Named the Nation’s Best Newsletter by NAREE
March 2017 Vol 11 Issue 3
MY TAKE By Rob Bowman Charter Homes & Neighborhoods P8 BIG DATA SANDBOX States Where Flipping is King P12
LOS ANGELES SPOTLIGHT The Densification of La La Land P13
DATA IN ACTION 20 Hottest Home Flipping Zip Codes in 2016 P23
Contents
FEATURED ARTICLE
In America we generally like things which are super. Bring on the Super Bowl, supersize lunch, and of course tell us about the super-rich. There is one big exception: mention the term “Superfund site” and the instant image involves unusable land laced with chemicals that oozes rusty bolts and probably emits nuclear radiation. P1 FROM POLLUTION TO PROFITS: HOW SUPERFUND SITES IMPACT REAL ESTATE Over the past decade, the housing industry has answered the increased demand for communities where people of the same age and lifestyle all live within the same footprint. However, recent research suggests that while 50 percent of baby boomers want to live with people their same age, the other half prefer to be surrounded by people of all ages. P8 MY TAKE: WHY BOOMERS AND MILLENNIALS ARE FINDING THEIR PLACE IN THE SAME NEIGHBORHOODS Home flipping reached a new 10-year high of more than 193,000 in 2016 while average gross home flipping profits reached a new all-time high of more than $62,000 per home flipped for the year. That average gross profit represented an average ROI of 49 percent per flip, but there were eight states with an average gross flipping ROI of more than 70 percent. P12 BIG DATA SANDBOX: STATES WHERE FLIPPING IS KING
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P8
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P13 THE DENSIFICATION OF LA LA LAND
Some of the symptoms of the last housing bubble are beginning to re-appear in the Los Angeles market, but most local experts believe this housing boom is built on a much more solid foundation of more jobs and higher wages pushing up prices on a constrained supply of housing. To ease that supply, developers are increasing turning to small lot subdivision projects that provide higher density housing.
P22 NEWS BRIEFS
P23
Among 5,625 U.S. zip codes with at least 10 homes flipped in 2016, there were 39 zip codes where at least 20 percent of all home sales during the year were home flips, including zip codes in Texas, Tennessee, Florida, California, Ohio, Virginia, Pennsylvania, Missouri, Washington, the District of Columbia, Maryland, New York and New Jersey. P23 DATA IN ACTION: 20 HOTTEST HOME FLIPPING ZIPS
HOUSINGNEWS REPORT
FEATURED ARTICLE
From Pollution to Profits: How Superfund Sites Impact Real Estate
BY PETER MILLER, STAFF WRITER
In America we generally like things which are super. Bring on the Super Bowl, supersize lunch, and of course tell us about the super-rich. There is one big exception: mention the term “Superfund site” and the instant image involves unusable land laced with chemicals that oozes rusty bolts and probably emits nuclear radiation.
The catch is that general labels may not be accurate. Large numbers of Superfund sites have been redeveloped and many are now ecological and financial success stories. Nationwide there are about 4,000 major sites in the cleanup inventory. These include 1,337 Superfund sites as well as an estimated 2,700 Formerly Used Defense Sites (FUDS). These sites —
which include many large, well-located properties — should not be written off as scrap real estate where the highest and best use is avoidance. Uncle Sam is spending big money to bring these areas back and has had some notable successes: no less important opportunities remain to convert what is now junk real estate into prime and profitable property.
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2016 Environmental Hazard Housing Risk by Zip
Risk Index
0%
250%
Click on map to view interactive nationwide heat map
investment than owners in areas with clean-up areas — 24 percent versus 21 percent. Fifth — the big take-away — despite the averages there are a number of cases where home values in ZIP codes with Superfund sites have substantially out- performed areas without such sites. For instance, home value increases in areas with a Very High ratio of Superfund sites include Pittsburgh (home values up 260 percent over the last 10 years), Nashville (146.7 percent), Oklahoma City (121.2 percent), Baltimore (120.8 percent), and Houston (117.6 percent). Beware of Generalities The great oddity of Superfund sites and their military counterparts, the FUDS, is that each is absolutely unique.
The great oddity of Superfund sites and their military counterparts, the FUDS, is that each is absolutely unique. Presumptions about value and potential based simply on labels can be extremely misleading.”
What The Numbers Say Research from ATTOM Data Solutions divided ZIP codes into four categories of risk based on the presence and prevalence of Superfund sites: Very Low Risk areas with no active Superfund sites. The ZIP codes with active Superfund sites were divided into “Moderate”, “High” and “Very High” categories. The level of risk among the three categories is based on the ratio of Superfund sites to homes in the ZIP code.
First, home values in ZIP codes with Superfund sites are consistently lower than in ZIP codes without Superfunds. Second, home price appreciation — particularly over the longer term (10 years) — is weaker in ZIP codes with Superfund sites than in ZIP codes without. Third, home prices even in the Very High risk ZIP codes have risen 38 percent on average over the past five years.
If we look at home appreciation results some surprising numbers show up.
