Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

2018 was a turning point in the current real estate business cycle, as the sales market transitioned from stable growth to declining volume.

2019 will certainly continue this downward trend for sellers, but agents who marshal their opportunities now by shifting their focus from sellers to the needs of buyers and mortgage lenders will weather the slowdown and eventual recession.

What else happened in 2018 to impact California’s housing market? Read on for a digest of:

• the most important legislative updates;
• how interest rates are impacting sales; and
• what type of progress home sales volume and prices made this year in California.

This digest is followed by first tuesday’s forecast for real estate in 2019 and beyond, and advice for agents on how to remain successful in the coming recessionary years.

2018 legislative updates

As outgoing governor Jerry Brown once said when vetoing a law: “not every human problem deserves a law.” And yet, when it came to new state housing laws, 2018 was another year for the books.

Some of these laws consist of updates to wording and clarifications on the finer points of forms — like with the changes to disclosure forms required in residential real estate transactions.

Some of these form changes include:

• replacing the antiquated terms “selling agent” and “listing agent” with the more consumer friendly “buyer’s agent” and “seller’s agent;”
• clarifying language in the required natural hazard disclosure (NHD) [See RPI Form 314];
• expanding protections for clients when their agent is acting as a dual agent; and
• adding more details and instructions into the Agency Law Disclosure. [See RPI Form 305]

Other new laws in 2018 build on 2017’s package of affordable housing bills, which were passed in response to the growing housing crisis.

For example, SB 828 encourages local governments to better meet regional housing need by re-defining how they determine regional need. This new law prohibits local governments from basing need on years when under-production of housing took place. Instead, locales will need to base need on the number of current low-wage jobs alongside the number of housing units available to low-income workers.

Another law that clarifies previous affordable housing efforts, SB 765, attacks the housing shortage by tightening exemptions that allow developments to receive streamlined approval when they include units for low-income households in their projects. Now, to receive streamlined approval, developers need to commit to setting aside units in their project for low-income households for at least 55 years for rented units and 45 years for owned units.

Related article:

New laws adjust planning, building standards in response to growing housing crisis

Glancing back even further, 2018’s legislative session saw the revival of the 2012 California Homeowner Bill of Rights.

This set of laws, revived by SB 818, puts a number of protections back in place for homeowners during the foreclosure process, an event likely to greatly increase as we move into the thick of this recession. For example, when a homeowner becomes delinquent on their mortgage, agents need to know that the lender, mortgage servicer or bank may not record a notice of default (NOD) for a trustee’s foreclosure unless 30 days have passed since contacting or making a diligent effort to contact the homeowner, including mailing a notice and calling at different times of day.

The Homeowner Bill of Rights also prohibits a mortgage lender from moving forward with the foreclosure process while a homeowner’s complete loan modification application is pending review. Also of note, lenders need to assign homeowners a single point of contact during the process so their agent knows who to talk to assist the homeowner.

Several other protections were re-instated by California’s Homeowner Bill of Rights. Read more here.

Interest rates in 2018

The Federal Reserve (the Fed) was busy in 2018, increasing their benchmark interest rate four times over the course of the year.

As a result, mortgage interest rates inched higher in 2018. For example, the average 30-year fixed rate mortgage (FRM) rate rose from 3.85% in December 2017 to 4.55% in December 2018, an increase of 0.7 percentage points. Translated to purchasing power, the increase in FRM rates alone meant homebuyers at the end of 2018 had a significantly smaller portion of their money payment remaining to apply to mortgage principal. Put another way, a homebuyer taking out a $500,000 mortgage today is spending 12% more on monthly payments than they would have a year earlier due solely to today’s higher FRM interest rate.

Therefore, today’s homebuyer acts in one of two ways. They can either:

• increase their mortgage payment (relative to what it would have been under the lower rate) to qualify with the same down payment for the same-priced home at today’s higher interest rates; or
• stick with the same mortgage payment by paying a reduced purchase price for the same type of property.

As homebuyers are only able to qualify for smaller (maximum) mortgage principal amounts as rates rise, some will be able to qualify to pay higher mortgage payments and thus qualify to pay last year’s price for the same type of home. However, homebuyers operating at the top of their budget will typically seek to purchase the same types of property, but at a lower price.

When interest rates rise, first homebuyers become discouraged and home sales volume slows. Then, as homes sit longer unsold and price cuts become more common, price momentum slows and soon reverses course.

As interest rates have increased at a steady long-term clip since late-2017, the impacts are already being felt across California, in slowing sales volume and declining prices. Expect these effects to continue for around another 20 to 24 months.

Related article:

How higher interest rates impact real estate

Home sales trail off by year’s end

Both home sales volume and prices experienced trouble in 2018. They peaked for this business cycle, and began to decline in all three tiers of home prices.

California home sales volume started off 2018 roughly level with the year before, a flat state of affairs which has persevered since 2014. However, beginning in June, sales volume began to trend down, first gradually, then accumulating to an avalanche in lost sales by year’s end.

While sales volume reports are not yet in for December 2018, they are on track for the year’s sales volume to be 4% lower than 2017, amounting to about 18,500 fewer sales overall.

Meanwhile, prices in California rose through the beginning of 2018, only to reverse direction beginning in August. The most recent home price reports show home prices are still higher than a year earlier, but more significantly, home prices are presently declining on a month-to-month basis.

As of October 2018, California home prices average:

• in the low tier, 7% higher than a year earlier (and 0.5% lower than the previous month);
• in the mid tier, 6% higher than a year earlier (and 0.6% lower than the previous month); and
• in the high tier, 5% higher than a year earlier (and level with the previous month).

Prices have begun to fall back consistently due to several economic factors pushing the housing market toward its own recession, likely to set in around mid-2019 with declining sales volume. Chief among these factors are rising interest rates, which have reduced buyer purchasing power and priced-out buyers which have caused home sales volume to dramatically slow. 

Forecast for 2019 and beyond

What’s ahead for California’s housing market?

As interest rates continue to rise in 2019 — and the Fed is likely to increase their key rate once more this year — the effects will ripple throughout the entire real estate market. Think capitalization (cap) rates, and consider that they have been far too low for the risks involved in owning illiquid assets during slower economic times.

Of course, once an economic recession is imminent, the Fed will pull their foot off the rate-increase pedal and reduce short-term interest rates for a time. Looking forward, by 2020 homebuyers and sellers will only see slightly lower mortgage interest rates, and in 2021 they will remain low only if the Fed steps into the mortgage origination void that is likely to take place, somewhat like it did in 2009.  By then, the bond market will likely drive up interest rates and thus secondary mortgage market interest rate demands – unless the Fed steps in to supply cheap mortgage money again.

Meanwhile, home sales will continue to decrease in 2019, slowing the flow of agent and MLO fees. The aftereffects of the rapidly rising prices experienced since 2012 and recent rising interest rates, along with uncertainty brought on by chaotic economic and trade policies, have further discouraged potential homebuyers and helped derail sales. first tuesday is forecasting 2019 home sales volume will decrease around 15% from 2018, continuing an even greater 10% drop in 2020 before rebounding in the years following.

Annual home sales volume won’t rise again until after home prices bottom and interest rates cool during the coming business recession, initially coaxing speculators and then homebuyers back into the market.

The cyclical peak in home prices has now occurred. When spring rolls around this 2019, we will see a meager month-to-month uptick in sales and pricing, but this increase will be brief and shallow and not reach the levels of one year prior. The overall trend for the next couple of years will be downward as we head into the next recessionary period: 2020.

first tuesday forecasts home prices will decrease 10%-13% in 2019 alone, and by the time prices bottom heading into 2021, they will have dropped:

• 35% in the low tier;
• 25% in the mid tier; and
• 20% in the high tier.

This chart shows average California home price movement in the three price tiers, along with the mean price trendline, the blue line. This line represents the mean price to which home prices cyclically return. It is determined by the amount homebuyers are able to pay for homes, largely influenced by average income increases, around 3% annually.

Each recession typically sees a dip in prices, returning them near to the trendline. first tuesday forecasts prices will hit this trendline in the winter of 2020-2021, rebounding in spring 2021.

Advice for agents in 2019

Our best advice for agents in 2019 is to treat every transaction like it may be your last. While this dire situation certainly won’t be the case for determined and persistent agents, this attitude will help you to save cash, a condition that will allow you to work smarter to diversify your professional efforts.

Save more of today’s fees for the rainy days ahead by:

• cutting costs where possible;
• resisting the urge to spend more money than you need to on upgrading or purchasing assets (capital outlays); and
• reducing your living standards and setting aside the savings in a rainy day fund.

While you’re saving, invest more time (and hopefully not too much money) expanding your client base of prospective buyers and mortgage lender personnel in foreclosure departments to make a profit in 2019-2020, even when the market is down. Expand your base by:

• focusing services on the needs of homebuyers in a down market, not sellers who will be in long supply and tough to deal with as they unsuccessfully attempt to sell at prices above market value;
• becoming a short sale expert focused on the needs of mortgage lenders facing increased foreclosures;
• learning about other transactions that will become more common in the coming recession, such as carryback financing, exchanges and investor/speculator buyer mentality in recessionary markets;
• taking on property management opportunities as demand for this service will rise all across the real estate market;
• reaching out to renter populations, informing them about financing available to future homebuyers and market conditions for timing a purchase to take advantage of pricing before the inevitable market turn-up in a recovery; and
• increasing your civic involvement to build recognition among local peoples and general trust to your personal brand – write a column for the local weekly newspaper or real estate journal.

Buyer’s agents can prepare their clients to meet resistance from sellers who will be under sticky price illusions. Many sellers will need to see multiple offers before they decide to succumb to the pull of downward trending prices, or pull their listing until prices rise again.

Don’t shy away from a challenge in 2019, as real estate professionals cannot afford to be picky in a down market. Listing agents are certain to be overworked and underpaid. Plenty of agents, brokers and other real estate professionals survived the 2008 recession, and you can survive the next recession, too. The good news is our 2020 recession is not anticipated to see the same amount of panic and extended depression as in 2008-2009.

Real estate professionals who are persistent, hard-working and creative will survive the coming years stronger, and with an intellectually wider skillset. The trick is to prepare today, seizing forward opportunities as they present themselves.

Related article:

How real estate agents can survive the next recession

Related topics:
california home prices, california legislation, california real estate,

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

This article digests the bills relevant to real estate that passed and were signed into law in California during 2019.

How a bill becomes a law in California: the basics

Dozens of bills passed in 2019 that are relevant to your practice as real estate agents and brokers, mortgage lenders, landlords and real estate investors.

How did these bills go from ideas to laws?

When a legislator decides to author a bill, the idea and language gets sent to the Legislative Counsel’s Office to be drafted into an official bill. Once approved by the author, the bill is introduced in either the state’s Assembly or Senate, depending on which body the bill’s author is a member of.

Sometimes, bills are the result of concerned citizens contacting their local assemblyperson or state senator. Other times, the bill originates with a legislator, but citizens weigh in at some point during the process.

Editor’s note — Are you interested in becoming more involved? Follow our Legislative Gossip page throughout the year to stay informed. Reach out to your local legislators with concerns and attend local city council meetings for the most impact.

Bills that are authored by an assembly member are denoted by Assembly Bill (AB) and bills authored by senators are denoted by Senate Bill (SB).

Over the course of several months, the bill goes through revisions as it bounces around committees and stands up (or fails) against floor votes. The bill needs to be approved by a majority of each house, gaining at least 21 votes in the Senate and 41 votes in the Assembly. The exceptions are urgency measures and appropriation bills, which require a two-thirds majority, or 27 votes in the Senate and 54 in the Assembly.

Once the bill passes in both houses, it goes to the Governor for a signature. The Governor may either sign, approve without signing or veto the bill. When the bill is vetoed, the bill may still be passed with a two-third majority in both houses. When the Governor signs or approves without signing, the bill goes to the Secretary of State to be chaptered.

All laws listed below take effect beginning January 1, 2020, unless otherwise noted. Some have expiration dates, which are noted when applicable.

Find the relevant laws which have passed, organized by real estate category and what areas of practice the laws will impact, below. For more details, click on the bill numbers to view the new laws in their entirety.

Practice

AB 892 requires multiple listing services (MLS’s) to maintain listing data for no less than three years from the date the listing was created. It also revises the Transfer Disclosure Statement (TDS) and narrows the obligation of a broker to conduct an inspection of the property and disclose material facts only to those brokers working with a prospective buyer of residential one-to-four unit property or a manufactured home. [See RPI Form 304]

AB 1018 adds to the legal descriptions of an appraisal an exclusion for an opinion offered by a home inspector, on top of currently existing exclusions for opinions offered by real estate licensees, engineers and land surveyors.

Property management

AB 338 requires mobilehomes to have smoke alarms installed in each room used for sleeping that are sold or rented beginning January 1, 2020.

AB 1110 requires a landlord increasing the rent of a month-to-month unit by 10% and no more than 15% to provide 90 days’ notice before the increase. Or, a landlord increasing the rent on a month-to-month unit by more than 15% needs to provide at least 120 days’ notice.

AB 1188 allows a tenant to temporarily permit a person at risk of homelessness to occupy the tenant’s dwelling, with written approval of the landlord. This bill expires January 1, 2024.

AB 1399 specifies that a landlord who pays a penalty under an Ellis Act eviction is not exempted from offering their unit to the prior tenant when it returns to the market.

AB 1482 prohibits a landlord from terminating the lease without cause of a tenant who has occupied the property for at least 12 months, and for no-fault just cause terminations, requires the landlord to provide one month’s rent to cover relocation costs. Further, beginning March 15, 2019, a residential landlord is limited from increasing rent no more than twice in 12 months. Each increase can be no more than 5% plus the percentage change in the cost of living, or 10%, whichever is lower, of the lowest gross rental rate charged for the immediately preceding 12 months. The provisions in this bill expire January 1, 2030. Read more.

SB 13 authorizes the creation of accessory dwelling units (ADUs) in areas zoned for single family residences or multi-family residences. It also broadens application, occupancy, parking and minimum square footage requirements. For example, until January 1, 2025, it prohibits local agencies from imposing an ADU owner-occupant requirement.

SB 18 extends indefinitely the Keep Californians Housed Act, which previously expired at the end of 2019. The Act requires a 90-day notice to quit to be provided to a tenant or subtenant under a month-to-month lease before the tenant needs to leave a foreclosed property. Tenants in possession of a unit with a fixed-term lease may reside at the property until the end of the lease term.

SB 274 makes several rule changes for mobilehome park tenancies, including requirements for the manager to notify a previous tenant of a park rebuilt after a disaster via mail, telephone and email; sellers of mobilehomes to notify the park manager before a sale closes and for the manager to provide the seller or purchaser with standards the manager will use to approve the new tenancy; and the manager to grant approval to a prospective mobilehome tenant/purchaser unless they reasonably determine the applicant does not meet the park rules, they don’t have the financial ability to pay rent and other charges, or they committed fraud during the application process.

SB 329 redefines the term “source of income” in regards to housing discrimination laws to mean verifiable income paid directly to a tenant, or paid to a housing owner or landlord on behalf of a tenant, including federal, state, or local public assistance and housing subsidies.

SB 644 prohibits residential landlords from demanding or receiving a security deposit from a service member greater than one month’s rent, or two months’ rent for furnished property. Landlords may not refuse to rent to a service member due to the new restriction on the amount of security deposit the landlord is able to collect.

SB 652 prohibits a landlord from prohibiting displays of religious items on an entry door or door frame into a dwelling.

Government

AB 68 shortens the permitting time for approving an accessory dwelling unit (ADU). Read more.

AB 101 allows the Attorney General to take action against a city or county, including levying fines, when its housing element does not follow laws to meet regional housing need.

AB 178 requires residential construction to repair, restore or replace a residential building damaged or destroyed in a disaster area before January 1, 2020 to comply with the photovoltaic requirements in effect at the time the building was originally constructed. This bill expires January 1, 2023.

AB 430 requires the County of Butte to establish a streamlined housing approval process to assist in rebuilding following the Camp Fire. This bill expires January 1, 2026.

AB 548 requires the California Residential Mitigation Program to provide outreach to low-income households to increase awareness of the Earthquake Brace and Bolt program and to set aside 10% of the funds available to the program each year to provide grants to low-income homeowners to retrofit their properties.

AB 671 requires local governments to make incentives for the creation of accessory dwelling units (ADUs) accessible to very low-, low- and moderate-income households. It also requires the Department of Housing and Community Development to develop a list of existing state grants and incentives for construction and operating these types of ADUs, and to post this list on its website by December 31, 2020.

AB 881 requires local agencies to loosen certain zoning laws to allow permitting of accessory dwelling units (ADUs). Among the changes are prohibiting agencies from requiring parking when the ADU is located within 1/2 mile of public transit and no longer allowing agencies to require ADUs to be on owner-occupied property.

Taxation, Finance

AB 872 excludes stock transfers from a deceased parent to child that results in a change in ownership of property from the definition of “change in ownership” for property tax purposes.

SB 306 allows a mortgage trustee to resign their position as trustee in lieu of a substitution.

Keep up with important new laws in 2020 by signing up for first tuesday’s newsletter and following our Legislative Gossip page.

Related topics:
california legislation, taxation

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

California’s Property Assessed Clean Energy (PACE) program has been plagued with issues since its 2008 inception, to the point that many local governments have cut the program altogether. Recent legislation attempts to do damage control and salvage the program, but will the changes be enough?

PACE problems

The PACE program enables property owners to purchase free or low-cost energy upgrades, helping them to save on energy bills and bring the state closer to its energy-saving goals. PACE is run through the state’s local governments, and each city which grants PACE assessments is repaid through a tax assessment on the improved property.

However, many PACE participants have found their energy savings do not always offset their PACE lien payment on their annual tax bill. In fact, in many cases, the owners of a PACE-assessed home have found themselves with unaffordable tax bills.

How does this happen? Before the 2018 legislation passed, the program qualified homeowners based mostly on home equity and not their ability to repay.

PACE’s unexpectedly high tax bills have inevitably led to defaults, which spiked in 40 California counties from 245 in 2016 to 1,110 in 2017, according to the Wall Street Journal’s analysis of PACE accounts. These homeowners face tax lien foreclosures, which do not eliminate the PACE lien.

Lenders’ main issue with the program is the first-lien status PACE loans enjoy. In fact, the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), Fannie Mae and Freddie Mac no longer insure mortgages associated with PACE-participating homes since the lien takes repayment priority in a foreclosure.

This so-called “super lien” is an issue for real estate agents as well, since it stays with the property and makes it difficult for PACE-participating homeowners to sell.

2019 PACE updates

While PACE administrators are directed to consider a homeowner’s ability to pay, new laws in 2019 break down this directive, making it more meaningful.

Beginning January 1, 2019, before an administrator first makes a reasonable good faith determination that the homeowner has the ability to pay the PACE assessment, Assembly Bill 2063 prohibits the administrator from:

• executing an assessment contract or home improvement contract; and
• allowing any work financed by an assessment contract to commence on the home. [Calif. Financial Code §22684]

PACE administrators are now able to use the income of a homeowner’s spouse or domestic partner to determine their ability to pay, even when that individual is not listed on the property’s title. However, when the spouse’s or partner’s income is used, that individual also needs to be listed on the assessment. [Fin C §§22687(a)(3)(A); 5898.24(d)(2)(A)]

Beginning January 1, 2019, Senate Bill 1087 requires the PACE program to ensure property owners are current on all mortgage debt as of the application date before approving a PACE assessment. Previously, there was confusion around when the homeowner needed to be current on their mortgage debt to be eligible for the program. [Fin C §22684(e)]

SB 1087 also makes allowances for when a PACE administrator is unable to verify a homeowner applicant’s income. When they are unable to verify the homeowner’s income before executing the contract, they need to verify it in a timely manner following the execution of the contract. [Fin C §22687(e)(7)]

PACE administrators determine property value by relying on an appraisal completed within the six months preceding the application date. Beginning January 1, 2019, they may use an appraisal ordered by the homeowner and conducted by a state-licensed or -certified appraiser, when it was obtained in connection with the home’s purchase, refinance or extension of a home equity line of credit (HELOC). [Fin C §22685(a)(2)]

Editor’s note — These changes are an attempt to clarify confusing aspects of AB 1284, which passed at the end of 2017. AB 1284 required PACE administrators to consider homeowners’ income and ability to pay, where previously the main consideration was the home’s equity.

Related topics:
energy efficiency, property assessed clean energy (pace)

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Arbitration is a form of alternative dispute resolution (ADR). In arbitration, the parties to an agreement — say, a real estate purchase agreement — forego a formal court action, agreeing instead to be bound by an arbitrator’s decision.

The arbitrator is a neutral third party appointed by a court or selected by the parties to the agreement to hear the dispute. The arbitrator makes the final decision, awarding judgment in favor of one of the parties. [Calif. Code of Civil Procedure §1297.71]

An arbitration provision may be included in multiple types of real estate agreements, including purchase agreements, listing agreements, escrow instructions and leasing agreements. However, consumer mortgage agreements may not include mandatory arbitration provisions. [12 Code of Federal Regulations §1026.36(h)]

Arbitration leaves consumers at a disadvantage, but it used to be much worse.

Prior to 2002, arbitration in California was conducted in secret, the basic facts veiled entirely from the public. This made it impossible for interested consumers or non-consumers to learn the outcomes of a case. Without knowing the outcomes, zero precedent was available for those interested in pursuing or preparing to pursue similar cases. Thus, arbitration shirks the critical legal framework our system inherited from English common law.

Then, in 2002, AB 2656 was passed to require California arbitration companies to make public certain information regarding the cases they arbitrate each quarter. These facts include:

• the nature of the dispute;
• when the arbitration occurred;
• the name of the non-consumer party to arbitration;
• whether the consumer is represented by an attorney;
• the result of the arbitration, including the amount claimed and awarded, if any;
• the number of occasions the non-consumer party has been to arbitration;
• the name of the arbitrator; and
• the arbitrator’s fee and how it is allocated between the consumer and non-consumer. [CCP §1281.96(a)]

While this was a significant step forward for arbitration transparency, the reports were not always useable to the public, nor did they carry the same weight as case law. In 2014, AB 802 was passed to ensure the information reported by arbitration companies was searchable on the arbitration company’s websites by consumers.

Flash forward to 2019. SB 707 recently passed to add another fact to the list of details required to be reported. Beginning January 1, 2020, arbitration companies will need to include demographic data of their arbitrators in the aggregate, including their self-identified:

• race;
• ethnicity;
• disability status;
• veteran status;
• gender;
• gender identity; and
• sexual orientation.

Requiring this demographic data to be made publicly available is part of a wider effort to promote transparency and lessen some of the implicit biases that inevitably come up during arbitration. However, these recent updates still don’t correct the inherent shortcomings of arbitration.

