Moses Kagan on Real Estate

We brokered and / or acquired just under $7.8MM worth of Los Angeles apartment deals in the last four weeks, and there’s a lot more to come.

We’ve done small deals (duplexes in Silver Lake and Echo Park), big deals (a 16 unit building in Highland Park), and tons of stuff in-between.

We’ve still closing some stragglers over the next week or so. Then it’s on us to turn these beat-up old buildings into the kind of places in which you’d want to live.

Are you interested in getting involved in apartment deals in Northeast LA? If you are, get in touch.

Had an interesting issue pop up on a brokerage deal yesterday.

After we inspected, we received the prelim and transfer disclosure statement, both of which indicated that a fence ostensibly on the property we are considering buying is actually encroaching on a neighbor’s lot. Clearly, seller was aware of the situation prior to us inspecting.

The question is: Should seller have disclosed this to buyer prior to buyer spending a bunch of time / money on inspections?

Per the contract, seller had 3 days from date of execution of the purchase agreement to provide buyer with all of the diligence material, including the disclosures (which would have alerted buyer to the encroachment). And, indeed, buyer could have waited to carry out inspections until after receiving the relevant documentation.

In the event that documentation was delayed, the contingency period would have been extended to five days after receipt of the last piece of documentation, enough time that buyer could still have carried out his inspections with time to spare.

So, why did I have the buyer move forward with inspections before receiving the docs? In two words, “good faith”.

I’ve found in brokering and in buying properties for myself / my funds that showing good faith in the beginning of the deal is extraordinarily helpful in moving things forward to completion.

There are plenty of bozos who tie properties up with no ability / little intent to close. Brokers find out they’re in escrow with a buyer like this when they go into contract and the buyer delays the inspection. That’s an immediate “bozo flag”.

Therefore, I like to be pro-active and move forward with the inspections immediately. Yes, every once in a while, this results in a buyer (sometimes me!) spending money that he could have avoided spending.

On the other hand, 100% of the time, it will send a strong, positive message to the seller that we are serious and making a good faith effort to close the deal. There are plenty of times during the course of every deal where the other side can either give you a break or make your life miserable. My experience has been that, if you go out of the way to show you’re not a jerk early on, you’re much more likely to get the benefit of the doubt if/when you need it later on.

One of the issues I deal with periodically is “buyer conflict”.

By buyer conflict, I mean the situation where multiple buyers with whom we are working decide to offer on the same piece of property.

As you might imagine, this presents a problem: We always want to help our clients get what they want, and this is one of the few cases where we will definitely fail at least one client (since, by definition, only one can buy the property).

So, how do we handle these infrequent, but annoying, conflicts? About how you would expect – gingerly, and with focus on behaving ethically.

In general, we:

1. Give priority to the first client who decides to offer on the property.
2. Cooperate. Once an agent has offered for one client, if another of his/her clients wants to offer, I personally write the offer for the second client;
3. Never disclose proprietary information from one client to another or one agent to another. So one client will never hear what the other client is bidding. And his agent won’t hear what the other client is bidding, either; and,
4. Disclose, disclose, disclose. With the exception of proprietary information relating to competitive bids, we favor total transparency. So, if we’ve written for one client and another ends up wanting to write, we make sure both of them know we’re representing multiple clients.

Buying good deals is, almost by definition, a ruthlessly competitive business. We do our best to help our clients get what they want. And, in the rare cases when our clients want the same thing, we do our best to give them the best possible help/advice, so that the client who wants the property most ends up getting it.

One of the weird things about our business is that I am both a broker and a principal investor. That means I look at deals for other people and for myself.

Who cares? Other brokers.

Brokers make money as middlemen. Their goal is to know who’s selling and who’s buying and match the two together. Simple, right?

The problem I sometimes have with brokers is that they are worried about sharing information with me. On the one had, they know that I buy all cash, close quickly, etc., so, in some ways, I am an ideal client.

On the other hand, they are aware that I also help other people buy stuff and they are concerned that they will share some information with me about who is selling and that I will then sell the deal to one of my clients, thereby cheating them out of a commission.

This is a totally reasonable and valid concern.

Here’s how I handle it: I never, ever share information about deals which brokers bring to me as a principal without getting their permission first.

The reason is simple: Sure, I could use the information to make a quick commission. But I’m in this business for the long haul. It does me no good at all to get a reputation for screwing brokers out of commissions… they’ll just stop bringing me good deals!

Was just thinking about the commonalities among the sales agents we’ve recruited to Adaptive Realty, Inc. and thought it might make interesting for everyone.

