If you own a residential rental property, be sure to review Assembly Bill 2710. This proposed bill is a prime example of the government stepping in to “fix” the free market, but causing more harm than good in the process.
At Selzer Property Management, we manage several hundred residential units, so we’re in touch with a lot of property owners. Lately, many of them have thrown in the towel on residential rentals in California. They are either converting their holdings to commercial property, investing in out-of-state residential rentals, or getting out of the real estate market altogether. The net effect is a decrease in the number of available rentals when we already have a severe housing shortage.
Now, along comes AB2710, which requires residential rental property owners to give first right of refusal to eligible prospective buyers who would then be given almost a year to decide whether they want to (and could afford to) buy—a whole year!
Let’s say you inherited your parents’ rental property upon their demise, and you need proceeds from the home’s sale to finish liquidating their estate, including paying off estate debts. Why should you have to hold onto the property for a year? Or maybe your circumstances change—you move out of the area, run into financial trouble, or just get tired of managing a rental. With AB 2710, you’ll have to wait a year before you can sell.
Financial investments are evaluated based on the rate of return and the associated risk. AB 2710 increases the risk to investors, which means they will demand higher returns. This does two things: it raises rents and delays the development of new rentals until the returns justify risks. Both are harmful outcomes for the vast majority of California tenants.
The best way to create more rentals is to remove unnecessary and unsuccessful regulation that limits property owners. When legislation violates free-market economics, the unintended consequences generally end up hurting the people it’s intended to help, in this case, people looking for a place to live. Just ask any local employer to name the single biggest challenge in recruiting people to Ukiah. They’ll tell you it’s a lack of available housing. Or ask a parent how they feel about their grown children leaving the area because they cannot find a place to live in Ukiah.
So, who benefits from this proposed legislation? Sadly, very few. An affordable housing agency might be able to acquire property they wouldn’t have been able to otherwise. Or a rare tenant who has time to pull together money over the course of a year may be able to purchase the house they’ve been renting. But forcing rental owners to hold on to property they don’t want will actually decrease the number of rentals available. AB 2710 hurts all those looking for a place to live, which far outnumber the proposed bill’s potential beneficiaries.
AB 2710 has some other concerning problems, too, not least of which is requiring the divulging of a tenant’s private information to multiple agencies. Right now, as a rental owner, I am only allowed to supply my tenant’s financial information to my mortgage lender and a prospective buyer of the property. AB 2710 would require information to be shared with a whole host of people.
The bottom line is that AB 2710 increases the risk of owning a residential rental which will drive people out of the market. The best they can hope for is to rearrange who owns the property. They haven’t added a single square foot to the market.
There is no good reason for the one-year delay. If someone wants to buy a property, they can make an offer when the property is put up for sale. If all this law did is require a seller to notify various agencies that a property is available, I would have less of a problem with it, but divulging tenant’s private information and forcing property owners to wait a year before selling is ridiculous.
If you have questions about property management or real estate, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 45 years.