Making arbitration less-worse isn’t the answer

All of these steps to make arbitration more transparent and fair are positive steps in the right direction. But they’re not enough to make arbitration the best option – or even a good option – for alternative dispute resolution.

An arbitrator’s decision still:

• does not need to follow legal precedent;
• is difficult to appeal;
• may take longer than a court case since it is not bound by the same time requirements; and
• lacks judicial review, and thus is more likely to include errors and be biased.

Along those lines, bias in arbitration is a well-documented issue for consumers. That’s because the non-consumer party — perhaps a lender — may choose and rely on the same arbitration company for each of their disputes. It’s thus in the arbitration company’s best interest to reach a more favorable outcome for the lender — which continues to send them business with each dispute — rather than the consumer who they will most likely see just the one time.

The arbitrator’s clouded and conflicted interest makes arbitration a bad deal for consumers. A better option for alternative dispute resolution is mediation.

In mediation, a mediator works with the persons who are involved in a dispute to come to a mutually agreed-to solution.

The cost of mediation is minimal compared to arbitration and court action. Further, mediation is typically a quick process, depending on the number of disputants, their willingness to reach a resolution and the complexity of the facts and issues involved. There are no lengthy waits for court hearings or the need for witnesses since the resolution is in the hands of the participants themselves.

However, mediation does have its limits. In real estate matters, mediation is limited to resolving disputes involving buyers and sellers. Landlord-tenant disputes and mortgage defaults are based on specific statutory requirements for performance — which are either satisfied or unsatisfied — leaving little room to dispute the facts, the law and the procedures involved.

Going to court cannot always be avoided, but mediation is the preferred first tool — not arbitration.

Real estate professionals: your clients do not need to initial the arbitration provision included in trade union agreements. In fact, arbitration is only enforceable when both parties initial the arbitration provision.

Editor’s note — As a matter of best-practices, RPI forms do not include arbitration provisions. RPI forms encourage mediation as the preferred alternative dispute resolution.

Related article:

Arbitration, explained

Related topics:
arbitration, mediation

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

The once idyllic city of Paradise, California still faces a long and difficult recovery nearly one year after 2018’s tragic Camp Fire. The deadliest and most destructive wildfire on the books in the state, the Camp Fire claimed 85 lives and caused over $16 billion in losses.

Making matters worse for survivors, about a quarter of these losses were uninsured, leaving many victims of the conflagration to start over from scratch. But even those not directly impacted by the fire are shouldering its economic consequences as its effects ripple across the state. With California’s 2019 fire season heating up, insurers are pulling policies from homeonwers in high-risk fire zones.

Thanks to the state’s recent record-breaking fire seasons, homeowners in high-risk fire zones may find themselves unprepared to insure or even sell their homes.

Drop it like it’s hot

Homeowners in high-risk fire zones are suffering sticker shock after seeing their insurance premiums double — and even triple in some cases — after worsening fire seasons. Insurers are hiking premiums and dropping policies to mitigate the increased risk of fire loss claims.

Editor’s note — Check this interactive map to learn if your California property is located in a high-risk fire zone.

This isn’t just a knee-jerk reaction. 2018’s Camp Fire claimed Merced Property & Casualty, a small Merced insurance company that collapsed under the weight of millions in claims for properties in Paradise. It was declared insolvent and seized by a California court in December 2018.

Insurers continue to tighten their belts in preparation for an especially active fire season in 2019. In lieu of rate hikes, an increasing number of homeowners have instead received the dreaded nonrenewal notice from their home’s insurer. This notice informs homeowners that their insurance provider has opted not to renew their insurance policy, leaving some to search for a new insurer year after year.

While data on insurer nonrenewals is limited, a few clues suggest this crisis is boiling over. The California Department of Insurance has received 451 complaints about cancellations and premiums from customers in high-risk fire zones in 2018, according to the Sacramento Bee. This is up from 95 in 2010. Further, the Department reports insurer nonrenewals grew 10% in high-risk zip codes between 2016 and 2018.

This trend puts homeowners in a difficult situation. Those without a mortgage may choose to risk everything by forgoing coverage, but those carrying a mortgage don’t even have that option. Lenders typically require homeowners insurance on mortgages.

Will home sales go up in smoke?

But therein lies the rub. Homes with ballooning insurance costs are not an attractive sell. Insurance costs can surprise buyers, upending their debt-to-income ratio and making an otherwise conservative transaction unworkable.

When this occurs en masse across communities in fire zones, it can snuff out the entire local economy. Homeowners can’t afford to stay because of burgeoning insurance premiums and can’t move to an area safer from wildfires without taking a bath on their home sale.

Homeowners lucky enough to have a home after a disastrous firestorm like that which swept through Paradise go on to see property values tank, taking with it their prospects of selling at its previous fair market value. Reconstruction is a lengthy process, and homeowners may not be able to wait for their community to rebuild from nothing.

Editor’s note — Visit the Butte County Assessor website for a helpful FAQ on home property values relating to the 2018 Camp Fire.

It doesn’t help that California’s home sales volume is weak to begin with. In August 2019, the number of homes sold was 2.6%  lower than a year earlier, continuing a long trend of falling year-over-year sales volume that began in the second half of 2018.

Homeowner action plan

Complicating an already sluggish housing market with an unraveling environmental crisis is a recipe for an economic firestorm. In response, homeowners and lawmakers are drawing up their fire safety action plans by mounting stronger physical and financial precautionary measures.

First things first, homeowners in high-risk fire zones need to secure homeowners insurance. While homeowners insurance is not a legal requirement to homeownership, it is strongly recommended that homeowners protect what is in most cases their most valuable asset from disaster.

Homeowners who otherwise cannot secure an insurance policy have a last resort in California’s Fair Access to Insurance Requirements (FAIR) Plan. The FAIR Plan is a state-mandated program that provides access to insurance for individuals having trouble insuring their high-risk property.

Thanks to increasing insurer nonrenewals, new FAIR Plan enrollments grew 177% between 2015 and 2018 in the ten California counties with the most homes in high-risk areas. While the FAIR Plan excels at guaranteeing basic coverage for otherwise uninsurable homes, it’s no remedy for sticker shock; FAIR Plan rates are often higher than those of traditional insurers since they take on increased risk.

California legislators are also stepping in to protect homeowners in high-risk areas. Governor Gavin Newsom signed 22 wildfire-related bills in October 2019. Of note to real estate professionals serving fire-prone areas is Assembly Bill 38 (AB 38). The bill creates a $1 billion fund for no- and low-interest loans for homeowners to replace or install fire-resistant systems or create defensible space around their property. Read the bill text here.

With the 2019 fire season gearing up, real estate professionals need to be prepared to quell homeowner fears about living in high-risk fire zones. Aside from securing the proper homeowners insurance, agents can also suggest improvements that will harden a home against fire, like upgrading to dual-paned windows and creating natural fire buffers through landscaping.

Agents — stay on top home fire safety standards for your clients in high-risk areas. Click through for more recommendations on hardening a home for the 2019 fire season.

Related article: https://journal.firsttuesday.us/half-a-million-california-homes-at-high…

Related topics:
fire, homeowners insurance, wildfire

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Calif. Civil Code §§6150; 5551; 5986

Amended by S.B. 326

Effective date: January 1, 2020

The Davis-Stirling Common Interest Development Act governs how common interest developments (CIDs) are managed and operated. This includes rules on who is responsible for maintaining specific areas of the CID. For example, unless the CID declaration says otherwise, the CID is responsible for maintaining common areas, while individual owners are responsible for maintaining their separate units.

This new law requires the CID to make a reasonably competent and diligent visual inspection of the project’s exterior elevated elements — load-bearing components and its associated waterproofing systems — at least once every nine years.

Load-bearing components include components that:

• extend beyond the building’s exterior walls;
• are supported completely or partly by wood or wood-based products;
• are designed for human use; and
• include a walking surface six feet or higher above the ground.

When the inspector finishes their inspection, they need to submit a report to the CID board detailing the condition of the elements inspected and their remaining useful life. When the inspector discovers an exterior elevated element’s condition poses an immediate threat to the safety of residents, the inspector is required to submit the inspection report to the local code enforcement agency within 15 days of the report’s completion. The association will make the needed repairs immediately and occupants will not be permitted to use the element until the local enforcement agency inspects and approves the repairs.

The first required inspection needs to be completed before January 1, 2025 and every nine years after.

Read the bill text here.

Related article:

The Davis-Stirling Act and California homeownership

Related topics:
condominium, inspection

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

California’s Department of Real Estate (DRE) is about to make it easier for non-residents to become licensed real estate agents and brokers.

The DRE has been licensing non-citizen real estate agents and brokers in California since 2016. In addition to accepting a Social Security number, the 2016 law changes directed the DRE to also accept a licensee applicant’s individual tax identification number (ITIN).

Related article:

Real estate licensure to open to noncitizen residents with individual tax IDs (ITINs)

ITINs are used by resident non-U.S. citizens, who lack the citizenship required for a Social Security number. The lack of Social Security number has traditionally kept many non-citizen residents from becoming licensed or credentialed in a number of jobs. The problem was that many individuals were practicing illegally, without a license. Expanding licensure to those with ITINs gave the DRE (and other state departments and agencies) authority over these previously-unlicensed individuals.

While the 2016 law opened the door for non-citizens to become licensed, 2019’s SB 695 goes a step further. It prohibits the DRE from requiring information on the applicants’ citizenship or immigration status. [Calif. Business and Professions Code §30(a)(2)(B)]

Further, the DRE is prohibited from denying licensure solely on the basis of an applicant’s citizenship or immigration status. [Bus & P C §30(a)(2)(C)]

The DRE needs to make these changes no later than July 1, 2019.

Editor’s note — These sweeping changes aren’t limited to real estate. The new law applies to the DRE, as well as other state licensing and credentialing organizations, including the State Bar and the Commission on Teacher Credentialing.

first tuesday has advocated for this change, as it encourages undocumented immigrants who are unlicensed but undertaking the responsibilities of an agent to become licensed, and thus be overseen by the DRE. 

California’s open attitude toward migrants

California is relatively friendly to undocumented immigrants and other noncitizens, enabling this population to participate almost fully in the state’s economic and business activities.

The state’s openness toward undocumented immigrants isn’t just a result of its progressive political leanings. Given the size of this population, it’s an economic necessity.

As of 2014, approximately 2.4-2.6 million undocumented immigrants resided in California, according to the Public Policy Institute of California. That’s roughly 6% of the state’s total population. Therefore, enabling these residents to work, pay taxes and contribute to the state’s economy is crucial to keep the state operating at a healthy level.

For real estate, the issue is twofold, as undocumented immigrants may:

• practice as real estate agents without becoming licensed, thus avoiding DRE oversight; and
• hesitate to purchase or sell real estate, as they seek to avoid anything that documents their unlawful presence and that may lead to their deportation.

Undocumented immigrants are understandably more likely to seek assistance in buying or selling from a fellow immigrant, who understands their situation and can help them take out a mortgage and buy with an ITIN.

These 2019 changes make it more likely for undocumented immigrants to take the leap into a career in real estate, and with more agents like them, more likely for undocumented homebuyers to take the leap into homeownership.

Related article:

Migration influences California’s housing market

Related topics:
agent licensing, undocumented immigrant

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

first tuesday breaks down the most important housing and homelessness items of the 2019-20 California State Budget.

This June, California lawmakers approved the 2019-20 California State Budget. It includes over $2 billion in spending for housing and homelessness issues. This budget is an important puzzle piece to reaching Governor Gavin Newsom’s promise of 3.5 million new housing units by 2025, but is it enough?

State of the state

First, let’s review a snapshot of the housing market lawmakers had in mind when crafting the budget. California is currently in the grips of a crippling housing shortage. Home sales are sluggish thanks to restrictive zoning schemes and soaring land and building costs. In turn, prospective homebuyers priced out of the market are forced to rent where they also face high housing costs.

One of the biggest culprits is antiquated zoning restrictions. These laws hold back development with height and density restrictions, parking requirements and more. They have resulted in:

• reduced construction;
• failure to meet high demand for housing;
• inflated prices of new and resale homes;
• an unstable housing market as home prices rise faster than incomes can keep up; and
• stunted homeownership and home sales volume.

While tight zoning has allowed suburban communities to maintain the status quo of post-World War II single-family residential (SFR) sprawl, it has also strangled new development. A dearth of affordable housing follows inflated prices and Californians are left to choose between being a super commuter or tightening their belts another notch to make rent.

An alarming number of households have chosen the latter and become cost-burdened. Such a household spends more than 30% of its income on housing costs. This is the tipping point at which they may have difficulty affording essentials like food, clothing and medical care, according to the U.S. Department of Housing and Urban Development (HUD).

For 130,000 Californians, this balance has tipped toward insolvency and left them homeless. California has seen double-digit jumps in homelessness numbers across the board. That’s 16% in the City of Los Angeles compared to the previous year and 17% in San Francisco compared to 2017.

Here’s how lawmakers reacted to California’s housing crisis through the 2019-20 state budget.

On housing and local government

The 2019-20 California State Budget dedicates a whopping $2.7 billion to housing and homelessness, the largest investment in recent memory for these programs. It earmarks $1.7 billion for housing programs and another $1 billion for homelessness programs.

Lawmakers look to tackle housing costs by investing in state and local government programs that produce housing, protect renters and preserve affordable housing. Here’s a rundown of the budget’s housing highlights.

• Short-term planning and infrastructure grants
  A $750 million one-time general fund to help local governments remove building barriers and support projects that drive high-density development.
• State housing loan program
  A $500 million general fund to offer loans for low- and moderate-income housing statewide via the California Housing Finance Agency (CalHFA) mixed-income development program.
• Expanded state housing tax credit program
  California expands state tax credits up to $500 million annually for new construction in the state’s Low-Income Housing Tax Credit program.
• Long-term statewide housing production strategy
  The budget installs a carrot-and-stick mechanism by which the state may incentivize policies that drive housing production. The “carrot” rewards cities and counties with more grant funding for housing and transportation projects. The “stick” empowers courts to hold non-compliant cities and counties accountable for their housing goals through fines and bring jurisdictions into compliance.

On homelessness

California’s 2019-20 budget includes $1 billion devoted to homelessness issues. Here are the highlights of the budget’s homelessness efforts.

• Homeless Emergency Aid
  A $650 million one-time general fund for homeless shelter and support programs. This mainly includes housing and job support programs.
• Health and Human Services Investments
  About $516 million in wraparound services to mitigate factors contributing to individuals’ homelessness, or to keep them from becoming homeless.
• California Environmental Quality Act (CEQA) exemption
  Allows builders to expedite the building of navigation centers (a kind of homeless shelter) by sidestepping the California Environmental Quality Act (CEQA). The CEQA requires state and local governments to inform decision makers and the public about the environmental impact of proposed projects.

Powerful players

While the 2019-20 budget might seem aggressive, California’s current housing climate warrants aggressive strategies. The carrot-and-stick method Newsom employs here will help produce sorely needed housing by bringing not-in-my-backyard (NIMBY) advocates in line, but even that may not be enough.

While local NIMBYs may be the most vocal on this issue, there are still more influential opponents in the arena. California State Senator Anthony Portantino, for example, unceremoniously shelved Senate Bill 50 (SB 50) despite widespread support. The bill would lift zoning restrictions on higher-density housing near mass transit stops. Portantino also happens to be the former mayor of the predominantly SFR suburb of La Cañada Flintridge.

Public animus toward new housing development runs even deeper; often neighborhood councils are the fiercest opponents. In April 2019, the Los Angeles City Council voted to oppose SB 50. Opponents often cite upholding local control as the driving force against state intervention.

This is only one of the kinks Newsom will have to iron out to win over powerful players. Perhaps the most controversial item in the budget is the courts’ role in real estate. If a city, unswayed by fines and incentives, refuses to comply, how adeptly can a judge bring it into compliance without damaging the character of its neighborhoods? Opponents will also take issue with this point as a gross overstep of the state’s power in general.

More speed bumps

Tying state funding to housing production will also be problematic considering cities aren’t always in control of this. This issue may prove even trickier for rural areas that simply don’t have the resources to make the same kind of housing goal progress as their metropolitan counterparts.

Finally, while parts of the budget address wraparound services to support local homelessness programs, the budget doesn’t strike at the heart of the issue. Building in California is prohibitively expensive. Homelessness programs help thin the flow of homeless persons in California, but it doesn’t address the underlying economic issues that drove many to homelessness in the first place: high housing costs driven by high building costs.

Those costs come in many forms, most notably impact fees. Impact fees are housing development fees levied by municipalities to offset the impact additional residents will have on infrastructure. They make up a significant chunk of total development costs of new housing in California, according to a 2018 Terner Center for Housing Innovation study.

Proposition 13 has limited California jurisdictions’ ability to raise revenue for infrastructure, forcing them to rely on impact fees to make up the difference. California’s impact fees continue to grow as the national average shrinks.

Make no mistake, Newsom’s budget is a step in the right direction. It gives current legislation some teeth to spur on housing production and gives housing and homelessness programs a much-needed cash infusion. But holes abound in the budget, and California’s most vulnerable residents may be left twisting in the wind.

Read the full budget summary here.

Related topics:
california, california environmental quality act (ceqa), homeless, homelessness, housing

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

California’s 2019 fire season is winding down, but the state’s home insurance crisis is just heating up.

Thanks to worsening fire seasons, homeowners’ insurance premiums are skyrocketing in areas at greater risk for wildfires. In many cases, insurers are dropping or refusing to renew policies in high fire risk areas.

Canceled

The California Department of Insurance (CDI) is responding to this crisis by issuing a mandatory one-year moratorium banning insurers from dropping homeowners’ insurance policies in and around areas affected by the 2019 California wildfires. The temporary ban on insurer-initiated non-renewals went into effect December 5, 2019 and ends December 5, 2020.

In addition, insurers need to offer to rescind any cancellation and non-renewal notices issued since the Governor’s emergency declarations in October 2019, and offer to reinstate or renew policies whose notices were issued due to wildfire risk.

The moratorium covers zip codes in and around areas affected by the 2019 California fires, which so far covers the:

• Saddleridge Fire;
• Eagle Fire;
• Kincade Fire;
• Tick Fire;
• Getty Fire;
• Hill Fire; and
• Maria Fire.

For a full list of the zip codes affected by the moratorium, download the Commissioner’s bulletin here. Expect the CDI to update this list with expanded zip codes as more fire data becomes available.

Insurance Commissioner Ricardo Lara’s moratorium is made possible by Senate Bill 824 (SB 824), which Lara authored in 2018 while serving as a state senator. It is intended to provide temporary relief from non-renewals to residents living near declared wildfire disaster areas.

Separately, the bill also allows the Commissioner to collect data from insurance companies to produce a report that will help insurers develop more appropriate policies. SB 824 gives insurers the opportunity to justify their insurance rates, a wise policy now that the industry is under such intense public scrutiny.

The ban will affect roughly 800,000 California homeowners, according to the CDI. Read the full press release here.

An industry ablaze

The moratorium comes a year after California’s deadliest and most destructive fire season. Determined to learn from 2018’s record-breaking fires, California is balancing industry health with homeowner needs.

On one hand, California’s home insurance industry is scrambling to ensure its business model remains profitable in an environment where extreme fire danger is a seasonal norm. One insurance company, Merced Property & Casualty, already went under as a direct consequence of millions in claims for properties destroyed in 2018’s Camp Fire.

On the other hand, homeowners need relief from exorbitant premiums and the annual threat of a non-renewal notice. As a result, homeowners in high risk areas are purchasing less coverage relative to their home’s value and opting for higher deductibles. This trend of underinsuring high-risk properties reflects homeowners’ plight. Many simply can’t afford their soaring premiums and are forced to go with ineffective coverage.

Even the FAIR Plan, California’s insurance market of last resort, falls short. FAIR Plan policies are meant as a last resort since they offer basic protection for properties uninsurable thanks to unique or extreme risks. Because of increasingly costly fire seasons, these policies are shouldering more than their fair share of the market. In fact, new FAIR Plan enrollments grew 177% between 2015 and 2018 in the ten California counties with the most homes in high-risk areas.

The moratorium offers homeowners some breathing room to adapt to more dangerous fire seasons and install or improve fire safety measures.

Extinguishing fear

Shrewd agents will watch how insurance companies react to this moratorium for signs of the industry’s (and their local market’s) stability. After all, insurance costs can surprise buyers at the end of a transaction and upend a sale that otherwise pencils out.

With cancellations and non-renewals on the rise, agents can establish themselves as local experts by reaching out to frustrated homeowners. Prevention should be your clients’ number one focus in this conversation. Be prepared for homeowner questions by staying on top of home fire safety standards in high-risk areas. Click through for recommendations on hardening a home for any fire season.

Related article:

Half a million California homes at high wildfire risk

Related topics:
fire, insurance, wildfire

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

The homeless crisis has reached a tipping point in California.

Our state is home to 12% of the nation’s population, but 24% of the nation’s homeless population and 47% of the nation’s unsheltered population, according to the Department of Housing and Urban Development (HUD).

The vast majority of homeless people live in California’s major coastal regions, like the Los Angeles, San Francisco and San Diego metro areas. The growing number of homeless camps — and the issues that come with them — has made the crisis an issue that impacts all residents. A 2018 United Nations report called the methods used to treat the homeless crisis in San Francisco a human rights violation.

And yet, residents continue to resist efforts to help homeless individuals, tying up proposed shelters and centers offering homeless services in lawsuits and generally giving them the full not-in-my-backyard (NIMBY) treatment.

But NIMBYs may have met their match in a new law, passed unanimously, which takes effect immediately. AB 101 earmarks and moves around some funds to address homelessness, but the biggest change the new law makes is to jump over the many hurdles NIMBY advocates tend to set up to avoid having homeless services in their neighborhood.

Specifically, AB 101 makes low barrier navigation centers a “use by right.” In other words, residents have lost the ability to appeal decisions to build navigation centers.

Anti-NIMBY legislation strikes back

Opening more navigation centers has the potential to decrease the state’s huge unsheltered population. These centers are less restrictive than regular shelters. Lifting common restrictions like those preventing homeless individuals from bringing their pets or remaining with their spouse or partner makes people more likely to get off the street and into shelter.

Even more promising, on top of providing temporary shelter, the ultimate goal of navigation centers is to find permanent housing for homeless individuals using the center’s services. On-site case managers guide and connect people to needed services that will help them find an income, obtain public benefits, health services and permanent housing.

For concerned residents: AB 101 isn’t complete martial law.

State Senator Wiener claims the bill won’t overly infringe on residents. He says: “I think overwhelmingly cities are going to continue to work with the local community, they’re not just going to drop something out of the sky.”

It still leaves some rules in place regarding where a navigation center can be opened. For example, the new law specifies navigation centers may only be constructed in areas zoned for mixed use and nonresidential zones permitting multi-family uses. So, navigation centers won’t be popping up in residential neighborhoods. But NIMBYs also won’t be able to block or stall nearby navigation centers using common methods such as California Environmental Quality Act (CEQA) appeals, as navigation centers are now CEQA exempt.

