Archive for the ‘Brokerage’ Category
Have been mulling over an idea for a few months that I’d like some feedback on.
Here goes: I would like Adaptive to help one deserving family which currently rents become owners of a small apartment complex.
Here’s how it would work:
- We identify a family to help
- We help the family find and offer on a sensible building
- We cover all of the costs associated with inspections, appraisal, etc.
- We help the family arrange an FHA loan
- We rebate our buy-side commission (typically 2.5%) to cover most of the down-payment, with the family contributing the rest (likely to be around $3-5k)
The effect of this project would be to give a deserving family a chance to go from being permanent renters to being small-time landlords with a stake in the city. That’s how my immigrant family and countless others got into the middle class.
Here’s my problem: I have no idea how to identify a deserving family. I think I have the following criteria:
- A family born and raised in LA
- Need to come from a working-class background without access to family capital (rich people don’t need more help!)
- Need at least one member to be working at an above-board job for at least two years and to have filed tax returns
- Need the working family member to have reasonable credit
- Need the family to be of good character – I’m not helping criminals, gangsters, etc.
- Need the family to be willing to have the whole process documented on this blog
If you know a family that fits the above criteria, get in touch.
Are you considering buying a recently renovated building? One that has washers and dryers in the units?
Check the permits!
To put washers and dryers into a building that was not built for them, you need to re-size all of the plumbing, including water supply, waste and gas lines.
If you put washers and dryers in without upsizing the permits, you are taking a risk. The risk is that the city comes in and demands that you either produce permits for the upsized plumbing or rip out the washer / dryers.
It is possible to re-pipe a building with tenants inside, but it’s expensive and stressful for the tenants.
If you choose instead to rip out the washer / dryers, then your tenants have a valid case for a rent reduction. And, even if they don’t pursue that remedy, when they move out, you will find it harder to rent the units, since a major amenity will be gone.
Why do I harp on this issue so much? Because we do of our renovations with permits (we learned the hard way!!) and it bothers me to see people cutting corners and sticking the new owners with the risk.
Finally: If you’re working with a broker and looking at a renovated deal and your broker hasn’t helped you pull and review the permit record, watch out. Brokers walk away from closed deals with their commissions; new owners are stuck dealing with the fall-out.
Regular readers may remember 1947 Clinton St: It’s the gigantic fourplex at the corner of Alvarado and Clinton acquired by Adaptive Realty Fund 1 roughly a year ago.
When we bought the property, it was in rough shape due to roughly 30 years of neglect by the previous owner. Pretty much everything that can wear out on a building had worn out.
We spent roughly 10 months fixing every single problem and re-imagining the property with stylish details and every modern convenience.
Our efforts paid off when we signed leases. The rent roll is now roughly $138k / year, up from something like $28k(!) when we bought it.
As you probably know from reading this blog, my general inclination is to hold real estate, not sell. That is particularly the case with this property, where our return on equity invested is likely to be around 10% / year, without using leverage.
That said, we recently received an unsolicited offer for the property. We therefore owe it to our investors to determine what the market value is. After all, it is my experience that, at the right price, anyone is a seller.
Here’s the MLS listing, in case you’re interested.
Thought you might be interested in some rough stats on deals I’ve personally brokered in the last 12 months.
The raw numbers:
- 17 deals
- 94 total apartments
- $14,284,000 in total value
All of the above were apartment deals ranging in size from several duplexes in Silver Lake and Echo Park up through a 16 unit building in Highland Park. All but one were in the gentrifying parts of NELA.
Four of the deals were not covered by LA rent control; the rest were.
Two deals were listings; the rest were buy-side.
Five were for individual, buy and hold investors. The rest were either fund or fee for service deals.
A few deals upon which I worked over the past 12 months are not included in the above: When there is a really hot deal, we often allow the listing agent to double-end, even though I end up doing just as much work.
By value, I’m definitely nowhere near the most active broker for apartments in LA… there are plenty of teams doing individual deals priced at $14-15MM. But I doubt whether there are many apartment brokers who have done the sheer number of deals I’ve done in the past 12 months. And you learn on each one.
It’s been about a month since escrow closed on my purchase of [redacted]. I want to thank you for directing me to David and let you know that I’m really pleased with the way he helped me find and manage the deal.
The deal was great for multiple reasons including a foreclosure that left 3 of the 4 units vacant at the time of sale and a selling agent that underestimated the market rents and therefore the value of the property. Long story short, I just finished doing a little rehabbing largely based on David’s advice, have rented the vacant units and now have a building with a GRM of 8.03 [!] in a gentrifying area that’s pretty decent.
Barring any major issues with the property, I plan to hold onto this building for a long time. I’ll definitely be doing business with David and Adaptive Realty in the future. Thanks.
One of my agents ran across an interesting deal in an improving neighborhood in NELA.
It needs a bit of work, say, $30k, but would work as a great owner user or investor property.
If you are an owner-user, you could potentially use an FHA loan on it, which would allow you to buy with 3.5-5% down.
There aren’t many deals in this market that work both on a price per sq foot basis AND on a GRM basis. That’s because, to get a low price per sq, you’re usually required to buy something beat up with low-paying tenants, implying a high GRM. And, if you find something with a reasonable GRM, it’s typically because the rents have been maxed out, implying a high price per sq ft.
For reasons that I can’t divulge here (because I don’t want the agents who read this to steal my ideas – hi guys/gals!), this property works both ways.
So, if you’re interested, get in touch and I’ll put you in touch with the relevant agent.
