The Densification of La La Land

Editor’s Note: The following is an excerpt from the March 2017 edition of the Housing News Report, an award-winning newsletter published monthly by ATTOM Data Solutions.

For John Gomez the best predictor of an emerging Los Angeles 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.

“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 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.”

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.

 

Small Lot Subdivisions Soaring

“The flippers have kind of gone aside. There’s not a lot of room anymore 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. “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.

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.

More on Los Angeles NOD trends.

Silicon Beach a “Structural” Change

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.

He argued that sales 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.

“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.”

More on home price appreciation trends by zip code in Los Angeles.

We Buy Cheap(ish) 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.

“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, who runs Helpful Home Solution with his wife, Laura. “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.”

That’s a good bread-and-butter target market for home flippers in lower-priced Los Angeles markets, according to Phyllis Rockower, president and founder of the Real Estate Investors Club of Los Angeles.

“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.”

More on home flipping trends by zip code in Los Angeles.

 

‘Ham-Handed’ Government Efforts

Los Angeles-based economist Chris Thornberg said that an improving economy with rising incomes is insulating the Los Angeles housing market from anything “remotely smelling like a real estate bubble.” He argued that the biggest challenge to the Los Angeles market is supply artificially restricted by local government policies.

“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.”

More on affordability trends in Los Angeles.

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 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.”

“Specifically within the city of Los Angeles, they are pro this type of development, but in the areas where they want it,” he added. “They want to do it in a controlled fashion.”

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