest if cash is used for major home upgrades 
- Property taxes: $10K cap on combined state and local tax deductions
- Moving expenses: deductible only for members of the military
- Standard deductions: nearly doubled, believing this will offset lack of interest and tax deductions for home Buyers
- Revised tax laws for entertainment expenses and rental income apply.

Effects of Tax Reform in CA
First-time Buyers
About 80% of first-timers buy a home under $750K (60% below $500K), so most will not feel the effect  that tax reform exerts on home prices.
Investors/Rental Market
Renters bode well with more benefits from tax reform. But, this is likely to increase  rents (where rents are already skyrocketing) as that demand increases. Investors can write off all expenses related to a rental, which is likely to increase demand  for income properties.
Repeat Buyers
About 60% of repeat Buyers purchase properties above $500K, so this market segment could e xperience a bigger impact due to tax reform.

Sales estimates above $1M in 2018
- About  550 to 1,000 units will be not be sold as a result of tax reform.
- Average loss of inventory is -1.2% (where supply is already an issue).
- Average drop in number of sales over 2017 is projected at -2.5%.

By now, you have been hearing and reading about the CA real estate market. Supply of homes for sale may be at an all-time low, while multiple offers continue to be the norm as Buyers still clamor for a CA home. So far, the only downward or flat price adjustments are leases, in some areas, after years of steady increase.

Valley Hits Record $$$
San Fernando Valley shattered record high home prices with a  16.7% gain over the same 2Q period in 2017. Tax reform, which limits home ownership deductions, has Buyers looking twice at living in the Valley where the weather is hotter, but prices are more reasonable. Read here .

ATTN: Would-be Sellers 
Data results in this study apply to all Sellers... read the Falling Fast article.
Affordability Crisis
The number one issue in the CA real estate market remains affordability. Continued low inventory and high demand is fueling the affordability crisis with high purchase prices. Furthermore, every year CA maintains a shortage of about 100,000 new housing units for sale to keep up with demand.

C.A.R. (CA Assoc. of REALTORS®) estimates that almost 43,000 additional home sales could be generated annually if Props 58 and 193 were overturned. These propositions, known as "inter-generational transfers", stem from Prop 13 whereby every CA property owner, over the age of 55 as of June 6, 1978, benefited from a 2% cap on annual property tax assessments (after taxes were rolled back to 1976 levels). Only when a property sells is the assessed value reset to the purchase price and property taxes are calculated at 1.25% of sale value.

Special Inheritance Rules  
CA voters created special rules that allow children, and grandchildren (if the parents are deceased), to inherit a home while retaining the Prop 13 low property tax. In 1986, voters approved Props 58 and 193 amendments for inter-generational transfers, in perpetuity. In reality, 100 years from now a homeowner can still be paying $5,000 in annual taxes on a property valued at eight digits or higher.

Forward Thirty-two Years Later
Legislators are realizing the results of Propositions 58 & 193:
- Substantial loss of housing turnover by Senior owners
- Heirs are keeping the family home for a rental and/or vacation property.
- Major taxpayer inequity, when a Buyer realizes their neighbor is paying a fraction of property taxes for the same home value
- Each year, 60,000-80,000 inherited properties are exempt from reassessment.
- CA annual revenue loss of $1.5 billion in reduced taxation
- Greater future revenue loss as CA homeowners continue to age and the use of the inheritance exclusion increases

While CA land is scarce, the ability to build new homes for sale remains an issue. So, how can the State generate more inventory to sell? A repeal or a revision of the inter-generational transfer laws are being considered by Sacramento.

Good-bye, Gladstones
After 46 years, and once CA's top income restaurant, Gladstones in Malibu has lost its lease. Make way for a Wolfgang Puck and Frank Gehry collaboration to build and create a fine and casual dining, two restaurant  location on the site. Gladstones , owned by former Mayor Riordan, will operate for two more years.
FSBOs Need Help
When a property owner decides to sell without a REALTOR ®, the reason is always to save money by not paying the Broker's commission. There is no other reason not to use a professional  who knows the ins and outs. The closing costs are fixed, so that is not affected either way. But, the inexperienced Seller needs professional advice.

Most FSBO (For Sale By Owner) sales originate from unsolicited offers. The passing of a homeowner brings interest from neighbors and developers. Buyers who lost a home purchase in multiple offers seek FSBOs where competing bids are non-existent.  Buyer door-knocking and sending letters to property owners are becoming more prevalent to find a FSBO willing to sell off-market.