Fourth, homeowners in Superfund-free sites generally saw a stronger return on
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Presumptions about value and potential based simply on labels can be extremely misleading. A prime example can be found just a few miles from the White House, in what is officially known as the “Spring Valley Formerly Used Defense Site (FUDS).” In the northwest quadrant of Washington, D.C., is the bucolic campus of the American University (AU). The campus is part of the posh Spring Valley area, today among the most desirable residential neighborhoods in the Nation’s capital. However, Spring Valley’s history includes a few surprising turns. According to the Environmental Protection Agency (EPA), “during WWI this area was known as the American University Experimental Station and Camp Leach, a 660-acre facility used as a research and test center for
not entirely. In 2010, Army engineers destroyed 80 chemical and conventional bombs found in what is now officially known as the “Spring Valley Formerly Used Defense Site (FUDS).” Has this history made the area less desirable? Not at all. Jack W. Wang, with RLAH Real Estate, explains that “many prominent Washingtonians call this idyllic neighborhood home and, despite being a military superfund site due to unexploded ordnance from testing during WWI, it continues to be an extremely desirable area, commanding impressive housing prices.” How Uncle Sam Entered The Cleanup Business For a very long time, U.S. land was an abundant commodity, the population was relatively small and ecological concerns
chemical weapons. The experimental station and chemical laboratories were located on American University property.” It wasn’t just the military that enjoyed Spring Valley. The Bureau of Mines, under something called the “Noxious Gases Subcommittee of the Military Committee of the National Research Council,” was responsible for producing more efficient gas masks, toxic gases, incendiary munitions, signal flares, plus “defensive and offensive smoke mixtures.” Camp Leach and its bomb-making activities were hardly a secret. In 1918 a nearby resident — Sen. Nathan B. Scott, R-W.V., as well as his wife and sister — were “slightly gassed” according to the Army. Over time, of course, the military history of the AU campus and the surrounding area has largely been forgotten — but
U.S. Homes by Superfund Risk
Many prominent Washingtonians call this idyllic neighborhood home and, despite being a military superfund site due to unexploded ordnance from testing during WWI, it continues to be an extremely desirable area, commanding impressive housing prices.”
Very Low Moderate
High
Very High
3% 3%
1%
93%
Jack W. Wang | RLAH Real Estate
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were largely ignored. The result was that many industrial and military sites were polluted without much public concern. All of this began to change about 50 years ago. The first Earth Day was in 1970, and by 1980 the Comprehensive Environmental Response, Compensation, Superfund law, this legislation provided standards for the “liability, compensation, cleanup, and emergency response for hazardous substances released into the environment and the cleanup of inactive hazardous waste disposal sites.” and Liability Act — CERCLA — was passed. Commonly known as the
“known releases or threatened releases of hazardous substances, pollutants, or contaminants.” Once identified, sites are then added to the National Priorities List (NPL). The catch is that not all NPL sites are equally polluted. The EPA uses a Hazard Ranking System (HRS) and gives priority to the sites which represent the most risk, but only after the public — including owners — comment about proposed inclusions for the NPL list. With the Superfund law in place, the game suddenly changed. No longer was pollution an incidental cost or no cost at all. Polluters could face huge, bankrupting, fines. Inadequate state
laws designed to shield polluters were dead. Environmental concerns instantly became a national value on the order of mother, apple pie and the American flag. Protecting the air, water, and ground was now a corporate priority. The changes brought on by CERCLA are not just a matter of optics. Big money is involved. Companies can get paid to clean up the hazards and debris left by others. Lawyers can file class- action lawsuits against polluters. The government itself is now on the hook for billions in clean-up costs.
Buried in the Superfund rules are several curious realities.
Under the new system, criteria were established to identify properties with
2016 Home Seller Price Gains by Superfund Risk Avg Price Gain Since Last Purchase Avg Pct Gain Since Last Purchase
30%
24.4%
$70,000
24.2%
23.0%
21.3%
$60,000
25%
19.6%
$66,076
$65,120
$50,000
20%
$51,307
$56,121
$40,000
$43,103
15%
$30,000
10%
$20,000
5%
$10,000
0%
$0
Very Low
Moderate
High
Very High
All Properties
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First, CERCLA created liabilities where none existed before. No longer could companies pollute and scoot. Under the legislation, the EPA can force responsible parties — typically past owners — to perform clean- ups or reimburse the government for the clean-up money it spends. Second, CERECLA is a jobs bill. There are Superfund sites widely disbursed among the states and congressional districts. They represent not only an opportunity to clean up environmental hazards but also a way to bring new dollars and employment into local communities. Third, underlying the legislation is an unusual goal. Ancient alchemists tried to turn lead into gold; modern lawmakers have a somewhat similar vision: they
want to convert real estate rubbish into high-value property that’s safe, usable and taxable. Unlike the alchemists, there is evidence that the Superfund effort has actually worked. How do we know? Nearly 400 sites have been cleaned-up and removed from the Superfund list. Uncle Sam. With claims going back to the Revolutionary War, many federal holdings are extremely well-located, properties acquired long before today’s cities and suburbs evolved. While we routinely think of government property in terms of vast national parks or the Federal Triangle, the reality is that a lot of government land has been military property. The FUDS Factor The largest U.S. land owner of all is
The FUDS program is part of the Defense Environmental Restoration Program (DERP) and cleans up properties using the standards established under CERCLA.