Here’s a lesson about brokering that they never teach you in real estate classes: Don’t let the buyer and seller speak to each other directly, if you can prevent it.
First, consider this law of human interaction: No one instinctively likes everyone he/she meets.
It’s just a fact of life that we sometimes run across people who rub us the wrong way. Depending on our personalities and their personalities, the chances of a bad first interaction are probably something like 5-15%. If one or the other of the people involved are particularly disagreeable, the odds of something bad happening are probably a lot higher.
Then, on top of our natural inclination to dislike certain of our fellow humans, there is the fact that buying or selling a property is an inherently stressful thing to do. There is a lot of money on the line. And you’re often talking about someone’s home. People under stress are even more prone to saying ill-considered things than people in every-day life, and one ill-considered line can blow up a deal.
What’s the solution? Brokers should keep the parties apart. This allows buyer and seller to be a bit more detached / dispassionate about the potential transaction and also provides a kind of fail-safe, preventing ill-considered outbursts from reaching the other side and blowing things up.
Deals (should) happen when they are in the interest of both buyer and seller. It’s such a shame when interpersonal BS screws them up.
Yesterday, the LA Times had an absolutely horrific story about a couple who bought a duplex and then got slammed by LADBS.
Here’s the piece.
How could this poor couple have avoided the pickle they’re in?
1. Foundation inspection. The retaining wall issue in the back would have been apparent to anyone who does a lot of foundation work. That’s why we always bring foundation contractors to our inspections.
2. Better general inspection. I’m not going to sit here and claim that a good general inspector would 100% catch the roof issue identified by the inspector. But I think the odds are pretty high that one would, because the right people have seen every type of building a million times and can tell when something is “off”.
3. Review of the permit record. Too many brokers / buyers fail to do this. You should really pull all of the permits for a building before you remove your contingencies. Something as obvious as the lack of a CofO for the second apartment would have jumped out immediately.
You might think that it is only a professional investor who needs to conduct thorough inspections and reviews of documentation in escrow. But you would be wrong. You see, I am capitalized such that no problem / mistake in diligence is fatal. Given money and time, any problem on something I buy for one of my funds can be solved.
It is the non-pro who needs to be especially diligent. When you’re plowing a huge chunk of your savings into a property, you probably aren’t holding a bunch of reserves in case something goes wrong. So, you need to be pretty damn certain about exactly what it is that you’re buying.
And that, candidly, is one of the main reasons we’re better than your uncle’s-friend’s-roommate-who-usually-sells-condos-in-Reseda-but-would-love-to-make-the-buy-side- commission-on-a-Silver-Lake-duplex.
Let’s be clear about what I mean by Mid-City: Everything north of the 10, east of La Cienega, south of Wilshire, and west of Western.
Why do I love it? Because:
1. It’s central: The area I just described is roughly 10-15 minutes by car from all of the jobs on the Westside (in Beverly Hills, Santa Monica, Culver City, etc.) and also 10-15 minutes from all the jobs Downtown. And you can get to the nightlife in West Hollywood and Hollywood in 10-15 minutes, as well. As more and more people forsake the suburbs (and the awful commute), they are going to want to be in places like this, instead.
2. The housing stock is great: Most of the area was developed from 1900-1930. That means there is an interesting mix of old Craftsman homes and nicely-proportioned 1920s duplexes and fourplexes with parking. These buildings have good bones – with some dough and some effort, you can make them really nice.
3. The retail is going to improve: Drive along Washing, Venice, Pico and Olympic (the big east-west commercial streets in the area). You will see mostly crummy businesses and a ton of awful strip malls. However, if you look closely, you will also see that many older, beautiful buildings remain. You will also see the first shoots of gentrification… a Paper or Plastik here, a Bloom Cafe, there. Over time, you’re going to see more and more of these interesting stores / restaurants, because the new, more affluent residents moving in demand them.
4. It’s cheap: You can still buy large single family homes in this area for around $500k. And there are plenty of 2-4 unit apartment buildings that makes sense on a cashflow basis, but also cost less than $200 / ft. It would cost $200 / ft to build these buildings today, even if someone gave you the land for free. So, you’re buying good buildings at below replacement cost with good in place cashflow. Someone explain the downside… I can’t see it.
We’ve been doing an increasing amount of business in Mid City. And we’d love to help you do some, too. If you’re interested, get in touch.
Regular readers know that Adaptive does a bunch of different things. We run investment funds, do fee-for-service development, manage property, and broker deals.
When we started Adaptive, the “brokering deals” part was just me. Now, we have a well-trained team of agents who are helping investors and owner-users do sensible apartment deals in the gentrifying parts of Los Angeles. The results are pretty clear: If you look at the MLS, you will see that Adaptive, with four active agents (including me), is doing as many deals on apartment buildings up to $3MM as much larger brokerages.
Because Adaptive is relatively young and because I generally oppose selling cashflowing real estate under most circumstances, we have tended to work mostly on the buy-side. That means we’ve had relatively few listings, to date.
But, as our reputation spreads in the market, we are starting to be asked to take on sell-side work, too.
So, I am happy to report that, over the next few weeks, we will be rolling out at least four new apartment listings in interesting areas. We will, of course, send out the details to people on our mailing list first, so that those people get the jump on the general public. (Hint: Join the mailing list!)
Why are we doing listings, when we philosophically oppose selling? Our job isn’t to impose our view of the world on our clients and potential clients. We aim to give them our best advice, even when that advice runs contrary to what they want to hear.
Once we’ve given our best advice, if they want to go another direction, we happily get on-board and execute to the absolute best of our abilities.