Whether the law is able to side-step the many obstacles that currently prevent homeless numbers from declining out of the current crisis level remains to be seen. But this step is one of many legislators have taken in recent years to reduce homelessness and increase the stock of low-income housing — both things that have the potential to improve the quality of life for all residents here in California.

Related article:

Legislative steps toward more affordable housing

Related topics:
california environmental quality act (ceqa), homeless, not in my backyard (nimby)

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Few residents need a reminder that the Golden State is in the clutches of a devastating housing crisis. Homelessness and housing costs are high while new construction and sales volume trudges along. Despite this, a sweeping bill aimed at easing California’s housing woes by allowing higher-density development near train stations was just stopped in its tracks.

Senate Bill 50 (SB 50), also known as the More HOMES Act, promoted higher-density housing development near transit- and jobs-rich areas. It called for the “upzoning” of areas near major transit stops to restrict enforcement of many local zoning ordinances, like height limits and parking requirements. This would have allowed four-to-five-story apartment buildings and up to fourplexes near mass transit stops and job centers.

To picture the scale of this legislation, consider that the City of Los Angeles estimated 43% of its developable land would have been eligible for higher-density development under SB 50.

Do the locomotion

At first, SB 50 seemed unstoppable. San Francisco Senator Scott Wiener introduced the bill in December 2018. It easily passed the California Senate Housing Committee. The bill’s aggressive protections for existing renters and promise to rapidly expand housing around transportation hubs also garnered the support of Yes-in-my-backyard (YIMBY) activists, among other influential groups.

Recent polling also showed the bill was quite popular among California voters. In one poll, 66% of California voters surveyed supported SB 50 while 18% opposed it, according to polling by Lake Research Partners.

Another poll by Change Research yielded similar results, with 61% of voters surveyed supporting the bill and 22% opposing. Unsurprisingly, both polls revealed a wide partisan rift, with Democrats favoring the bill in greater numbers than Republicans.

Nevertheless, SB 50 cleared a major hurdle in the California Senate Governance and Finance Committee in April 2019. With this win, the bill was gaining steam and on track to realizing the state’s most ambitious legislative step in easing the housing crisis.

Derailed

And then it was shelved. In May 2019, SB 50 was converted into a two-year bill, blocking it from leaving the California Senate Appropriations Committee. This means the bill won’t be eligible for debate or a vote on the California Senate floor until 2020.

SB 50 had the support of many municipal leaders, chambers of commerce, environmental groups (the bill’s focus on mass transit would have helped reduce carbon emissions from California’s notorious traffic jams) and business groups. It won endorsements from the New York Times and Los Angeles Times. It cleared the California Senate Housing and Governance and Finance Committees. So how did a bill with so much momentum go off the rails?

Critics point to the bill’s regulatory overreach. It’s no surprise that city officials would balk at the idea of surrendering zoning control to the state. (Not-in-my-backyard) NIMBY advocates protested that SB 50 effectively eliminated single-family residence (SFR) zoning in many areas. It would have changed the character of cities without local input, they argued.

They also contested that new housing resulting from SB 50 would have mostly benefited high earners instead of the low- and moderate-income households for whom it was intended. This is because the high cost of construction would have forced newly erected high-density housing to debut with an equally inflated price tag to turn a profit. A valid concern, considering overwhelming land, building, permitting and labor costs have all but gridlocked new construction in California.

Unstoppable force, meet immovable object

But as the California Senate Appropriations Committee Chair, Senator Anthony Portantino was ultimately responsible for stopping the runaway bill. Senator Portantino is a former mayor of La Cañada Flintridge, a predominantly SFR suburb. Portantino’s district includes other bedroom communities that felt similarly threatened by the mid-rise construction SB 50 would have brought to their cities.

Portantino claimed SB 50 wasn’t targeted enough. So in February 2019, the senator introduced his own solution: Senate Bill 509 (SB 509), a laughable license plate program that sought to raise awareness for the California housing crisis. Under Portantino’s bill, the proceeds from the license plate sales would have been later appropriated by the California legislature for housing-related programs.

Californians forced to live through the crisis are well aware of it and a promotional license plate would not have generated nearly enough revenue to address the issue. California needs a substantial compromise that balances affordable housing expansion with protections for existing residents.

A platform for change

The California Budget and Policy Center claims that roughly half of California households are cost burdened, meaning they spend more than 30% of their income on housing costs. This is the tipping point at which a household may have difficulty affording essentials like food, clothing and medical care, according to the U.S. Department of Housing and Urban Development (HUD).

An Apartment List study found that renters with a median household income seeking a two-bedroom rental are cost burdened in 25 major U.S. markets. It’s no surprise for anyone familiar with California’s high cost of housing that 12 out of these 25 U.S. cost-burdened metros are located in the Golden State.

Related article:

Rent-to-income gap widens for California renters

A crisis of this magnitude calls for a seismic shift in policy, but SB 50’s ambition to move mountains did not come without polarization. For now, Californians will have to wait. SB 50 has not been decommissioned, just delayed.

Related topics:

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

134,000 individuals are homeless in California, and this number continues to increase dramatically each year, rising 14% from 2016 to 2017. In Los Angeles, the homeless population is rising even faster, at a rate of 30% from 2016 to 2017, an increase of 13,000 individuals.

Previous fixes for the state’s growing homeless population have included the straightforward and obvious — building more shelters to house the homeless. But these efforts are not working to keep the many people who need extra resources to maintain their mental health off the street.

One-third of California’s homeless population have an untreated mental illness, according to the Los Angeles Times. Therefore, a more effective solution to keep this significant portion of the homeless population off the street may be to address the root of the issue. This entails providing more resources for individuals to cope with mental health challenges to avoid becoming homeless in the first place.

In the November 2018 election, California voters chose to do just that with 63% of voters approving the passage of Proposition 2, more clumsily known as the Use Millionaire’s Tax Revenue for Homelessness Prevention Housing Bonds Measure.

Now that the measure has passed, what changed with the passage of Prop 2?

This measure shuffles around money a bit, but doesn’t directly impact anyone’s wallet. That’s because it builds off a 2004 measure, Proposition 63, the Mental Health Services Act, which implemented a 1% tax on income exceeding $1 million in California. The money collected through this tax — around $1.5-$2.5 billion each year — is set aside for mental health services and programs.

Prop 2 clarifies that a portion of the revenue collected with the Mental Health Services Act may be used to house mentally ill individuals at risk of becoming homeless. Opponents to Prop 2 claimed that the money was supposed to be used only to treat mentally ill patients. However, supporters argued that keeping mentally ill people housed is an important part of treatment.

With Prop 2’s passage, hundreds of millions are dollars will be made available to local governments to construct housing for mentally ill individuals. The proposition’s text specifies its goal to provide funding for 20,000 supportive housing units across the state. These units will be permanent housing, not the typical shelter environment which can contribute to instability and exacerbate mental health challenges.

More permanent supportive housing units developed across the state will improve conditions for mentally ill individuals. It will also improve communities and save money, as it is more expensive to police and provide emergency services to mentally ill and other homeless individuals than it is to simply provide shelter and the chance at a better long-term outcome.

Related topics:
homelessness

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Seniors are the quickest growing population in California. As this population ages, their old housing is becoming unsuitable or untenable. Where will they live now? This is a question to which many Californians are finding they don’t have an answer.

Senior housing challenges

Aging comes with a unique set of challenges. Unable to move around as easily, many seniors find they can’t climb stairs or maintain their large homes or properties like they used to.

And yet, more seniors are choosing to age in place, holding onto their single family residences (SFRs) longer than previous generations. Nationally, seniors live in roughly 1.6 million homes, according to Freddie Mac.

However, aging in place may not be possible for all seniors, especially those who need extra help and those who rent. Others are modifying their homes, adding accessibility features to make staying in their long-term home easier. This includes adding:

• ramps;
• railings or grab bars;
• stair lifts; and
• additional safety and security features.

Modifications can be cost-prohibitive, and even when they are made, seniors may need the assistance of a caregiver. In the end, it may make more sense to downsize, move closer to family members who can help — perhaps into a family member’s casita — or relocate to a senior housing community.

Related article:

Setting the stage for a new life: Tips for seniors on downsizing and moving

Senior housing is exempt from the age discrimination requirements set forth by the Federal Fair Housing Act (FFHA) for those in housing intended for and solely occupied by residents 62 years of age and older. [24 Code of Federal Regulations §100.303(a)]

Here in California, a senior housing development needs to consist of at least 35 residential units specifically developed or renovated for seniors. [Calif. Civil Code §51.3(b)(4)]

Also qualifying for the senior housing development exception are qualified permanent residents. This includes disabled children or grandchildren living with a senior citizen due to the disabling condition. [CC §51.3(b)(3)]

Permitted healthcare residents who are hired to provide live-in, long-term or terminal health care to the senior resident may also live in a senior housing development. [CC §51.3(b)(7)]

Alternatively, at least 80% of the units need to be occupied by at least one resident 55 years of age or older. [24 CFR §100.303(d)]

Read more about the types of senior housing in California here.

Senior renters face a shortage

Seniors who own their homes have the option of modifying their homes or selling and downsizing. But senior renters are much more vulnerable. Living on a fixed income, they are most vulnerable to the rent increases that are occurring on an increasing basis across California, as demand for housing outstrips supply.

In Los Angeles, 26% of no-fault evictions happen to residents who are 62 years or older. In contrast, roughly 13% of the city’s units are occupied by seniors. Thus, the eviction rate for seniors in Los Angeles is significantly higher than it is for other age groups.

No-fault evictions usually occur when a renter is living with a month-to-month lease. Some seniors are unaware they have this type of lease, as when their annual lease ends the landlord may choose to continue the lease on a month-to-month basis. Then, when the landlord decides to re-list the unit at a higher rate, they may simply evict the long-term tenant with very little notice.

Editor’s note — When a landlord changes the terms of a month-to-month lease, 60 days’ notice is required for rent increases greater than 10%, or 30 days for increases 10% or less. [CC §827(b)]

A growing trend in California, limited partnerships have been buying up rentals in bulk and raising the rent and/or sending eviction notices to senior tenants, according to the Los Angeles Times. Tenants who try to fight the increases face lengthy and costly legal battles that don’t always turn out in their favor.

In the Bay Area, a 2015 report from U.C. Berkeley showed over half of senior renters did not have enough income to meet their basic needs. Even legally defensible rent increases have been devastating to these seniors, forcing many from their long-time homes onto the streets.

The result?

The number of homeless seniors is rising at an alarming rate. In Los Angeles, the number of homeless seniors rose 22% in 2018, leaving 4,800 seniors on the streets. Experts predict the number could rise to 30,000 by 2030.

Our state’s extreme homeless crisis is a growing problem, horrifying for the seniors who are forced to walk miles in search of a bathroom, food and water, and damaging to the quality of life in our cities, too.

Legal efforts to keep seniors housed fall short

Some legal protections exist to keep seniors in their current housing arrangements, which real estate professionals need to be aware of.

Rent control can provide some protection for seniors in low-income housing, but rent-controlled units are few and far between. Further, there are loopholes landlords use to get around rent control laws. Ellis Act evictions are a common sidestep used by landlords to skirt around the law and evict tenants from rent-controlled apartments. In these cases, the landlord “goes out of business” by converting the rent-controlled unit into a condo or single family residence (SFR) or simply demolishing it (even then, some landlords perform the Ellis Act eviction and then re-list the property at a higher rate, anyway).

Other laws are gradually being put into place to provide more helping hands for seniors attempting to stay in their homes.

For example, as of July 1, 2019, the Senior Citizens Manufactured Home Property Tax Postponement Law went into effect. This law allows senior mobilehome owners to defer payment of their property taxes, due upon the sale or transfer of the mobilehome.

Another law currently under consideration, SB 364, would remove the inflation factor from a property’s assessed value for veterans aged 65 and older. It would also exempt a disabled veteran from paying property taxes on the full value of their principal residence.

Various other laws encourage local governments to expedite zoning and permitting for new senior housing developments. This is ultimately the needed solution to the shortage in senior housing — more units need to be built to house this growing population. At the same time, more laws are needed to protect seniors and keep their rent affordable to their fixed incomes.

Seniors who are having conflicts with their landlords may be able to find help from the state’s Department of Aging. Qualifying Californians are aged 60 or older, regardless of income level.

Related topics:
casita, senior housing, seniors

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

This article examines whether or not California’s rent control policies work to keep low-income renters in place, and efforts to change these policies.

Rent control in California

Rent control is meant to keep rents on certain units from rising beyond the financial abilities of long-term tenants. This is especially important here in California, where rent increases regularly exceed changes in income. In theory, rent control creates more stable neighborhoods since tenants won’t be forced out due to rising rents, especially in neighborhoods where gentrification is occurring.

Rent control laws are broadly set at the state level and adapted through local rent control ordinances by individual cities.

Here in California, the following cities have their own rent control laws:

• Berkeley;
• Beverly Hills;
• Campbell;
• East Palo Alto;
• Fremont;
• Hayward;
• Los Angeles;
• Los Gatos;
• Oakland;
• Palm Springs;
• San Francisco;
• San Jose;
• Santa Monica;
• Thousand Oaks; and
• West Hollywood.

Specific rent control laws vary by city. Some cities only limit increases in rent (usually to about the rate of inflation) and others also restrict the reasons for which a tenant may be evicted. However, there are some prevailing controls over how rent control laws are set.

For example, to be valid, rent control ordinances need to be reasonably related to the prevention of excessive rents and maintaining the availability of existing housing. No case has yet found an ordinance lacking in this purpose, regardless of its inability to attain, much less come close to, its stated purposes. [Santa Monica Beach, Ltd. v. Superior Court (1999) 19 C4th 952]

Another controlling precedent, known as Costa Hawkins, allows rent-controlled apartments to be reset to market rent whenever a tenant moves out.

Costa Hawkins is a 1995 law which removed vacancy controls. Due to this removal, rent-controlled units are able to be reset to market rent when a tenant moves out. Costa Hawkins also limits the types of units local governments can set rent control laws on, including single family residences (SFRs), condominiums and new construction. [Calif. Civil Code §1950 et seq.]

Related article:

Prop 10 explained: California’s battle to remove limits on rent control

Results of rent control

Rent control is a quick fix to a complex issue. Like most quick fixes, it does not hold up in the long run and usually does more harm than good.

Perhaps most apparent, landlords of rent-controlled apartments have no reason to maintain or improve their properties. Their only duty is to maintain habitable living conditions, and beyond that, any improvements made won’t provide the landlord any return. This leads to decaying rent-controlled units, blighting neighborhoods and making life hard for tenants.

A Stanford study looked into the impact of rent control on San Francisco’s rental housing market and found rent control did help low-income renters remain in their homes. But this was achieved at the cost of a:

• 20% decrease in mobility for renters of rent-controlled units; and
• 15% decrease in rental housing stock in the city.

Decreased mobility means renters of rent-controlled units may at times wish to move, due to a job change, a growing family, shifting needs or simply a decaying unit. But they cannot give up their rent-controlled apartment since to do so would mean finding a replacement at a prohibitively high rate. This harms individuals and the broader economy.

The decrease in rental inventory is closely related to landlords rejecting the demands of rent control. Instead of continuing to accept low rents, landlords choose to “go out of business” by selling or demolishing the rent-controlled unit in favor of building an SFR or condos.

With the reduction in rental inventory, the supply-and-demand imbalance grows, causing rents to jump more quickly than incomes can handle. It’s this low rental inventory that has caused San Francisco’s astronomical market rents. At the same time, low-income residents, financially exhausted by years of depleting their savings to pay ever higher rents, are increasingly winding up on the streets and the city’s homeless crisis has reached inhumane levels.

This story is not unique to San Francisco. Rapidly rising rents and homelessness are being seen throughout the state.

Recent law changes

In September 2019, California’s governor signed into law Assembly Bill 1482, which has been described as instituting “statewide rent control.”

The new law caps annual rent increases at 5% plus an inflation factor through January 1, 2030. It will not supersede local rent increase caps when they provide more tenant protection than the 5% cap.

This rent cap law applies to all residential rental property except:

• SFRs or condo units owned by individuals (mom and pop owners rather than corporate landlords);
• housing issued a certificate of occupancy within the last 15 years;
• hotels;
• housing available at nonprofit hospitals, religious facilities, extended care facilities and adult residential facilities;
• school dorms; and
• when the owner occupying their home as their principal residence rents out a portion of their home as:
  • room(s) for rent;
  • accessory dwelling units (ADUs) on the property; or
  • the other dwelling of a two-unit duplex.

Separately, the law requires landlords to show just cause for evicting a tenant when the renter has occupied the unit for 12 months. For a no-fault just cause eviction — for example, when the owner evicts the tenant so they themselves can move in — the owner needs to provide the tenant with relocation assistance equivalent to one month’s rent, in addition to waiving the final month’s rent.

This final law was a compromise of sorts, after much lobbying against the changes by the California Association of Realtors (CAR) and the California Apartment Association (CAA).

Passage of AB 1482 was generally lauded by tenants’ rights groups as a victory for renters. But, as shown in the Stanford study, there will be long-term drawbacks.

The rent control alternative

What’s better than rent control? More rental housing!

The goal is to help low-income renters continue to afford their rent and avoid being pushed out of their long-term neighborhoods. Instituting rent control to meet this goal is like pulling weeds — it’s painful for everyone involved and the same problems crop up over and over again. As the old adage goes, it’s easier to plant seeds than pull weeds.

Planting seeds, in this case, can be achieved by simply building more rental housing.

Rent control got its start in the U.S. during World War II, when building materials were scarce. Residential construction was not feasible, so governments made sure residents were still able to afford to live even as vacancies declined. They understood it to be a necessary but temporary measure.

So, what’s the excuse holding residential construction back in 2019 and causing so many residents to rely on rent control?

Building incentives and re-zoning for denser housing is an easy legislative fix. But while efforts to encourage more construction are often supported by legislators, they end up being derailed by vocal not-in-my-backyard (NIMBY) advocates.

Fortunately, California’s housing crisis has brought the oversized influence of NIMBYs into focus for state lawmakers. Recent legislative efforts have begun to work around local opposition, prioritizing housing over maintaining neighborhood character.

The ideal solution will be a marriage between local interests and statewide need. One thing is certain: the current approach is not working for California renters. Plans to increase rent controls also lack promise.

The key is building more rentals. It’s time for legislators to shift their gaze from the short-term fix provided by rent control and get serious about constructing more low-tier rental housing.

Related article:

Legislative steps toward more affordable housing

Related topics:
costa hawkins, not in my backyard (nimby), rent control

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

President Donald Trump was recently criticized for leaked emails in which his administration planned to retaliate against political opponents by releasing U.S. Immigration and Customs Enforcement (ICE) detainees in sanctuary cities. This heavy-handed tactic scored points with his supporters and drew the ire of opponents in California, which is home to over 45 sanctuary cities.

But sanctuary cities are more than a political football; they have tangible effects on local industries. California’s economy depends on the roughly 2.6 million undocumented immigrants living there and the real estate industry is no exception.

Fewer immigrants means fewer buyers

First, a reality check. A recent first tuesday poll asked readers about the effects of mass deportations on the real estate industry. A plurality of respondents believe that deporting California’s 2.5 million undocumented immigrants will have absolutely no effect on the state’s housing market. 37% of voters see home sales volume rising in response to a sudden vacuum of a group of potential homebuyers.

Some experts are not as optimistic. A 2016 study between Brigham Young and Cornell Universities finds that increased deportations between 2006 and 2008 led to a higher rate of foreclosures in the years that followed among Latino households when compared to other ethnic groups.

One third of undocumented immigrants live in owner-occupied homes, according to a New York Times interview with the study’s authors. Three-quarters of these households are comprised of individuals with different documentation statuses. When mixed-status households pool together resources, their household inevitably collapses when a financial contributor is deported and the household is unable to timely make mortgage payments. This is partly how California’s foreclosure crisis played out.

The Brigham Young/Cornell study suggests that Trump’s mass deportation policy will likely result in another spike in foreclosures. Their absence will also be felt in the rental market. California needs Latino buyers. If these drastic immigration policies gain traction, agents currently serving communities with any significant Latin American population can expect fewer buyers, falling prices and dwindling fees as well.

Real estate sanctuary

Widescale deportations like those studied by Brigham Young and Cornell are achieved through U.S. Immigration and Nationality Act Section 287(g) agreements. These are arrangements in which local law enforcement officers may be deputized into federal immigration agents to interrogate and further detain suspected undocumented individuals as part of their regular law enforcement activities.

This is where sanctuary cities come in. Though there is no legal definition of sanctuary cities, the term is used to describe a municipal jurisdiction that limits its cooperation with ICE’s effort to enforce immigration law. This includes prohibiting 287(g) agreements. In turn, local law enforcement agencies are better able to build trust with undocumented immigrant populations.

Not-in-my-backyard (NIMBY) advocates worry that sanctuary cities will jeopardize their neighborhoods’ safety, but these fears are statistically unfounded. Sanctuary policies make undocumented individuals more willing to report crimes and cooperate with investigations. In fact, white residents of sanctuary cities are safer from violent crimes than those in non-sanctuary cities, according to a 2017 Center on Juvenile and Criminal Justice report.

The California Values Act (Senate Bill 54), more commonly known as the “sanctuary state” law, went into effect January 1, 2018. The controversial law basically applies the sanctuary city model to the entire state of California, limiting how much local law enforcement can cooperate with ICE in enforcing immigration law.

This law prohibits local law enforcement in California from:

• entering into 187(g) agreements;
• inquiring about an individual’s immigration status;
• extending an individual’s detainment with an ICE detainer request;
• arresting an individual based on a civil immigration warrant;
• providing office space in local jails exclusively for ICE;
• using ICE agents as interpreters;
• participating in immigration enforcement task forces,
• providing ICE with an individual’s non-public personal information;
• notifying ICE of an individual’s release date, with few exceptions; and
• transferring an individual into ICE custody, with few exceptions. [Calif. Government Code §7284.6(a)]

This law shuts down the 287(g) agreements that exacerbated California’s foreclosure crisis by targeting Latino communities. By creating a sanctuary state, the California Values Act protects its most vulnerable communities, gives them an opportunity to invest in their neighborhoods and protects local real estate markets from economic instability caused by federal agencies.

Echa pa’lante! (Onward!)

California’s new statewide sanctuary policies are poised to lift a community of homeowners and renters out of the darkness. This will be a boon for California’s economy as immigrants account for two-thirds of economic growth in the U.S. since 2011, according to a Citigroup and Oxford University study. Despite immigration’s negative perception, it presents an unprecedented economic opportunity for California’s local industries, including real estate.