However, FUDS sites are counted separately from Superfund sites.
According to the U.S. Army Corps of Engineers, the FUDS program exists to clean up former military properties — and there are a lot of them. It’s estimated that more than 10,000 properties can potentially be included in the FUDS program, but the government says “only about 2,700 properties require some type of cleanup.”
Given that the term “some type of cleanup” may seem a little vague, the government
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Home Price Appreciation by Superfund Risk Avg of 10-Year HPA Avg of 5-Year HPA Avg of 1-Year HPA
On the other hand — and perhaps surprisingly — there are buyer protections which have been built into the system. When the Superfund program began there were worries that as the rules were then written that subsequent, non-polluting owners could be held responsible for massive clean-up costs. In an effort to provide relief, Congress passed the “Small Business Liability Protection Act” in 2001. According to the EPA it “exempts de micromis contributors of hazardous substances and household, small business, and nonprofit generators of municipal solid waste from liability for Superfund response costs at National Priority List sites.” In addition, the rules also exempt from Superfund liability “contiguous property owners, prospective purchasers, and clarified appropriate inquiry for innocent landowners.” Given that all properties are unique it follows that the due diligence which works for one site will not be sufficient for another. For details and specifics buyers will need to review each property with qualified attorneys and environmental specialists. Money Each year about an eighth of the entire EPA budget is spent on Superfund cleanups, roughly $1.1 billion in fiscal 2016. Another $1.1 billion has been set
-1.5%
37.6%
Very High
6.3%
-0.1%
38.2%
High
6.3%
0.4%
45.3%
Moderate
6.3%
2.3%
42.7%
Very Low
7.1%
also offers a more precise list of possible problems, a list which includes:
The EPA says it’s “the prospective purchaser’s sole responsibility to ensure that its proposed use does not interfere with or impede the site’s cleanup or protectiveness. EPA does not offer any guarantees or warranties as to the compatibility of a proposed use with the cleanup. It is also the purchaser’s sole responsibility to maintain liability protection status as a bona fide prospective purchaser.” Not be outdone, the Army says the FUDS program “does not certify that the property is clean, particularly where contamination may be present as the result of actions of parties other than DoD.”
• Hazardous, toxic and radioactive waste (HTRW). • Building demolition and/or debris removal (BD/DR). • Military munitions response program (MMRP). • Containerized hazardous, toxic and radioactive waste (CON/HTRW), such as underground storage tanks. Warranties & Liability If there’s one certainty about federal cleanup guarantees it’s that they’re not absolute.
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aside for fiscal 2017, the period which ends September 30.
Presidential budgets should be seen as little more than financial piñatas, big targets to be picked apart. Presidents can propose but the Constitutional reality is that all spending bills must originate in the House and the final outcome on Capitol Hill can be very different than any president’s budget proposal. In fact, there’s now an effort on Capitol Hill to gut the EPA entirely. Proposed legislation — HR 861 — would simply “terminate the Environmental Protection Agency” if passed. While cuts of some sort at the EPA seem likely, reductions to the Superfund effort do not. According to The Washington Post, Scott Pruitt, the incoming EPA Administrator, has stated that “Superfund is an area that is absolutely essential.”
how Washington works. Consider the Board of Tea Examiners: it took Congress a number of tries and nearly a century to kill off a federal agency which in the end had eight employees and a $300,000 budget. In contrast, the EPA now employs some 15,000 people and has an annual budget of $8.1 billion, money spent in every state. It’s the last part that’s important: Superfund money has been spread and sprinkled across the country. Regardless of party, senators, representatives, governors, and mayors all want the spending to continue — especially in their jurisdiction.
FUDS program expenditures through fiscal year 2012 totaled $5.8 billion, however the Army expects the program to continue through 2085 — read indefinitely — at a cost of $280 million a year in constant dollars. Looking forward, there’s an additional $19 billion or so FUDS money to be spent. At this writing it’s been widely reported that the Trump Administration plans to reduce the annual funds set aside for the EPA by $2 billion (about 25 percent) and to slash the workforce by 3,000 jobs (about 20 percent). At the same time, the Trump budget plan also calls for a $54 billion increase in military spending. This means that the FUDS program — a program handled by the Army — might actually see a budget increase at the very same time EPA funding is reduced. Each year about an eighth of the entire EPA budget is spent on Superfund cleanups, roughly $1.1 billion in fiscal 2016. Another $1.1 billion has been set aside for fiscal 2017.”
