Losing a good deal to make a better track record

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Am looking at a deal now that has an interesting problem: While ZIMAS and the county both show 12 units, the certificate of occupancy shows 11 units.

The building only has 11 parking spaces, so it was pretty clearly built as 11, with the final unit added at some point along the way, most likely illegally.

The 12th unit is totally legit-looking. There is no way that a casual inspection by, say, LAHD would uncover the (potential) illegality.

But, of course, the paper-trail doesn’t support 12 units.

This is the kind of situation where a money-manager (like me) is at a significant disadvantage compared to your standard high-net worth apartment investor.

The standard investors takes the deal… it’s cheap, in a good area, etc. He figures that he most likely won’t get caught and, if he does, he’ll spend the money to resolve the situation and then move on down the road.

We face an entirely different set of incentives, because we are working on building a track record that will allow us to raise institutional money. If we bought this building, kept the 12th unit, and then got busted and had to spend $50k relocating a tenant and removing the unit, we would have a big red mark on our record that we would need to explain to potential investors reviewing the numbers.

Because we want to avoid that kind of conversation (and because we like to sleep well at night), we won’t take that kind of risk.

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