Real estate agents are in a unique position to capitalize on a growing population that needs homes. Because Fannie Mae and Freddie Mac only purchase loans held by legal residents, agents looking to take on undocumented clients will need to familiarize themselves with alternative mortgage products. For instance, prospective buyers can still become homeowners without a Social Security number by using an Individual Tax Identification Number (ITIN).

Obtaining an ITIN mortgage is more difficult than obtaining a traditional mortgage, so only those with exceptional financial histories may qualify. Because ITIN mortgages present a unique risk, homebuyers can expect higher down payments and rates than conventional mortgage products. Is your practice versed in the extra steps it takes for our 2.6 million undocumented immigrants to purchase homes? Find out more about ITIN mortgages here.

Learning the language of your area’s most populous immigrant community, be it Spanish or Mandarin, can also give your practice a competitive edge in hard-to-reach pockets of your service area.

Regardless of your feelings on its immigration policy, California continues to lure residents from around the world in every price tier. Is your practice ready for them?

Related topics:
mortgage, nimby, undocumented immigrant

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

To say there isn’t enough housing for low-income households in California is kind of like saying the Titanic took on some water. The lack of affordable rentals has become a statewide crisis, at its worst in expensive coastal cities like Los Angeles and San Francisco.

For example, the median-income household in Los Angeles spends 46% of their monthly income on rent alone, high above the recommended 31% rent ceiling. Since it’s financially unfeasible for most households to spend almost half of their income on rent, the resulting options are to:

• move in with roommates or family members;
• become homeless (which a staggering number have done in recent years); or
• find some sort of subsidized or controlled rental solution.

However, most housing experts believe one of these most commonly used solutions — rent control — causes more harm than good. In fact, only 2% of housing experts believe rent control is an effective solution to a lack of low-income housing in a normal housing market.

Here in California, the following cities have rent control laws:

• Berkeley;
• Beverly Hills;
• Campbell;
• East Palo Alto;
• Fremont;
• Hayward;
• Los Angeles;
• Los Gatos;
• Oakland;
• Palm Springs;
• San Francisco;
• San Jose;
• Santa Monica;
• Thousand Oaks; and
• West Hollywood.

Specific rent control laws vary by city. Some cities only limit increases in rent (usually to about the rate of inflation) and others also restrict the reasons for which a tenant may be evicted.

Rent control is meant to keep rents on certain units from rising beyond the financial abilities of long-term tenants. This is especially important here in California, where housing cost increases regularly exceed income increases. In theory, this creates more stable neighborhoods since tenants won’t be forced out in the face of gentrification.

So why do housing experts say that rent control doesn’t work?

There are several disadvantages to rent control. Unlike with a traditional rental, where a landlord attracts tenants by properly maintaining the unit and can charge more rent when they improve the property, this system gives very little incentive to landlords to maintain and improve properties.

Worse, rent control encourages landlords to push out tenants whenever possible, since they are able to collect higher rents whenever a new tenant moves in due to a controversial workaround produced by Costa Hawkins.

Editor’s note — Proposition 10 appeared on the 2018 ballot to repeal Costa Hawkins, the law which resets rent-controlled apartments to market rate whenever a tenant moves out. However, this effort was unsuccessful, and Costa Hawkins remains in effect.

Rent control places tenants and landlords in adversarial roles. It also causes decreased property values, as landlords or impacted units have little to no incentive to maintain their properties and see their rentals become outdated and dilapidated. Due to decreased values, the benefits of building more rental housing in a city with rent control are considerably lower (even though rent control laws do not apply to new construction), which compounds the issue of not enough rental housing and skyrocketing rents.

Better than rent control

Clearly, rent control is not perfect. But is there a better solution that allows low-income renters to qualify to pay rent, while also keeping landlords happy?

Yes, and it’s really simple — more construction of low-income housing is needed across California, and especially in its coastal cities.

There are already 1.5 million fewer homes than needed to keep up with the population of low-income residents in the affordable housing inventory, according to the Low Income Housing Coalition. Every year, this number grows as the increasing population exceeds new residential construction of all types.

To fight this severe housing shortage, local governments need to encourage the building of more housing suitable for low-income households. This can be done through builder incentives and re-zoning to allow denser building near jobs and public transit. However, such efforts often receive the support of legislators, but end up being derailed by local not-in-my-backyard (NIMBY) advocates. For a recent example, see SB 50, a promising bill to provide more housing near public transit which has been delayed due to NIMBY interference, citing the bill’s potential to change the “character” of their neighborhoods.

When sufficient rental housing exists to shelter the state’s low-income population, the need for rent control will diminish.

Read about California’s numerous efforts to encourage more affordable housing here.

Related topics:
low-income housing, rent control

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Every experienced landlord knows that even the best tenants can forget to pay rent on time. That’s why specifying the penalty for paying late — and clarifying exactly when a payment is considered late — is critical to protect the landlord’s investment.

A lease agreement creates a tenancy that continues for a fixed period of time. In return for the use and possession of the premises, the tenant agrees pays the landlord rent until the natural expiration of the lease. Further, the tenant agrees to pay a late charge if the rent is not paid on the due date, or within the grace period established in the lease. [See RPI Form 550]

A grace period is the time period following the due date during which rent may be paid without incurring a late charge. When rent is past due and unpaid, it is not delinquent until the running of the grace period. The landlord may then deduct the late charge from the tenant’s security deposit. [Calif. Civil Code §§1950.5(b); 1950.7(c)]

California law dictates a late charge needs to be a reasonable amount related to the landlord’s administrative costs and loss of interest. However, it doesn’t specify what exactly these may add up to. [CC §1940.5(g)]

This ambiguity in law creates a grey area in practice. Is 5% of the monthly rent due reasonable? Is 20% reasonable (definitely not)?

Typically, late charges fall in the 10% or less range, but this custom is not definitively set in statute, and thus not uniformly applied. Some leases stipulate that the late fee amount will escalate the longer the rent goes unpaid.

California also fails to regulate grace periods. The grace period included in the lease may be phrased in a multitude of ways, and provide any number numerical time periods. In other words, it’s completely up to the landlord’s discretion. More troubling, the landlord may not even specify the existence or length of a grace period in the lease, leaving the door open for confusion for the tenant and landlord alike. By not setting an explicit grace period, the landlord leaves themselves open to headache and potential loss of money when the tenant ties up a demand for payment with legal difficulties.

One exception exists: depending on the county where the leased property is located, certain local standardized rules may apply to late charges and grace periods. For example, in Los Angeles County, the late charge may not exceed 5% of the monthly rent payment to be considered reasonable. However, like the rest of the state, Los Angeles County does not mandate a grace period.

California is typically considered a tenant-friendly state. However, in denying statutory grace periods and late charges, California is abandoning both landlords and tenants to the whims of individuals interpreting lease agreements, which are not always thorough, reasonable or fairly applied.

first tuesday suggests that California’s legislature adds rules specifying a minimum grace period for residential leases and requiring the landlord’s handling of a grace period to be transparent and agreed to in each lease. We also recommend defining what “reasonable” means in regards to late charges, standardizing the calculation of the amount charged and requiring that this be stated forthrightly in the lease.

Related article:

Legislative Gossip

Related topics:

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Ability-to-repay rules put in place following the 2008 recession — the disastrous result of years of de-regulated mortgage lending — require residential mortgage lenders to make a “reasonable and good faith effort to verify that the applicant is able to repay the loan.” [12 Code of Federal Regulations §§1026.43 et seq.]

To simplify matters for lenders, the Consumer Financial Protection Bureau (CFPB), along with other federal agencies, introduced the qualified mortgage (QM), a category of loans that automatically meet the rules.

To meet the definitions, lenders need to verify applicant criteria such as income, employment, debt-to-income ratios (DTIs) and assets. Likewise, the mortgage offered needs to meet criteria like limits on the mortgage term, points and fees and payment ratios.

The benefit for originating a mortgage that meets these criteria is, for the lender, greater protection or safe harbor if the homebuyer defaults and, for the homebuyer, a more competitive interest rate and terms.

However, one notable requirement is missing — there is no minimum down payment requirement included in the QM or QRM rule.

Before the QM was adopted as the gold standard, two categories of acceptable mortgages were floated, the QM and the qualified residential mortgage (QRM).

Originally, it was expected that the QRM rules would have stricter rules, including the need for a higher down payment. But when the rules were finalized in 2014, the agencies in charge chose to align the QRM rules with the QM. The potential down payment rule did not make it into the final QRM ruling.

Excluding a down payment requirement was a big miss for overall housing market stability. The federal agencies in charge reasoned a 20% down payment requirement would limit mortgage access for low- and moderate-income homebuyers. But at the same time, any down payment below 20% requires the added expense of private mortgage insurance (PMI), inflating overall borrowing costs for low- and moderate-income homebuyers unable to muster a 20% down payment.

The agencies’ approach — championed by trade associations like the California Association of Realtors (CAR) — was to qualify as many mortgages as QRMs, rather than actually making any changes in the mortgage market. In their words, their aim was “reducing regulatory burden.” Thus, more mortgages will be originated under the current QRM and QM, but this comes at a steep price: lower principal amounts due to PMI and a higher risk of increased defaults due to a lack of skin in the game from low-down-payment homebuyers.

Of course, the agencies were correct: imposing a down payment requirement was sure to have decreased mortgage originations at the start. But it would have meant a more stable housing market over the long-term cycles of boom and bust. Short-term discomfort for long-term stability.

A better, alternative approach would have been for the agencies to have imposed a graduated down payment requirement. first tuesday’s suggestion is to introduce this graduated down payment plan, to increase over several years, giving time for homebuyers to plan and adjust. This might start with a minimum 5% down payment, to increase gradually over the next 7-10 years, at which time the minimum down payment to qualifying homebuyers for the QRM will be set at 20%.

A graduated minimum down payment plan helps avoid the pitfall of lost homebuyers and steep drop-off of sales volume that an immediate 20% down payment requirement would cause. But, unlike the current rules, it would ensure long-term housing market stability, even during future recessions.

Related topics:
down payment, qualified residential mortgage (qrm)

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

In order to avoid conflicts of interest, the California Department of Real Estate (DRE) commissioner and designated DRE employees are prohibited from receiving honoraria and a limited amount of gifts. The DRE commissioner is also required to disclose all investments, business interests and positions in real property and income.

But DRE employees and the DRE commissioner are not prohibited from maintaining membership in real estate trade associations while in office.

Limiting DRE involvement in real estate trade unions draws firmer lines between the DRE’s mission to safeguard public interests and the interests of private enterprise.

first tuesday proposes to prohibit the DRE commissioner from maintaining memberships with a real estate trade association.

We feel a change is needed, given the DRE’s history of appointing commissioners with deep ties to the state’s trade union. For example, Jeff Davi served as CAR’s director before being appointed to the role of DRE commissioner. He served in this role from 2004-2011.

What’s the harm in CAR and the DRE having strong ties?

CAR is a member-supported organization — since it doesn’t receive state funding, without members, it doesn’t have the financial ability exist. Therefore, their goal is ultimately to grow their membership base.

On the other hand, the DRE’s goal is to protect the public’s interest with regards to real estate matters.

These two missions don’t always align. While CAR officials might want to see more licensees flood the market to increase their membership pool, a glut of licensees — who may be less experienced and offer less quality — is against the public’s interest (and the DRE’s mission).

The DRE needs to focus on its goal to safeguard consumers — buyers, sellers, renters and landlords — rather than protect CAR’s interests — agents and brokers. It all starts with the commissioner, whose ties to CAR ought to be limited.

Related topics:
california association of realtors (car), department of real estate (dre)

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

The amount and quality of supervision brokers offer their sales agents varies considerably from brokerage to brokerage. In many brokerage offices, a lack of supervision has led to negligent behavior from sales agents. A newly licensed sales agent with little to no supervision from their employing broker is more likely to make mistakes, costly to them, their brokers and their clients.

first tuesday proposes that newly licensed sales agents be required to serve as apprentices or trainees for a set amount of time, say two years, before being able to practice fully.

Compare this training period with the requirement for new appraisers to undergo training and satisfy experience requirements before being licensed.

For example, a new appraiser needs to obtain a combination of experience which includes:

• carrying out several instances of the full appraisal process under the guidance of a supervising appraiser;
• completing a work log;
• reviewing others’ appraisals; and
• assisting in preparing appraisals.

Much like new sales agents, appraiser trainees receive lower rates of pay than fully licensed appraisers, as a portion of the appraisal fees collected goes to the supervising appraiser.

The supervising appraiser needs to review and accept responsibility for all of the trainee’s appraisal work. They may have no more than three trainees under their supervision at one time.

This requirement protects members of the public — buyers and sellers— from inexperienced appraisers, who have the ability to derail sales, mislead lenders and set false home value expectations.

Sales agents fresh from their education likewise lack the necessary experience to advise buyers and sellers, as they have no knowledge of licensed activities beyond general real estate concepts. The “dumb agent” rule no longer cuts it for today’s more knowledgeable population of buyers and sellers. Agents are expected to provide real value beyond access to the multiple listing service (MLS), and that value is gained through experience.

In the case of real estate agents, the proposed training would require each new sales agent to assist a supervising broker in various types of transactions. After assisting more experienced agents, the trainee would serve as the lead agent for several transactions under the supervision of a responsible, supervising broker. Over time, the agent will learn to legitimately address the concerns of buyers, sellers and investors, including issues regarding:

• taxes;
• title;
• property boundaries;
• homeowners insurance;
• mortgages;
• foreclosures, short sales and real estate owned (REO) property;
• appraisals;
• disclosures;
• staging;
• fair housing; and
• local housing market fundamentals.

Of course, many sales agents already undergo some form of training before they begin taking on clients under an employing broker. But this requirement would formalize the process and ensure a more educated, experienced crop of sales agents — and fewer mistakes.

Related topics:
licensee, sales agent

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Arbitration is a thorny issue for real estate, and one first tuesday has touched upon on numerous occasions over the years.

Arbitration is a form of alternative dispute resolution (ADR). In arbitration, the parties to an agreement forego a court action and agree to be bound by an arbitrator’s decision. The arbitrator is (supposed to be) a neutral third party appointed by a court or selected by the parties to the agreement to hear the dispute. The arbitrator makes the final decision, awarding judgment in favor of one of the parties to the agreement. [Calif. Code of Civil Procedure §1297.71]

An arbitration provision may be included in multiple types of real estate agreements, including purchase agreements, listing agreements, escrow instructions and leasing agreements. However, residential mortgage agreements may not include mandatory arbitration provisions. [12 Code of Federal Regulations §1026.36(h)]

Arbitration’s popularity stems from claims it is a faster and less costly method of dispute resolution than a court action. But there are several big drawbacks. Namely, participants in arbitration give up the right to:

• appeal the arbitrator’s decision, even when it goes against legal precedent or is based on faulty information;
• have an unbiased arbitrator, since arbitrators are usually chosen by the company involved in the dispute and thus have a monetary incentive to continue to represent the best interests of the company (not the consumer); and
• have their decision published in the public record, since the results of arbitration are not required to be published like court cases.

The fact that the results of arbitration are not made publicly available is what first tuesday proposes to alter slightly.

Unlike in a court of law, an arbitrator is not required to share anything that arises in the arbitration proceedings, thus they aren’t obligated to report violations of real estate law. Imposing a duty on arbitrators to report violations of real estate law by licensees in cases before them to the Department of Real Estate (DRE) for remedial disciplinary action ensures unethical, dishonest or grossly negligent licensees are subjected to a licensing review. This exposes improper conduct in the real estate industry to better protect members of the public.

Therefore, first tuesday proposes all arbitrators be required to report violations of real estate law by California licensees to the DRE.

Editor’s note — As a matter of policy, RPI (Realty Publications, Inc.) forms do not include arbitration provisions. RPI forms include a mediation provision to be followed in case of a dispute. Like arbitration, mediation is usually less costly than heading directly to court. But unlike arbitration, decisions negotiated in mediation can always be brought to court when the individuals involved are unsatisfied with the outcome.

Related topics:
arbitration

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

A real estate team is a group of sales agents or broker-associates who pool resources and leads to promote and expand their practice. The use of real estate teams to increase listings and pool resources has taken off in recent years, but laws to protect the public from the potential risks created by teams have not kept up.

Here in California, a team consists of two or more licensees, none of which needs to be a licensed broker.

Licensees on a team are still technically under their employing broker’s supervision. But, in practice, teams can perform very independently from the rest of the brokerage. With few California Department of Real Estate (DRE) guidelines in place regarding team structure and operations, the potential for risky behavior abounds.

When team members behave with too much independence from the rest of the brokerage, this leaves the employing broker open to risks.

For example, specific advertisement requirements exist to inform the public about a team’s employing broker. This includes the requirement of the employing broker’s name to be displayed just as prominently as the team’s name on any advertising materials. [Calif. Business & Professions Code §10159.6(b)]

But when a team is behaving so independently from their brokerage that their supervising broker isn’t checking to ensure they are following advertising rules, they may — perhaps unintentionally — not follow proper advertising procedure and mislead clients. Worse, at the end of the day it’s the broker’s license on the line since they agreed to supervise their agents, team or no team.

Another legal issue teams run into is the use of unlicensed assistants to perform activities which require a license (such as entering into a listing agreement or taking part in negotiations). Again, the improper use of unlicensed assistants may be intentional or unintentional, but this is more likely to occur in teams that are less experienced and lacking proper supervision.

Requiring the team leader to hold a broker’s license protects not only the broker, but the public, too. One of the main jobs of the DRE and all employing brokers is to protect consumers in undertaking what is often the largest financial transaction of their lives. When teams are led and operated by agents, who are often inexperienced, important steps may be missed.

first tuesday proposes that these risks can be mitigated by requiring the team leader to be a licensed broker, who by virtue of their license has more education than sales agents and typically more experience.

Requiring a team leader to be a broker does not absolve the employing broker of responsibility. But, given a broker’s additional education and experience, it does add another layer of protection for consumers and the team’s employing broker.

Related article:

All about real estate teams in California

Related topics:

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Consider an individual who wishes to purchase a property with income-producing potential. Alone, they don’t qualify to purchase due to a lack of funds. But if they gather other investors, they can combine their funds into a group investment, called a real estate syndicate.

Syndication is the act of bringing together in co-ownership a group of investors to fund the purchase, operations, and eventual resale of an income-producing property. Syndicated co-ownership is most effectively accomplished when structured as a limited liability company (LLC).

Syndicating real estate allows individuals to correspondingly build net worth and receive additional flows of income from fees for management services and distributions of spendable income.

The individual who negotiates the acquisition of the property and organizes the group is known as the syndicator or manager. This individual may also perform property management services during the group’s ownership of the property and handles the resale of the property.

But does the syndicator need to be licensed by the Department of Real Estate (DRE)?

The answer is, sometimes, but not always.

Licensing to cover consumer exposure

Typically, and in the most basic terms, a real estate license is required when an individual acts as an agent for a client in a real estate transaction. Since syndication does not necessarily involve an individual acting as an agent, it may seem straightforward that a DRE license is not needed.

But this logic doesn’t always apply. For example, a trust deed dealer who buys, sells or exchanges eight or more trust deed notes in a calendar year is required to hold a DRE broker license (unless they retain a broker to negotiate the resale), even though they are acting as the principal. [Calif. Business and Professions Code §10131.1]

In the case of trust deed dealers, a license is required to protect consumers due to the sensitive implications of dealing in trust deed notes, even though they are not acting as agents.

We argue the same is true for syndicators, who — even when they are not acting as agents — may expose consumers to the side effects of risky investments.

A syndicator needs to be licensed by the DRE when they perform activities requiring a real estate license. Further, there are various other laws syndicators need to be aware of. The laws they need to follow depend on many factors, including:

• what type of entity the syndicate is;
• the number of investors;
• whether the investors are accredited;
• the syndicate’s purpose; and
• where the syndicators are located.

The DRE currently has no stance on whether real estate syndicators ought to require a real estate license. Rather, the DRE emphasizes the need for licensees and other individuals conducting syndicator activities to understand the securities exemption under the Department of Business Oversight (DBO).

In particular, syndicators need to be aware of when their activities cross the line from simple investment to security, which falls under additional legal scrutiny.

Related article:

Real estate syndication and securities law

Our proposal

first tuesday proposes to require California real estate syndicators to be licensed by the DRE.

A DRE license not only lends a syndicator credibility, but it helps protect consumers from potentially risky investment activity. For example, an inexperienced or unknowledgeable syndicator may inadvertently venture into securities territory, which requires additional rules to be followed. Currently, the DBO regulates the securities exemption allowed under California law. But it does not require licensing.

Just as real estate transactions open consumers to possible misrepresentation and fraud, so do real estate syndicates. Therefore, requiring syndicators to be educated on the many laws created to protect consumers and investors will only benefit consumers.

Related topics:
department of real estate (dre), syndication

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Editor’s note — The California Department of Business Oversight (DBO) supervises, licenses and regulates a variety of financial institutions, including some real estate mortgage loan originators (MLOs) holding a Nationwide Multistate (or Mortgage) Licensing System & Registry (NMLS) license. Alongside the California Department of Real Estate (DRE), the DBO shares the responsibility for overseeing MLOs depending on their license use.

December’s DBO Bulletin Digest covers new 2020 laws, streamlined NMLS licensing and FDIC reports.

New laws for 2020

Start the new decade right by getting a leg up on the competition on new legislation. Veteran housing protections, trustee substitutions and income discrimination: these are just a few DBO-related bills that passed in 2019. These three laws were highlighted by the DBO as legislation California MLOs need to prepare for in 2020:

• Senate Bill (SB) 222 (Discrimination: veteran or military status): This bill prohibits housing discrimination based on veteran and military status. The protections also prohibit landlords from discriminating against prospective tenants based on their use of a Veterans Affairs Supportive Housing (HUD-VASH) voucher.

• SB 306 (Mortgages and deeds of trust: trustee substitutions): This bill allows a trustee named in a deed of trust to resign as trustee or refuse an appointment as one. It also insulates the underlying deed of trust from any claims against it that arise from such a resignation or refusal.

• SB 329 (Discrimination: housing: source income): This bill expands the definition of “source of income” to include federal, state and local public assistance and housing subsidies. This means landlords may not discriminate against tenants based on their use of Section 8 vouchers to pay rent.

Some DBO licensees who use their license for loan origination beyond home mortgages may be interested in the DBO’s extended list of new legislation. Click here to see the DBO’s full list of 2019 legislative highlights.

MLO streamlines licensing

MLOs may now do business while moving between states or between a bank employer to a nonbank employer. This is thanks to the new Temporary Authority to Operate provision in the Secure and Fair Enforcement (SAFE) Act of 2008.

The provision streamlines the licensing process for federally-licensed MLOs to become licensed at the state level and state-licensed MLOs to become licensed in another state. It does this by allowing qualified MLOs to continue practicing while changing employment between institutions or states at the same time they complete any additional required pre-licensing education. The provision aims to minimize the interruption in practice MLOs previously faced when transitioning their licenses.

