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(important caveat: this won’t be possible in the Palisades, Malibu, or foothill communities of Altadena, as the law does not apply in high fire risk areas)
Meet Gladys, a 65 years old retired Hollywood makeup artist who lives off of a small pension
Gladys bought her dream home in Altadena in 2009 for $380,000
On January 5th, her house was worth $1.17 million
On January 8th, her house burned down in the Eaton fire
Gladys hadn’t updated her insurance coverage to keep up with rising construction costs
She’s soon going to find out that her coverage limit is $250,000, but it will cost around $400,000 to build a new 1,300 sq ft house
In the past, Gladys would have had two options:
First, she could take out a loan to cover the gap.
But Gladys still owes $200,000 on her mortgage, and with high interest rates and a fixed income, she can’t afford the additional payments.
Her other option would be to sell the land. She recently got a mailer offering to buy it for $650,000, which she thinks is a pretty good return on her original purchase.
But after paying off the mortgage, that wouldn’t be enough to buy a new home in Altadena.
She had hoped to one day pass the home on to her daughter. That dream would be dead.
Now, thanks to SB 1123, which goes into effect in July, Gladys has a new, better option.
SB 1123 allows her to subdivide her vacant, 8,200 sq ft single-family lot into five lots, and requires that the county approve up to a 1,640 sq ft home (1 FAR) on each lot
Gladys partners with an experienced homebuilder, who helps her out in exchange for a flat-fee per home built.
She takes out a construction loan from a low-interest loan fund created to help pay for the costs of rebuilding.
Each new home costs $450,000 to build, plus $30,000 to pay the builder and $20,000 to cover construction interest, for a total of $500,000
Gladys sells three of the homes for $800,000, resulting in a $900,000 profit. $500,000 of that covers the rebuilding costs for her new home, and she uses $200,000 to pay off her mortgage.
The fifth house Gladys sells to her daughter at-cost, using the remaining $200,000 as a down payment.
Notably, Gladys can transfer her existing prop-13 tax basis onto her new home, but the county gets significant tax revenue growth from the four new homeowners
Some neighbors might complain that replacing one home with five ruins Altadena’s character.
But Altadena’s character doesn’t come from buildings, it comes from the people and institutions that form its community
Before 1123, it is likely that Gladys would have had no other option than to sell and leave her community
Now, Gladys will be able to stay. Her daughter will become a homeowner. And her grandchildren will get to grow up in Altadena and help write its next chapter
In theory this sounds promising. In practice this sounds unrealistic for most people to pull off. I wonder what the biggest limiting step is: getting a home builder/GC to work with you, getting all the finances figured out, getting the construction loan, other?
On a pension & builder loan? Maybe a hard money loan in which case the HM lender in 5 of 6 cases will end up w/ the property after the balloon comes due and project is not done.
I am all for the free market but what you propose is very risky for a pensioner.
This would be a great solution. SB9 allows something similar (1 lot becomes 2 lots). I expect some of these families with their generational homes on large lots to utilize these to rebuild and add more supply to the neighborhood, which would be such a win-win.
I saw this super interesting thread and thought of your parents . I'm so sorry that they lost their home.
Is this realistic for a cost per square foot? In Denver it’s over $400/sq ft. I can’t imagine it’ll be less expensive in LA, especially when there is far more demand for builders when thousands of homes burned down. The #MarshallFire in Colorado probably has some transferable
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It’d be great if SB-1123 could work out like this. I hope people take advantage of it
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Joe, a lot of Gladys don't have the knowledge or experience to get this accomplished, however noble. A great many will get scammed and that will lessen the amount of people doing it. How many you think would do this?
Sounds sketchy. Maybe small units won't sell for $300k. Or there's cost overruns. Probably the contractor/developer will dump risk on owner and run away. And who's going to lend on this? Typical overcomplicated gov't scheme.
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