CA rent control

[Deleted member 142783]

Hello, does anyone have good articles/references on how to handle rent control? I have no experience with rent control and need to get educated due to the new law...

Thanks for your help!

 

[George Hatch]

The various jurisdictions handle these controls differently, so that's where you start in any given assignment. Appraisalwise the main thing is to ensure you're comparing apples to apples. For example, the City of LA has rent control, but the city of Inglewood doesn't. If you're appraising in one you don't want to even consider crossing the border into the other for comps. Even if they're located across the street from each other the two properties will not be the most similar comparables to each other.

Likewise, if/when there's an age cutoff for which properties are subject to rent control vs which aren't that's another boundary you don't want to cross.

BTW, rent control elements fit under the "legally permissible" criterion of your HBU analysis, just like a condo map or a street easement.

 

[Deleted member 142783]

It is statewide. My main concern is comparing long term tenants with 50% below market rents to current market rent properties... anyone aware of literature or sites I can visit?

 

[Deleted member 142783]

Lots of blah blah blah on this site... No one knows where to get information on this question ?

And anyone who says "analyze the market", this is not helpful due to the law just being passed with no current data. I asked a successful commercial agent who said "we just have to wait and see how things pan out". Not really an option for an appraiser...

 

[Elliott]

Have you gone to AI's library and search for articles? Seems like I recall some over the last 20-years.

 

[George Hatch]

It looks to me like you're going to have to learn how to do a rent loss analysis. Standard stuff for anyone who works with income property, and there will be lots of literature covering it. Including in some of the basic texts.

If the beater 1bd unit in So Central is current renting for $1000 and the market rents are $1400, and given the maximum annual rent increase will be on the order of 7.5% when including the 5% cap + 2.5% increase in CPI it will take several years for that $1,000 to catch up to where the $1400 market rent rate ends up with at that time. Assuming the market rents increase in line with CPI (which is highly debatable) it will take ~7 years. The cumulative rent loss for that one unit during that time and under those assumptions will amount to ~$16,000. Rinse and repeat for all the other units.

If you're doing 3 and 4 unit properties you might end up with as much a cumulative rent loss at those rates and under those assumptions of as much as $70k. Not counting whatever natural vacancy losses occur over the next 7 years. How often will that unit turn over when facing a 7.5% increase every year. Because once they split the unit then goes straight to the market rent.

How that rent loss relates to the pricing will remain to be seen. How many 2-4 buyers and their brokers are savvy enough to do the math because if it ends up being most of them you get one reaction and if it ends up being few of them you get a different reaction.

As an appraiser your job is to watch what the market participants are actually doing, not to try to outsmart them and tell them what they should be doing.

 

[George Hatch]

In its most basic form it's a simple calculation to do on a spreadsheet. It just takes a couple minutes.
The harder part is to account for the variables.

 

[Doug Wegener]

Hello, does anyone have good articles/references on how to handle rent control? I have no experience with rent control and need to get educated due to the new law...

Thanks for your help!

These are good questions. I have a former appraiser friend who was going to buy income property in California but the new rent control law scared him off. I am sure it is doing so to many investors. He then decided to buy in Oregon but I had to sadly inform him that Oregon had beaten California to the punch.

I used to do appraisals in South Central ( a rent control area) prior to licensing. When the rents were locked low , we used them with GRM we determined for the area- but I am not saying that it is the way it should be done. In areas where there is plentiful data, it seems to me you should units with similarly locked low rents as your comparables. As for me, I have refused to do small income properties since the rent control law came into effect. Why should I? I can stay busy doing single family residences.

As an aside, rent control is an anti-americann, unconstitutional socialist/communist type of scheme. It is nothing more than legalized theft by the govenment.

 

[glenn walker]

Lots of blah blah blah on this site... No one knows where to get information on this question ?

And anyone who says "analyze the market", this is not helpful due to the law just being passed with no current data. I asked a successful commercial agent who said "we just have to wait and see how things pan out". Not really an option for an appraiser...

No one knows where to get information on this question ?
Yes we do but you are in California and there is almost no such thing as below market rents and in some buildings the waiting list to get in can be 2 tor 3 years. Anyway lots of Blah, Blah, Blah because all you have to do is go to google and type in rent control studies and research in California. There are numerous sites including government agencies you can contact. You can also contact your local AI or ASA chapter and they can direct you to research papers and you can even take a course where you will real appraisers who do not Blah, Blah, Blah go and finally you can take a test and get their official Rent Control Appraisers Certification. Once I come across that below market rent building in Los Angeles I know "Pushin-Value & Associates" can do it

 

[Doug Wegener]

No one knows where to get information on this question ?
Yes we do but you are in California and there is almost no such thing as below market rents and in some buildings the waiting list to get in can be 2 tor 3 years. Anyway lots of Blah, Blah, Blah because all you have to do is go to google and type in rent control studies and research in California. There are numerous sites including government agencies you can contact. You can also contact your local AI or ASA chapter and they can direct you to research papers and you can even take a course where you will real appraisers who do not Blah, Blah, Blah go and finally you can take a test and get their official Rent Control Appraisers Certification. Once I come across that below market rent building in Los Angeles I know "Pushin-Value & Associates" can do it

Exactly how can landlords in Santa Monica , Los Angeles, (and now the whole state) get market rent when the law does not allow it?