A bill that would make it harder for housing speculators to rehab and sell distressed properties missed a key deadline in the California Legislature. Photos via ZINC Financial
Written by Edward Smith
Correction: A citation from Steve Flach, president of the Fresno Association of Realtors was corrected to read that price appreciation had declined to 9.4%.
A bill that would have slapped a capital gains tax on housing speculators missed a deadline Friday, putting off for at least another year a bill one expert says would hurt the very people trying to put houses on the market.
Assembly Bill 1771 would have added a 25% tax to gains made on homes sold within five years of the purchase date. Authored by Chris Ward (D-San Diego), the bill was aimed at curbing the meteoric rise of housing values by taxing speculators trying to profit from rising home values.
Data cited by the bill’s authors claim that purchases by investor-buyers drove sales growth 51% from 2020 to 2021 in Southern California, compared to national averages of 18%.
Because of lagging inventory, homes have garnered a record number of offers, elevating home prices well over appraised values — with sellers favoring cash offers in many circumstances.
But the bill would have also targeted people bringing blighted properties back onto the market. Todd Pigott, CEO of ZINC Financial, a distressed-asset lender in Fresno, said it would hurt the very people who are making dents against the housing crisis.
Blighted properties can’t qualify for conventional loans until they’re brought up to code. Flippers have to either pay cash for these homes or secure special short-term financing. Most homes are purchased, rehabbed and sold within a year’s time, triggering the highest tax in the bill’s tiered system.
There are three kinds of homes that need work in order to qualify for conventional mortgages, said Pigott. The cost of repairs for the first kind are less than 10% of the acquisition cost. These are homes that might need new carpet or paint or a ground-fault circuit interrupter in the bathroom — the kind of work someone might be able to do in a few weekends. Most flippers avoid these because not only can homeowners do that work, but the returns on investment are not enough to justify loan terms or labor put into the property.
The second kind of home needs repairs totaling between 10% to 30% acquisition costs. These are homes in need of new roofs or structural work.
“These are extensive repairs,” Pigott said. Most homeowners don’t have the four hours a day to dedicate to coordinating construction crews to bring these homes up to snuff.
The third kind of home is everything beyond that, including homes with flood or fire damage or those that have been heavily vandalized. These homes attract squatters and neighbors regularly call city government on vagrants living in the homes.
“Name me one primary homeowner that has a full-time job that can find four hours in a day to go to a property that is in moderate distressed condition that is within 10-30% of the acquisition cost that has the know-how, the ability, the hassle factor or the time,” Pigott said.
A capital gains tax on top of the income tax at both the federal and state level disincentivizes doing the work to fix these homes, Pigott said.
“You’ve disincentivized the very people who can fix this problem and fix the blight,” said Pigott.
As for investors buying homes to sit on them and sell at a profit, there have only been a couple times in history when there have been double-digit returns on homes — now and just before the Great Recession.
Real estate experts say thorough vetting on home loans is why they don’t fear a collapse, but Pigott says the market will correct itself. Returns on homes have already begun to stabilize.
In his presentation in the recent Fresno County Economic Development Corp. Real Estate Forecast, Steve Flach, president of the Fresno Association of Realtors said the median price growth had declined to 9.4% year-over-year in January, compared to double-digit growth seen consistently in Fresno County.
“We haven’t seen single-digit appreciation (comparing same month, prior year) in two years,” said Flach.
In February, the number of listings was up 565 — a sign that inventory is growing.
The bill did not make it out of committee last Friday. So that means it remains dead for the 2022 legislative session.
“California is full of blight, full of homeless, full of trash, for God’s sake don’t penalize him,” Pigott said.