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Developers and Owners in LA Turn to STR Management Instead of Selling: Measure ULA’s Impact on Luxury Homes

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By: Brad Greiner, CEO of Open Air Homes and OpenAiRE Brokerage

Open Air Homes Sees Spike in Management Inquiries Amidst Challenging Real Estate Landscape

In the ever-evolving landscape of Los Angeles real estate, the recent passing of Measure ULA has added a layer of complexity. This Vanity Fair article lays out how Measure ULA has transformed the Los Angeles Real Estate market for high end homes overnight. This controversial law adds a percentage that the seller must pay on the sale price, with rates soaring to 5.5% for properties selling for more than $10 million. Consequently, this has led to a marked decrease in luxury property transactions.

An Abrupt Transition

The transition from a 0% tax rate to a 4-5.5% rate is what has caught many off-guard. For developers who had planned and constructed over years, the sudden law can make their entire venture unprofitable. 

For example, selling a property at $10 million means a hefty $550,000 goes to the new tax, no matter if you sell the home at a loss or not. Such figures can be a major blow, especially for developers who had not anticipated such costs, or are now underwater on a property due to this new 5.5% tax on homes for sale above $10,000,000. 

A Waiting Game

Instead of navigating this complex market, many sellers are adopting a waiting strategy. The underlying belief is that this law might undergo revisions or reductions due to the abruptness of its introduction and its far-reaching implications. With the landscape so uncertain, luxury property owners, especially those with homes above the $5M mark, are seeking alternatives.

Enter Long-Term and Month+ Rentals

One such alternative has emerged in the form of long-term rentals. Property developers and owners, instead of selling, are now considering renting out their luxury properties. Open Air Homes, among other agencies, is seeing a surge of homeowners reaching out with this exact proposition. The idea is to wait out the storm of Measure ULA and potentially avoid paying the hefty tax once it’s revised or reduced.

Homeowners are weighing their options, as they consider both 12-month unfurnished leases, or Month+ bookings through a company like Open Air Homes.  Many homeowners seem bullish that Measure ULA will be rescinded in short order, considering the sales data has dropped tremendously since Measure ULA was adopted. 

The Broader Context

Measure ULA wasn’t the only challenge the LA real estate market faced. The article from Vanity Fair touches on additional challenges such as fleeing insurers due to wildfire risks, a significant writers’ strike affecting multiple sectors, and raised interest rates. 

Furthermore, the introduction of the law had led to a pre-implementation rush where prices were slashed, with brokers even resorting to gifts like sports cars to entice buyers.  

These congruent forces are adding up for both real estate developers and the standard homeowner looking to sell.  Many are being advised to partner with a company like ours and wait out these various forces.  Sellers might have been able to handle one of these scenarios, but all of them combined are leaving them feeling like now is a terrible time to sell their Los Angeles residence. 

A Market in Stasis

The numbers are telling: While nearly 130 homes priced over $5 million were sold in March, this number dipped to a meager THREE HOMES between April and June. This hiatus is an unequivocal indication of the market’s reaction to the law.  

As discussed above, there are various forces at play here, but Measure ULA has decimated the luxury home sales market, and we are a bit worried about how the stars of Selling Sunset are going to feed themselves $26 Cobb Salads with the dressing on the side. 

A Glimpse into the Future

Despite the gloom, the resilience of Los Angeles cannot be underestimated. As the epicenter of the entertainment industry, it will always be home to those with considerable financial power. The luxury home market will continue to thrive, albeit after navigating through these current challenges.  

In summary, Measure ULA, along with other unforeseen challenges, has cast a shadow over LA’s real estate market, pushing sellers towards alternatives like Month+ and long-term rentals. Open Air Homes has been having conversations with many of these developers who feel stuck, and we imagine we are going to see a drastic increase in the supply of homes for rent above $5,000,000 in the coming two years.

It remains to be seen how the market adjusts, but for now, it’s a game of patience and strategic pivoting.

Next, we will cover a post on some tips to consider when buying a STR property, starting with, purchasing a home in the $2-3M range to avoid Measure ULA altogether! 

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