There’s a new bill in California called AB 1771 that proposes a 25% tax on the profit of home flippers. This is worth talking about because laws can affect the housing market. This is NOT a political post, but I want to talk about some of the issues involved and offer perspective based on stats and expertise.
News piece with Fox 40: A few days ago, I shared some thoughts with Fox 40. And yes, I referenced mom jeans. New career high? Enjoy below (or here).
Anyway, let’s talk about this bill.
THIS BILL IS ABOUT FRUSTRATION:
1) Frustrated with home prices: People are frustrated with the skyrocketing price of homes and rents, so something needs to be done.
2) Frustrated with investors: There is no mistaking investor activity has been increasing nationally, and people are frustrated about that because they feel investors are squeezing them out of opportunities.
STATS:
a) John Burns stats: This visual from John Burns Real Estate Consulting shows investors purchased one out of every three homes in the United States in January 2022. This is definitely up from a decade ago, though it’s not clear how much of this represents flippers (not all investors are flippers).
b) Redfin: Stats from Redfin show investors purchased 18.2% of the national market during the third quarter of last year. This is a much lower percentage than John Burns, so we’ll have to figure out which stats should be given more weight. Of course, Redfin’s numbers focus on Q3 of 2021 instead of January 2022.
Local: Redfin states 19.4% of buyers in Sacramento are investors, while John Burns says 26% for the same time period. Keep in mind about 15% of sales in the region are cash, which reminds us investors don’t always use cash. Check out investor activity in cities across the country.
c) Sensational percentages: AB 1771 states there has been 51% growth in investors in Southern California since last year. I’m not sure where this figure is coming from, but the OC Register had a piece from November 2021 where this stat was mentioned. A couple of things. The bill is about flippers, and it’s doubtful 51% represents flippers alone (key point). Secondly, a focus on percentage growth is making this stat sound super sensational. This is a nerdy point, but it makes all the difference. Look at the Redfin graph above. There was a dip in investor activity one year ago, which means when we compare today with then, the growth stat this year sounds insane. Look, I’m not downplaying the trend, but I am saying we have to be careful with percentages (especially if last year was low).
THE PROBLEM WITH THIS BILL:
1) It’s easy to blame flippers: The real estate market has seen dramatic increases in value – especially during the pandemic. This is extremely frustrating to many consumers, but at the same time, flippers aren’t the big driver of price gains. Crazy low mortgage rates and incredibly anemic housing supply are the big culprit. I know it can sound triggering to hear this, but it’s easy to vilify flippers and pin the trend on them while ignoring bigger issues.
2) Flippers are creating housing supply: This bill targets home flippers, who are actually creating inventory for buyers. It’s true that these homes are going to be more expensive after being remodeled, but keep in mind some of these homes would not have been able to obtain traditional financing due to condition. And most of all, buyers are purchasing these homes, which shows the public wants them (huge point). Flipped units come in all sorts of price ranges, and there are many first-time buyers also buying flips.
3) Institutional investors are getting a pass: In the background, Wall Street investment funds are salivating over residential real estate, and the irony is AB 1771 doesn’t target them at all because they’re buying and holding instead of flipping. We’ve seen lots of articles about corporations like Invitation Homes or BlackRock. Sometimes these stories are blown out of proportion, but there’s no mistaking we’re seeing big entities trying to play Monopoly in real life.
4) This bill doesn’t treat the real issue: The real problem is we need more supply and more affordable housing. This bill will create a fund with tax revenue to benefit some, but it doesn’t help homes become more affordable, and it doesn’t lead to producing more inventory for consumers.
Ideas? All that said, I am not a policy maker, but is there a way to incentivize investors selling to owner occupants? What have we seen work in other countries? Can zoning be amended to help create more opportunities for building homes? Is it possible to lower exorbitant permit fees and/or streamline the building process? Moreover, a bill like this sounds like something born in an up market. Would we want this if prices weren’t rising any longer? Lastly, if you penalize home flippers, will this pave the way for more buying and holding, Airbnb rentals, and institutional investor activity?
Anyway, that’s what’s on my mind.
