Moses Kagan on Real Estate

Archive for the ‘Property Management’ Category

Why every last dollar of rent matters

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Sometimes people question why it’s so important to get that last dollar of rent.

On a $2800 apartment, does an extra $100/month matter? After all, $100 is only 3.6% of $2800… no a big deal, right?

Wrong. Here’s how we think about rent in our business:

So, if you ask me to take $100 / month less in rent, you’re asking me to light $14,400 on fire. Which I’m probably not going to do.

A final note: Implicit in the above calculation is the idea that you are going to sell the building. If you’re not, then getting that last dollar is a bit less important. After all, charging a bit less rent reduces turn-over (because your units are a bit under what the tenant can find somewhere else). So, particularly in a non-rent control building, it’s not unreasonable to take a bit less, once you factor in the costs of turning units over (maintenance, lost rent while its vacant, leasing commission to refill it).

Written by mjkagan

07/29/2013 at 11:36 am

How CA residential leasing law hurts poor people

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The courts have screwed up unlawful detainer (eviction) in California and it’s hurting poor people.

Here is the current situation with leasing in CA:

  • Courts won’t enforce a lease provision through which tenant waives jury trial (see this article for the background); and
  • Courts won’t enforce arbitration provisions in residential leases (see here) (arbitration is effectively private court system that allows for faster resolution of civil disputes than is possible in court)

 

Bottom line: There is no way for a landlord to prevent a tenant under eviction from getting a jury trial if the tenant wants one.

Why should landlords care? Because if you have a tenant who doesn’t pay rent and you go for an eviction, you will find yourself negotiating a settlement, because that’s almost always going to be cheaper/faster than going through with a jury trial.

OK, but why should non-landlords care? Shouldn’t society be happy that tenants can get in front of a jury, and therefore have a lot of leverage in eviction cases?

No. And here’s why: Making it difficult to remove bad tenants means that landlords are/should be much pickier about letting in any tenant who might conceivably turn out to be bad. In practice, that means that landlords should avoid tenants who have have been evicted before, have bad credit, lack references, and / or can’t pay large security deposits.

Which tenants fit that description? Poor people. California’s well-intentioned courts have made renting apartments to poor people into a terrible business. You can’t make enough money charging affordable rents to make up for the losses that are the inevitable result of a few bad tenants failing to pay rent, then opting for jury trials in the event you go to court, and forcing you into expensive settlements.

Can you imagine a better way of doing things? I can:

  • Make arbitration clauses mandatory in residential leases
  • Collect a small fee from every landlord every year to pay the arbitration costs (so that individual tenants don’t have to pay for half the cost, as is customary in arbitration)
  • Give arbitrators the ability to order lock-outs, the way that courts can

Under my proposed system, it would be much easier to get a bad tenant out, making it much less risky to let a potentially bad tenant in. And, ultimately, that’s better for society: We should want a system where a poor person who can afford to make a reasonable security deposit and the first month’s rent can get a decent apartment, even if he’s had some problems in the past. We should want a system that makes it easier to give people second chances.

[Note: I am not a lawyer and this is not legal advice. That said, I spend do unfortunately spend a lot of time in eviction court.]

Written by mjkagan

07/25/2013 at 10:28 am

Possibly the most important thing you can put in a residential lease

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Here it is:

“If any legal action is brought by Tenant or Landlord related to this Agreement, the prevailing party shall be entitled to recover attorneys fees not to exceed $500.00.”

Why is this so important?

There exists a class of tenant advocacy lawyers who make their living in the following way:

  • Tenant fails to pay rent
  • Tenant receives notice to pay, still fails to pay
  • Landlord files eviction papers
  • Tenant gets one of these lawyers, who agrees to take the tenant as a client on contingency
  • Lawyer demands a jury trial for his client

So, the tenant has agreed to share something like 30-40% of any move-out payment he gets with his lawyer.