The change is part of an ongoing NMLS effort to reduce friction in licensing and lending nationwide. It went into effect November 24, 2019. For more information on the Temporary Authority to Operate provision, download the NMLS’s Frequently Asked Questions sheet here.

FDIC nonbank lending reports

The Federal Deposit Insurance Corporation (FDIC) is publishing three reports on nonbank lending in the next FDIC Quarterly edition. This quarterly publication covers issues from banking trends to regulatory policy research. This edition features three in-depth banking trend articles for MLOs, including:

• Bank and Nonbank Lending Over the Past 70 Years, which broadly summarizes trends in different lending markets since 1952;
• Leveraged Lending and Corporate Borrowing, which examines the risks and benefits of the shift in corporate borrowing toward leveraged loans; and
• Trends in Mortgage Origination and Servicing, which which focuses on banking trends in residential mortgages between 2010 and 2019 and how risks have migrated outside the banking system after the 2007 subprime mortgage crisis.

While these topics are not new to informed MLOs, the FDIC provides in-depth research and analysis crucial to understanding the underlying mechanisms of these banking trends. Click here to access past FDIC Quarterly issues.

That’s a wrap on 2019! Check back next month for the first DBO Bulletin Digest of 2020. As always, you can read the full DBO bulletin on their website.

Related topics:
department of business oversight (dbo), dfpi bulletin digest, nmls

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Schmidt v. Citibank, N.A.

Facts: A homeowner obtains a mortgage from a lender then goes into default. The lender contacts the homeowner by mail and telephone numerous times, and they discuss the homeowner’s financial situation and options to avoid foreclosure, as required by the Homeowners’ Bill of Rights (HBOR). The homeowner does not cure the default. Greater than 30 days after contacting the homeowner, the lender records a notice of default (NOD) and notice of trustee’s sale (NOTS) against the property.

Claim: The homeowner seeks money losses and to prevent the sale of their home, claiming the lender violated the HBOR since the lender failed to initiate contact with them regarding their default before recording the NOD.

Counterclaim: The lender claims they complied with the HBOR since they discussed foreclosure alternatives with the homeowner before recording the NOD.

Holding: A California court of appeals holds the lender complied with the HBOR since they discussed foreclosure alternatives with the homeowner in compliance with the HBOR. [Schmidt v. Citibank, N.A. (November 7, 2018)_CA6th_]

Editor’s note—The HBOR requires the lender to discuss the homeowner’s financial situation and options to avoid foreclosure in person or by telephone. This requirement is satisfied when contact occurs and the homeowner’s options are discussed, regardless of who initiated contact.

Read the case text.

Related Article:

California’s Homeowner Bill of Rights is back

Related topics:
default, foreclosure, mortgage, notice of default, notice of trustees sale

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

California’s Earthquake Brace and Bolt program provides $3,000 grants to homeowners completing improvements to safeguard their home against earthquakes.

The program is meant to help homeowners perform improvements to keep their home from sliding off its foundation during an earthquake. These improvements include:

• strengthening the home’s cripple wall by installing plywood to strengthen the wood structure that surrounds the crawl space in some homes;
• installing bolts and sill plates in the home’s crawl space to strengthen the connection between the concrete foundation and the home’s wood framing; and
• strapping and bracing the home’s water heater to both protect the home’s water supply and reduce the chances of water and fire damage during an earthquake.

Since these improvements are not mandatory and don’t contribute to the aesthetic value of a home, they are easily overlooked by most homeowners. Add to that the high price tag, and the earthquake safety improvements might never be made — without a boost from the program.

When homeowners are aware of the program — and the need to make the improvements — the program’s $3,000 grants can go a long way toward helping homeowners make necessary retrofits. However, the average cost is in in the range of $3,000-$7,000. Thus, the grants do not usually cover the full cost of improvements.

A new law attempts to extend these funds, and to get the word out about their availability.

AB 548 was recently passed to much support, specifically to help low-income homeowners retrofit their homes.

Under the bill, the Brace and Bolt program will be required to set aside 10% of its funds to make separate grants to low-income homeowners, in addition to the funds the low-income homeowners will already receive under the program. Together, the new law will help qualifying low-income homeowners receive up to 90% of the needed funds remaining to complete the safety improvements.

Eligible homes are:

• in need of the necessary retrofits;
• located in a pre-approved zip code (found here);
• built before 1980 and sit on a level ground or low slope;
• detached, one-to-four unit residential units;
• new to the program, having not already received funds for a previous improvement from the program; and
• not on the National Register of Historic Places.

The new law also requires the California Residential Mitigation Program — a joint effort between the California Earthquake Authority and the Office of Emergency Services — to provide outreach to eligible low-income homeowners about the funds available.

Real estate professionals: share information about earthquake safety with your clients with this free FARM Letter: Earthquake safety tips.

Related topics:
home improvements

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Calif. Government Code §§12940; 12965; 12923; 12950.2; 12964.5

Amended by S.B. 1300

Effective date: January 1, 2019

Beginning January 1, 2019, employers may be responsible for any type of harassment activity of nonemployees (such as a client or even a trespasser) towards their employees, applicants, individuals providing contract services, unpaid interns or volunteers. Previously, under the California Fair Employment and Housing Act (FEHA), employers were only held responsible specifically for sexual harassment by nonemployees.

To be held responsible, the employer needs to:

• have actual knowledge of or reasonable cause to know about the harassment; and
• fail to take appropriate corrective action.

Employers are also now prohibited from requiring the execution of a release of claim or right under the FEHA as a condition for employment, continued employment, a raise or bonus. The employer is further prohibited from requiring an employee to sign a nondisparagement agreement or other document which limits the rights of the employee to disclose unlawful acts in the workplace such as (but not limited to) sexual harassment.

Attorneys fees and court costs will only be awarded to the prevailing party if the court finds that the court action brought by the individual was clearly unreasonable or groundless.

The new laws also encourage — but do not require — employers to provide bystander intervention training to their employees. This type of training may include information and guidance on how bystanders may recognize harassment in the workplace and what actions they can take to stop the harassment.

Read the bill text here.

Related:

Sexual harassment prevention training requirements expanded

Related topics:

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

This video reviews the rules governing appraiser independence under the Truth-in-Lending Act, including prohibitions of conflicts of interest and deliberately inaccurate evaluations.

More information about this topic is available @ firsttuesdayjournal.com.
More information about our real estate licensing and renewal courses is available @ firsttuesday.us.

Related topics:
mlo, nationwide mortgage licensing system (nmls), nmls, tila

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Public Resources Code §25402.13 

Amended by A.B. 178

Effective date: January 1, 2020

California’s legislature is removing one obstacle to rebuilding for residential homeowners whose homes were damaged or destroyed before January 1, 2020 by a state-declared disaster.

Until January 1, 2023, construction to repair these types of residential buildings will not need to comply with current photovoltaic (PV) requirements. Instead, certain homeowners may repair or rebuild their PV system to meet the requirements in place at the time of the original construction.

A PV system is made up of one or more solar panels and other components like the inverter, mounting and cabling that make up the system which converts solar light into electricity.

To be eligible, the homeowner needs to:

• have an income at or below the county’s median income;
• complete the construction on the site of the original home that was damaged or destroyed;
• not have had code upgrade insurance when the home was damaged; and
• ensure the new construction does not exceed the property’s square footage at the time it was damaged.

Related topics:
solar

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Real estate appraisers are required to be independent of other individuals with interests in a real estate transaction. This requirement helps to ensure the appraisal is conducted without outside influence which may sway the appraiser’s view of the property’s value. [Calif. Business & Professions Code §11345.4]

To that end, many appraisers believe that any communication with individuals involved in the transaction — including real estate agents — is unlawful. However, the Bureau Chief of California’s Bureau of Real Estate Appraisers (BREA) debunked this view in a recent BREA newsletter.

According to the Bureau Chief, an appraiser ought to take data offered by an agent into consideration in order to create the most accurate appraisal. Any information offered by the agent or other interested individual needs to be independently confirmed by the appraiser to determine whether it is credible.

However, communication between an agent or other individual and the appraiser is not lawful if it violates appraiser independence.

The violations of appraiser independence are:

• any action by a participant to the transaction which attempts to influence the appraiser to disregard their independent judgment;
• deliberate mischaracterization by the appraiser of the appraised value of the property;
• any action which encourages the appraiser to appraise the property at a targeted value to facilitate the making or pricing of a transaction; and
• the withholding or the threat to withhold payment for services rendered after the appraisal contract has been fulfilled. [15 United States Code §1639e]

In California, improper influence of an appraiser includes:

• withholding or threatening to withhold timely or partial payment for a completed appraisal report, regardless of whether a sale or financing transaction closes;
• withholding or threatening to withhold future business from an appraiser;
• demoting or terminating, or threatening to demote or terminate an appraiser;
• expressly or implicitly promising future business, promotions or increased compensation for an appraiser;
• conditioning the ordering of an appraisal report or the payment of an appraisal fee, salary or bonus based on the opinion, conclusion, valuation or preliminary value estimate requested from an appraiser;
• requesting an appraiser provide an estimated, predetermined or desired valuation in an appraisal report prior to entering into a contract or completing a report;
• requesting an appraiser provide comparable sales prior to the completion of the report;
• providing an appraiser with an estimated, predetermined or desired value for a property or a proposed or target amount to be loaned to the borrower, except that the appraiser may be handed a copy of the purchase agreement;
• requesting the removal from an appraisal report of comments disclosing adverse property conditions or physical, functional or economic obsolescence; or
• hiring an appraiser based on the valuation likely to be generated by the appraiser. [Department of Real Estate Regulations §2785(a)]

Nowhere in federal or California law is an appraiser prohibited from communicating with real estate agents when that communication does not touch on any of the violations mentioned above.

Further, an individual with an interest in a real estate transaction is always allowed to ask an appraiser to:

• consider additional, appropriate property information including comparable properties;
• provide further explanation for the appraiser’s value conclusion; and
• correct errors in the appraisal report. [DRE Regulations Article 11 2785(b)]

Related video:

Is it a violation of appraiser independence?

Related topics:

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Question: Can I list a property “as is” in California? 

Answer: No, properties may not be listed “as is.” Rather, properties as listed as disclosed, a difference more significant than just semantics.

For many agents, “as is” has become synonymous with “no disclosure required.” In fact, the transfer disclosure statement (TDS) is statutorily required in California and cannot be waived by the buyer.  Any attempted waiver, such as the use of an “as-is” clause in the purchase agreement, is unenforceable by public policy. [See RPI Form 304]

“As is” implies a failure to disclose something adverse known to the seller or their agent, a prohibited activity. In contrast, “as disclosed” is the condition of the property as known by the buyer when the seller accepts their purchase agreement offer. [Calif. Civil Code §1102.1(a)]

Exceptions

The seller is never excused or excluded from disclosing known material facts, nor are any of the agents involved in the transaction excused from performing their due diligence and visual inspections.

However, transactions which exempt the seller from delivering the statutory TDS form to a buyer include those occurring:

• by court order, such as probate, eminent domain or bankruptcy;
• by judicial foreclosure or trustee’s sale;
• on the resale of real estate owned (REO) property acquired by a lender on a deed-in-lieu of foreclosure, or by foreclosure;
• from co-owner to co-owner;
• from parent to child;
• from spouse to spouse, including property settlements resulting from a dissolution of marriage;
• by tax sale;
• by reversion of unclaimed property to the state; and
• from or to any government agency. [CC §1102.2]

But whether or not the seller is exempt from using the TDS, the seller’s broker and their agents are never exempt from:

• conducting a visual inspection of a one-to-four unit residential property, sold or acquired on behalf of any seller or buyer; and
• disclosing their observations and knowledge about the property on a TDS form or other separate document. [CC §2079; CC §1102.1]

Timely delivery of the TDS

When preparing the TDS, the seller sets forth any known or suspected property defects.

Defects to be disclosed in the TDS include any conditions known to the seller which might negatively affect the value and desirability of the property for a prospective buyer, even though they may not be an item listed on the TDS. Thus, disclosures to the buyer are not limited to the conditions preprinted for comment on the form. [CC §1102.8]

It’s best to deliver the TDS to potential buyers as soon as possible — before the buyer and seller enter into negotiations. This is for two reasons. Delivering the TDS as soon as possible:

• helps narrow the field of potential buyers to those who are truly serious about buying, even knowing all disclosed facts; and
• decreases the likelihood that the buyer will later negotiate based on adverse facts that are new to them.

Disclosure of defects and other known conditions do not obligate the seller to repair the items mentioned in the TDS. The buyer may choose to negotiate based on the disclosed facts, or they may simply acknowledge them and move forward with the transaction. However, when material facts are discovered, say, during the home inspection, the buyer is more likely to negotiate with the seller for repairs, seller concessions or a lower price.

Delivering a thoroughly completed TDS to the homebuyer isn’t only beneficial to the seller’s bottom line. It also helps protect their brokers from potential liabilities.

The failure of the seller or any of the agents involved to deliver the seller’s TDS to the buyer does not invalidate a sales transaction once it has closed. However, the seller and the seller’s broker are both liable for the actual monetary losses incurred by the buyer due to an undisclosed defect known to them — or unknown to them due to their negligence — at the time the offer was accepted by the seller. [CC §1102.13]

Editor’s note — Have a question about California real estate? Email our editorial department at editorial@firsttuesday.us and your question may be featured in our next Letter to the Editor.

Related topics:
as-is, transfer disclosure statement (tds)

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Question: What are the occupancy limitations for rental properties in California?

Answer: The federal rule of thumb is two occupants per bedroom plus one additional occupant, but special conditions and local housing standards may affect these occupancy limitations.

Landlords have the right to determine the number of occupants in their rental properties, providing they:

• do not discriminate against families;
• apply the limitations consistently to all tenants; and
• conform to federal and state guidelines.

A landlord may wish to reduce wear and tear on their rental property by setting an occupancy limit, but they may not set an unreasonably low limit that violates the Fair Housing Act. The Fair Housing Act prohibits discrimination based on familial status, meaning whether a tenant has children. The threshold for what constitutes a reasonable limit is hazy, but landlords have many resources to look to for guidance.

The following criteria may affect the occupancy limit of your rental property.

Number and size of rooms

The U.S. Department of Housing and Urban Development (HUD) adopted a formula from the 1991 Keating Memorandum to determine how many people may live in a unit. Commonly known as the “two-plus-one” rule, this formula determines landlords need to allow at least two occupants per bedroom plus one additional occupant in a rental unit, regardless of their relationship. For example, two people may occupy a studio unit, three may occupy a one-bedroom unit, five may occupy a two-bedroom unit and so on.

California’s Department of Fair Employment and Housing (DFEH) has also adopted the “two-plus-one” formula. Note that this formula is only a guideline and not a hard-and-fast rule. There are other factors that may change your property’s occupancy limitation.

The size of a rental unit and its bedrooms may change how many people may live in it. Section 503.2 of the Uniform Housing Code clarifies that two people may occupy a minimum-sized unit, which consists of a room of at least 120 square feet with additional rooms adding at least 70 square feet. Such a unit needs to add at least 50 square feet for each additional occupant.

Some properties may have additional rooms like dens or studies that tenants may be able to use for sleeping as well. This accounts for the “plus-one” part of the “two-plus-one” formula. It allows for some flexibility by acknowledging that tenants may be able to use non-bedroom spaces for sleeping.

Property capacity

There are some exceptions to the “two-plus-one” formula. Landlords may be able to impose more restrictive occupancy policies based on the property’s capacity, such as sewer, septic system and parking limitations. For example, when a property’s septic system is not built to handle the amount of people prescribed by the “two-plus-one” formula, the landlord may be able to justify a more restrictive occupancy limit.

Age of occupants

The Fair Housing Act protects tenants with minor children. It prevents a landlord from evicting or forcing tenants to move to a larger unit on account of their children since doing so would have the effect of discriminating based on familial status. This protected class includes pregnant tenants and tenants gaining custody of a minor child. Landlords are also prohibited from imposing rules on children’s sleeping arrangements.

State and local laws

State and local governments may also change occupancy standards for health and safety reasons. This means landlords need to check with their municipality for local laws even when their occupancy limit satisfies the “two-plus-one” rule. These may include additional restrictions enforced by local authorities like fire departments.

In short, anything more restrictive than the “two-plus-one” rule could have the effect of discriminating against families with children. Only under special conditions may a landlord impose more restrictive occupancy limitations. HUD publishes separate guidelines for public and subsidized housing.

Since HUD opted not to impose binding enforcement codes, the reasonableness of any property’s occupancy limitations is reviewed on a case-by-case basis. The effect of such weak guidance is that landlords need to do their homework when setting occupancy limitations and not just rely on HUD’s basic formula.

Landlords, be sure to contact your local code enforcement agency and ask about regulations and ordinances affecting your rental property.

If you have a question about Landlords, Tenants and Property Management or any other real estate topic, write the first tuesday editorial staff at editorial@firsttuesday.us.

Related topics:
department of housing and urban development (hud), landlord, rental

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Question: What are squatters’ rights in California?

Answer: Squatters’ rights occur when an individual makes a claim of adverse possession, by openly using and possessing the property for five uninterrupted years, paying current and past delinquent property taxes and meeting other criteria, mentioned below.

Squatters’ rights come about when an individual takes ownership of real property not legally belonging to them, known as adverse possession.

Adverse possession is the only means by which the law will take 100% of an individual’s legal ownership interest in a parcel of real estate and give it to another individual without compensation.

The idea of adverse possession is based on the social and economic rationale that real estate is not to lie unused. An individual who puts another’s land to use without interference or compensation and pays property taxes — ad valorem — is allowed (in time) to enjoy the benefits of ownership.

This “use it or lose it” rationale has remained unchanged since its inception when the doctrine of adverse possession was established to dispossess medieval lords of their stranglehold on fertile farmland in England.

Adverse possession in practice

Perpetrators of adverse possession may do so knowingly, or unknowingly.

For example, consider a property which is conveyed by a recorded grant deed to an individual on the distribution of a deceased relative’s estate. The individual takes possession of the property and exercises the rights and responsibilities of ownership, unknowingly taking adverse possession.

Later, it is discovered the deceased relative in fact was only a lessee, not the recorded owner of the property, and had no legal title to convey. However, the individual has an adverse possession claim to the property based on the color of title since they had a good faith belief the deed they received was valid. [Helvey v. Lillis (1934) 136 CA 644]

On the other hand, squatters who knowingly attempt adverse possession are also lurking. Just how does a squatter accomplish such a feat?

Squatters most commonly win adverse possession over properties in one of two situations. In these cases, the property is:

• vacant and left for a future use by the owner, often located in a rural, seldom-visited corner of the state; or
• a portion of the owner’s lot of which they are unaware belongs to them, an ignorance their neighbor takes advantage of.

Any person claiming title to property through adverse possession needs to satisfy specific criteria to perfect their claim of ownership. If the adverse possessor fails to meet any criterion, their claim to ownership fails as it has not been perfected. The criteria for perfecting ownership by an adverse possession claim are:

• a color of title or claim of right to title;
• actual, notorious and open possession;
• hostile, adverse and exclusive use;
• continuous and uninterrupted possession for five years; and
• payment of current and delinquent real estate taxes and assessments. [Gilardi v. Hallam (1981) 30 C3d 317]

A tenant who attempts to claim squatters’ rights will face obstacles. That’s because a lease or rental agreement involves the owner’s express permission for the tenant to occupy the property. If, after the lease is over, the tenant attempts to take adverse possession of the property, their claim will be barred when they occupy the property under a lease or rental agreement at any time during their five-year claim.

Related article:

Brokerage Reminder: Protect yourself – and your clients – against adverse possession

Related topics:
adverse possession

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Question: When a couple divorces and they own their residence, how is the property divided?

 Answer: Who gets the property and how it is divided depends on a number of circumstances surrounding when and how the property was acquired, the obligations of each spouse and whether or not there are children living at home.

Property: community or separate?

Consider a property that was acquired by either spouse while they were married. This property is community property, unless the couple clearly states their intention to own individual interests in the property. [Calif. Family Code §760]

However, real estate is treated as separate property when it is acquired:

• before marriage; or
• after marriage as a gift or inheritance. [Fam C 770(a)]

Just because a home is treated as separate property doesn’t mean the owner gets to automatically keep 100% of the home upon a divorce (or profits from the home if it is an income-producing property).

For example, when the spouse contributes money from their own funds to improve their spouse’s separate property or make mortgage payments on the property, the situation becomes complicated and may be decided by a judge. For example, the spouse of the separate owner may be awarded money to cover their investment in the separate property. [Fam C §2640(c)]

On the other hand, community property is divided equally when a couple divorces. [Fam C §2550]

Since you can’t exactly cut a home in half, how does a judge decide how to divide community property?

Dividing community property

A judge considering how to divide up community property may have the owners:

• sell the property and split the profits;
• defer the sale of the property; or
• give ownership of the property to one person, granting the other an equal share of other community assets.

The couple has a say in which route the judge chooses, but it’s up to the judge to determine which route is most fair (especially when children are involved) and economically feasible.

For example, the parent who receives primary custodial care of a child (or children) may request the deferred sale of the property until the child graduates high school. The judge needs to determine whether it’s economically feasible for the parent(s) to keep up with the costs of mortgage payments, repairs, homeowners’ association (HOA) fees, insurance coverage, etc. after their finances change post-divorce. [Fam C §3801(a)]

When the judge determines it is economically feasible to defer the sale of the home for the duration requested, they will consider whether it’s necessary to limit the burden to the child residing in the home. The judge will consider:

• how long the child has lived there;
• how old the child is;
• where the home is located in relation to their school or childcare facility and the resident parent’s place of work;
• whether the home has been specially modified to accommodate a disability of the child or resident parent;
• the child’s emotional attachment to the home;
• whether the non-resident parent will be able to find suitable housing;
• the tax consequences of deferring the sale; and
• the negative financial consequences of deferring the sale for the non-resident parent. [Fam C 3802(b)]

Property in a different state

When the property is located in another state, the judge will divide the property in a way that it isn’t necessary to change the individuals’ interests in the property. This may be accomplished by selling the property and splitting the proceeds, or by one individual keeping the property and “paying out” the other with other assets. [Fam C §2660(a)]

Editor’s note — When a couple signs a prenuptial or postnuptial agreement specifying how property is to be treated in case of divorce, the agreement set forth in that document will likely prevail. [Fam C §2550]

Do you have a real estate question? Email your question to editorial@firsttuesday.us and we may feature it in a letter to the editor!

Related topics:

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Eith v. Ketelhut

Facts: A homeowner’s property is part of a common interest development (CID) subject to the covenants, conditions and restrictions (CC&Rs) enforced by a homeowners association (HOA). A restrictive CC&R prohibits business and commercial activity on the property. The homeowner cultivates a vineyard on their property and sends the grapes to be made into wine, bottled and sold offsite.