When a prospect initially approaches a homeowner, the would-be Buyer begins with a promise to save the Seller a 5-6% commission fee by not using an agent. Yet,  when an offer is received it is usually below market value because the Buyer deducts the "savings". 
 
What FSBO Sellers fail to realize  is most Buyers are educated in the purchase process and are versed in CA laws to transfer a property. Home Buyers know how to negotiate. A Successor Trustee or a l ongtime homeowner may not have sold a property in decades, or possibly ever. Two main reasons a FSBO needs a Realtor ®  is to help negotiate and to avoid potential legal issues.

While real estate commission fees are dictated by Brokers and the Multiple Listing Service, there is more flexibility when a Buyer has been found without the time and expense expended during an on-market listing. When a FSBO Seller receives an offer, they should immediately contact a REALTOR ® and ask for help. There is an ability to represent only the Seller with a substantially reduced Broker's fee. Then, the cost should be incorporated in the counter offer price to the Buyer. After all, the Buyer may be saving money on the purchase by not competing in multiples, which is still today's norm and multiple offers always bring a higher sale price.
 
When a Spouse Dies
All properties that are  jointly owned need a written appraisal  when the first spouse passes away to substantiate an increase in basis. The "basis" is the original purchase price   of the property, which may be increased to the current market value depending on how the property is vested. The purpose of an increased basis is to reduce  or to eliminate capital gains tax when  the property is sold

REALTOR
® Radom provides a written valuation free to people on my mailing list, so contact me, instead of paying for an appraisal, (310) 288-0479.
Reverse Mortgages
As a Seniors Specialist REALTOR ®, I am often asked my opinion about reverse mortgages. While I have never applied for this type of a loan,  I do know only a few  homeowners who have utilized this financing. This is what I have  been told and observed:
- Reverse mortgages are very expensive.
- Homeowners are outliving the end of the loan, having spent all the cash.
- There is a limit of $679,650 for an FHA (government secured) loan.
- A lender is required expensive improvements (on a teardown) before approving a loan.
- Reverse mortgages cannot be extended or refinanced.
- When the loan is due, the homeowner needs to pay-off the full amount with hefty interest.
- Jumbo loans (non-FHA) total 34% loan to value; and requirements often change.

I know a homeowner who spent the full reverse mortgage loan amount and was then forced to sell the family home with no equity remaining. My thoughts on obtaining a reverse mortgage are these: w hile I can appreciate having limited, or fixed, income in one's Golden years, adding to one's debt does not make sense to me. W hy increase personal debt when most Senior homeowners have a lot of equity in their home to utilize? Seems to me, people who are strapped for money should be looking at ways to reduce  their living expenses. And, yes, that may require selling the family home while there is equity to be realized Only a professional financial planner can advise if obtaining a reverse mortgage is  fiscally sound. These loans are not for everyone...so, tread cautiously.
Subprime Demand
Subprime loans are back with a vengeance. These are the loans that caused the 2008 financial crisis and brought the world economy to its knees. Subprime mortgages are home loans granted to borrowers with impaired credit history,  no collateral,  flexible down payments and low borrower credit scores.  The subprime mortgage bond issuance has been almost  non-existent  in the last ten years.

The Financial Times reports that subprime mortgage bond issuance doubled in the first quarter of 2018 compared to a year ago. Furthermore, predictions indicate that total year-end issuance will continue the pace and double all of 2017 to hit $10 billion. As a reference, in March 2007 U.S. subprime mortgages were about $1.3 trillion.

A mortgage bond is a bond backed by a pool of mortgages on a real estate asset, such as a house, secured by the pledge of specific assets. These tend to have lower yields with less risk.  Apparently, investors are hungry f or bonds with higher yields, resulting in the rapid expansion of subprime mortgage loans.

In the current Seller's market, where inventory is low, adding a plethora of  Buyers will only wreak more havoc on affordability. The expansion of mortgage credit into subprime loans will exacerbate higher prices and increase lack of affordability, making this lending practice even riskier. However, repeal of the Dodd-Frank bill may be in the works by Congress.