COMMENTS: I’ll only approve comments that add to the conversation. This topic can quickly become a cesspool, but that’s not the vibe here.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
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Questions: What do you think of AB 1771? What did I miss? What are the positives and negatives?
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This will not solve the problem as flippers improve properties and put them on the market. Not fair to them. People buying second homes as investments or SFR Reits have the biggest effect and take product away from homebuyers. NOT FLIPPERS. Ryan, can you run the second homebuyer #’s in the Sac Metro Area. I know that there was a huge % in LA.
That’s a good thought. I think we need to consider second homes, Airbnb units, institutional money, etc… Lots of factors. Unfortunately I don’t have a good way to run that number. There has been increased attention on second units though, so I’m hopeful a big data firm will start to speak to the second home market more definitively in various areas around the country. I think there is an itch for this type of information, so it would be great to see someone publish regularly. This really has to be a big firm though rather than a small fish like me. One issue of course is people are not always selling their existing homes because the payments are so low and/or locked into such a low mortgage rate. Not everyone is wanting to deal with capital gains too, so it just makes sense to hold instead of sell. The rental market of course helps with this since rates have been lofty.
If rates go up another 1%, builders continue to build and the overall economy slows the 25% taxable gain will be the least of flippers worries, LOL (yes tax for flipper makes zero sense)
12-24 months out I would guess the market will adjust so Flippers BE CAREFUL on your buy price no more extra 20-50K appreciation while it took you too long to rehab.
And to throw out more ideas… One of the problems flippers are having right now is it’s not easy to find a low-priced home to quickly flip – on MLS anyway. So in quite a few cases they have to do a more substantial remodel to make the numbers work. The bottom of the price market has disappeared too since we no longer have a foreclosure crisis. In other words, we don’t have low-priced units being given away any longer. Frankly, this makes it difficult on first-time buyers also. Ultimately it’s more difficult to easily flip and pull off a lipstick on a pig situation (though there are some big corporations that are tending that way ironically…).
Exactly as most flips are big projects bringing homes to marketable condition, adding value that makes it possible for homebuyers/end user to obtain a loan.
Hey Ryan,
Haven’t followed this one. Do ibuyers fall under this? If not, why not? I don’t understand why it was proposed.
I don’t see why iBuyers wouldn’t fall under this. If they don’t, then this becomes really suspect in my opinion to target mom and pops companies while letting the big corporations run without a leash. Technically iBuyer supporters say the model doesn’t flip, but then again we see them buy for lower and want to sell for higher… So at some point we’re splitting hairs to say they are not a flipper.
The bill text is here in case any onlookers want to read it. I’m not sure why they are specifically targeting home flippers, but it’s possible it stems for an inaccurate understanding of what is making the market move. I suspect they are reading “investors are increasing”, and they are mistakenly taking that to mean flippers. To be fair, Southern California does have lots of money coming from overseas, so they could be trying to curb heightened investor activity in that regard. Ultimately, no matter what the reason, this seems flawed and misguided. The bill language does make it clear this is about affordability and investor dominance. It’s just the target on home flippers is a head-scratcher. I’d love to hear more on their rationale. Part of me wonders if they read one article in the OC Register and they are using a sensational percentage stat to drum up support?? I wonder if they talked with any real estate housing experts or real estate participants. This just seems like they are trying to deal with a real world problem (affordability) with a flawed strategy (penalize flippers).
Bill: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB1771
We will see how IBuyers do but probably not so good in a normal market. They were making an extra 100% profit on all deals and still a lot of them were still losing money. When this crazy market slows they have zero room for error. Only one big company has scaled flipping “Wedgewood” out of Southern Cal, most others have failed.
Thanks Christian. Yeah, it’s easier to make it work with the benefit of massive appreciation. For reference, iBuyers own about 500 homes in the Sacramento region right now.
I’d like to hear what CAR says. I can’t imagine they are happy to see this come through.
Looking forward to that. I would assume the same. I guess we’ll know more soon.
I do a fair amount of new construction assignments in San Joaquin County and I have 30 – 40+% year over year increases in prices in some neighborhoods. I have seen home buyers close on new construction purchased 6-8 months prior, turn around and sell into this crazy market and clear $200-300K. I can’t see a 25% cap gains charge putting a damper on this type of flip.