Claim: A neighbor seeks to stop the homeowner from cultivating a vineyard on their property, claiming the operation violates the HOA’s CC&Rs since it constitutes a prohibited business and commercial activity.

Counterclaim: The homeowner claims vineyard cultivation is not prohibited by the HOA’s prohibition on business and commercial activity since it does not change the residential character of the community.

Holding: A California court of appeals holds vineyard cultivation is not prohibited by the HOA’s prohibition on business and commercial activity and the homeowner may continue cultivating their vineyard since it does not affect the residential character of the community. [Eith v. Ketelhut (December 17, 2018) _CA6th_]

Read the case text.

Related topics:
business, cramdowns, hoa, homeowners’ association (hoa)

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Turner v. Seterus, Inc.

Facts: A homeowner experiences financial difficulties after losing their job and obtains a mortgage modification, but still falls behind on their mortgage payments. The lender issues a notice of default (NOD) and a notice of trustee’s sale (NOTS) is later recorded against the property. Greater than five days before the trustee’s sale, the homeowner offers to cure the default and reinstate the mortgage by paying the outstanding balance, but the lender refuses to accept payment since the homeowner is no longer actively in the mortgage modification process and sells the property.

Claim: The homeowner seeks money losses, claiming the lender improperly prevented them from curing the default and reinstating their mortgage by refusing to accept payment.

Counterclaim: The lender claims the homeowner could not cure the default to reinstate their mortgage since they may only do so if they are in the mortgage modification process, which the homeowner was not as they went into default on the modified mortgage.

Holding: A California court of appeals holds the lender may not prevent the homeowner from curing the default to reinstate their mortgage since they have until up to five days before the foreclosure sale to pay the outstanding balance. [Turner v. Seterus, Inc. (September 24, 2018)_CA6th_]

Editor’s note – See Real Estate Finance Chapter 42: Reinstatement and redemption periods during foreclosure.

Read the case text.

Related topics:
foreclosure, mortgage, mortgage modification, reinstatement, wrongful foreclosure

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

McClear-Gary v. Scott

Facts: The owner of a property holds an easement over the servient property. The owner of the servient property installs a gate blocking the easement holder’s access to the easement for five years. The owner of the servient property later pays delinquent property taxes on the land covered by the easement in a lump sum and attempts to extinguish the easement by adverse possession.

Claim: The easement holder seeks to quiet title to the easement and regain access, claiming their easement has not been extinguished since the servient owner’s property tax payments were not timely.

Counterclaim: The owner of the servient property claims they extinguished the easement on their property since they paid delinquent property taxes in a lump sum within the five-year period of possession.

Holding: A California court of appeals holds the owner of the servient property has not extinguished the easement through adverse possession since their property tax payments were not timely as they were delinquently paid in a lump sum. [McLear-Gary v. Scott (July 11, 2018)_CA6th_]

Read the case text.

Related topics:
adverse possession, easements, property taxes

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Murray v. BEJ Minerals, LLC

Facts: A seller conveys one-third of the mineral rights of a property to a buyer. The seller reserves the remaining two-thirds of the mineral estate. The buyer later discovers rare, well-preserved dinosaur fossils on the property and sells some of them to a museum after learning of their high value.

Claim: The seller seeks ownership of two-thirds of the dinosaur fossils and sale proceeds, claiming they belong to them since they hold two-thirds of the estate’s mineral rights and dinosaur fossils are minerals.

Counterclaim: The buyer seeks ownership of all the dinosaur fossils and sale proceeds, claiming they belong to them since they are the owners of the estate and dinosaur fossils are not minerals.

Holding: A federal appellate court holds two-thirds of the dinosaur fossils and sale proceeds belong to the seller since they retained two-thirds of the estate’s mineral rights and dinosaur fossils are properly classified as minerals. [Murray v. BEJ Minerals, LLC (9^th Cir. 2018)_F.3d_]

Editor’s note—Mineral rights are explained in first tuesday’s video on Land: The First Component of Real Estate.

Further, court opinions occasionally contain nuggets of linguist brilliance. This case begins with a dramatic opening worthy of Hollywood:

Once upon a time, in a place now known as Montana, dinosaurs roamed the land. On a fateful day, some 66 million years ago, two such creatures, a 22-foot-long theropod and a 28-foot-long ceratopsian, engaged in mortal combat. While history has not recorded the circumstances surrounding this encounter, the remnants of these Cretaceous species, interlocked in combat, became entombed under a pile of sandstone.

That was then . . . this is now.

Read the case text.

Related topics:

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Zissler v. Saville

Facts: A servient estate owner grants an appurtenant easement for access, ingress and egress to vehicles and pedestrians to an adjacent dominant estate. The easement is used for landscaping purposes. Both estates are sold to new owners. The dominant estate owner proposes a large construction project requiring them to use the easement for heavy machinery.

Claim: The servient estate owner seeks to limit the easement’s use to 12 vehicle trips per year unrelated to construction activity, claiming the easement is ambiguous and needs to be clarified based on its historic landscaping use since it does not specify the types of vehicles or frequency of use allowed.

Counterclaim: The dominant estate owner seeks to use the easement for their construction project, claiming the easement is not ambiguous since a failure to disclose the types of vehicles or frequency of use allowed does not constitute an ambiguity.

Holding: A California court of appeals holds the dominant estate owner may use the easement for access, ingress and egress to vehicles and pedestrians, including for construction purposes, since the easement is not ambiguous. [Zissler v. Saville (November 29, 2018)_CA6th_]

Editor’s note — Even if the original owners had intended to limit the easement to landscaping use, this undisclosed limit would be unenforceable since the new dominant estate owner is a bona fide purchaser and was not notified of this restriction. Furthermore, appurtenant easements accommodate future development and cannot be restricted based on historic use.

See Legal Aspects of Real Estate Chapter 13: Easements: running or personal and Chapter 14: Creating an easement.

Read the case text.

Related topics:
easements

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Granny flats, in-law apartments, casitas; call them what you will — accessory dwelling units (ADUs) are surging in popularity across California.

An ADU is a secondary housing unit on a single family residential (SFR) lot. It can be attached to the primary house like a converted garage, or unattached like a freestanding cottage. Homeowners can create ADUs from new or existing structures.

These cozy dwellings have long been a popular way for seniors to age in place. But thanks to California’s housing crunch, ADUs have piqued the interest of residents of all ages across the state. Los Angeles saw the biggest influx of ADU applications, from 80 in 2016 to 1,980 in 2017, according to the Terner Center for Housing Innovation.

Because they are smaller and more affordable than traditional housing options, ADUs would help low- and moderate-income renters weather the Golden State’s skyrocketing housing costs. They add sorely needed density to SFR neighborhoods without materially altering their character. Most importantly, this density is controlled by local homeowners, not big developers.

Homeowner benefits

The density propelled by ADUs is an “invisible density” because it manifests in a homeowner’s backyard, not a mid-rise eyesore. But the benefits for both homeowners and renters are easy to see. Renters are searching for relief from high housing costs and ADUs can be an excellent investment for homeowners. It’s a win-win situation requiring minimal compromise.

For one, ADUs offer a stable rental income for homeowners who choose to rent their unit. Because demand has quickly outpaced new rental construction, rental vacancy rates are well below their historical equilibrium at 4.4%. Homeowners looking to build or repurpose a structure in their backyard, garage, home or basement will have little trouble finding competitive renters.

Homeowners will also find that adding an ADU is affordable, depending on the project. The average cost to build an ADU is $156,000, according to another Terner Center study on cities with permissive ADU regulations. Repurposing an existing structure like a garage or basement is even cheaper. To be fair, the study does not include California cities, so homeowners in the state should expect higher building costs.

Nevertheless, ADUs do not carry the added burden of California’s soaring land costs. An acre of land in coastal California — where the majority of jobs are — costs about eight times the U.S. average, according to the state Legislative Analyst’s Office. Since most homeowners already own the land on which they might build their ADU, they won’t have to clear this extra financial hurdle.

Though ADUs’ effects on property values are difficult to measure across markets and construction qualities, evidence suggests that they significantly increase property values. One study found that ADUs contributed between 25% and 34% of each property’s assessed value, according to The Appraisal Journal. Because this figure is highly variable, local agents and brokers are better suited to evaluate potential ADUs in their markets.

Barriers to ADU creation

Despite these benefits, many California cities are still hostile to ADUs. Zoning, permitting and costs are the biggest culprits.

Restrictive zoning policies have a history of stunting homeownership and home sales. For instance, many cities enforce parking requirements for homeowners building ADUs. Understandably, vocal not-in-my-backyard (NIMBY) activists don’t want to see parking in their neighborhoods become even more scarce. Similarly, NIMBYs claim increased density in general will also materially alter the character of their neighborhoods.

Aside from parking requirements, the prohibitive permitting process continues to hold back would-be ADU builders. Remember that ADU construction is largely driven by homeowners who aren’t as suited to navigating a costly, lengthy and complex permitting process as large-scale developers. If California wants to allow people to exercise their right as homeowners to build ADUs, it needs to streamline the permitting process.

Perhaps the tallest hurdle is cost. Though building an ADU is certainly far less expensive than a traditional SFR, financing options for ADU builders are limited. Large lenders are hesitant to fund these projects since they can’t place a lien on just the ADU and many cities enforce a deed restriction requiring ownership. Other lenders refuse to factor in the ADU’s future rental income, undervaluing the property. Without traditional financing options, ADU builders are filtered down to those who can afford to pay out of pocket or take out a mortgage against the main house or a reverse mortgage.

In addition to construction costs, impact fees are often overlooked costs that hurt ADU creation. These are fees paid to the city to offset the impact new residents will have on infrastructure. Think schools, roads, public services and the like. But across California, impact fees for ADUs are disproportionately high compared to those for traditional SFRs. Because owners renting their ADUs are likely to pass these fees on to renters, impact fees that go beyond a structure’s “fair share” prevent ADUs from becoming an affordable solution for low- and moderate-income renters.

ADU-friendly legislation

California lawmakers recognize ADUs’ potential to help alleviate the state’s housing crunch. The most noteworthy of recent legislative changes to ADU laws are parking requirement prohibitions. For many SFR neighborhoods resistant to density changes, this has become a sticking point. Key recently enacted, ADU-friendly laws include:

• Senate Bill 1069, which prohibits parking requirements if the ADU is within a half mile from public transit;
• Senate Bill 2299, which limits parking requirements to one space per unit or bedroom and provides maximum standards a local government is authorized to issue on ADUs (for example, an ADU may be built on a property zoned for SFR use only); and
• Senate Bill 2406, which allows junior ADU construction of no more than 500 square feet within an SFR and prohibits additional parking requirements.

Similar ADU-friendly legislation currently pending in the California legislature includes:

• Senate Bill 13, which prohibits parking replacement requirements for garage conversions, reduces impact fees levied on ADUs and streamlines the application and permitting process; and
• Assembly Bills 68 and 69, which speed up the application process and allow more types of ADUs.

These bills aim to lift regulatory barriers hampering ADU creation. Because of California’s immutable car culture, many ADU-friendly bills address parking requirements. While NIMBYs claim that parking will become scarce and change the character of their quiet SFR neighborhoods, progressive ADU legislation in other markets does not support this argument.

Given that ADUs and research on them are rare, one illuminating example can be found in Portland, Oregon. Because of its progressive zoning laws, Portland is the nation’s leader in ADUs and offers some insight into densifying. Here, ADUs have had a negligible effect on parking, according to an Oregon Department of Environmental Quality study. The average number of cars per dwelling was lower than the city’s average for all new rentals and only about half of those cars occupied street parking spaces.

Of course increased density will change a neighborhood; the question is to what degree this will occur. ADUs represent an acceptable compromise to California’s most pressing crisis. Yes, homeowners deserve to maintain the character of the neighborhood they bought into, but how can one justify such inflexibility and opposition to invisible density amid a crippling housing crisis?

Getting ahead of the curve

As trusted real estate professionals, agents are a homeowner’s first stop when thinking about building an ADU. Agents looking to maintain a strong and constant presence in their markets can familiarize themselves with laws and regulations controlling ADUs and offer consultations.

Editor’s note — Download first tuesday’s ADU FARM Letter here.

California needs greater housing density; the future of its economy depends on giving people more options for living near their workplaces and reining in suburban sprawl. ADUs are a small but effective step toward closing this housing gap in California. On a larger scale, California’s legislature has passed several other bills geared toward affordable housing. Follow the link to learn about legislation California lawmakers have enacted to fight back against the housing shortage.

Related article:

Legislative steps toward more affordable housing

Related topics:
accessory dwelling unit, adu, nimby, zoning

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Mortgage lenders have long tailored their information collection, disclosure and sharing practices to the federal Gramm-Leach-Bliley Act (GLBA). The GLBA implements protections for nonpublic consumer information. This is about to change for some lenders in 2020.

The privacy safeguards of the GLBA seem quaint in comparison to those in the newly-minted California Consumer Privacy Act (CCPA). Though California’s new law doesn’t go into effect until January 1, 2020, it’s already drawing attention from California mortgage lenders because of its broad reach and potential to impact the home mortgage industry.

Given recent high-profile data breaches and the European Union’s landmark General Data Protection Regulation (GDPR), the CCPA has been long overdue. Then-Governor Jerry Brown signed Assembly Bill (AB) 375 into law in June 2018. Like the GDPR, the CCPA aims to regulate the collection and sale of personal information by expanding consumer rights and installing enforcement mechanisms. You can read the full bill in its original form here.

Most notably, the CCPA allows consumers to:

• request businesses disclose their collected information [Calif. Civil Code §1798.100(a)];
• opt out of the sale of their information [CC §1798.120(a)]; and
• request the deletion of their information. [CC §1798.105(a)]

Will my business have to comply?

The CCPA applies to for-profit businesses operating in California that:

• earn greater than $25,000,000 in annual gross revenue;
• collect or share the personal information of more than 50,000 California residents annually; or
• earn at least half of their annual revenue from selling personal information for California residents. [CC §1798.140(c)(1)]

Personal information includes conventional identifiable information like physical addresses and phone numbers, but more broadly encompasses any information that can identify, relate to, describe, is capable of being associated with or be reasonably linked with a particular consumer or household. [CC §1798.140(o)(1)]

To picture the scope of this law, imagine your business’s website collects the email address, geolocation data and search history of a California resident and creates a preference profile based on this data to better market to them. Under the CCPA, even inferences drawn from this profile are subject to regulation. Unauthorized access of any of this data stemming from a failure to properly secure it will be considered a CCPA violation.

The high revenue threshold for compliance squeezes out all but the largest mortgage lenders, but even small businesses will find themselves reaching the second criterion quickly. For instance, it only takes 137 daily credit card transactions for a business to fall under CCPA regulation in a year. Any businesses that meet one or more of these criteria will need to overhaul their privacy practices to comply, risk exposing themselves to costly lawsuits or exit the market entirely.

Conflicts with federal legislation

Businesses in compliance with the GLBA can breathe a small sigh of relief. The bill’s original language carves out an alcove for the GLBA. AB 375 states that the new law will not apply to personal information collected, processed, sold or disclosed under the GLBA and its regulations when in conflict with that law. But this exemption only raises questions about what constitutes a conflict between the GLBA and CCPA.

Adding to the confusion, the CCPA relies on a broad definition of consumer instead of the one set out by the GLBA’s Privacy of Consumer Financial Information Rule and the California Financial Information Privacy Act (CFIPA). Their much narrower definition only includes individuals who apply for or obtain or have obtained a personal-use product or service from an entity controlled by Regulation P. On the other hand, the CCPA’s definition includes any California resident.

Editor’s note — first tuesday explores Reg P’s definition of consumer in this Mortgage Concepts video.

Because the CCPA’s definition of personal information is much broader than that found in the GLBA and CFIPA, this exemption is quite limited. Businesses are still on the hook for the breach of any data collected outside the GLBA/CFIPA umbrella and under the larger CCPA umbrella.

SB 1121, a clean-up bill passed only three months later, amended this section to address some of these issues. In listing exemptions to the compliance requirements, the bill removes language concerning “conflicts” with the GLBA. It also adds the CFIPA to the list of exemptions.

In other words, just because your business is regulated by the GLBA or CFIPA doesn’t mean it’s totally exempt from the CCPA. It’s exempt from any information collected under the GLBA, but broader data-collecting activities like targeted advertising are not covered in the GLBA/CFIPA. [CC §1798.145(e)]

You can read SB 1121’s full changes here.

Related article:

Consumer financial information privacy rules

How will it affect my business?

Legislation that restores power to consumers over their information is a boon for privacy advocates, but not everyone is enthusiastic about this shift. Many business owners are wary of how such laws’ overbroad language may be exposing them to litigation. This is especially true of the CCPA since its enforcement mechanism allows consumers to sue individually on a per-incident basis for breaches stemming from a failure to properly secure data.

The risk for incurring such penalties is magnified by the vast scope of what constitutes personal information in the CCPA. Businesses regulated by the new law need to expand their data security systems to include many more categories of information that aren’t currently regulated with the same rigor.

Businesses subject to the CCPA will need to provide consumers with opportunities to opt out of personal information sales. In tandem with opt-out options, they will also need to update their consumer disclosures to comply with the CCPA’s broad definition of personal information. The disclosure needs to include:

• how data is collected;
• why it’s collected; and
• with whom it’s shared. [CC §1798.110(a)]

In addition to this mandatory disclosure, consumers of CCPA-regulated businesses have the right to request more granular disclosures, including:

• the categories of collected personal information;
• the categories of sources from which personal information is collected;
• the purpose for collecting or selling personal information;
• the categories of third parties with whom personal information is shared; and
• the specific pieces of personal information collected. [CC §1798.110(b)]

Although it has been signed into law, the CCPA does not go into effect until 2020 and is still subject to changes. This gives lawmakers some time to iron out its many kinks as they’ve attempted with SB 1121. It also gives business owners a chance to revamp their privacy practices in compliance with the new rules. The road to transparency is paved with good intentions, but potholes abound.

Related topics:
fair credit reporting act (fcra), law

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

In February 2019, Assemblywoman Blanca E. Rubio (D-Baldwin Park) introduced AB 1590, which creates a targeted tax credit for some first-time homebuyers to help raise homeownership rates in disadvantaged communities. AB 1590 is currently pending in the California Senate and comes on the heels of a growing affordable housing crisis in California.

This bill aims to combat the affordable housing crisis by assisting low- and moderate-income households to purchase their first homes in disadvantaged communities. It achieves this by offering qualified first-time homebuyers a tax credit for the lesser amount of:

• 3% of the purchase price; or
• $5,000.

To qualify, a homebuyer needs to:

• be a first-time homebuyer;
• earn no more than 120% of the median income for their area;
• purchase a home in a state-designated disadvantaged community; and
• purchase the home as their principal residence

between January 1, 2020 and January 1, 2023.

Communities are designated as disadvantaged by the state based on geographic, socioeconomic, public health and environmental hazard criteria, including areas with concentrations of low-income residents.

Rubio’s office estimates the $50 million AB 1590 allocates could help 10,000 households.

AB 1590 passed in the Assembly and is awaiting assignment with the California Senate Rules Committee. Read the bill text here.

Baby steps

Although it would assist some first-time homebuyers, the bill’s impact will be limited because it does not address the state’s larger issue: a lack of low- and moderate-income housing inventory.

This bill makes some existing housing easier to acquire, but existing housing is inadequate. California faces a dire shortage of low- and moderate-income housing.

For those homebuyers lucky enough to find an affordable home in the first place, this bill offers precious breathing room for unexpected expenses like repairs.

For the rest of California households suffocating amid the state’s affordable housing crisis, this bill is a small but welcome step toward making home ownership accessible for low- and moderate-income families.

Follow the link to see more recent California legislation aimed at alleviating the state’s affordable housing crisis.

Related article:

Legislative steps toward more affordable housing

Related topics:
first-time homebuyer, law

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

With California’s housing shortage at a crisis level in 2019, legislators are coming up with new and creative ways to bolster inventory.

Beginning in 2020, local governments will be required to incentivize and promote accessory dwelling units (ADUs) for very low-, low- and moderate-income households.

Also known as casitas or granny flats, ADUs are secondary housing units located on a single family residential (SFR) lot. The ADUs incentivized under the new law will need to be available at a rent equal to 30% of the income available to each of these income classes.

Just how local governments will incentivize ADUs is largely up to individual agencies. But given that upfront costs for construction, permitting and planning are often unsurmountable obstacles for homeowners, any financial incentive is beneficial.

These incentives need to be included in a local government’s housing element, which is the identification and analysis of an area’s housing needs, goals, finances and objectives for the development of more housing.

This change, enacted by AB 671, also requires California’s Department of Housing and Community Development to create and post a list on its website of state grants and financial incentives for:

• operation;
• administration; and
• expenses related to planning and construction.

Related article:

Much ADU about accessory dwelling units

ADUs: a (small) part of the puzzle

California is second-to-last in the nation for the number of housing units per resident. As high-tier housing is more profitable to builders than low-tier housing, the shortage is concentrated in low-tier housing. In fact, California is short 1.4 million affordable rental housing units, according to the California Housing Partnership.

The solution to California’s housing crisis is ultimately more housing. How to get more housing is what legislators have attempted to address in recent years with an array of new affordable housing laws.

Incentivizing homeowners to build and rent ADUs to low-income households is one approach favored by legislators. It can essentially double the number of units available on a single SFR lot, but in practice the result is limited.

Realistically, the ADU potential is for a few thousand more units a year, at best. For example, in San Diego, 213 ADU permits were issued during 2018. The much greater potential for more building is in multi-family units, which numbered 5,700 in San Diego during 2018.

More construction is needed of all residential types everywhere in California. AB 671 is a positive step toward increasing affordable ADUs, but the impact will be limited. New legislation needs to focus on requiring local governments to re-zone for denser housing near jobs and amenities. Changing zoning to allow for the construction of more multi-family properties in city centers will bring rents and prices down and stimulate housing market growth.

Related article:

Change the law: amend zoning laws to promote multi-family construction

Related topics:
accessory dwelling unit

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Getting housing bills through the California legislature has been an excruciating process this year. So far in 2019, lawmakers have introduced more than 200 housing-related bills into the California legislature, some promising and others fatally misguided. This influx is a reaction to California’s snowballing housing crisis. Housing and construction costs are soaring, and now lawmakers are scrambling to legislate a solution.

Rent control

Of the lucky few survivors of this May’s housing bill bloodbath is Assembly Bill 1482 (AB 1482). It is the only tenant protection bill to escape the chopping block this year. Introduced by San Francisco Assemblymember David Chiu, the bill limits rent hikes to 7% plus inflation. This caps the rate at which landlords may raise rents to an average of 10% per year.

Exempt from AB 1482’s rent cap restrictions are:

• properties already covered by local rent control ordinances;
• properties of owners with ten or fewer single family residences (SFRs); and
• properties built within the last ten years.

