This article outlines the various restrictions placed on absentee owners in California.

California’s absentee owner problem

Three years on from 2013 — “the year of the speculator” — California homeowners are learning to live with the presence of speculators turned long-term absentee homeowners. New laws and regulations apply.

A speculator is an individual who plans to own a property short-term, sandwiching themselves between the seller and the end user in order to make a profit. Speculators are plentiful in markets characterized by rapidly rising prices, as they sell within a few months of initially buying, making their profit based on market momentum alone.

Speculators are distinct from long-term investors by duration of investment. Long-term investors rely on rental income for a stream of revenue. Rental income is not usually part of the speculator’s long-term plan.

However, when the market slows, as prices have done in 2015-2016, speculators are sometimes forced to rent their properties to recoup their investment. Then, new issues come up.

A preference for owner-occupants

Compared to owner-occupied homes, property tended by absentee owners is more often neglected. Pride of ownership has a visibly positive impact on the property, as homeowners like to take care of their property. But when the owner is not present, the property can fall into disrepair or worse, proving troublesome to the neighbors and local property values. Thus, rules exist at the state and federal level to discourage both long- and short-term absentee owners.

In California, homeowners’ associations (HOAs) may establish additional rules and fees for absentee owners, even if they weren’t in place in their covenants, conditions and restrictions (CC&Rs) when the absentee owner first purchased the property. [Watts v. Oak Shores Community Association 235 CA4th 466]

At the national level, the Federal Housing Administration (FHA) restricts purchases of homes owned by speculators. This so-called anti-flipping rule requires a speculator wait at least 90 days after acquiring the property before it becomes eligible for purchase with an FHA-insured mortgage. [HUD Handbook 4000.1 Chapter 2.A.1.iv]

The anti-flipping rule was placed on hold following the Great Recession, the waiver ending January 1, 2015. The reasoning for the temporary waiver was twofold:

  • to encourage first-time homebuyers, who are often reliant on FHA-insured mortgages; and
  • to allow speculators to work their recovery magic by breathing life into the market.

Speculators usually have the cash available to rid distressed sales from the housing market’s bloated inventory. This activity helps home prices to stabilize and rise at a time when lenders are cautious and owner-occupant homebuyers wait on the sidelines.

But speculators without cash on hand need to rely on financing, which is more expensive for investors than owner-occupant homebuyers. Lenders know it’s more risky to lend to an absentee owner, since in times of recession or financial hardship the speculator is more likely to default, walking away from the investment.

Absentee owners who lie on a mortgage application, claiming they will occupy the home, are committing occupancy misrepresentation. [See RPI Form 202-3]

California has one of the highest risk levels for mortgage application fraud, occupancy misrepresentation chief among the types of fraud applicants commit, according to the Interthinx Mortgage Fraud Risk Report. The fraudster’s goal is to:

  • receive a lower mortgage interest rate; and
  • qualify for lower down payment requirements.

But when the non-owner-occupant is caught, the lender may call the full mortgage amount due immediately. They are also placed in the Suspicious Activity Reports (SARs), a national database that essentially prevents them from qualifying for a mortgage or refinancing in the future.

California’s love-hate relationship with speculators

Speculators and long-term investors each have their roles to play in the housing market. During a housing recovery, such as occurred following the 2008 Great Recession, the role of speculators is especially significant.

While some speculators are helpful, too many becomes a problem for everyone else, including buyer-occupants who are pushed out of the market and the future neighbors of all these absentee owners.

Speculators went overboard at the tail end of the most recent recovery. In 2012-2014, speculators completed one-in-three home purchases. When including grant deed and trustee’s deed sales, this number swells to one-in-two home purchases completed by speculators. In contrast, a healthy share is closer to one-in-seven home sales going to speculators.

In 2016, speculators are making a small comeback, though they remain well below their 2012-2014 presence. The metro areas in California with the highest share of speculators are places populated by low-tier properties, including Fresno and Los Angeles, according to CoreLogic.

However, expect speculators to descend back to healthy levels in 2017. Today’s tightening home sales volume and increasing home prices will keep speculators at bay. Further, once mortgage rates rise — anticipated around late 2016 or early 2017 — prices and sales volume will suffer, discouraging speculators.

The next boom on the horizon is likely towards the end of this decade, around 2019-2021. Built-up demand from first-time homebuyers anxious to get into the market and Baby Boomers who have delayed retirement following the Great Recession will converge, and speculators will undoubtedly seek to profit.