To understand why the Superfund is largely untouchable you have to know
Home Values & Prices by Superfund Risk Avg Estimated Value Avg 2016 Median Sales Price
$329,172
VERY LOW
$278,846
$268,607
MODERATE
$224,210
$266,032
HIGH
$229,533
$305,193
VERY HIGH
$270,009
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MY TAKE
Why Boomers and Millennials are Finding Their Place in the Same Neighborhoods
Rob Bowman
Rob Bowman is President of Charter Homes & Neighborhoods. He is a member of the Urban Land Institute, where he serves on the executive committee of the Residential Neighborhood Development Council. Founded in 1990, Charter has delivered more than 4,500 homes and earned every major industry award, including the 2014 Gold National Housing Quality Award and the Best Neighborhood in the Country award. Charter currently has 20 neighborhoods open across Pennsylvania and aims to develop neighborhoods that are more than just subdivisions, but incorporate the existing landscape into its designs.
Over the past decade, the housing industry has answered the increased demand for communities where people of the same age and lifestyle all live within the same footprint: Townhome communities where young professionals network with other young professionals; Single family subdivisions in desirable school districts where young families tend to gather; Age-restricted 55+ communities where retirees are looking to downsize to first floor living and participate in planned social activities with people at the same life stage.
However, recent research suggests that while 50 percent of baby boomers want to live with people their same age, the other half prefer to be surrounded by people of all ages. Boomers today are feeling younger than generations did before them. Many plan to continue to work, and with a focus on health, wellness and enjoying all that life has to offer, they don’t want to just sit back and relax with others their age, just because they are getting older.
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MY TAKE
A new kind of neighborhood At Charter Homes & Neighborhoods, we recently spent more than half a year conducting an in-depth segmentation study profiling the different homebuyer targets in the Pennsylvania market. What we found was that, contrary to popular belief, the attitudes and lifestyle preferences of homebuyers in the millennial and boomer segments really aren’t all that different. The millennials, which make up about 40 percent of our homebuyer base, are looking to live life to the fullest, express their individuality and make authentic connections with the world around them. They value relationships and community
Likewise, many millennials are also seeking neighborhoods which resemble the traditional multigenerational communities from their childhood. They’re encouraged to foster close relationships with their parents throughout life, and, as a result, many stay in close proximity. Conversely, with an increased emphasis on their careers, many millennials are also finding themselves relocating away from home and extended family, thus welcoming a neighborhood that fills the void they may have left behind. So what do millennials want in their ideal neighborhood? And is it so different from the boomer generation, even if they’re decades apart?
and are striving to find a balance between work and play.
At 25 percent of our homebuyer base, boomers are independent, open-minded and, similar to the millennials, looking to connect with those around them. They approach life purposefully with a strong focus on balancing work, family and community. typically built communities with one type of home targeted at a particular demographic and no place for people to spend time together and connect. So we started to look beyond the industry standard of building multigenerational households and instead focus on creating multigenerational neighborhoods. Multigenerational households vs multigenerational neighborhoods The most recent research on multigenerational living from the Pew Research Center reveals that the number of people living in multigenerational households has doubled since 1980, rising to 57 million. Thus, multigenerational housing has long been the homebuilders’ solution to meet the needs of boomers, millennials, and the “sandwich generation” in between. More recently, as the economy and job market improves, not all families have to live under the same roof, but may still want to live close enough to be able to connect on a regular basis As Charter started creating neighborhoods, we learned the industry
... multigenerational housing has long been the homebuilders’ solution to meet the needs of boomers, millennials, and the “sandwich generation” in between.”
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MY TAKE
Bringing together like-minded people, whether they’re 25 or 85, and giving them spaces to connect, whether that’s at a local coffee shop, a morning stroll with the dog along tree-lined walking trails or at the neighborhood mailboxes. It’s about creating a place where people are re-defining the traditional definition of “family” to include friends and neighbors. The result is one way we at Charter are reimagining America one neighborhood at a time, offering the new lifestyles people desire, and shattering the typical notion of the 1950s suburbs. Regardless if they check the millennial or boomer box, or anything in between, today’s homebuyers want diverse neighborhoods, opportunities to connect and be a part of something bigger than themselves, and authentic spaces that encourage an active lifestyle. In The Great American Neighborhood®, this is what they get. Homebuyers are looking for a place to live that’s more than just an address; one that offers them the opportunity to shop, play, work and connect with their neighbors.”
Neighborhoods that don’t discriminate by age
as active participants in their children and grandchildren’s lives. Rather than relying on a limited number of nearly identical home plans that target a specific income group and lifestyle, we found that people want neighborhoods that include townhomes, traditional single-family homes, and first-floor living at various price points, so neighbors with different lifestyles all have an opportunity to live on the same street. This gave us the opportunity to pioneer a new kind of neighborhood for people of all ages to live together and foster more natural connections. A neighborhood that offers an authentic alternative with spaces designed for the way people want to live, with more interesting architecture and optional recreational opportunities. In a Charter neighborhood it’s not unusual to see a first-floor maintenance free home on the same block as a two-story single family home where the homeowners maintain their own yards.
