Moses Kagan on Real Estate

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Further to my earlier post on dumb brokers:

I am working with a couple now who came to me through this blog (hi guys!). They were previously working with another broker who had them in contract on a small building in the Miracle Mile area.

The broker they were working with neglected to inform them that the property was in REAP (the Los Angeles Housing Department’s “Rent Escrow Account Program”), despite having been informed himself by the listing broker.

Let’s pause for a moment to review the consequences of buying a property in REAP:

  1. There is a cloud on title placed there by the City of Los Angeles preventing you from re-selling the property;
  2. Some or all of the tenants are paying 50% of their rent into a city account instead of to you;
  3. Despite this decreased cashflow, you need to fix all of the issues with the building, requiring you to pay both for the actual work and the cost of permits through LADBS;
  4. Once everything is fixed, you need to go through two rounds of inspections, one by an outreach contractor and one by LAHD;
  5. Once you pass the inspections, the city council has to vote your property out of REAP;
  6. While this is going on, the city is billing you a REAP administration fee of something like $50 / unit / month, plus extra for additional LAHD inspections;

In short, for a mom-and-pop investor, having a property go into REAP is a disaster. It’s not just because of the money involved in solving the problems and getting the property out. The aggravation from dealing with two different city departments, two different inspectors, etc. is enough to give even an otherwise healthy adult a life-threatening stomach ulser.

If you’re an experienced multi-family broker in LA, you know all about the REAP program. If you’re a numbskull, you don’t, and you put your clients in danger of losing a lot of money and years off their lives.

You know what the amazing thing was? These are such nice people that they felt bad about stopping work with the agent in question, because he’s a friend of a friend. That’s, like, Mother Theresa territory. I’d be prepping the tar and feathers, but that’s just me.


Written by mjkagan

04/30/2012 at 7:00 am

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