The lawyer, knows the following:

  • Cost of a jury trial to the Landlord is something like $10-15k, and this does not guarantee victory
  • In event there is an attorney fee provision in the lease, but it is not capped, the lawyer can claim attorneys fees of $20k in the event his client wins

In this situation, the landlord settles, because he’s trying to get his unit back and there’s no chance he’s exposing himself to tens of thousands of dollars in potential liability.

But, if you have capped the attorneys fees at $500.00, here’s the tenant’s lawyer’s situation:

  • If you go to court, his client is probably going to lose
  • He’s going to have to spend a lot of time fighting, and there is nothing in it for him (since, even in the event his client wins, s/he won’t be entitled to any money)
  • So, the only way for him to get paid for not working is to settle (in which case he takes 30-40% of whatever you pay the tenant)
  • If you are willing to push it, and refuse to settle easily, you’ll be able to negotiate a very cheap move-out

The one thing preventing you from using the strategy above is the legal fees on your side. As I sit here and write this, I’m thinking  that I should train myself to go through the court paperwork process up through the start of a jury trial. That way, the clock isn’t running on fees while we wait to go to court. In that situation, there is literally no reason to settle, so I would have great leverage to extract the best possible deal.

Actually, sounds like a plan…

[Note: Obviously, I am not a lawyer, and no one should treat this blog post as legal advice.]

Written by mjkagan

07/22/2013 at 1:31 pm

Leaving a dog?

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We just completed a move-out that came about as a result of going to eviction court.

As part of a settlement, the tenants who were under eviction agreed to move out, rather than face formal eviction / a judgment / etc.

These were not very nice people, to put it mildly, and we’re happy they’re out of our client’s building.

As a kind of parting gift to us, along with a ton of trash left in their unit, they left one of the pitbulls they had been breading in their backyard.

We’re obviously doing the right thing… we’ve got someone from the neighborhood who is going to adopt the dog. But, can you even imagine the kind of people who would just up and leave a dog?

Written by mjkagan

04/09/2013 at 11:15 am

University Park Rent Survery

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Today, we’re looking at rents in the USC University Park area. It’s an older neighborhood, centered on the University, with loads of old Victorian and Craftsmen homes in various states of repair.

Situated between downtown and South Los Angeles, there is easy access to the 110 and 10 freeways and the Expo Metro line.

Given the proximity to campus, much of the rental housing is geared towards students, pushing rents higher than usual for an area where the median income is under $20,000. Unlike many of the other neighborhoods surveyed recently, there is quite a bit of inventory, albeit at much higher prices.

Here are the highlights of our survey:

  • Median asking rent for one bed / one bath units was $1395 / month
  • Median asking rent for two bed units was $1900 / month.
  • Median asking for three bed /on bath units was $2,200 (the sole 3/3 unit was listed for $3,000)

Aspiring landlords in the area ought to remember that renting to students is not like being a normal landlord. You end up dealing with turn-over every year, loads of wear-and-tear on the assets, and rent collection issues. My strong advice if you’re thinking of becoming a student housing landlord is to get the parents to co-sign all leases and collect very large security deposits. Consider yourself warned!

The fine print: For our rent survey, we looked at apartments for rent in the area defined as USC University Park by the LA Times neighborhood mapping project. Here’s the raw data: University Park Rent Survey 3-12 (1) 

Written by mjkagan

03/14/2013 at 9:32 am

Eviction court

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Spent my morning at eviction court on behalf of one of the owners for whom we manage property. Not, strictly speaking, the highest value way I could be spending my time.

However, we try to manage properties the way we would if they were our own, and sometimes that means making no money and slogging through an eviction hearing.

You take a financial hit in the short term to improve the whole building for all the tenants (and the owner) in the long term.

Ancillary benefit: it does kind of excite the could-have-been lawyer I have buried in me somewhere. At least, it does in theory. Once I get under those florescent lights in 111 N. Hill St., will probably wish I was back at my desk running the numbers on some triplex in Atwater Village.

Anyway, wish me luck.

Written by mjkagan

03/05/2013 at 2:51 pm

Done and done

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Just finished leasing up a 5 unit Echo Park project we did with some partners.