Over the past 10 years, the team at Charter brought all of this together to form the idea of The Great American Neighborhood®, a way to create novel places that are a thoughtful alternative to the norm, engaging people and leaving an enduring legacy. These places span demographics and age groups in a way that’s unique to this industry and fit the niche of both the millennial and boomer demographics. Homebuyers are looking for a place to live that’s more than just an address; one that offers them the opportunity to shop, play, work and connect with their neighbors. Our ultimate goal with The Great American Neighborhood® is to set a new standard for what neighborhoods live and look like in the suburbs. Neighborhoods that attract people who believe that age is truly just a number. Neighborhoods that are more about lifestyle than life stage.
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BIG DATA SANDBOX
States Where Flipping is King
Move over cash sales, flipping a home is the new king. Home flipping may have calmed down a bit from its height in 2005, where 8.2 percent of sales were flips but according to new data released from ATTOM Data Solutions, 2016 saw an uptick in home flips: 5.7 percent of all home sales were flips, up 3 percent from last year to a 10-year high. Now what states are producing the biggest gross profit? ATTOM Data crunched the numbers and found the Top 8 states where flipping can really boost your income.
ATTOM Data Solutions analyzed sales deed data for this report. A single family home or condo flip was any transaction that occurred in the year where a previous sale on the same property had occurred within the last 12 months. Gross flipping profit was calculated by subtracting the price for the first sale (purchase) from the price of the second sale (flip). Gross flipping return on investment was calculated by dividing the gross flipping profit by the first sale (purchase) price.
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HOUSINGNEWS REPORT
BY DAREN BLOMQUIST EXECUTIVE EDITOR THE DENSIFICATION OF LA LA LAND
LOS ANGELES SPOTLIGHT
For John Gomez the best predictor of an emerging housing bubble isn’t buried in esoteric economic numbers or arcane housing statistics; it’s what other real estate investors are willing to pay for bottom- of-the-barrel homes in his local market of Norwalk, California. “Yesterday I went on Auction.com. A trashed house in Norwalk, the bid started at $200,000; 390 was the top bid. That property probably needs about $40,000 to put it back in use,” said Gomez, owner of Acton Real Estate who has been investing in the Norwalk and Compton areas in south Los Angeles county for 25 years. “When you’re selling a three- bedroom trashed home at $400,000, we’re in another bubble I guess. We’re heading that way.”
Median home prices in Los Angeles County have increased on a year-over- year basis for 57 consecutive months through February 2017 and hit a new post-recession high of $565,000 in June 2016, according to sales deed data collected by ATTOM Data solutions. Prices are still 7 percent below the pre-recession peak of $605,000 in August 2007. Median home prices in Norwalk hit a new post-recession high of $440,000 in August 2016, and home prices have also increased on a year-over-year basis for 57 consecutive months through
February. Prices in Norwalk are still 12 percent below the pre-recession peak of $498,500 in April 2007. Pull Back on Home Flipping While Gomez is always on the lookout for the next good deal to fix and flip, he plans to pull back on purchasing in 2017. “We’re staying fast. We’re not buying anymore. I don’t know what’s going to happen with the market by the end of the year,” he said, noting that his business
When you’re selling a three-bedroom trashed home at $400,000, we’re in another bubble I guess. We’re heading that way.”
John Gomez | Owner, Acton Real Estate in Norwalk
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LOS ANGELES SPOTLIGHT
because you are not getting it as cheap as it should be to get a return,” said Ray Newton, CEO at Ocean Partners Investment, a real estate firm based in North Hollywood. “You have a lot of these investors who are doing development. … Small lot subdivision is the key thing right now … Take a three unit and turn it into a 19 unit, that sort of thing.” Following the last housing downturn in Los Angeles, Newton began buying non-performing mortgages — or notes — in the Los Angeles area and across Southern California. He said he’s found a particularly profitable niche in buying notes backed by commercial property. “We have a huge list of investors who like the non-performing loans. Since we’re in a seller’s market, REOs aren’t attractive anymore because investors bid them up to fair market value,” he said. “Nobody really cares about the commercial guy; everybody cares about the residential guy. But there was a quiet tsunami (of commercial defaults).” Uptick in NODs Newtown sources many of his non- performing note deals by tracking commercial property notices of default (NODs) on RealtyTrac, and said he has observed a recent uptick in those NODs. “We’re starting to see an influx now … in LA any given month we are starting to see 30 to 40 loans go into default. In residential it’s probably triple that,” said Newton, who added that he’s been
Los Angeles County Median Home Price Trends YoY Pct Change Single Family & Condo Median Sale Price
Aug 07 $605,000
Jun 16 $565,000
$700,000
40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
The flippers have kind of gone aside. Small lot subdivision is the key thing right now … Take a three unit and turn it into a 19 unit, that sort of thing.”
Ray Newton CEO, Ocean Partners Investment in North Hollywood
adopted a similar strategy leading up to the last housing bubble burst. “In 2008 everything started going up and up until it finally crumbled. What goes up must go down … we just held back and then you started see all the short sales come around, and (we) started bidding on those things and stayed in business.” A total of 5,470 single family homes and condos were flipped in Los Angeles County in 2016, accounting for 7.6 percent of all home sales. That home flipping rate was down 2.3 percent from the previous year, counter to the national trend where the home flipping rate
increased 3.1 percent in 2016 compared to 2015.