I would suggest it could be tied to the volume of product an institutional investor is involved with in an MSA to make sure your targeting the right entity. I think auto sales works on a volume basis, once you surpass a threshold you become an auto sales entity, then you can be more effectively regulated.
I agree with christian making it harder for a small investor or contractor to rehab and flip homes to improve the housing stock seems counter intuitive.
The other problem is that institutional investors will know how to work the tax system to their advantage, you and me not so much.
Thank you so much Joseph. I appreciate how the comments can all bring a different perspective and then make the post better. Your example makes me think of accidental flippers who sell their homes even though they planned to stay put. Sometimes life happens and people just need to move even though that was not the plan. Maybe it’s a job change, relationship change, death, birth, etc… Do we really want these types of residents to be penalized because they are technically flippers? Hence, the definition of a flipper really matters. But as a non-lawyer, can big buyers be legally targeted? In other words, can a law be made to attack the issue of investment funds and tech buyers alone? Not sure.
I know our real affordability problem is due to a mismatch between supply and demand. I’m guessing we can’t solve that quickly. So that’s the reason for new statewide changes (ADUs, RHNA allocations, up zoning), and that’s also how bills like this one get started. I think we don’t really know whether the institutional investors are flipping or are holding for rentals — probably both, but how much or what % of each? I wonder if the Terner Center at Cal has any data? If data show that institutions are holding out for rentals, maybe there’s a way to put a lid on that? Eg, a time limit on how soon a previously owner occupied home can become a rental, or a tax penalty for changing to rental within a certain time after the property changes hands. Some jurisdictions are already keeping track of rentals for regulatory purposes (rent control, AirBnB limits) so it might not be much more of a different step.
Thanks. And it’s a good idea to address the housing issue in many ways. I agree with that. I just can’t get behind this flipping bill because it doesn’t do anything constructive for consumers. It seems to misunderstand the drivers of the market, and pin the trend on flippers. And that’s a problem to make policy based on bad information. I say this as a non-flipper. Invitation Homes has over 80,000 rentals across the United States. They are the #1 landlord from what I understand, and they are holding. It’s possible they will sell some day, but they have not done that yet en masse. And they bought thousands of units in the Sacramento area in 2012 and 2013, and they have held the vast bulk of those units based on everything I have read and all the conversations I have had about this dynamic. They’ve even put out reports stating they have basically held everything besides some non-performing assets (they sort of trimmed the fat so to speak by selling a low percentage of units that weren’t performing).
As always-restircting a free market by laws or taxes always results in failure and massive un-intended consquences.
Also-I have pooled my local assessor offices. They mostly agressivly try to get people to claim homestead/homeowners exemptions.
This is able to be claimed usually on only 1 home in teh country occupied >50% of the time.
This is a good way to find(caveat-not all are claimed) out ownership percent.
Locally-the percent is calculated in the mid 30’s based ONLY on homeowners exemptions.
Often college or vacation towns will have a higher percent in the town.
Polled-not pooled…..
Thank you so much, Mark. I would be curious to see ownership stats by zip code. I think many people would be surprised to know that basically half the state rents. I had to look to be sure, but FRED stats (based on the US Census Bureau) show the ownership rate for the entire state is 54%. I suspect it’s much lower by county that as you mentioned though. On a related note though, when people vilify renters, that’s half the population… https://fred.stlouisfed.org/series/CAHOWN
I’m curious as to how this will apply to military families as well. Obviously CA has many housing issues. “Affordable” housing no longer seems to exist, but I think reducing permit and development fees would make the biggest impact.
I recently read an article about the housing CA is creating to combat the homeless crisis and the estimate was that the cost was near $800,000 per unit created! How does that even begin to make sense?
If you want affordable housing unfortunately you have to move out of state.
Hi Shelley. There is some sort of a provision for military families. For specific language, maybe check it out to see what it says exactly. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB1771 I saw that stat also regarding $800K. Wild and clearly not sustainable at that level.
I make loans to (typically nonprofit) developers of affordable housing. The near $800k per unit is for SF; it’s less in other counties but yes, still a crazy high number.
