The last 4 weeks
We brokered and / or acquired just under $7.8MM worth of Los Angeles apartment deals in the last four weeks, and there’s a lot more to come.
We’ve done small deals (duplexes in Silver Lake and Echo Park), big deals (a 16 unit building in Highland Park), and tons of stuff in-between.
We’ve still closing some stragglers over the next week or so. Then it’s on us to turn these beat-up old buildings into the kind of places in which you’d want to live.
Are you interested in getting involved in apartment deals in Northeast LA? If you are, get in touch.
Can we see the plans? No.
You might think that, somewhere, the City of Los Angeles has plans for every structure erected in the city, at least since modern building permits came into use in the 1910s. You might think that, if you’re planning to renovate an old building, you can go down to some records room, pull the plans, and then begin work on designing your renovation.
You would be wrong on both counts. Here’s why:
- The city has very spotty records for plans going back before the early 1990s. Want to see plans for a 1920s building? Forget it.
- Even in the rare instances that the city has the plans, the rules require that you get written permission from the architect before the city will release them. Which is fine, except that, for a building built in 1960 by an architect aged 50, you’re trying to get written permission from someone who is 103 years old.
So, the first step of every single renovation project we do is to get “as-builts” drawn.
What are “as-builts”? They are detailed drawings done by an architect who measures every dimension of the building as it is in real life and puts it on paper.
Only then can you start messing around with putting together new layouts for your units.
Some pics of three of our projects
Thought you might like to see what 1920s buildings look like when you rip them open.
When I say we gut our projects, I mean it.
How much to disclose pre-inspection
Had an interesting issue pop up on a brokerage deal yesterday.
After we inspected, we received the prelim and transfer disclosure statement, both of which indicated that a fence ostensibly on the property we are considering buying is actually encroaching on a neighbor’s lot. Clearly, seller was aware of the situation prior to us inspecting.
The question is: Should seller have disclosed this to buyer prior to buyer spending a bunch of time / money on inspections?
Per the contract, seller had 3 days from date of execution of the purchase agreement to provide buyer with all of the diligence material, including the disclosures (which would have alerted buyer to the encroachment). And, indeed, buyer could have waited to carry out inspections until after receiving the relevant documentation.
In the event that documentation was delayed, the contingency period would have been extended to five days after receipt of the last piece of documentation, enough time that buyer could still have carried out his inspections with time to spare.
So, why did I have the buyer move forward with inspections before receiving the docs? In two words, “good faith”.
I’ve found in brokering and in buying properties for myself / my funds that showing good faith in the beginning of the deal is extraordinarily helpful in moving things forward to completion.
There are plenty of bozos who tie properties up with no ability / little intent to close. Brokers find out they’re in escrow with a buyer like this when they go into contract and the buyer delays the inspection. That’s an immediate “bozo flag”.
Therefore, I like to be pro-active and move forward with the inspections immediately. Yes, every once in a while, this results in a buyer (sometimes me!) spending money that he could have avoided spending.
On the other hand, 100% of the time, it will send a strong, positive message to the seller that we are serious and making a good faith effort to close the deal. There are plenty of times during the course of every deal where the other side can either give you a break or make your life miserable. My experience has been that, if you go out of the way to show you’re not a jerk early on, you’re much more likely to get the benefit of the doubt if/when you need it later on.
Apologies for the lack of posts!
My wife, Lucy, and I just welcomed a new addition to our family: Baby Giles, age 8 days or so.
I decided to take an extended paternity leave this time of 2.5 days. Am back in the office now and crazy busy with the deals we have in escrow for our funds / partners / clients.
Between work, hanging out with our older boy, and trying to sleep, I haven’t had much fuel in the tank for writing. For that, I apologize.
I promise to be back at it next week. There’s a lot going on right now and plenty of interesting stories to share, once I get a free moment.
Dealing with buyer conflicts
One of the issues I deal with periodically is “buyer conflict”.
By buyer conflict, I mean the situation where multiple buyers with whom we are working decide to offer on the same piece of property.
As you might imagine, this presents a problem: We always want to help our clients get what they want, and this is one of the few cases where we will definitely fail at least one client (since, by definition, only one can buy the property).
So, how do we handle these infrequent, but annoying, conflicts? About how you would expect – gingerly, and with focus on behaving ethically.
In general, we:
- Give priority to the first client who decides to offer on the property.
- Cooperate. Once an agent has offered for one client, if another of his/her clients wants to offer, I personally write the offer for the second client;
- Never disclose proprietary information from one client to another or one agent to another. So one client will never hear what the other client is bidding. And his agent won’t hear what the other client is bidding, either; and,
- Disclose, disclose, disclose. With the exception of proprietary information relating to competitive bids, we favor total transparency. So, if we’ve written for one client and another ends up wanting to write, we make sure both of them know we’re representing multiple clients.
Buying good deals is, almost by definition, a ruthlessly competitive business. We do our best to help our clients get what they want. And, in the rare cases when our clients want the same thing, we do our best to give them the best possible help/advice, so that the client who wants the property most ends up getting it.
Leaving a dog?
We just completed a move-out that came about as a result of going to eviction court.
As part of a settlement, the tenants who were under eviction agreed to move out, rather than face formal eviction / a judgment / etc.
These were not very nice people, to put it mildly, and we’re happy they’re out of our client’s building.
As a kind of parting gift to us, along with a ton of trash left in their unit, they left one of the pitbulls they had been breading in their backyard.
We’re obviously doing the right thing… we’ve got someone from the neighborhood who is going to adopt the dog. But, can you even imagine the kind of people who would just up and leave a dog?