The bill also folds in its companion bill, AB 1481, which disappeared after failing to come up for a vote before its deadline. AB 1482 adopts a provision from its companion bill that prevents landlords from evicting tenants without cause.

If signed by Governor Newsom, these restrictions go into effect in 2020 and expire in 2023.

Unintended consequences

Sounds like a good deal, right? Well…

The bill aims to keep rents from rising beyond the financial abilities of long-term tenants. In theory, this creates more stable neighborhoods since tenants won’t be forced out because of gentrification.

The idea behind rent control is stable tenants create better neighborhoods. Long-term tenants become more invested in their homes, keeping the community cleaner and safer than short-term tenants.

But in practice, rent control has very different consequences. Rent control measures are turned on their heads because of a loophole created by Costa Hawkins. It resets rent-controlled units to market rate whenever a tenant vacates the premises. In turn, landlords are encouraged to maximize tenant turnover to collect higher rents.

A landlord looking to raise rents beyond the rate allowed by local rent control ordinances may limit property maintenance to the legal minimum to encourage a tenant to leave. It inadvertently creates a perverse landlord/tenant relationship that fails to keep its promise of keeping long-term tenants in place.

Related article:

Rent control versus gentrification in California

Running interference

Originally, the bill was more generous to tenant-protection advocates. The rent cap sat at 5% plus inflation just before a last-minute deal with the California Association of Realtors (CAR). The trade union gave the green light after an exemption for owners of ten or more SFRs was added and the bill’s sunset date was advanced to its current 2023 end date.

San Francisco, home to Assemblymember Chiu’s district, has seen some of the worst of the housing and homelessness crises. Here, homelessness rose by 30% since 2017. And yet Chiu is essentially applying a band aid to a gushing head wound with this misguided and declawed version of AB 1482.

But AB 1482’s effectiveness becomes a moot point when you consider rent control does little to protect tenants and ease the housing and homelessness crises.

Keeping long-term homeowners in place is a noble goal, but the use of “fixes” like rent control contradicts municipalities’ desire for new development. Instead of rent caps, California needs legislation that creates more affordable housing stock. Follow the link ahead to learn why construction of low-income housing is a more effective strategy than rent control when it comes to combating California’s housing crisis.

Related article:

Change the law: Eliminate rent control in favor of more low-income housing

Related topics:
costa hawkins, rent control

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

In November 2018, the Camp Fire swept across Butte County, destroying 18,800 structures. This was the most destructive fire in California history, by far — the second-closest was 2017’s Tubbs fire, which destroyed 5,600 structures, according to CalFire.

Why did so many homes and other buildings perish in the Camp Fire? And how can residents prevent a similar catastrophe?

In the case of wildfire safety, newer is always better, as the majority of homes destroyed were older homes built with non-fire-resistant materials and methods.

Of all the homes in the path of the fire, 60% of the single family residences (SFRs) built after the 2008 building codes went into effect survived with minor or no damage, compared to just 21% of the SFRs built prior to the 2008 change. If all the homes in the path of the fire had been built post-2008, thousands of homes would have been spared. In fact, just 3% of the homes in the vicinity had been built since 2008, according to the Sacramento Bee.

Research by the Sacramento Bee shows that newer mobilehomes did not fare as well as new SFRs, despite being built to stricter codes than their older counterparts. The difference? While spacious yards separated the SFRs in the path of the Camp Fire, mobilehomes were typically packed tightly into mobilehome parks — like matchsticks.

In other words, a new mobilehome’s fire safety features make little difference if it’s surrounded by kindling. Further, many of the newly-built SFRs that suffered damage or destruction in the fires were surrounded by older homes, which caused them to be overwhelmed with smoke and embers.

These figures tell us that wildfire safety is a community effort. Buying a new home will help you avoid danger, but its chances of survival improve significantly when neighbors take part in making their own homes and properties safe.

Fire safety tips for all homes

With the large and highly publicized impact of the Camp Fire and other big wildfires in recent years, homebuyers are more aware of the importance of fire safety now than ever. They want to know if their potential new home is located in a fire hazard zone, information that is disclosed in the Natural Hazard Disclosure (NHD). [See RPI Form 314]

Homebuyers also want to be assured that the seller has taken concrete steps to safeguard the property from wildfires.

Related article:

Disclosure of Very High Fire Hazard Severity Zones

While newer homes are proven safer due to the updated building codes, not every homebuyer can buy a newer home. But they can make fire safety improvements. For example, whenever the structure needs regular maintenance, homeowners can gradually replace parts of the building with fire-safe materials. Read more about these types of physical improvements here.

Beyond the home’s structure, all homeowners can take steps to protect their home (and, by extension, neighboring homes). Regardless of the year it was built, homeowners can follow a few simple landscape directives to reduce their home’s chances of being destroyed in a wildfire, including:

• trimming and cutting down unsafe or clustering trees;
• trimming shrubs to a maximum height of 18 inches;
• removing any vegetation within three feet of the home;
• clearing out leaf or tree debris from the yard;
• cleaning gutters and debris from the roof;
• moving wood piles away from structures; and
• replacing grass or vegetation near the house or other structures with gravel.

Planning a home’s landscape to protect the structure from wildfires is part of creating defensible space zones. Properties located in very high fire hazard severity zones require at least 100 feet of defensible space surrounding the home or structure. [Calif. Government Code §51182(a)(1)]

Read more about creating these natural fire buffers here.

Likewise, agents showing homes to buyers in fire-prone areas can keep an eye out for these hazards that increase the chance of wildfire damage, such as:

• tall grass and weeds;
• dead or dry leaves, pine needles and tree branches;
• vegetation beneath decks and porches;
• tree limbs within ten feet of the chimney;
• shrubs within a few feet of the home; and
• trees clustered within ten feet of each other on or near the property.

Buyers and sellers who need help paying for fire safety improvements may find assistance from 2019’s Wildfire Safety Finance Act, which provides public financing to install permanent wildfire safety improvements.

Related article:

FARM: Avoid fire danger around your home

Related topics:
fire, new construction

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

The types of situations triggering an individual’s right to a property tax refund have expanded in 2019, with some slight changes to California’s property taxation laws.

Individuals who might seek a property tax refund include:

• disabled veterans who are retroactively exempt from paying property taxes;
• property owners who paid taxes erroneously or more than once; and
• property owners who have had their property reassessed and the assessment value reduced, and are seeking a refund on taxes paid in that assessment year. [Calif. Revenue and Taxation Code §§205.5; 5096]

Previously, tax refunds were able to be collected and verified by:

• the person who paid the tax (including the last recorded owner) or their guardian;
• the property’s executor; or
• the property’s administrator.

With the passage of SB 1246, beginning January 1, 2019, a trustee of the person who paid the tax is also able to collect a tax refund. [Rev & T C §5097(a)(1)]

Further, the law changes authorize a property tax refund to be granted without a verified claim when:

• the property has not been transferred the same fiscal year the taxes were collected; and
• the refund is for less than $5,000. [Rev & T C §5105(a)]

Property tax refunds may only be granted without a verified claim in counties where the board of supervisors adopts a resolution or ordinance allowing such unverified claims to be granted tax refunds. [Rev & T C §5105(b)]

Verifying a claim typically takes a lot of work on behalf of the taxpayer, as the onus is on the taxpayer rather than the county to get a refund they are entitled to on property taxes. Now — in counties choosing to adopt the law change, which will likely be many due to the lack of opposition to the bill — the county will be able to simply issue a refund without the taxpayer needing to first file a claim.

Anything that simplifies the property tax collection — and refund — process is positive news. These changes make the property tax refund process more efficient, avoiding extra steps and needless headaches.

Related article:

Is a taxpayer required to exhaust administrative remedies before claiming a refund of taxes assessed on property they do not own?

Related topics:
california property tax

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Brokers commonly refer their clients to title companies, but when may a broker benefit or profit from these referrals? This article clarifies the line between lawful and unlawful referral practices.

Clients’ reliance on referrals

Choosing a title insurance company is probably the last thing on your homebuyer clients’ minds. This is something they rely on other professionals to worry about for them. As a result, few of them shop around for different rates or levels of service.

This indifference on the part of homebuyers makes them more likely to overpay due to overreliance on broker or lender referrals to title companies. By extension, referring a title company is a natural point in the transaction when the broker may be tempted to receive unlawful kickbacks.

The prohibition against kickbacks exists to protect consumers. A homebuyer relies on their broker to provide unbiased referrals, guiding them toward the businesses which provide the most reliable customer service and lowest rates. But brokers who refer businesses due to kickbacks are not steering homebuyers towards the best choice, but only toward those companies which directly benefit the broker.

The Real Estate Settlement Procedures Act (RESPA) regulates referrals made by brokers representing clients purchasing a one-to-four unit property and originating a mortgage. The aim of RESPA is to protect SFR owner-occupant homebuyers (not investors) when they are shopping for a mortgage and mortgage-related services. Section 8 of RESPA prohibits kickbacks — improper fee-sharing — during the mortgage origination process. [12 Code of Federal Regulations §2607(a)]

In California, even stricter rules apply regarding unlawful kickbacks and benefits received by the broker in exchange for a referral. Read on for the details on when a broker may refer a business, what disclosures need to be provided and when this behavior is strictly prohibited.

Example: receiving a fee for referring a title company

For example, consider an SFR homebuyer shopping for title insurance. Their broker refers them to a title company that is not owned or co-owned by the broker. In exchange for the referral, the title company gives the broker a referral fee.

Is the referral fee allowed under RESPA?

No! A broker who refers a settlement service company involving a one-to-four unit SFR may not receive a fee for doing so. [12 CFR §1024.14(b)]

RESPA prohibits the splitting of unearned fees between multiple parties. However, it does not regulate pricing or overcharging (so-called “garbage fees”). [Freeman et al. v. Quicken Loans, Inc. (5^th Cir. 2012) 626 F3d 799]

Related article:

first tuesday case in point: RESPA “no-new-service, no-second-fee” rule applies only to fee splitting

A broker receiving a broker fee for negotiating the sale or purchase of a one-to-four unit residential property involving a mortgage origination may not receive a referral fee in addition to their broker fee received on the sale. This is true even if the broker discloses the fee and/or receives consent from the homebuyer. [Calif. Business and Professions Code §10176(g)]

The penalty for accepting a referral fee is a fine of up to $10,000 and/or one year in jail for each offense. [12 CFR §2607(d)(1)]

In California, anti-kickback laws apply to all California Department of Real Estate (DRE) licensees engaged in real estate activities (not just those covered by RESPA), including the purchase, sale or lease of residential or commercial real estate or vacant land.

Further, the state anti-kickback laws expose a DRE licensee to disciplinary action for accepting anything of value in exchange for referring business to other related businesses, like title insurance companies or home inspectors. [Bus. & P C §10177.4]

Related article:

Winter 2016/17 CalBRE Real Estate Bulletin Digest

Example: referring a title company which rents desk space

Consider the same scenario above, but in this case the title company rents desk space from the broker. The broker has no ownership interest in the title company, and they do not receive a referral fee for referring the homebuyer.

Is the broker lawfully allowed to refer the title company renting desk space in the broker’s office?

It depends. On its face, the relationship between the title company renting desk space and the broker’s referral is completely innocent. But in reality, these arrangements often result in backdoor dealings which benefit the broker.

For example, the title company may pay an inflated rental rate in exchange for the broker referring their clients to the company. The title company may pay for all of the brokerage’s utilities or buy fancy catered lunches for the office in exchange for referrals. These are each considered things of value, and thus fall under the same RESPA prohibitions as referral fees and kickbacks. [12 USC §1024.14(d)]

Alarm bells go off for regulators when observing so-called closed offices, where brokers ban third-party service providers from competing legitimately with their chosen service provider. These “preferred” title companies or lenders are usually benefiting the broker in some indirect or direct way, and thus are engaging in unlawful activity under RESPA.

Example: using a marketing service agreement (MSA)

Consider a broker who signs a marketing service agreement (MSA) with a title company. The MSA specifies that the broker will provide marketing services for the title company for a fee.

On the surface, an MSA is a simple tool used by title companies and other settlement service providers to gain business. But MSAs are more often used as a disguise for the sending and receipt of unlawful kickbacks and referral fees.

For example, the Consumer Financial Protection Bureau (CFPB) reported in 2015 that MSAs carry significant regulatory risks. In one case, the CFPB found a title company using an MSA which paid out based on the number of referrals received and the profits generated from those referrals. In another case, the CFPB found a settlement service provider did not disclose its affiliated relationship and did not tell its clients they had the option to shop around for other services before steering them toward their affiliated provider.

In both cases, an MSA was used to disguise the unlawful behavior which violates RESPA’s anti-kickback regulations.

Related article:

CFPB crackdown: Marketing Services Agreements (MSAs) with brokers

How to lawfully benefit from referrals

In a recent first tuesday poll, 30% of respondents said their broker rents desk space to a title company or encourages the exclusive use of a title company by closing their office to other titles companies. (first tuesday has repeated this poll over the years — in 2017, 22% responded “yes” and 32% responded “yes” in 2016).

Of course, not all of these arrangements are necessarily unlawful. But brokers who rent desk space to title companies and refer those companies to their clients walk a thin line. Closed offices and MSAs are not necessarily RESPA violations, but they put the broker at risk of violating RESPA and are best avoided.

Still, this doesn’t mean brokers aren’t allowed to branch out and find alternate revenue streams for their brokerage.

Diversified brokerages go beyond the simple services of listing and representing buyers of property, offering additional services to increase their income streams. To that end, they may become full-service brokers, referring buyers and sellers to lenders and service providers they own or co-own. Thus, the broker indirectly benefits from making referrals to these service providers by sharing in any profits produced by the referrals.

This relationship is called an affiliated business arrangement (ABA), when a broker may lawfully profit from referring a client to a service provider the broker owns or co-owns (having a disclosed ownership interest greater than one percent in the title company they are referring to the homebuyer). When the broker makes this referral, they need to use an ABA disclosure. [See RPI Form 519 and Form 205]

The compensation the broker receives due to the ABA is a conflict of interest which creates a fundamental agency dilemma. In contrast to brokerage fees, a conflict of interest addresses a broker’s or agent’s personal relationships with others that are potentially at odds with their agency duty of care and protection owed the client.

Conversely, the broker may lawfully refer a client to a business in which they do not possess an ownership interest as long as they do not receive a fee or any other financial benefit from the referral.

Further, fees and benefits received by the broker need to be disclosed to the client, including compensation received in the form of:

• professional courtesies;
• familial favors; and
• preferential treatment by others toward the broker or their agents. [See RPI Form 119]

Unless disclosed and the client has given their consent, an undisclosed conflict of interest is a breach of the broker’s fiduciary duty of good faith, fair dealing and trust owed to the client. Therefore, full-service brokers need to always be transparent with their clients, disclosing to them the ABA and the potential fees and benefits the broker will receive if the client chooses to use their owned or co-owned services.

Related topics:
real estate settlement procedures act (respa), referral fees, title insurance

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Calif. Revenue and Taxation Code §62

Amended by A.B. 2663

Effective date: September 29, 2018

A person whose real property was reassessed due to a transfer from their registered domestic partner between January 1, 2000 and June 26, 2015 may have the reassessment reversed by filing a claim with their county assessor. The claim needs to be made no later than June 30, 2022, and include documentation reflecting that the domestic partnership was registered on or before the date of the relevant property transfer and that they were of the same sex at the time of registration.

Property transfers eligible for a reassessment reversal under this change include:

• transfers to a trustee benefitting a:
  • domestic partner;
  • surviving domestic partner of a deceased transferor; or
  • trustee of such a trust to the domestic partner of the trustor;
• transfers triggered by the death of a domestic partner;
• transfers to a current or former domestic partner from a property settlement agreement or dissolution of a domestic partnership or legal separation;
• the creation, transfer or termination of a co-owner’s interest; and
• the distribution of a legal entity’s property to a current or former domestic partner in exchange for the partner’s interest in the entity from a property settlement agreement or dissolution of a domestic partnership or legal separation.

The reassessment reversal will apply starting with the lien date of the assessment year in which the claim is filed.

The adjusted full cash value of the property will be its adjusted base year value in the assessment year the purchase or transfer took place, factored into the assessment year of the claim for:

• annual inflation; and
• new construction on the property.

Editor’s note—This bill’s property transfer eligibility period likely ends on June 26, 2015 because that was the day the United States Supreme Court ruled on Obergefell v. Hodges, guaranteeing same-sex couples the right to marry in all 50 states.

Read the bill text here.

Related topics:
property tax, reassessment

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

San Francisco is in a unique position within California’s real estate landscape. Unlike in many other parts of the state, jobs have fully recovered in San Francisco thanks to its prosperous tech industry. As a result, the region’s home prices have surpassed those just before the Millennium Boom.

But this recovery has brewed a perfect storm of high prices and low inventory. The city’s real estate market has the dubious honor of having the highest home prices in the state and a below-average rental vacancy rate.

Prospective homebuyers priced out of the market are forced to rent, but even rentals have become scarce. This is because new units aren’t going up fast enough to keep up with the decline in vacant rental units. In turn, nearly 10,000 residents have been locked out of the home and rental markets entirely and are homeless as of 2019.

To combat its housing woes, San Francisco is putting its money where its mouth is by passing a fee waiver bill.

Mo’ money, mo’ problems

In July 2019, the San Francisco Board of Supervisors voted unanimously to waive nearly $2 million in projected fee revenue from the Department of Building Inspection (DBI) for 100% affordable housing and accessory dwelling units (ADUs). This means builders of qualifying developments won’t have to pay certain DBI fees at all. By not collecting these fees, the city is lowering a significant financial barrier to the creation of desperately-needed affordable housing units.

Editor’s note — “100% affordable housing” refers to developments whose units are all rented at reduced rates. An ADU is a secondary housing unit on a single family residential (SFR) lot.

The pilot program will last for one year and drops inspection, plan review, records retention and site surcharge fees for qualifying developments. According to the DBI, these fees average $3,200 for ADUs and $150,000 for affordable housing developments. They estimate the bill will benefit over 200 ADUs based on previous application inflow.

To qualify, 100% affordable housing developments need to be multifamily residential buildings whose units are:

• subject to a regulatory income restriction; or
• funded by a nonprofit charitable organization providing housing for the homeless.

Managers’ units are exempt from these criteria.

Qualifying ADUs need to be:

• within a building;
• on a property with four or fewer units; or
• on a nonprofit charitable organization’s residential project.

The ordinance awaits San Francisco Mayor Breed’s signature but will retroactively apply to the specified fees collected since June 1, 2019. Those applicants can expect a refund.

Read the full bill text here.

One more chance

San Francisco is not the first to recognize ADUs as a valuable tool for quietly increasing density, but only the latest in a growing push by California lawmakers ready to give them a second chance.

On the state level, Senate Bill 13 similarly lowered a significant financial hurdle for ADUs: impact fees. These fees offset the impact new residents will have on infrastructure. In California, these fees are disproportionately high for ADUs compared to traditional SFRs, hampering an effective density creator. The bill is currently with the California Assembly Appropriations Committee.

But fees alone aren’t usually the deal-breaker for new affordable housing projects or even homeowner-developers looking to build an ADU. Plenty of larger barriers to ADU creation exist, like building costs, parking requirements and an often long, drawn-out permitting process.

In fact, San Francisco recently accelerated the ADU permitting process to make progress on a massive backlog of over 900 permit applications. Between August 2018 and February 2019, 439 of those units were permitted with 90% of those being rent controlled. Together, small steps like streamlining permitting and cutting fees wherever possible add up to create a more affordable San Francisco.

Nevertheless, fee-busting legislation for affordable housing will add another reason for San Franciscans to create more diverse housing options. By stripping away thousands in fees, the bill will hopefully embolden homeowners on the fence about contributing a new ADU to the city’s tight rental market.

Likewise, this may buoy new housing creation among larger developers considering 100% affordable housing developments that simply don’t pencil out with all the fees.

Related article:

Much ADU about accessory dwelling units

The process for building an ADU can be daunting for homeowners. Luckily, the California Department of Housing and Community Development publishes an informative handbook on ADUs, covering everything from the basics to new legislation. Use this tool to become the local expert on ADUs and you’ll be a homeowner’s first call when thinking about adding a unit to their home.

Agents—are you prepared to navigate possible clients through the ADU building process in your city? Download first tuesday’s ADU FARM letter here to connect with your market and stay on top of the upcoming ADU surge.

Related topics:
accessory dwelling unit, adu, affordable housing, san francisco

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

This article covers what an agent needs to know about selling and marketing their client’s home to an investor, as opposed to an owner-occupant buyer.

“We buy homes for cash!”

You’ve seen the signs advertising investors who are eager to buy your clients’ homes — maybe you even know some of the people who post those signs. Most sellers avoid these types of buyers, aware that at worst they are scammers and at best even the most legitimate offers won’t be top dollar.

Some investors may try to persuade homeowners to sell their home to them without an agent to assist them, as a seller who does not pay a listing agent’s fee may be more inclined to lower their price. But sellers need help wading through the pool of scammers to locate serious and legitimate investor buyers. That’s where an agent experienced with investor buyers shows their value.

Types of investors

There are three basic types of investor purchasers, including those who:

• intend to flip the home based on market momentum;
• will make improvements to the home to sell at a significant profit; and
• will rent it out as a long-term income-producing property as a buy-to-let.

Sentimental ideas about their ideal home and neighborhood charm aren’t going to sway an investor. Therefore, the best way to induce an investor to consider your client’s home is to show its value.

Most experienced investors are all-cash buyers. Not reliant on financing, they are able to skip the appraisal and home inspection process, ensuring a smooth closing that can occur in a matter of days. In contrast, a regular buyer using a lender typically closes over several weeks.

But these time-saving measures can come at a big cost — investors have a bottom line, and unlike most homebuyers, they think squarely with their wallet. But that doesn’t necessarily mean the seller will get a bad deal.

Unlike regular buyers, investors know exactly how much the home is worth in whatever capacity they intend to profit from, be it a long-term rental, an improvement project or a flip. Sure, they may try to get a below-market deal, but an agent can also run comparable properties and calculate the home’s worth. Therefore, with the help of an agent, the seller can find assurance that they are negotiating for the best investor deal.

As large online homebuying services are growing in popularity, many sellers are considering these new types of investors. These services, like Opendoor, Offerpad, Zillow Offers and Redfin Now, are known as iBuyers. With their own in-house brokerage services, they handle the entire transaction in an effort to appeal to sellers who want to sell their home with zero hassle. This process also cuts out sellers’ agents who aren’t directly affiliated with the iBuyer companies.

Related article:

Zillow, Redfin test out full-service model

Sellers who use iBuyers end up netting less money, either through a below market purchase price or the higher fees compared to a traditional listing and buyer’s agent. So, when a seller can skip the hassle of making improvements and preparing their home to sell by selling to a traditional investor, why do many still choose an iBuyer when they know they will make less money?