Leased all units between Wednesday and Sunday night of last week at rents ranging from $100-250 above forecasts. Read that again.

On this deal, after paying us our fee, our partners own a brand-new, renovated apartment building for under 9x the rents. That blows away what anyone can get just by buying a building on the market.

Here’s an exterior pic:

 

Bellevue Exterior

And an interior:

Bellevue Kitchen

 

On to the next one…

 

Written by mjkagan

03/04/2013 at 11:45 am

Yet another inspector!

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A few days ago, I got notice of yet another type of inspection to which apartment buildings in LA are apparently subject. It turns out that the county Health Department makes it their business to inspect every building every year. Of course, despite owning and managing more than 20 buildings at various points over the past five years, this is the first I’ve heard of it.

I found out about this new kind of inspection because the inspector left a fairly annoying little form letter explaining that he had inspected a few units at a property I manage and that he was requesting that I make a few ridiculous repairs. Fortunately, the repairs he requested are cheap to do, so there’s no real reason not to do them.

I’m not opposed to the idea of inspections. There are plenty of jerky landlords who ought not to be allowed to own apartment buildings. But every building in the city is already subject to regular Systematic Code Enforcement Program inspections, so its pretty absurd to have yet another inspector coming through and asking for repairs. I kind of felt like telling him to get in line.

Anyway, just another example of the Kafka-esque world of Los Angeles real estate bureaucracy…

Written by mjkagan

01/08/2013 at 4:51 am

LA apartments need carbon monoxide detectors

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As of the 1st of the month, all Los Angeles apartments are required to have carbon monoxide detectors in addition to smoke detectors.

Regular readers know I’m not exactly the biggest fan of the way LA regulates landlords. That said, this one is kind of a no-brainer. There’s no reason people should be dying from problems the solutions to which costs $50.

If you own units and are trying to figure out the easiest way to comply with the regulation, my advice is to replace an existing, hard-wired smoke detector in each unit with a combo smoke/CO detector. A cursory search of Amazon shows a whole range of these available from around $35 a unit. The labor involved in installing shouldn’t cost you more than $5-10 / unit, or you can just do it yourself.

In case you’re wondering how the Housing Department plans to enforce the new regulation, my guess would be via the Systematic Code Enforcement Program (SCEP). That’s the controversial program where city inspectors visit each unit in the city roughly every three years. In years past, a SCEP inspector would write you up for missing smoke detectors; I’m sure missing CO detectors will just be added to the list of potential violations.

So go out there and get this sorted out for your units. You’ll think about it once and then never again. And let’s hope we save a few lives along the way.

 

Written by mjkagan

01/07/2013 at 6:55 am

Never let a tenant use the security deposit for rent

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Am helping a client close on a nine apartment building in Silver Lake tomorrow.

One of the tenants has given notice of his intent to vacate at the end of this month. When I reviewed the rent statemnt in advance of closing, I noticed that the current landlord allowed the tenant to use his security deposit as his last month’s rent.

This is a seriously terrible idea for the landlord. Why?

When you allow a tenant to use his security deposit as his last month’s rent, you are trusting him/her to vacate and deliver the unit to you in good condition. If he doesn’t, you’re going to have to eat the cost of any repairs, because you don’t hold a deposit and there’s no chance you’re getting any more money out of the tenant at the end.

And, to make matters worse, the kind of tenant who doesn’t have his act together enough to pay you the last month’s rent is exactly the kind of tenant you don’t want to trust to deliver you back your unit in decent condition!

So, what do you do when a tenant fails to pay rent on the first day of the last month of a lease? You immediately post a three day notice demanding your payment. Then, if the tenant doesn’t pay, you threaten to begin eviction proceedings and, if you still don’t get paid, you go through with your threat. Most people (sensibly) want to avoid have evictions on their records, so they will pay.

I know this sounds harsh, but the security deposit is not intended to be the last month’s rent. It’s your only leverage to ensure that the tenant returns your unit to you in decent shape. You’re running a business and you need to stand up for yourself.

Written by mjkagan

12/12/2012 at 4:21 am