Navigating the broker/principal divide
One of the weird things about our business is that I am both a broker and a principal investor. That means I look at deals for other people and for myself.
Who cares? Other brokers.
Brokers make money as middlemen. Their goal is to know who’s selling and who’s buying and match the two together. Simple, right?
The problem I sometimes have with brokers is that they are worried about sharing information with me. On the one had, they know that I buy all cash, close quickly, etc., so, in some ways, I am an ideal client.
On the other hand, they are aware that I also help other people buy stuff and they are concerned that they will share some information with me about who is selling and that I will then sell the deal to one of my clients, thereby cheating them out of a commission.
This is a totally reasonable and valid concern.
Here’s how I handle it: I never, ever share information about deals which brokers bring to me as a principal without getting their permission first.
The reason is simple: Sure, I could use the information to make a quick commission. But I’m in this business for the long haul. It does me no good at all to get a reputation for screwing brokers out of commissions… they’ll just stop bringing me good deals!
How I pick agents
Was just thinking about the commonalities among the sales agents we’ve recruited to Adaptive Realty, Inc. and thought it might make interesting for everyone.
Here’s what we look for:
1. Integrity – This one is obvious. I can tolerate mistakes (the first time someone makes them; not the second). But I absolutely can not tolerate dishonesty. At the end of the day, if one of my agents screws up a deal because s/he lied or covered something up, I’m the one getting sued. I don’t mind (and, indeed, encourage) playing rough if that’s what it takes to deliver for my clients. But I need total transparency / honesty and I won’t settle for less.
2. Reading and listening comprehension – Being successful at doing real estate deals requires you to quickly take in large amounts of information, figure out what’s important, and then maneuver to get the outcome you want. There are tons of tricks and subtle nuances, but you can’t access any of them if you can’t read / listen and comprehend quickly and accurately.
3. Curiosity – I still learn something new on almost every deal I do. Do you know why there is CW zoning in a one part of Westlake? I do. Do you know what material sewer lines were made out of in the 1920s? I do. Do you know the reasons you can legally evict a tenant under the RSO ordinance? I know that, too. Why do I know all this weird trivia? Because I pay attention, ask questions, look stuff up. Over time, the little bits of information cohere into a framework that allows one to look at deals in a more sophisticated way. But that only comes from being curious enough to gather all the information along the way.
4. Tenacity and (controlled) aggression – This is a big boy/big girl game. When there’s a good deal, you need to jump on it. That means you need to get off your ass and MOVE before the other guys do. You can teach people a lot of things, but you can’t make them energetic and tenacious. Either they bring those traits to the table or they don’t.
5. Ability to sell – I don’t just mean “to clients”. A huge part of an agent’s job is to sell his clients’ offers to listing agents. There are all kinds of tricks for distinguishing your offers from other peoples’, but a big part of winning in this game is conveying to the listing agent that your client is serious and intends to close. That’s all about selling.
6. Numeracy – This is pretty self-evident. My whole brokerage is based on the following concept: If the numbers make sense, lean hard towards doing the deal. We’re not doing rocket science here, but you need to be able to look at and understand spreadsheets, etc. If you can’t do that, you might as well go peddle townhomes in the Valley.
7. Willingness to get dirty - A large part of what we do involves looking at a screwed-up building over the course of a 2-3 hour inspection and helping the client figure out exactly how screwed-up it is and what it will take to fix it. Being willing to get your hands (and knees) dirty crawling around / underneath apartment buildings is part of the game.
Did you notice that “experience” isn’t on the list? It’s not that I won’t take on experienced agents. It’s just that I find that most agents who’ve been doing this for a little while have not been doing it particularly well. I’d rather find people who have the above characteristics but who, for whatever reason, didn’t “click” with another career*, then train them to be great at real estate.
We’ve got four people working with Adaptive now who fit the bill, but we’re always looking for more. If you know someone who you think might have what it takes to do this stuff well, send them my way.
* Interestingly, I’ve had a lot of success with people who went into creative fields after college, recognized that those fields don’t pay very much, then decided to try real estate.
Why I don’t write much about our funds
Got an email from a reader recently asking me why I don’t write more about the funds we run.
Believe me, I’d love to!
The problem is that I don’t want to run afoul of securities regulations, which prevent the open advertising / marketing of unregistered securities.
The reasoning behind these regulations is sound: The government has an interest in preventing hucksters from setting up BS investment vehicles and scamming unsophisticated investors into parting with their capital. So, if you want to market to the public, you need to be registered with the Securities and Exchange Commission, which is a very expensive proposition.
However, there is an obvious need among entrepreneurs for cash from investors. After all, there are plenty of investment opportunities which:
- Require more money than can normally be mustered by an individual or family;
- Are too small to interest large funds / public companies which can advertise publicly;
- Are too complicated / risky for bank debt to fund; and
- Which are still sufficiently interesting to be worth doing
Responding to this need for private equity, the government has carved out a workable loophole: Entrepreneurs can raise money for these kinds of opportunities from high net worth investors, so long as they don’t solicit publicly (and so long as they abide by a whole bunch of other requirements). Basically, the fundraising needs to be done via personal contact / referrals / introductions.
Because I don’t want to violate the law, I don’t write about my funds directly. It’s kind of a bummer, because this blog would be, in some ways, a pretty great fund-raising platform. And also because, as you may have guessed, many of the most interesting things I’m working on right now relate to our funds, meaning that I can’t share as much as I’d like to you with!
The required legalese: This post is NOT, and should not be interpreted as, a solicitation for investment or for the sale of any securities. Also, I’m not a lawyer, so this post should not be considered legal advice.