Here’s what we look for:

1. Integrity – This one is obvious. I can tolerate mistakes (the first time someone makes them; not the second). But I absolutely can not tolerate dishonesty. At the end of the day, if one of my agents screws up a deal because s/he lied or covered something up, I’m the one getting sued. I don’t mind (and, indeed, encourage) playing rough if that’s what it takes to deliver for my clients. But I need total transparency / honesty and I won’t settle for less.

2. Reading and listening comprehension – Being successful at doing real estate deals requires you to quickly take in large amounts of information, figure out what’s important, and then maneuver to get the outcome you want. There are tons of tricks and subtle nuances, but you can’t access any of them if you can’t read / listen and comprehend quickly and accurately.

3. Curiosity – I still learn something new on almost every deal I do. Do you know why there is CW zoning in a one part of Westlake? I do. Do you know what material sewer lines were made out of in the 1920s? I do. Do you know the reasons you can legally evict a tenant under the RSO ordinance? I know that, too. Why do I know all this weird trivia? Because I pay attention, ask questions, look stuff up. Over time, the little bits of information cohere into a framework that allows one to look at deals in a more sophisticated way. But that only comes from being curious enough to gather all the information along the way.

4. Tenacity and (controlled) aggression – This is a big boy/big girl game. When there’s a good deal, you need to jump on it. That means you need to get off your ass and MOVE before the other guys do. You can teach people a lot of things, but you can’t make them energetic and tenacious. Either they bring those traits to the table or they don’t.

5. Ability to sell – I don’t just mean “to clients”. A huge part of an agent’s job is to sell his clients’ offers to listing agents. There are all kinds of tricks for distinguishing your offers from other peoples’, but a big part of winning in this game is conveying to the listing agent that your client is serious and intends to close. That’s all about selling.

6. Numeracy – This is pretty self-evident. My whole brokerage is based on the following concept: If the numbers make sense, lean hard towards doing the deal. We’re not doing rocket science here, but you need to be able to look at and understand spreadsheets, etc. If you can’t do that, you might as well go peddle townhomes in the Valley.

7. Willingness to get dirty - A large part of what we do involves looking at a screwed-up building over the course of a 2-3 hour inspection and helping the client figure out exactly how screwed-up it is and what it will take to fix it. Being willing to get your hands (and knees) dirty crawling around / underneath apartment buildings is part of the game.

Did you notice that “experience” isn’t on the list? It’s not that I won’t take on experienced agents. It’s just that I find that most agents who’ve been doing this for a little while have not been doing it particularly well. I’d rather find people who have the above characteristics but who, for whatever reason, didn’t “click” with another career*, then train them to be great at real estate.

We’ve got four people working with Adaptive now who fit the bill, but we’re always looking for more. If you know someone who you think might have what it takes to do this stuff well, send them my way.

* Interestingly, I’ve had a lot of success with people who went into creative fields after college, recognized that those fields don’t pay very much, then decided to try real estate. 

One of my agents, Marcus, is closing on a really sweet FHA fourplex deal today for a client. It’s so attractive that I’m still kicking myself for not buying it for one of my funds (I tried, believe me).

This deal was not without hiccups, to put it mildly.

The client came to us with his own lender. In those situations, we generally agree to work with the client’s lender, rather than trying to push the client to use a loan broker we trust.

In this particular instance, the lender puked all over the deal.

It’s not really worth getting into specifics – it suffices to say that they jerked our client (and, by extension, us and the seller) around for a few weeks, asking for endless reports / evaluations / bids / etc. for what should have been a straightforward deal. Marcus tenaciously fought for the deal, jumping through each and every hoop, until we finally realized the lender had no intention of closing.

When Marcus finally told the lender we were pulling the deal and moving it somewhere else, they told him that any other lender would have the same issues / concerns.

Enter Justin Brown, our go-to loan broker. Justin assured us he could close, despite what the other lender told us.

In a genuinely heroic bit of loan brokering, Justin closed it two weeks from the day on which we pulled the deal from the first lender. As you can imagine, everyone is pretty freakin’ happy around here.

And, as you can also imagine, we are going to be a bit more skeptical when clients come to us with a lender already picked out. Closing any apartment deal in this environment is tough. When it’s an FHA deal, it’s tougher still. You really need to have the loan side working with you in order to have a clean shot at closing.

Anyway: Bravo, Marcus and Justin!

If you’re on my mailing list, you received an email this afternoon with a good idea for putting out around $365k and getting back around $42k / year (and rising). For those not doing the math along with us at home, that’s a return of roughly 11.5%, not including equity build-up as you pay down the mortgage.