Real estate investors completed 78 home flips in Norwalk zip code 90650, the third highest number of any zip code in Los Angeles County and representing 9.8 percent of all home sales for the year, according to ATTOM Data Solutions. But the home flipping rate in Norwalk was down 12 percent from 2015. (see home flipping heat map on Page 20.)
Small Lot Subdivisions Soaring “The flippers have kind of gone aside. There’s not a lot of room anymore
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LOS ANGELES SPOTLIGHT
Small lot subdivision: Developer Jonathon Dillworth with c&d partners purchased two single-story single family homes at the corner of N. Man- sfield Avenue and Fountain Avenue in Los Angeles, each with two bedrooms and one bathroom (photo on left), and is subdividing them into four two-story single family homes, each with three bedrooms and 3.5 bathrooms (rendering on right). More details on Page 20.
tracking NODs on RealtyTrac since 2005 and at the height of the crisis saw as many as 100 commercial loans fall into default a week in Los Angeles. “We get about 10 a week now (in Los Angeles). We’re starting to see more come out of Orange County, Riverside and San Bernardino.” Newton said his company recently facilitated the sale of an $11 million commercial non-performing note that he found out about on Feb. 1 and was closed on within three weeks. “They gave me five on one day,” he said, referring to a trustee company that contacted him directly. “One was $11 million. We closed it already. We have three or four more that we are still trying to work. … We find all kinds of stuff. Now the lenders will call us: ‘I’ve got a note; see if you can get rid of it for me.’”
A total of 1,069 NODs were filed in Los Angeles County in February, up 32 percent from the previous month and up 7 percent from a year ago, according to ATTOM Data Solutions. It was only the second month with a year-over-year increase in NODs in the last 12 months, but was still less than one-tenth of the 15,165 NODs filed in Los Angeles County in March 2009 at the height of the foreclosure crisis. Unlike Gomez, the Norwalk investor, fellow Los Angeles real estate investor Bruce Bartlett is still in acquisition mode. Bartlett, managing partner at Sequoia Real Estate Partners headquartered in the Westwood Village area of Los Angeles, gravitated toward the higher end of the market when he began to face stiffer competition in the lower end in 2012.
“We were getting stuff off the courthouse steps then, but once all the big private equity funds moved in, we moved up market because that’s where the margins were,” said Bartlett, a former literary agent in the movie business until 2007, when he saw “the writing on the wall that that part of the business was dying” and went back to school for his MBA before launching a full-time real estate investing career in partnership with one of his UCLA professors. “Let’s go out and buy REOs,” Bartlett said of the duo’s strategy in 2007. “That was before anyone was doing it.” Silicon Beach a “Structural” Change But now Bartlett has shifted his investing strategy to the higher end of the market, buying homes in the $800,000 to $2 million price range. He argued that sales
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LOS ANGELES SPOTLIGHT
and price growth in the higher end of the Los Angeles market is grounded in more long-term structural changes rather than cyclical market fluctuations that are more fickle in nature. He cited as an example the higher paying jobs coming to Silicon Beach, loosely encompassing the west side of Los Angeles, including Playa Vista, Playa Del Ray, Westchester, Santa Monica, Venice and also spreading into surrounding areas such as Marina Del Ray and Hermosa Beach. “Silicon Beach … is having a huge impact on high-end jobs and is transforming a lot of neighborhoods in West Los Angeles,” said Bartlett, explaining that the Silicon Beach ripple effect is continuing to spread to more cities and neighborhoods as buyers chase affordability. “You are starting to see
some of those adjacent neighborhoods keyed up in terms of price appreciation … but if something is a good a product and priced right, it’s going to sell because of the lack of inventory. “My Realtor is telling me North Redondo Beach is the hottest neighborhood in the South Bay,” Bartlett continued, adding that neighborhoods like North Redondo Beach are still relatively affordable and have good schools. “They are where buyers are moving to and gentrifying these areas.” Median home prices in the 90278 zip code representing North Redondo Beach were $903,000 in 2016, up 5 percent from 2015, according to ATTOM Data Solutions. That was a discount compared to the $1,249,500 median
sales price in the coastal 90277 zip code of Redondo Beach, although prices in 90277 also continued to rise in 2016, up 4 percent. For homes priced above $750,000, the median price per square foot in Los Angeles County was $613 for homes sold in February 2017, a new all-time high and 19 percent above the pre- recession peak of $517 per square foot in March 2008. Conversely, Bartlett cautioned that neighborhoods in the “lowest tier of prices” and not as close to well-paying jobs or good schools are experiencing more of a cyclical real estate boom that could be more susceptible to a correction.
