In a soft market, home sellers switch to rental strategy

Anxiety over the looming Measure ULA transfer tax and softening home prices is giving a boost to the home rental market in Los Angeles, according to real estate agents.

It’s a frustrating trend for agents, because rentals don’t offer as lucrative a payday as home sales. 

Patrick Michael, founder of LA Estate Rentals, a high-end rental agency, said the market has grown for listings from ultra-luxury homes to condos and bungalows.

“It has been getting busier in the past month-and-a-half. We’re seeing people in panic mode who want to rent their house long-term and short-term, Michael said.

Many would-be home sellers have decided to change strategies, based on L.A.’s new transfer tax, which takes 4 percent of the sales price on deals above $5 million and 5.5 percent for sales above $10 million. At the same time, the overall home market has cooled as mortgage interest rates have climbed.

Another reason for the rental market uptick is the ebb and flow of the seasons. Spring and awards season are typically times that see an uptick in homes listed for lease in Los Angeles, Michael said. 

West L.A., for example, has seen a leasing uptick compared to new rental listings on both a  year-to-year and month-to-month basis, according to MLS.  In January 2023, there were 7,173 new listings of single-family homes and condos for rent for West L.A., compared to 5,524 in December 2022. In January 2022, there were  5,912 new listings. 

February 2023  new listings for rentals showed a dip to 6,128. But that’s still higher than a year previous; in February 2022, there were only 5,182  new rentals listings.

AirDNA, a research firm that tracks the rentals market, counted 31,355 short-term rentals available in Los Angeles County in January 2023, which represented a 32 percent growth year-over-year. However, it remains 26 percent below pre-pandemic levels. In January 2019, there were 42,206 short term rentals available in Los Angeles County.

Rochelle Maize, a Beverly Hills-based agent with Nourmand & Associates, has fielded more interest in leasing. Sellers have mentioned ULA and softening home prices as reasons for a new willingness to change roles from home sellers to landlords. 

These prospective landlords are interested in finding rental income during a slow market. But there’s a trade-off: They also have to accept the headaches of property management. 

“They start getting calls every week. ‘My plumbing line broke.’ ‘The  toilet is overflowing.’ It’s not what they signed up for,” Maize explained.

Paydays for agents never equal what they would make in a sale, Maize said. A $12 million house would give her a $300,000 payday if she takes a 2.5 percent commission. If the same house leases for $420,000 annually, the agent would make a 3 percent commission and probably make $12,000. There’s also a chance agents would lose money. Marketing listings for lease and sales can take big bites away from commissions. But there’s a reason why agents put up with the grief.

“It’s not always about the money in business,” she said. “Yes, it’s a favor most of the time, but remember the luxury lease market is about relationships. It’s the relationships you cultivate and convert into future buyers and sellers. Ultimately, renters become buyers and landlords become sellers faster and more frequently than in other market sectors. Many of my clients find leasing is a good option until the market strengthens.” 

Many homeowners hedge their bets by playing dual roles. They offer their homes for lease while continuing to list them for sale.

Anthony Marguleas, founder of Amalfi Estates based in Pacific Palisades, has noted an uptick in leases. But he forecast that the lease market would be influenced by the same pressures of supply and demand as the home sales market.

“The issue is that home sellers don’t realize that the lease market is as soft or softer than the sales market,” he said. Based on an MLS search of new lease listings, Marguleas estimated that 20 percent of lease listings have reduced their prices since the beginning of the year.