Spend enough time looking at Los Angeles apartment listings and you will find one that says something like “Property in REAP. Looking for an all-cash buyer”. Or, much worse, you might get a letter from the Los Angeles Housing Department (LAHD) threatening to place your property in REAP if you don’t comply with their demands.
So, what is REAP?
“REAP” is the acronym for the Rent Escrow Account Program. It is a city-administered program originally designed to punish slum-lords but now used as a sanction to get all landlords to comply with Housing Department orders.
Here’s how a property gets into REAP:
- A building is found to have problems negatively affecting habitability, either as a result of the regular Systematic Code Enforcement Inspections (SCEP) or an inspection brought on by a tenant complaint;
- LAHD sends a “notice to comply” to the landlord specifying the issues, what the landlord must do to fix them, and the date by which the issues must be resolved. Note that LAHD posts the notice on the building and sends it to whatever address they have on file for the landlord; if the landlord has moved and doesn’t ever receive the notice, that’s the landlord’s problem;
- If the landlord does not fix the issues, he receives a “notice of a general manager’s hearing” directing him to appear before Helen Morales, the hearing officer, to discuss the violations;
- If the landlord doesn’t appear or appears but does not convince Ms. Morales that he is addressing the issue, Ms. Morales sends a “decision letter” placing the property in REAP;
Once you’re in REAP, you’ve got major problems:
- Depending on the severity of the violations, your tenants will receive notice informing them of their right to pay some portion, between 50-100% of their monthly rent, into a rent escrow account controlled by the city instead of to you. Now your cashflow is reduced and your ability to service your mortgage is under threat;
- The city records a notice on title of the property being placed in the REAP program. This alerts potential buyers and, more importantly, their lenders, that there is a problem with the property. Until the notice is cleared from title, no one will lend to you or to anyone trying to buy the property from you.
- You are charged an administration fee of $50 per unit per month beginning when your property is placed in REAP and continuing until it is removed. These fees are automatically deducted from the rent escrow account and, if there is a negative balance in the account when you try to exit REAP or sell the building, you will have to cover the outstanding fees.
To get out of REAP, you need to:
- Fix the original violations (which can be difficult if you have angry tenants who break what you’ve just fixed and / or call in new complaints)
- Call in one of the city’s outside tenant habitability contractors for an inspection (more on these guys some other time)
- Assuming the contractor passes you, call in a city inspector for another inspection (which you’re billed a few hundred bucks for)
- Assuming you pass that second inspection, wait for the property to be voted out of REAP by the city council at their next meeting (this is assured if you pass the inspections, but you still have to wait for the meeting and accrue fees in the interim)
- If there is a negative balance in the rent escrow account, pay off the difference in cash;
- Get a letter from the city attesting to the fact that the property is out of REAP; and
- Get the relevant city functionary to remove the REAP notice from title so that you can freely sell or borrow against the property again.
If you’ve stuck with me so far, you can see that getting your property placed in REAP is a major disaster, mostly because your cashflow from rents is choked off at exactly the time you need the money to pay for repairs and city fees. This dynamic of lower cashflow and higher expenses has forced many, many smaller LA landlords into foreclosure.
I’ve never had a property I’ve owned be placed into REAP, but I’ve bought plenty of properties that were in it when I bought them (we almost always pay cash, so the inability to get a loan isn’t an issue for us). And I’ve had to fight the city to keep them from putting one of my properties in after a SCEP inspection turned up an un-permitted unit.
My advice to anyone facing REAP is to do everything possible to avoid getting your property put in the program.
If it’s too late, and you’re already in, be careful. There are a lot of so-called “consultants” who make money preying on landlords desperate to avoid getting put in REAP (I know, because I’ve been ripped off by two of them). If you need help, get in touch, and I will direct you to the people who have helped us. You’ll still end up paying plenty of money, but at least you’ll know you’re getting the best possible help.