LA County NODs Below Pre-Recession Levels YoY Pct Change Notices of Default
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Bruce Bartlett Managing partner, Sequoia Real Estate Partners in Westwood Village jobs and is transforming a lot of neighborhoods in West Los Angeles. … You are starting to see some of those adjacent neighborhoods keyed up in terms of price appreciation.” Silicon Beach … is having a huge impact on high-end
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LOS ANGELES SPOTLIGHT
Buying in lower-priced neighborhoods does come with rundown homes that require extensive rehab for a profitable flip, according to Chotkevys. “We do pretty much a full gut on the houses we buy. Most of those we buy are pretty nasty … they’re falling down, there are druggies living there,” he said, estimating a typical rehab in the Los Angeles neighborhoods where he flips costs $40,000 to $50,000 and can sometimes hit six figures. Chotkevys said he sells the homes he flips primarily to first time homebuyers with young families, typically using low down payment loans backed by the Federal Housing Administration (FHA). That’s a good bread-and-butter target market for home flippers in lower-priced Los Angeles markets, according to Phyllis Brett Chotkevys Co-owner, Helpful Home Solution that flips homes in South Central Los Angeles With us being where we are in the cycle, and us being very near the top, we’re not buying any big properties, anything close to a million and trying to flip those.”
Home flippers Brett and Laura Chotkevys purchased this Compton home in December 2015 for $175,000, put in $50,000 in rehab and sold in March 2017 for $330,000.
“At the low end of the market a lot of it tends to be low quality, that meaning bad location,” he said, arguing that the construction of the new NFL stadium in Inglewood will not represent a structural change to the area’s housing market. “I don’t think the stadium is going to be a big deal … I just know that the land around the Los Angeles Coliseum hasn’t really gotten better because of the Coliseum.” We Buy Cheap(er) Houses Home flipper Brett Chotkevys prefers operating in the lower-priced cities like Inglewood, where he has seen a recent upsurge in demand that he attributes to the coming NFL stadium. Chotkevys, who runs Helpful Home Solution with his wife, Laura, said he prefers those markets because he believes they represent less risk for his flipping business than do high-priced homes,
especially in a housing cycle that he thinks is close to its peak.
“With us being where we are in the cycle, and us being very near the top, we’re not buying any big properties, anything close to a million and trying to flip those … we couldn’t cash flow that,” said Chotkevys, noting he flips about 75 properties a year all across Southern California. “I’m comfortable with these areas in South Central and buying it for 250 grand. Worst case scenario is I could put a renter in it. “If I was doing a couple flips a year I wouldn’t worry about it. But when you are doing 20 at a time … it’s more of a risk management,” said Chotkevys, who started full-time investing in 2011 after working his way through college as a waiter. “I don’t think it’s going to drop, but nonetheless I want to have a backup plan on all my properties.”
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LOS ANGELES SPOTLIGHT
she started to see signs of a coming downturn. “The thing I love about real estate is nothing ever happens overnight. You have time …Just pay attention to the details. … It’s not like the stock market that just falls out of bed.” Los Angeles-based economist Chris Thornberg agreed that an improving economy with rising incomes is insulating the Los Angeles housing market from anything “remotely smelling like a real estate bubble.” “The LA County economy is on fire. It’s been doing wonderfully, said Thornberg, founding partner at Beacon Economics, headquartered near the Los Angeles International Airport. “As expensive as LA is, we’re cheaper than the Bay Area. That’s one of the reasons that tech is looking south. “(The idea) that there is no affordability here is really just preposterous,” Thornberg continued. “If no one could afford it you wouldn’t see prices going up.” Affordability in Los Angeles County is still on par with historically normal affordability levels, according to the ATTOM Data Solutions Home Affordability Index, which gave Los Angeles County an affordability index of 100 in the fourth quarter of 2016. An affordability index of 100 is normal affordability compared to historical averages while any index reading above 100 is more affordable than normal and any index below 100 is less affordable than normal. In contrast
LA Home Price Appreciation by ZIP
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Everybody wants the same. They want their kids in the neighborhood with a good school where they’re not going to shot … if I’m afraid to get out of my car in the daytime, I’m going to keep going. That’s not the house for me.”
Phyllis Rockower President and founder Real Estate Investors Club of Los Angeles
Rockower, president and founder of the Real Estate Investors Club of Los Angeles.
they’re not going to shot … if I’m afraid to get out of my car in the daytime, I’m going to keep going. That’s not the house for me.“ Rising Incomes Lifts Housing Boats Rockower said she predicted the last two major housing downturns in Los Angeles, but isn’t seeing any signs of an imminent downturn now. “Income is going up so (buyers) are able to afford more,” she said, adding that the slow-moving real estate market gave her plenty of time to exit back in 2005 when
“I don’t want expensive houses … all you need is a downturn in the stock market,” said Rockower, adding that renting homes in lower-end neighborhoods is another matter. “I don’t mind buying in marginal neighborhoods, but I sure wouldn’t want rentals in marginal neighborhoods. “Everybody wants the same,” continued Rockower. “They want their kids in the neighborhood with a good school where
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to Los Angeles County, the affordability index for San Francisco County was 91 in the fourth quarter of 2016. Affordability in Los Angeles County continued to track on par with historically normal levels despite the fact that median home prices in the county have risen 78 percent since bottoming out in Q1 2012 while average weekly wages tracked by the Bureau of Labor Statistics are flat compared to Q1 2012 — although average wages have risen on a year-over- year basis for 10 consecutive quarters ending in Q2 2016, the latest wage data is available. ‘Ham-Handed’ Government Efforts Thornberg argued that the biggest challenge to the Los Angeles market is supply artificially restricted by local government policies.
