New California Laws Affecting Real Estate: Analysis and Discussion

December 22, 2020 | Sundae Investor Team

We provide a quick analysis of recently signed bills in California that impact real estate. We also interviewed Sundae lending, valuation, and construction experts to get their take.

Given the unprecedented nature of recent events, it’s not surprising that there is considerable disagreement over the short- and long-term horizon for housing markets. 

As the nation’s affordable housing crisis intensifies, there is a growing movement in high-cost areas for regulations around tenant and homeowner rights, as well as a potential flood of foreclosures and the expansion of accessory dwelling units (ADUs).  

California started 2020 with over 100 housing bills under consideration. Some of the most ambitious pieces of legislation failed to pass before the latest deadline and were pushed to the next legislative session.  Below is a summary of bills signed in fall of 202o

COVID-19 Emergency Relief

AB 3088 – COVID-19 Emergency Relief protects tenants from evictions due to COVID-19 related financial hardship until January 31st 2021. Tenants are required to pay at least 25% of the rent. Landlords may eventually recover the rest of unpaid rent in small claims court, but non-payment can not be the basis for an eviction. 

Housing Production

AB 168 – Tribal Resources requires local governments to consult with Native American Tribes before processing a SB 35 application to determine if the proposed development could impact a potential tribal cultural resource. 

AB 725 – Moderate-Income Housing requires that at least 25% share of the regional housing need for moderate-income housing be allocated to sites with zoning that allows at least four units of housing, but no more than 100 units per acre. In other words, the law requires that the local jurisdictions supply their assigned number of moderate and above-moderate-income housing through 4+ unit properties rather than only through single-family homes.

AB 1851 – Parking Lot of Religious Institutions prohibits denial of a development project proposed by a religious institution unless it reduces over 50% of existing parking spaces. 

AB 2345 – Density Bonus Law allows local jurisdictions the authority to grant additional concessions/incentives beyond currently permissible limitations if a project exceeds maximum density limits. 

AB 3182 – Right to Rent in HOAs / ADU Permits prohibits Homeowners Associations (“HOA”) from adopting or enforcing a provision that restricts renting or leasing a property within the HOA, except for restrictions on short-term rentals of 30 days or less. The bill would automatically approve an application for ADU or junior ADU if the local agency has not acted upon the completed application within 60 days.

AB 3308 – Teachers Housing permits restricting occupancy on land owned by school districts to teachers and school district employees of the school district that owns the land, includes allowing school districts and developers receiving tax credits designated for affordable rental housing.

Tenant & Homeowner Rights

AB 2405 – Right to Housing is to take effect on January 1st 2026 and it declares that it is the policy of the state that every individual has the right to safe, decent, and affordable housing, and would require the policy to consider homeless prevention, emergency accommodations, and permanent housing, as specified. 

AB 2463 – Ban on Forced Sale of Home Due to Consumer Debt would prohibit lenders of unsecured consumer debt (such as accrued medical bills, credit card debt, etc) from forcing a sale of someone’s home.

AB 2782 – Mobile Home Rent Control allows rent control on mobile home leases that are more than 1 year long. 

SB 1079 – Foreclosure Sales allows current tenants and potential owner-occupiers an option to bid on a house in a foreclosure sale. The bill would prohibit the bundling of properties during an auction. 

SB 1157 –  Optional Credit Reporting for Tenants  would allow tenants in certain buildings who want to build a credit history to request that their landlord report their rent payments to a credit agency. 

SB 1190 –  Right to End Lease Early for Victims of Violent Crime  would enable all victims of violent crimes and their families to terminate a lease without penalty within 180 days of the crime having occurred. 

Roundtable with Sundae Experts

We asked our industry veterans at Sundae to weigh in on the above, specifically, if any of the bills stand out as controversial. Viewpoints included here are from: 

 

Interestingly, our team unanimously agreed that SB 1079 leaves the most room for questions and interpretation. 

SB 1079 bars sellers of foreclosed homes from bundling them at auction for sale to a single buyer. Instead, homes must be sold individually. The law will also allow tenants, families, local governments, affordable housing nonprofits and community land trusts 45 days to beat the best auction bid to buy the property after the trustee sale. The goal of SB1079 is to avoid a repeat of 2008, when corporations benefited from the foreclosure crisis and home ownership suffered. 

