Why are there vacant buildings for sale?

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Lately, have seen a bunch of vacant apartment buildings come on the market for sale.

Normal investors don’t buy vacant buildings, because banks generally won’t lend on them.

So, these vacant buildings are being marketed to cash buyers who would presumably renovate and re-tenant them.

Since a sale strategy that dramatically limits the pool of prospective buyers is, on the face of it, likely to produce a sub-optimal outcome, you need to ask why these guys are selling.

I suspect the reason is that the current owners entered into the projects without fully comprehending the cost of renovating to modern standards in LA. Upon getting construction bids, they realized they’d rather bail out now with a profit, rather than push through to completion with a lower-than-expected yield.

So far, we’ve passed on these deals, for two reasons:

  1. Price – Every one of these owners paid a lot of money on the way in. Then, they spent a lot of money to vacate the building. Now, they’re looking for a big return, which means selling at a high price. Unfortunately for me, the prices they’re asking don’t leave anywhere near enough meat on the bone to renovate and re-tenant and get a reasonable yield.
  2. Legal issues relating to previous tenancies – The city has strict rules about vacating rent stabilized apartment buildings. While I have no particular information about any vacant property on the market, I worry that the present owners are unlikely to have followed those rules, creating risk for a new owner.

Eventually, I expect these deals to sell at prices low enough to tempt rehabbers to come in. Maybe we’ll buy some.

But I am hopeful the prices will be low enough to dissuade the original owners from repeating the process, thereby clearing the field of some of our competitors. (A guy can dream, right?)

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