Tidbits of News
- $ 110M sale  in Malibu breaks record
- Americans continue to lead high-end estate purchases with 76% of sales over $20M. Volume of estates sold in 2018 is on target with record-breaker 2017.
- Though LA homes  have never been more expensive, the median price across all of SoCal is still 14.3%  below its pre-recession peak, when adjusted for inflation.
- Fairmont Hotel and condos in Century City are expected to open in February.
- CA has the oldest children living at home with their parents.
There was a 55% drop in U.S. commercial real estate investment by Chin ese Buyers in 2017 vs. 2016. 
View the rendering for Purple Line's Westwood station...the end of the line.
- Roughly 33% of CA renters spend half of their income on housing.
- CA ranked last  in the top ten States with the highest overall tax burden in 2017; NY was #1; HI #2 and ME #3.
- Fun Fact: A new Starbucks store opens in China...every 15 hours!
- Solar panel installation  may be required for new homes in 2020,
- CA has the lowest percentage of homeowners than any State in the nation.
Property Tax Initiative
The potential November ballot initiative introduced by C.A.R. ( CA Assoc. of REALTORS ®) is purposed to eliminate a "moving penalty" for Senior homeowners, 55+ years of age, who don't want to lose their low property tax. Dubbed the Property Tax Fairness Initiative,  the measure   w ill encourage longtime owners under Prop 13 to sell their primary residence and move without being subject to a possible massive increase in property taxes. The sold homes would then be available for families and other Buyers to purchase, increasing the assessment to current tax rates (1.25% per $1,000), and reducing the lack of inventory.

Current Law
Under Props 13, 60 and 90, Senior homeowners can transfer their low property tax when buying a less expensive home, or one purchased for the same price that the current home fetched, as long as it is in one of eleven (out of 58) CA counties specified . This transfer can only be used once.

Proposed Change
A replacement home can be purchased for any price, can be located anywhere in CA and can be continuously used...not just a one-time transfer.  The proposed initiative will also be available to the disabled and victims who lost a home in a natural disaster, regardless of age.

How it Works
If a Buyer purchases a less expensive home, the property taxes will be proportionally the same as the original home. For example, if the tax base was one-third of the sale price, the revised tax would be one-third of the new home's purchase price, thereby reducing the property tax bill even more.

If the replacement home costs more than the property just sold, the difference would be assessed at the current tax rate and added to the low tax base.

The big question is:  will this measure be incentive enough to offset the tax paid on capital gains to entice Seniors to sell? What do you think of  this measure? Send a confidential e-mail to: Cynthia@RealtorRadom.com

Seminar  Consensus
My latest seminar, Selling Your Home 101, was enjoyed by all..."both detailed and simple, great presentation, highly informative, easy to follow, glad I attended", said the attendees. If you missed the session, and would like to schedule a personal meeting to answer your questions, I welcome the opportunity, call (310) 288-0479.

(Allow me to toot my horn for again being honored as a 2017 top-producer  in the Coldwell Banker Residential Brokerage company of  92,000 agents worldwide.)
Rental Saturation
Recently, there were 93 expired "for lease" listings  on the Multiple Listing Service daily update  in the surrounding Westside area. Th at means that 93 home or condo owners tried for an average of six months to lease their property, to no avail. Some listings may have had price reductions along the way, but if these lease offerings get reinstated, a price reduction is imminent.
 
Every day, there are more expired lease listings than any other category. Yet, new leases keep hitting the market and many rentals are finding a tenant. Property owners are trading their status for becoming a landlord to make a quick buck. People, with no intention of selling, are moving out of their home and cashing in on our high rental price market. But, they too have to find a place to rent that gives them the financial advantage to uproot.

Fortunately, the 2017 tax reform did not change the tax-free capital gains deduction. The requirement is that a homeowner must live in their primary residence two of the last five years to
utilize the deduction when selling; $500K per couple or $250K for a single owner. This may require a temporary landlord to move back into their home if they want to sell. Or, their residence will be designated an "income" property, which is another subject matter altogether.

Would-be landlords often fail to look at other possible issues:
- Cost to evict a tenant
Failure to find replacement tenant at a suitable price
- Unusable property because of tenant damage or a natural disaster
- Oversaturation of rental properties causing price reductions and vacancies
- Who will manage the property?

Another option
Consider downsizing and buying a condo under Prop 13. Transfer the low property tax base and take advantage of the tax- free capital gains deduction. This keeps you in the real estate investment arena with a property that is easier to manage and to eventually rent.

There is a difference
The City of LA still can't decide what to call this speed deterrent even when streets are repaved. HumpsBumps or a combo thereof are seen all over in LA, while  Bumps is preferred in Bev Hills. 

Nate 'n Al...Update 
Rumor has it the new location may be the former Fleming's at 252 N. Beverly Dr.
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