Moses Kagan on Real Estate

How to be a bad broker (episode 387)

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Am working with a client considering buying a duplex in LA. The listing broker has the building on the market at $500k. He has no idea what the rent is on the one occupied unit (in what is a rent control building).

To illustrate how insane this situation is, let’s review the numbers:

  • List price of $500k
  • Two units, both 2 bed / 2 bath
  • One unit vacant, should rent for $2k / month
  • Other unit occupied, listing agent has no idea of the rent

If the occupied unit is getting $2k per month (very unlikely), the building is doing $4k / month, or $48k / year. That implies a gross rent multiple of $500k / $48k = 10.4x. That’s a total steal for the neighborhood.

If, on the other hand, the occupied unit is getting $1k per month, the building is doing $3k or $36k / year. That implies a gross rent multiple of $500k / $36k = 13.9x. That’s a bad deal for the neighborhood.

Regular readers will know that there’s no easy way to get rid of a rent controlled tenant in LA, unless that tenant fails to pay rent. So, if you buy this property and it turns out the tenant is paying $1k, you’re probably stuck with this guy for life.

It’s not clear to me whether the broker understands LA rent control. If he does, and he still hasn’t taken the time to figure out what the rent is, well, then, I am (unusually for me!), speechless.


Written by mjkagan

08/02/2012 at 4:04 am

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