Andrew Jewett: SB 1079 has the potential to completely upend California’s current nonjudicial foreclosure process and introduce the need for court involvement if bids for properties can come in after the trustee sale.    

Polina Ryshakov: Giving the tenant an ability to bid on the property if it goes into foreclosure is a controversial component. The way a property can go into foreclosure is if the landlord fails to make payments on the loan against the property. Unless the tenant is failing to pay rent, it’s unlikely.  If a large single-family property aggregator is going out of business, it may work. Otherwise, the legislature creates a misalignment between a landlord and a tenant, which may result in unforeseen circumstances. Currently, small landlords provide a more affordable alternative to rent condos and single family homes than larger single-family REITs and in some cases, luxury apartments.  

Another controversy I see with this legislation is that if the individual buyers and bidders have 45 days to bid on the property, it will create more upward pressure on prices, bringing it to market price. If the property is in subpar condition, scoping the repairs is difficult for inexperienced individuals. From what we’ve seen, properties undergoing foreclosure can have issues ranging from stripped appliances and punched holes in the walls that are fairly easy to repair to concrete dumped in the plumbing and wild animals wreaking havoc inside the property. 

Aubree Kendall: Polina hit on an important point. Spotting water damage areas and former leaks is not always straightforward. Also, signs of foundation issues can be tricky. We have seen examples where a buyer rehabbed the inside of the house first and then started outside. When they did the shingle work on the roof, it rained and the interior was almost entirely trashed. We’ve seen someone getting a deal on defective materials. We’ve seen someone completing the work and not being able to get a mortgage because they weren’t able to permit the work.

The story that stuck with me the most was a veteran in Texas that used his life savings to purchase a property that was too complex for his expertise level. It was a massive home with an indoor swimming pool but had endless structural issues (roof caving in over the pool area, for example). The agent who sold him the property off market just kept pitching him on how much money he was going to make. He told him his retirement money would be ahead of the game after selling it as opposed to insufficient without it since social security would not pay him and his family enough to live on.

I talked to this investor both on the feasibility side and then on the draws side post close. The project went massively sideways (the agent and contractor were partners — surprise!). The veteran took a line of credit out on his personal home to try to pay for the extra repairs and monthly loan payments. I told him not to do this because he risked losing both properties. He said after fighting for this country he couldn’t live with himself not paying his debts in full. This gentleman lost the home he took a loan on and it was wholesaled to an internal investor at a profit. It’s been six years now and I still think of this man often. 

We saw tons of examples of this after hurricanes and flooding in the south. Homes that were write-offs by insurance companies from flooding were addressed by the insurance companies (drywall cut off at the water line) and sold at a discount. The market would get inundated with first-time flippers thinking they had a bargain home and then not being able to complete all the regulations needed (to code and certification), within budget to make the homes habitable to resell. We would end up bulk selling these homes to internal investors as we took back ownership.

Andrew Jewett: To add to Aubree’s and Polina’s concerns, individual investors need to do their due diligence. Knowing to check properties for tax liens and being aware that securing a loan on a property that needs work through conventional channels is often extremely challenging, and sometimes impossible. In my opinion building upon past experience, allowing affordable housing non-profits to bid on foreclosed properties makes the most sense as a viable solution. These non-profits have a more mission-based approach and are able to hire experts or volunteers who have extensive experience in the space or, in certain cases, partner with existing companies who do (like Sundae). This allows them to not only further their mission but helps to combat some of the issues these bills are targeting, not to mention reducing risks to their benefactors. Sundae is looking forward to the opportunity to partner with some of these non-profits as our missions compliment each other quite nicely.

Share

5 Biggest Questions for Real Estate in 2021

Real estate markets weathered a challenging 2o2o with a strong second half. But will the positive trends hold? Here are the 5 biggest questions for real estate, and who should care most, looking ahead to 2021. As the saying goes, hindsight is 20-20. But this year most Americans will be pleased to