The emerging risk is local political, ham-handed efforts to handle the problems we want to solve. … They can work to expand supply or they can live in La La Land and … immediately assume it’s a bad capitalist out there screwing everything up.”
Christopher Thornberg Founding partner, Beacon Economics, Los Angeles
“The biggest problem we’re facing right now … is the fact that there seem to be a certain portion of the population that is pissed off that things are going well,” he said, referencing Measure S, a proposal rejected by Los Angeles voters in the March 7 election that would have placed a two-year moratorium on some types of high-density buildings, according to Curbed Los Angeles. “The emerging risk is local political, ham-handed efforts to handle the problems we want to solve.”
Thornberg said the easy solution to the restricted supply is “densification” of housing in a county with a “shocking amount of our housing in single family.” “You just build up the infrastructure to deal with it. That’s how adults deal with these sorts of things,” he said. “If you artificially restrict supply … you drive the prices up to a point where low-income people have to either leave the area
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or make some downward decisions in housing.”
lots with higher-density housing. The home, located less than a mile from the famous Hollywood Chinese Theatre, was approved for small lot subdivision development by the city planning department, but then the planning department backtracked, according to Bartlett. Bartlett said he had to “get creative” and worked with the owner of the single family home next door to sell the two homes together as a package deal to another developer willing to take on the project. “Two single story single family homes that are going to be turned into four two-story homes with underground parking,” he said, noting the planned development is being called the Fountain Four. We probably made as much or more than if we had developed the property ourselves.”
According to a brochure provided by the site’s developer, Jonathan Dilworth with c&d partners, the four new homes will each consist of three bedrooms and 3.5 bathrooms and more than 3,300 square feet of floor space. One of the two current single family homes is 902 square feet with two bedrooms and 1 bathroom, and the other is 1,490 square feet with two bedrooms and 1 bathroom, according to public record data. “Specifically within the city of Los Angeles, they are pro this type of development, but in the areas where they want it,” Bartlett added. “They want to do it in a controlled fashion.” Another “densification” option for developers and investors in Los Angeles is finding older, smaller homes and
The choice for local policymakers, according to Thornberg, is fairly straightforward: either continue to artificially restrict supply as has been done in the Bay Area, resulting in the “country club effect” where lower-income folks are pushed out; or to allow for expanded supply and ease upward pressure on home prices. “They can work to expand supply or they can live in La La Land and … immediately assume it’s a bad capitalist out there screwing everything up,” he said. “It’s easier to be a liberal in San Francisco. All the poor people moved away.” Newton, the note buyer, said small lot subdivision developments would help ease supply, but those developments often face regulatory hurdles that restrict financing. “Small lot subdivisions where you can take a lot and build four houses or five houses … they are beautiful projects, but going back to affordability the prices on them are really inflating,” he said. “I have been hearing about a lot of areas that have been putting up moratoriums on building … guys have bought all these properties and they are stuck for years.” City Pro-Development, Sometimes Bartlett – the high-end flipper – said he almost got stuck with a single family home that he had purchased with the intent to subdivide into smaller
2016 LA Home Flips by Zip Heap Map
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LA County Affordability on Par With Historic Norms Median Home Prices YoY Pct Change Avg Weekly Wages YoY Pct Change
ATTOM Affordability Index
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rehabbing them into homes that are more appealing to modern buyers, according to Bartlett. He provided examples of homes in the city that are 2-bedroom, 1-bath properties with 1300 square feet. “Knock out a couple of walls and figure out a way to turn that into a 3 -2. … Best product for that neighborhood to achieve the best ROI,” he said “Buyers today want bathrooms five times larger than they did 50 years ago.” Trump Bump? According to Bartlett, the two biggest risks for the Los Angeles housing market now are an earthquake or “some kind of economic shock that comes from
outside of the United States.” He noted that the election of Donald Trump as U.S. president is generally thought of as positive for the real estate industry. “Great, we’re going into extra innings,” he said, describing the sentiment of many in the real estate industry in response to Trump’s election. “If lending standards loosen up, it’s going to help the real estate industry.” Rockower, president of the Real Estate Investors Club of Los Angeles, echoed that sentiment. “As much as I dislike him, he’s probably good for business, which is why the stock market is doing well. … He’s going to get
rid of Dodd-Frank, which is good for real estate” she said, explaining that Dodd- Frank is bad for investors “because if we want to do owner-financing we are subjected to the same rules as Bank of America, which doesn’t make any sense.” But Trump’s unpredictable nature could also be a problem for the real estate market, according to Bartlett and Thornberg, the economist. “Wildcard now is what the hell is Trump going to do?” said Thornberg. “That can go a couple ways.”
ATTOM Data Solutions • P21
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