Another thought provoking, great content blog! You make such excellent points! I continue to appreciate your thoughts on all areas of the market.
Thanks Janet. I appreciate the kind words.
Great job keeping us informed on all fronts Ryan! So CA already collects a capital gain tax on the sale of real properties, just like when we sell other investments, which will be equal to the seller’s marginal tax bracket when it’s short term gain. Isn’t double taxation frowned up? And I realize many flippers are incorporated, so these gains would be treated as ordinary income for them. And like some of other responders, why would CA want to collect additional taxes on the folks who are helping with the housing shortage matter?
Hi Jeff. This sounds like an additional tax. I suspect the authors of the bill view home flippers as the culprit of lopsided market conditions. I think lots of people might think of it this way because it’s easy to hate investors (to be fair, some investors have given us good reasons). As far as tax, this seems like a reaction to a growing problem of affordability and more investors in the market, but I’m not sure these legislators are really understanding the fine print of how things work in real estate.
Might be a work around for neighborhoods that fret over gentrification in that its language sounds like it would discourage flipping and have some sort of damping effect on pricing? Problem is that seldom is the highest and best use in favor of low-income housing which this legislation appears to be pointed at? Seems too simplistic of a solution. Political posturing. Would this tax instead perpetuate blight?
To be determined, David. It’s hard to say. We have some real issues on our hands in terms of affordability, homelessness, gentrification, skyrocketing rents… There isn’t just one solution, but this proposed bill seems out of sync. I worry it would do nothing to solve some of the big problems we are facing. Flippers are simply the wrong target. But backing up, what do we do about iBuyers and institutional investors? I think legislators are wise to talk regularly about these models.
Great information as usual, Ryan! I’m wondering if this bill is coming to play because of the Owner Occupied Buyers complaining they are losing out on homes to investors. Regardless, taxing the flippers is not going to solve the issue. Like you said, we need flippers to take the houses that may not qualify for your typical loans out there. If the issue is competing against investors for owner occupied homes, maybe implement a law that investors can only purchase homes that have been “on market’ after so many days/weeks to allow your owner occupied buyers to have a chance? I don’t know. That’s all I can come up with. Would love to hear your thoughts on that idea.
Thank you. The bill does say investor activity has increased, so it seems like it is coming from a place of good intentions. But there is room for more creativity here I think. I’d love to see these two legislators sit down with housing experts and advocacy groups to come up with a plan to increase homeownership rates (especially in communities where it is shrinking), and think out of the box for solutions that might work to stall the trend of institutional buyers. This is a real concern as I wrote about. It’s just this bill doesn’t address any of that.
I’m in Oregon. Is this just a random bill that has little chance of passing or does it have a lot of support? Sounds like treating a symptom and not a cause.
Bingo. I think that’s exactly what it is doing. I don’t know yet about support. This is a brand new bill that was basically introduced in February 2022 and amended in March 2022. I’ll be listening for support or lack thereof.
The bills is so poorly thought out that they are not taking into consideration that flippers put back into a local economy for the labor & material they purchase to update the home, the permit fees, the above mentioned adding of inventory and fixing up an old house that a potential buyer may not have the funds to fix themselves, but can finance a home that has just been rehabbed. If they want to fix the issue, why not limit wall street from buying & holding and making it easier to build new homes, apartments, etc.
Thank you Levi. I really appreciate your two cents. Yeah, we’ll see what happens here. Regarding institutional investors, I just put out there this morning that Invitation Homes bought 200 homes (maybe more) over the past year in the Sacramento Region, and 30 of these were from Zillow and 17 were from Opendoor. Granted, 200 homes is a drop in the bucket of total volume, but there is no mistaking we are living through a time where institutional funds are salivating over residential real estate. The public ought to talk more about this. And I hope legislators talk more about this.
I don’t understand how this bill would solve housing inventory issue. Investors play a vital role in rehabilitating properties that otherwise traditional buyer would not be able to purchase with traditional financing and certainly don’t have spare $200K to do a whole house renovation.
This bill will push investors into holding on to properties long term for passive income, investors will also shift to other business opportunities and some will go outside of CA.
This may also cause values and desirability in our neighborhoods to decline by homes that need major improvements done where traditional homeowner will not have the means to do so.