Sellers are naturally more likely to sell to an investor whose name they recognize and trust. Of course, an investor doesn’t need to also be a tech company to be trustworthy — but finding and vetting investors on their own is beyond the capabilities of most sellers. That’s where an agent comes in. Knowing which local investors are honest and fair and which investors are best avoided is part of the experienced listing agent’s job.

Locating a credible investor

When a seller’s home is outdated or dilapidated and they are unable or unwilling to make improvements, an investor may be their best option. Once it is determined they are open to an investor purchase, how does a seller market the property to investors?

First, determine the aspects of the property that will be most attractive to investors. For example, a home located in a desirable area in need of improvements will catch the eye of an investor looking for a home improvement project. Or, a home in a community popular for renters ought to be marketed to buy-to-let investors.

Prepare the listing’s marketing package with these goals in mind. Mention the big improvements that will need to be made while highlighting the home’s potential. Include real numbers, such as any rental income the property already brings in or what similar nearby homes are renting for. If other homes have been rehabilitated nearby, tell investors what these homes are selling for now.

Next, identify credible investors. Ideally, you will grow a list of trustworthy investors to consult. Information to collect includes:

• neighborhoods where they invest;
• what home tier they work in;
• what types of investment properties they purchase;
• referrals of other agents or clients they have purchased from; and
• what type of financing or funds they use to purchase investments.

When working with an investor for the first time, ask for referrals from other professionals. Be sure to require a proof of funds when they offer cash, or a preapproval letter from a lender when they are using financing. Make calls and speak with someone directly at their bank. Check any business or professional licenses and seek out their online presence.

Suspicious actions that ought to ring alarm bells include when the buyer:

• is unwilling to see the property in person (an indication they may be on the other side of the world and have no real intention to purchase the property);
• insists on using a check rather than a wire transfer to purchase the home;
• overpays on earnest money using a check, later asking for a cash refund (spoiler alert: the check will bounce and the cash refund will be gone);
• communicates over email with a long time between responses (which may mean they are handling multiple scams at once);
• alters the purchase documents (which could point to money laundering); and
• offers a “too good to be true” or extremely high price (another potential indication of money laundering).

Any one of these actions on their own doesn’t necessarily mean the buyer illegitimate. But it definitely means caution and further investigation are warranted.

Related topics:
all-cash buyers, buy-to-let investor, flipper

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Calif. Government Code §§12950, 12950.1

Amended by S.B. 1343 and S.B. 778

Effective date: January 1, 2019

By January 1, 2021, employers with five or more employees need to provide at least two hours of sexual harassment prevention training to all supervisory employees and at least one hour of training to all nonsupervisory employees every two years.

New employees and those newly assuming a supervisory position need to complete their training within six months of hire or assumption of supervisory position.

This law affects real estate brokers and agents, despite their independent contractor status.

The training may be completed:

• with other training;
• in a group or individually; and
• in shorter segments, if the segments meet the time requirement.

The Department of Fair Employment and Housing (DFEH) offers free training courses online, but employers may also develop their own training materials. Employers can also use the DFEH’s Sexual Harassment and Abusive Conduct Prevention Toolkit in conjunction with an eligible trainer. [2 Calif. Code of Regulations §11024(a)(9)(A)]

Beginning January 1, 2020, employers need to provide this training to:

• seasonal employees;
• temporary employees; and
• employees hired to work for fewer than six months;

within 30 days of their hire date or within their first 100 hours worked, whichever is first.

In the case of a temporary employee employed by a temp agency to work for a client, it is the temp agency’s responsibility to provide this training.

An employer who provides this training to an employee in 2019 is not required to provide it again until two years thereafter.

Information equivalent to the DFEH’s information sheet on sexual harassment, which an employer may provide to employees in lieu of the DFEH’s information sheet, needs to include a web link to the sexual harassment online training courses on the DFEH’s site.

Read the code text here.

Related topics:
2021, training

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

August 24, 2020 update: The state’s Sexual Harassment Prevention Training is now available here.

California brokers: you were likely aware of the law passed last year requiring employers with five or more employees to provide sexual harassment training by January 1, 2020. A recent change was passed to give you more time to provide this training.

Now, by January 1, 2021, employers of five or more employees need to provide at least two hours of sexual harassment prevention training to all supervisory employees. Additionally, employers will need to provide at least one hour of training to all nonsupervisory employees. This training will need to be completed within six months of hiring a new employee and repeated once every two years.

Brokers and other employers who already provided this training in 2019 may wait two years to repeat the training — they do not need to repeat the training before the 2021 deadline.

The training may be provided:

• in a classroom setting or through another interactive training method;
• individually or as part of a group; and
• in a single setting or broken up into shorter segments.

The training will consist of information regarding:

• federal and state laws on the prohibition and prevention of sexual harassment in the workplace;
• resolutions available to victims of sexual harassment in employment;
• practical examples aimed at supervisors for preventing sexual harassment, discrimination and retaliation; and
• the prohibition of harassment based on gender identity, expression and sexual orientation.

The training will be delivered by trainers or educators with knowledge or expertise in the prevention of harassment, discrimination and retaliation. The training will also include a way for employees who have completed the training to print and save a certificate of completion.

Employers who want to go above and beyond these minimum training requirements are welcome to provide additional training.

Related article:

Employer responsibilities to correct harassment in the workplace expanded

Related topics:
broker, independent contractor

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Roughly one-in-four adults believe they have experienced housing discrimination at some point in their lives, according to a recent survey by Zillow and the National Fair Housing Alliance (NFHA).

Housing discrimination comes in many forms. In California, the Unruh Civil Rights Act requires real estate professionals to follow high anti-discriminatory measures. It protects against discrimination due to:

• age;
• ancestry;
• color;
• disability;
• genetic information;
• national origin;
• marital status;
• medical condition
• race;
• religion;
• sex (including gender and gender identity and expression);
• pregnancy; and
• sexual orientation. [Calif. Civil Code 51(e)]

Thus, a landlord or property manager may not:

• refuse to rent a dwelling or to negotiate the rental of a dwelling for prohibited discriminatory reasons;
• impose different rents on a dwelling for prohibited discriminatory reasons;
• use discriminatory criteria or different procedures for processing applications when renting a residence; or
• evict tenants or tenants’ guests for prohibited discriminatory reasons.

The highest number of fair housing complaints are in regard to disability status, according to the NFHA. This is followed by complaints of race-based discrimination.

There are two types of discrimination committed by real estate professionals:

• explicit discrimination, for example, when a real estate agent or landlord refuses to show homes to or accept applications from members of a protected group; and
• implicit discrimination, the more common form of discrimination.

According to a decades-long study by the Department of Housing and Urban Development (HUD), implicit racial discrimination ensures minority homebuyers (and renters) are:

• shown fewer properties; and
• given less information by real estate agents.

For example, consider a potential renter who has a disability which makes walking up and down stairs difficult. They are interested in a property that has stairs. When the landlord becomes aware of their disability, they refuse to accept their application, insisting the stairs will be a problem for their disability.

While the landlord may have been well-meaning, their actions were still discriminatory. [42 United States Code §3604(f)(1)]

So what is the appropriate and lawful action the landlord ought to take? In the example above, the landlord doesn’t need to go so far as to build an elevator to accommodate the applicants’ disability — that would be unreasonable. Rather, their duty is to make reasonable accommodations or modifications for their prospective tenant. For example, installing an accessibility ramp at the front entrance may be a reasonable accommodation when requested by the tenant, as long as it does not create a significant financial burden for the landlord. [42 USC §3604(f)(3)]

To ensure brokers, agents, mortgage loan originators (MLOs) and landlords don’t violate non-discrimination laws — even unintentionally — professionals need to:

• ask the same questions of all applicants — for landlords, feel free to ask about matters that will actually impact tenancy like pets or water beds, but never ask about a protected status like race, religion, sexual orientation, pregnancy, disability status, etc.; and
• keep records of client interactions — while a client is unlikely to pursue legal charges for discrimination, it’s best practice for an agent to keep track of all client interactions and property tours for several reasons, including identifying any unintentional biases.

When in doubt, contact a local fair housing expert for advice — find a list of experts at HUD’s website.

Related article:

Fair housing 101 for landlords

Related topics:
housing discrimination

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

Renters across California came home to an early Christmas present from their landlords this season: a 60-day notice to vacate.

Reports of sudden eviction drives are emerging throughout the state, spurred on by AB 1482’s effective date of January 1, 2020. The new law caps annual rent increases in California at 5% plus inflation through January 1, 2030. Separately, the law requires landlords to show just cause for evicting a tenant when the renter has occupied the unit for 12 months.

The Legal Aid Society of San Mateo County reports that these mass eviction notices spiked 200% in the 30 days after AB 1482 was passed In September 2019.

Editor’s note — Download RPI Form 569-1 to review the proper use and terms of a 60-day notice to vacate.

Down the loophole

Sounds like a good deal for renters, right? Well, legislators neglected to account for a little loophole in the law caused by Costa Hawkins. This controlling precedent allows landlords to reset their rent-controlled apartments to market rent whenever a tenant moves out.

So how are landlords taking advantage of this oversight? Technically, a landlord may serve a tenant a no-fault eviction notice — say, their unit is undergoing a substantial renovation — and then hike up the rent afterward. Because service of a 60-day notice to vacate is required, the last day to take advantage of this loophole was October 31, 2019.

Editor’s note — Property managers and DRE licensees alike can refresh their knowledge to ensure compliance with the latest state and federal housing laws using first tuesday’s Landlords, Tenants and Property Management 45-hour Continuing Education package.

Related article:

California’s rent control problem

This workaround leaves California tenants in the very situation AB 1482 was intended to prevent. Even long-time tenants are being forced to choose between accepting huge rent hikes and moving out after being served an eviction notice.

The recent rash of 60-day notices has prompted some cities to issue emergency moratoriums on evictions as a stop-gap until AB 1482’s effective date. The following California cities have passed such moratoriums or similar provisions to protect tenants until AB 1482’s effective date:

• Bell Gardens;
• Daly City;
• Long Beach;
• Los Angeles;
• Milpitas;
• Pasadena;
• Pomona;
• Redwood City;
• San Mateo;
• Santa Cruz; and
• South Pasadena.

Editor’s note — Have you been served a 60-day notice? Tenant group Tenants Together publishes a tenant advocacy tool kit to enforce your rights.

Double take

These moratoriums are a direct response to local tenant group objections. They characterize loophole evictions as unconscionable. In many situations, families occupying rent-controlled units are wondering where they’ll sleep come January 1 after being forced out — some after more than ten years of residency.

With over half of California’s renters cost burdened, this scenario is not uncommon as rent-controlled units house some of the state’s most vulnerable residents.

Some landlord groups are less sympathetic, contending that this “loophole” is a legitimate practice. After all, what incentive do landlords have to play nice and let others reap the rewards of bungled legislation? Barring local moratoriums, some landlords consider this playbook fair game.

That’s not to say all landlords are taking advantage of preemptive no-fault evictions. The number of AB-1482 evictions is unknown, but they have been reported in such significant volume that they paint a crystal-clear picture; a sudden rush of evictions on this scale doesn’t happen apropos of nothing, after all.

This is just the first of many issues plaguing rent-control policies. While it may protect some tenants at first, AB 1482 is a band-aid solution to a long-term problem. Click through for a first tuesday proposal to replace rent control with more common-sense housing production policies.

Related article:

Change the law: Eliminate rent control in favor of more low-income housing

Agents and brokers — with the rental market in a death grip, is there any breathing room for compassion in real estate? Or have legislators forced the hand of landlords? Leave your thoughts in the comments below.

Related topics:
eviction, landlord

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

This article covers need-to-know termite topics for California real estate agents, including inspections, forms and customs.

Termites: perhaps a homeowner’s worst nightmare, these wood-boring insects can infest and ruin a home. Their untimely discovery can derail a home sale or leave a homebuyer in deep regret.

What can real estate agents do to ensure a smooth home sale when termite activity has been present on the property? Read on for the rules, customs and the forms involved.

Termites and the home sale

Termite inspections are not required in California, nor are they customary in all regions. However, forward-looking buyers and sellers will order a termite inspection to ensure problems won’t be discovered when it’s too late.

The results of the termite inspection are delivered by the termite inspector with a form called a structural pest control report (SPC).

SPCs are not required in California and many lenders do not require this type of disclosure. In contrast, the Natural Hazard Disclosure (NHD) and the Transfer Disclosure Statement (TDS) both need to be delivered to the homebuyer purchasing a one-to-four unit residential property. [Calif. Civil Code §§1102(a), 1102.3; see RPI Form 304]

One potential exception exists for mortgages insured by the Federal Housing Administration (FHA), which requires an SPC inspection and report only when:

• SPC inspections are custom for the area;
• an active infestation is observed on the property;
• it’s mandated by state or local law; or
• it’s called for by the lender. [HUD Mortgagee Letter 05-48]

Lender and statutory requirements aside, homebuyers are always able to include a termite inspection contingency in their purchase agreement. If the seller refuses to cover a termite inspection, a prudent buyer will pay for their own termite inspection of the property, along with a regular home inspection.

Termite inspectors

Buyers can investigate the property they are considering purchasing by searching for the property on California’s Structural Pest Control Board website. If the property has been inspected within the last two years it will show up in the system and the buyer may submit a request to obtain the results of the report.

However, this process may take a while, usually well beyond the typical due diligence period included in most purchase agreements. Therefore, ordering a new SPC inspection is most prudent when faced with a deadline.

Agents ought to become familiar with a few trusted termite inspectors or inspection companies so they can make recommendations. Agents and consumers can look up licensees here.

While no substitute for an official inspection, agents and their clients can keep an eye out for these signs of a termite infestation:

• sawdust piles near wood surfaces;
• dirt or mud-like trails about as thick as a pencil near exterior walls or crawl spaces;
• darkened, blistered, hollow or thinned wooden parts of the home such as windowsills; or
• swarming winged termites (sometimes confused with winged ants) in or around the property.

Read more and download an informational pamphlet at the Pest Control Board’s website, here.

Termite eradication

When termites are found in the home, the entire home will likely need to be fumigated by a licensed and registered provider. This is true even if termites are only found in a part of the home, as they may have spread undetected.

The fumigation process varies based on a number of factors but can last a few hours up to a week. All people, pets, foods and plants need to be removed. The home is tented, locked and pumped with gas that will destroy the termites. Once the fumigation company completes the job and deems it safe to enter, they will post a permanent plaque somewhere unobtrusive in the home, such as the attic or garage, stating when the home was fumigated.

Alternatively, the tented home may be heated to a degree that kills the termites. Damaged wood will be repaired or replaced.

Other, local treatments for destroying termites exist but don’t guarantee a full house eradication. These methods are still fairly invasive and involve drilling and the use of toxic pesticides, heat, cold, microwave energy or electrical current.

Subterranean termites need to receive an additional type of treatment, as they live beneath the home and in the yard, too. The mitigation expert will need to create a barrier between the home and the termites’ nest.

Termite prevention

Homeowners can take these preventative steps to avoid future termite infestations:

• store wood piles away from the home and off the ground;
• make sure siding is not touching the ground;
• do not bury scrap wood in your home’s yard;
• keep rain gutters and downspouts clean of debris, specifically branches that could attract termites;
• keep wood mulch away from the areas immediately next to the home;
• refrain from planting bushes or shrubs directly alongside the home; and
• eliminate dampness and any leaks, removing the water source for any termites.

For peace of mind, homeowners can schedule annual check-ups for their home. Some termite companies offer discounts for customers on a regular termite inspection schedule. If the inspection finds signs of termites, the good news is they will have likely caught it before too much damage has occurred. Letting potential homebuyers know the home has been regularly inspected for termites will also help make their home more attractive than other homes lacking the same disciplined schedule.

Related topics:
termite inspection, transfer disclosure statement (tds)

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

According to a recent report from the Urban Institute, the decline in American homeownership rates since the Millennium Boom is most severe among black Americans. While the significant gulf in homeownership has always existed between whites and other American racial groups, the chasm is widening with time. The gap between white and black Americans is particularly large.

The rate of white homeownership has dropped 1% from its 2004 peak, while homeownership has dropped a full 5% in roughly the same period among black Americans. In Riverside, CA, for example, black homeownership dropped from nearly 50% in 2005 to 38% in 2016.

What’s at the bottom of this consistent and widespread issue, and how can it be solved?

The roots of the problem

The nature of the issue is twofold. First, housing policies in the US, even in California, one of the most left-leaning states in the country, are steeped in a discriminatory legacy. Look no further than the all-too-common practice of redlining, wherein lenders refuse to provide financing or insurance based on community demographics.

The second aspect of this problem has to do with lending practices immediately preceding the Great Recession. Many minority homebuyers financed the purchase of their homes with subprime mortgages — loans the mortgage holders knew had a high risk of default. The consequences of this practice reverberated into the recovery, when instead of peddling subprime mortgages, lenders stopped offering loans to minority homebuyers at all.

This shift in policy carried the always-present inequality in ownership rates between whites and everyone else into the post-recession economy.

Where do we go from here?

The Urban Institute report outlines five solutions to combat the disparity in black homeownership:

• targeting the problem at the local level, including understanding why black ownership increases in some communities while it declines overall;
• dealing with a shortage in housing supply — especially affordable housing;
• supporting policies that help renters become homeowners (like down payment lending programs);
• beefing up government mortgage programs like those run by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA); and
• keeping people in their homes — even through recessionary periods.

In California, one of the solutions might have to do with loosening overly restrictive zoning laws. Because of inflexible zoning policies, construction slows, leaving many potential homebuyers out to dry due to increasing home prices. At the same time, the overall state population increases at a faster rate than newer homes are built.

The California legislature recently passed a crop of affordable housing laws designed to target the state’s housing crisis. While many of these bills are aimed at the proliferation of multifamily housing, they come with additional side effects — such as increased savings rates — which will have a positive impact on homeownership trends, including rates of black ownership.

While zoning laws are only one aspect of the problem, fixing them is an important first step in closing the homeownership gap between white Americans and everyone else.

Related topics:
affordable housing, black homeownership, california homeownership, great recession, millenium boom, zoning

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

California’s housing crunch has left developers feeling like they’re digging money pits. Thanks to some sneaky fees, the money pit goes even deeper than expected.

With developers, homeowners and renters squeezing lawmakers in all directions, Sacramento is buzzing with bills aimed at alleviating the state’s affordable housing shortage. One easily overlooked legislative goal this year includes reforming a critical part of the housing approval process: impact fees.

Deep impact

Impact fees are levied by local governments against new developments to offset the fiscal impact new residents occupying these units will have on public infrastructure. The collected fees go toward providing and maintaining vital public services like utilities, schools and roads.

The problem with impact fees in California is that they are difficult to pin down. A 2018 Terner Center for Housing Innovation report substantiates developer complaints that impact fees:

• are extremely difficult to estimate;
• are set without oversight or coordination between city departments, causing them to vary widely between cities;
• substantially increase building costs; and
• sometimes go undisclosed in fee schedules.

The report also reveals that development fees add up to 18% to the cost of new units in some cities. California’s development fees were nearly three times the national average in 2015. This spells disaster for an already hamstrung housing market.

California’s construction starts fail to keep pace with population growth, driving up home and rental prices. Unpredictable impact fees exacerbate this problem by further discouraging much-needed development. After all, how can a developer pencil out a project if the fees keep changing?

Pending legislation

Skyrocketing building costs are forcing lawmakers to search for relief in every corner of their legislative toolbox. The objective: tamp down development costs to encourage low- and moderate-income housing development statewide.

Assembly member Tim Grayson sees a solution in Assembly Bill 1484 (AB 1484). Grayson, whose Bay Area district is nestled against the epicenter of California’s housing crisis, introduced the bill in February 2019. It would prohibit cities and counties from imposing an impact fee on a housing development unless the fee is published on their website before the application is submitted.

AB 1484 hopes to achieve greater transparency by compelling cities and counties to clarify the fees they impose. By making this information more accessible, cities and counties will be forced to stick to their published fees and end flimsy and surprise fees.

While the bill awaits a hearing in the California Senate Appropriations Committee, Grayson plans to amend it with recommendations from a more recent August 2019 Terner Center report. He’ll need to move quickly as the bill is due on Governor Newsom’s desk by mid-September. Read the bill text in its current form here.

What’s a county to do?

Impact fees are a necessary part of maintaining cities and counties. Local governments can’t just cap impact fees across the board; that would damage communities’ access to public services and possibly force cash-strapped areas to block new development entirely.

Instead, local governments should begin by increasing fee transparency so developers can better prepare for impact fees.

Originally referred to as “exactions,” impact fees were first codified in the Mitigation Fee Act of 1987. It adopts the “reasonable relationship” test in which impact fees need to have a reasonable relationship to the impact it mitigates. But with such poor fee transparency, how can developers determine if a fee is reasonably related?

Greater transparency makes costs more predictable and new development easier to realize. The 2019 Terner Center report, which was funded by the California Department of Housing and Community Development, weighs a few recommendations with the same goal, including:

• tightening oversight of how cities determine the relationship between a project and its impact on a community, as well as the connection between those impacts and fees charged;
• creating stronger feasibility standards for determining what fee amounts new developments could reasonably absorb; and
• improving other local funding options for infrastructure.

But impact fees are not the only financial drag on California construction. The 2019 Terner Center report focuses on impact fees under the Fee Mitigation Act, but these are only the appetizer. Impact fees fall under a larger umbrella of development fees. These range from permit processing, affordable housing, and site-specific fees.

Diagnosing high prices

Even so, unpredictable and overzealous development fees are only a symptom of a greater disease.

Local governments have finite opportunities for generating revenue. Since Proposition 13’s passage in 1978, California counties have relied more and more on impact fees to provide revenue. Prop 13 limits the property taxes a county can collect to 1% of a property’s assessed value.

Without this vital funding instrument, local governments need to make up the lost revenue from property taxes with more creative tools, like impact fees.

The Terner Center recognizes as much. In their 2019 report, they propose amending Prop 13 to expand local access to infrastructure funding. While a statewide tax reform plan would require closer analysis, it’s a possible solution to high development fees and sluggish housing development.

Impact fees have become a significant hindrance to new low- and moderate-income housing production thanks to limited funding options. Californians cannot continue to allow local governments to impose such significant fees with broad strokes. Transparency in development fees is critical to stimulating housing production.

Related topics:
prop 13, proposition 13

Reprinted from firsttuesday Journal  — P.O. Box 5707, Riverside, CA 92517

An overview of the circumstances that trigger repayment of a home equity conversion mortgage, as well as deferment options available to eligible non-borrowing spouses.

More information about this topic is available @ firsttuesdayjournal.com.
More information about our real estate licensing and renewal courses is available @ firsttuesday.us.

Related topics:
nmls, reverse mortgage