The mansion tax was a ‘nightmare’ for luxury Los Angeles real estate this year, ‘Selling Sunset’ star says. But 2024

You may know her as the Barbie-like figure landing multimillion-dollar deals for a Los Angeles–based luxury real estate firm on Netflix’s hit TV series Selling Sunset. But Emma Hernan was a real estate investor long before she was an agent selling properties to superstars.

This self-made multimillionaire, former model, entrepreneur, and real estate investor earned her fortune investing in the stock market and startups before she bought her own home in 2017. The following year, she started working for the Oppenheim Group, the firm she had used to buy her house, focusing on selling luxury real estate to and for many celebrities. In 2023, she fought off many of the challenges facing the local housing market—namely the newly introduced city mansion tax—by helping pop star Harry Styles sell his L.A. estate for $6.7 million.

All the while, she’s also been running Boston-based vegan food manufacturing company Emma Leigh & Co., best known for its plant-based empanadas. The company also supplies other food companies, which she says has equally been a boon for her real estate business in terms of her rubbing elbows with CEOs and other executives—i.e., folks likely to buy luxury homes. This bicoastal money maven owns several residential and commercial properties in both LA and Boston, and calls her rental income as “mailbox money.”

“When I’m renting my home out, someone’s paying my mortgage, and my mortgage is paid off,” she tells Fortune. “And now I’m just receiving a check every month. So for me, it was a natural transition from the stock market into real estate.”

Even with some big wins in 2023, being a luxury real estate agent to the world’s rich and famous isn’t as effortless and opulent as it may seem. High mortgage rates that peaked at 8% in October hurt business, but the real obstacle was the introduction of the mansion tax, which tacks on between 4% to 5.5% to the price of selling multimillion-dollar properties.

The mansion tax spells trouble for real estate in L.A.

The so-called mansion tax in L.A. applies to property sales of at least $5 million. Properties over $5 million incur an additional 4% tax, while properties costing more than $10 million have an extra 5.5% tax—with the tax typically being paid by the seller. The cost of the tax is separate from a home’s sale price and can be a “massive amount of money,” Hernan says.

“If I could describe the mansion tax in one word it would be ‘nightmare,’” she says. “It’s taken a lot of business away from us as agents, but also [from] developers. Developers are less likely to go purchase another home to try and do a flip because the numbers aren’t going to add up when you add in this mansion tax.”

In addition to Los Angeles, mansion taxes are in effect in New York, New Jersey, Connecticut, and Vermont.

The issue of the mansion tax is a double-edged sword, though. Introduced as Measure ULA, the transfer tax took effect in Los Angeles on April 1 with the intention of the city using the funds it collects to funnel more money into affordable housing and homelessness prevention efforts at a time when more and more people are living without shelter. An estimated 75,000 people were homeless in L.A. between June 2022 and June 2023, according to the Los Angeles Homeless Services Authority, a 9% increase from the same period a year prior.

But as Hernan and other agents and housing experts point out, L.A. properties are already incredibly expensive when compared to most other cities. Indeed, not every million-dollar home in L.A. could even really be considered a “mansion,” which, according to an informal definition from Smith & Associates Real Estate, includes at least 5,000 square feet made of high-end materials, and plenty of leisure space like a gym, spa, or in-home movie theater. Merely a median-priced home in LA is $1.3 million, according to November figures from Realtor.com, more than triple the median nationwide.

Now, Hernan warns her clients about the mansion tax before they prepare to sell. For example, if they sell their home for $5 million, they must pay an extra $200,000 that they “didn’t really factor in when they bought the home because the mansion tax wasn’t in play,” she says. Now, they might break even or even take a loss if they price for what the home is actually worth, she adds.

“It’s been something that is definitely a difficult thing for buyers, for sellers to navigate, and agents of course because we lose business as well,” Hernan says.

The ‘sweet spot’ for buyers

On a more positive note, Hernan says she’s been seeing buyers outside of the “mansion tax territory” get better deals on properties this year—especially as mortgage rates have dropped. By mid-October, the average 30-year fixed mortgage rate had hit 8%, but it’s since fallen to around 6.6%, according to Mortgage News Daily.

Hernan subscribes to the “date the rate, marry the home” mentality, and suggests that method to her luxury real estate clients.

“Buyers need to remember, you cannot renegotiate the price of a home, but you can renegotiate interest rates,” Hernan says, referring to refinancing a mortgage rate. “Even though interest rates are a touch high right now, they want to get in. There’s an opportunity to get a really good price on a home because there’s not that much inventory right now.”

For that reason, Hernan expects more buyers and sellers to “dip their toes back in the water” next year, even after a slow 2023. In fact, she’s seeing buyers get better deals on homes than they did a year and a half ago, to the tune of a 10% to 20% discount per home.

“I tell my clients all the time, renegotiate and you can get a better interest rate down the line, but you have your house locked in—and that’s the most important thing,” Hernan says. “I can’t control the interest rates, but that’s the advice that I’m giving to clients.”

Taking her own advice

Despite all the highs and lows of 2023, Hernan expects 2024 to be her best year yet. Hernan plans to take her own advice next year, with plans to purchase more investment properties.

“That’s something that’s very unique about myself is that I’m not just an agent out here trying to sell homes,” she says.

But real estate agents also face major changes to their pay structure going into 2024. The real estate industry was rocked in late October when a Missouri jury found that the National Association of Realtors had conspired to artificially inflate the home-sale commissions paid to real estate agents.

The $1.8 billion verdict could change real estate commissions as we know them. Typically, the total real estate commission paid by the seller is about 5% to 6% of the sale price. The outcome could threaten the livelihood of realtors nationwide and, some argue, make it more difficult for homebuyers trying to purchase a home. But still, nothing is “set in stone” about how commission structure may change, Hernan says, likening the current outcome to a high school rumor.

“Think about the mansion tax. There were rumblings about the mansion tax before it happened, and whether it was going to happen or not,” Hernan says. “These are all rumblings, but I think that these are all things that really need to be thought out and thought through. We’ve taken a lot of hits this past year, so I hope that the decision that’s made is the best decision.”

This story was originally featured on Fortune.com

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