Thanks Inessa. I suspect the authors of the bill haven’t considered the issues here. I think it’s easy to see stats on investor activity increasing, and then to come up with a remedy to tax flippers. I concur that this doesn’t really solve any problems. No new inventory is created, homes haven’t become more affordable, prices haven’t come down, and most notably…. investment funds are still buying. I do wonder if part of this bill is aimed at taking on iBuyer activity. That’s a viable concern in real estate also, but this is simply short-sighted and not a reasonable solution to help consumers navigated the lopsided market. The last thing we want is for more investors to buy and hold.
Great info Ryan, thanks. Penalizing the flippers is ridiculous and would likely mean less homes on the market. The flippers I know sometimes have tight budgets to get a profit. It also makes me nervous that if this bill passes, the legislature will start looking for other independent contracts to slap more taxes on…….
Thank you Deniece. Yeah, who is next? It’s important to be sure policy is formed by facts. There are some very powerful narratives that can sometimes shape public perception and laws. This is where rhetoric can win over facts, and it’s unfortunate to see at times.
Way too many huge houses are being built. Buyers need more options in the smaller square footage single family home market. Say 1100 sq ft to 1400 sq ft. Smaller homes may be more expensive per sq ft but more buyers can afford them not to mention the maintenance is much less.
Thanks Ron. It would be nice to see smaller homes built, but it’s hard to make the numbers work. Not only do consumers tend to want larger homes, but it’s basically impossible to build small affordable housing without some sort of subsidy. In California at least. A few years back builders did start to build a little bit smaller – presumably due to helping buyers afford the market. But units were still quite large. I wish this wasn’t the case, but it’s the market we have. Backing up though, the most affordable homes are actually existing older homes rather than new ones. New homes by nature are going to cost more simply because they’re new (like buying a new car). I’m personally a huge fan of smaller homes too because you’re right. Easier to clean, cheaper heat and air, etc… 🙂
Thanks for the reply Ryan. Existing small homes may be the most affordable but we don’t have nearly enough. I have to think the growing proportion of the population that can’t afford to buy would accept less square footage if it made owning feasible for them. So put me down as skeptical about builders’ claims that they can’t make money on smaller homes. Is there hard data you know of to support their claims? Also more duplexes and townhouses would help.
I’m just saying sometimes in the affordability conversation we are focused on new, but old is actually more affordable in so many cases. I feel like this is a valid point that doesn’t always get considered. But backing up, it’s a real problem over the long haul if only larger homes are built. This becomes a big issue down the road when we don’t have enough entry-level housing stock. There were so many homes and neighborhoods between 900-1400 sq ft that were built in the 1950s through the 1970s especially, but homes this size are difficult to build today. I would say the best data is the cost of land and the cost of construction. I don’t have that formalized, but the Sacramento Business Journal has a piece about fees from 2021, and it’s basically about $100,000 per house (not a typo). How in the world do we attempt to build something affordable when the fees alone are that high? This doesn’t include the land, labor, materials, or profit. https://www.bizjournals.com/sacramento/news/2021/06/03/north-state-bia-building-fees.html
More duplexes and other products would be great. It would be fascinating to see which states and areas if any are able to build affordable housing for their community (not affordable from a California perspective). What are they doing to make that happen? What can we learn from that? I don’t have the answers as that’s outside my wheelhouse, but like you, I’m pointing the finger to say we definitely have a problem.
Ryan, you make some very valid points. I especially like points 1 and 2. The bill appears to be a knee-jerk reaction that wasn’t well thought out. I’ve always thought that if there was a special program for home buyers that want to purchase and renovate a home (that they would live in for a certain period of time-say five years or whatever) then it would take advantage of the inventory of neglected houses that are available, provide houses for those needing them, and stimulate the economy for the related workers that would be required to fix these properties up. I know banks offer these types of loans, however, if there was some program that streamlined this process and incentivized buyers to go this route then it might be helpful.
Thanks Tom. I’m all for thinking out of the box here. I would love to see better tax breaks for owners and some incentives for investors to sell to owner occupants. This is above my pay grade, but there are smart people with ideas that can be implemented.