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Los Angeles luxury real estate moves extremely quickly. With various factors such as cash transactions, loan approvals, and fluctuating interest rates, homes can disappear in the blink of an eye. Mercer Vine's 2017 Complete Guide to Buying Luxury Real Estate in Los Angeles is designed to give both buyers and sellers the best tools for navigating the market.
Politics Are Going to Determine the Real Estate Market
After eight years with a Democratic president, the political landscape of the U.S. is quickly shifting under the new Republican administration. Topics such as the Dodd-Frank Act, loosening credit standards, and America's future in NATO are all creating ripple effects in real estate. Although certain factors such as cash transactions and finding a strong negotiator are always constants, 2017's real estate market is going to largely depend on the legislation that takes place under President Trump's administration.
"Cash Is King"
Cash is still going to be king in 2017, especially in luxury real estate markets such as Los Angeles. Cash transactions are attractive because they are straightforward and do not require as much bureaucracy as traditional loan financing. With cash, the seller does not need to deal with the loan approval process, appraisals, or other types of contingencies. This results in closes that can run as short as five to seven days. Cash transactions are also typically easier to close for sellers and run a lower risk of falling apart due to the lack of loan approval requirements for the buyer. With cash transactions, sellers do not risk committing to a buyer whose bank may ultimately reject their loan. Additionally, sellers do not have to worry about the appraisal of their property – especially since appraisals often times fall short for popular properties that have multiple offers, driving the price of the property up. The lapse could result in appraisals lower than the buyer's purchase price.
Strong negotiation is an essential skill to have when dealing in real estate. However, not all agents are created alike – some are stronger negotiators than others. Finding strong negotiators means more than finding agents who are brave and aggressive during the various stages of a sale. It also extends to their experience and awareness of the city and its different neighborhoods. Effective luxury real estate agents should be well-informed so that they can leverage statistics in your favor during negotiations. Agents should have a history of outbidding for their clients when there were multiple offer situations on a single property. Buyers also want to find agents who have navigated the various ups and downs of the market seasons and negotiated multi-million dollar transactions.
Increase Your Market Knowledge
Staying informed about the market is important for all parties of a real estate transaction. For sellers, being aware of up-to-date market news helps develop realistic asking prices for their home. For buyers, real estate news helps to evaluate their purchasing power in the current real estate landscape. Market knowledge is also vital for real estate agents so that they can negotiate more aggressively. Staying informed, however, entails much more than reading websites such as Zillow and Trulia for local markets. Reading about global factors such as international markets, politics, and current events are also important as they all affect real estate prices in the U.S. Additionally, understanding specifics about each neighborhood is also vital. For instance, in Los Angeles it is common for homes located across the street from one another to differ drastically in value.
Stay Informed About Financial Legislation
With President Trump's election, experts are especially interested in how the former real estate mogul will affect the market. According to Forbes, the financial legislation currently taking center stage is the Dodd-Frank Act. Passed by the Obama Administration in 2010, the act was designed to regulate the floundering market during the 2009 recession. Deregulation supporters such as President Trump, however, deem the act a "disaster" and "will be working to dismantle it." Deregulators argue that the less regulation banks receive, the easier lending will be for banks in the short term. Critics of deregulation, on the other hand, argue that relaxed lending standards will ultimately harm the market since it will make lending to high-risk candidates easier. As can be seen from the debate over the Dodd-Frank Act, staying informed of financial legislation and its effects on the market is crucial to gaining an advantage in the world of luxury real estate.
Be Aware of Rising Interest Rates
Staying aware of rising interest rates is a must for buyers in 2017. Last December, the Federal Reserve raised interest rates for the second time since 2006. Fortune Magazine predicts that the reserve will raise rates three more times this year. For buyers, this may complicate matters as many are priced out of their dream homes. It could also mean that buyers may have more pressure to buy houses earlier rather than later in the year when interest rates are expected to rise. Experts, nonetheless, do not see rising rates as a negative sign. Instead, rising rates are symptoms of a healthy real estate market and economy. Although rates are increasing, experts report that they are rising at historically lower increments compared to previous years. Interest rates are predicted to stay below 4.3 percent on 30-year mortgages.
Take Advantage of More Available Credit
More available credit may be buyers' secret weapons against rising rates. With looser lending standards, buyers will likely be able to use mortgage credit as a tool to compensate for 2017's interest hikes. More available credit began in 2015 under the Obama administration and will continue to play a large part in 2017's real estate market. Fortune Magazine reports that mortgage giants Fannie Mae and Freddie Mac are spearheading this trend since they will begin financing larger mortgages this year – a move that neither company has made in over ten years.
Look For Other Alternatives To Non-Bank Lending
Commercial Mortgage-Backed Securities (CMBS) are going through a strange phase due to the passage of the Dodd-Frank Act. In 2016, Forbes reports that CMBS lending has likely slowed due to the act's "skin-in-the-game" provision which requires "sponsors of commercial mortgage-backed securities to hold on to 5% of every new deal or assign the risk to a B-piece buyer." For buyers, this means that non-bank lending may be more difficult to attain in coming years depending on whether President Trump's administration is able to effectively dismantle the act. Deutsche Bank, one the largest CMBS lenders, is of special interest to economists due to Trump's past relationship with them. According to Forbes, House Democrats predict that Trump may show favor to Deutsche Bank as it "has been the only major Wall Street bank to continue to lend to Donald Trump and his entities in the wake of six Trump-business bankruptcies." Although a few investment firms such as Blackstone are still very much open to lenders, it may be best to adopt a wait-and-see approach with the Dodd-Frank act before considering CMBS loans.
Knowledge Is Power
When it comes to staying ahead of the competition, maintaining knowledge of the market is always going to give buyers an edge. Understanding how global events, politics, and legislation all affect the market is essential for understanding and predicting trends in real estate. We urge buyers and sellers alike to constantly read about and research the markets around them before selling or buying real estate in Los Angeles.