If you’re not on the mailing list but are interested in opportunities like the one above, I strongly suggest you sign up. I don’t send out emails very often (maybe once every six weeks). But when I do, they’re always worth taking a close look at.

If you don’t see a sign-up form for the mailing list below, just click on one of the article links on the right side of the page, let the article load, and then scroll down to the bottom of the page. You’ll see a form for your email address and name – go ahead and sign up.

Welcome!

Since I’ve decided to make my career in one little corner of Los Angeles, I spend a lot of time thinking about how best to preserve and enhance my reputation among the brokers, owners, and tenants who participate in my market.

The most important thing I do to get and keep a good reputation is to do what I say I’m going to do.

For example: I don’t re-trade. Re-trading is offering high, tying the property up, and then trying to chip the seller in escrow. That’s definitely the right way to go if you don’t care about how people perceive you.

But, I can’t do that, because I intend to do a lot of deals and I want people to be able to trust my offers when I make them.

If I say I’m going to pay a certain price for a building, I pay it, unless there is some major issue that crops up during diligence of which I was not informed prior to going into contract.

Believe me, it’s extremely frustrating to lose deals to people who don’t care about their reputations. But, I’ve also been able to get deals others would never, ever be able to get because the brokers knew me and trusted that I would close.

I’m hoping, in the long run, that behaving like a mensch wins me more deals than it loses me. But the jury is definitely still out.

Take a look at this listing on Silver Ridge in Silver Lake:

http://takesunset.com/2013/03/2338-silver-ridge-avenue-in-silver-lake/

Absolutely beautiful example of modernist design in an A+ location.

So, why am I complaining about it?

Take a look at those rents. They’re getting $2595 each, which implies they were rented pretty recently (if they’d been rented more than a year ago, I would expect the number to be less “round”, due to one or more 3% increases). That equates to roughly $62k / year, meaning the property is listed at a whopping 14.5x the rents.

Now, for an investor, that’s an insane price. The returns are going to be terrible going in and for a long time to come.

For a homeowner, that price may not be that crazy. After all, if you want to live in one of the units, you can talk yourself into paying whatever price you feel.

But, here’s the problem: The tenants are rent controlled. So, getting them out in favor of an owner-occupier user is going to cost a minimum of around $7500 (more if the tenants are older, have children, etc.) plus a major pain in the ass with the city.

By filling both units and then putting the property on the market, the owner has made it much more difficult to get the price he wants. A better strategy would have been to rent one of the two units, renovate the other as a really slick owner-occupier unit and sell it with that unit vacant.

1. You don’t like confrontation. Inevitably, you are going to have tenants who screw things up and need to leave your building. No one is going to care about it as much as you do, so you’re the one with whom the buck is going to stop. If you can’t stick up for yourself / your family, don’t buy a building.

2. You can’t tolerate risk. Apartment buildings are little businesses. No matter how much you plan / prepare / etc., there is still risk to owning them. Earthquakes happen. Fires happen. Market prices and rents swing. Working with a good agent and being smart about what you buy and how you buy it can mitigate risk to a large extent, but it can’t remove risk entirely. This is a big boy / big girl game.

3. You hate negotiating. In business, I’ve found, everything is a negotiation, whether you realize it or not. When you own a building / business, you’re going to be employing all kinds of people and companies. Many of them will try to take advantage of you. You don’t have to “win” every negotiation (often, you’re willing to happily pay a price the other side is happy to accept), but you need to be aware that you are, indeed, negotiating. And you have to not despise the process.

4. You’re disorganized. There is an unbelievable amount of paperwork that accompanies owning buildings. There are a million different regulatory agencies, tax authorities, insurance companies, banks, managers, etc., all of whom want documentation, bills paid on time and in full, etc. If you’re the kind of person who avoids opening mail, either make sure you hire someone to do it (that’s what I do) or stay out of the business.

5. You don’t like numbers. This isn’t a video game. There isn’t a big “You Win” or “You Lose” screen that pops up. The business is about patiently husbanding your capital, placing it, watching it grow, limiting your expenses, mitigating your risk, etc. All of this involves thinking about numbers. If you don’t like numbers, do something else.

6. You don’t like to learn. I’m still learning a lot, every single day, roughly five years into doing this for a living. If you want to do a good job with buying and owning apartment buildings, you have to keep your ears open for new ideas, your eyes open for new neighborhoods or changes to existing neighborhoods, and your mind open to thinking about existing assets / threats / opportunities in new ways. If you’re closed off and hate new ideas, don’t start buying buildings.