Moses Kagan on Real Estate

Thought you might like to see what 1920s buildings look like when you rip them open.

When I say we gut our projects, I mean it.

This site is 99.9% for owners. But, because I’m always looking at rents in different neighborhoods, I sometimes come across very good rental deals.

The one I’ve linked to below isn’t one of our buildings (otherwise, the rent would be higher!).

It’s a huge apartment, with loads of parking, W/D, etc. in a fourplex in a decent part of Mid City, for a ridiculously low rent. And, it’s rent controlled. My guess is that whoever ends up moving in will never, ever want to leave.

I have no connection with the building. Think of this as a public service for the renters who read this blog:

http://losangeles.craigslist.org/wst/apa/3675907798.html

(Oh, and PS: This is why you hire professional management. This apartment should go for $200 more, which would mean adding $200 x 12 x 10 = $24k to the value of the building!)

We finished selling the Better Dwellings portfolio in December. I have been dealing with getting all of the cash out to the investors, closing the entities, providing a final accounting, etc.

This has, of course, occasioned some thinking about our strategy during 2008-2010, when the world was falling apart. Here are some of the lessons I’m taking away from the experience:

1. Keep dry powder. We were lucky in that I was able to raise a bunch of capital to buy stuff when the market tanked. Lots of people didn’t have any, so they couldn’t take advantage of the buying opportunity. Next time the market goes bad, I’m going to a few of the usual suspects and putting together a small fund to go bargain hunting immediately.

2. Buy when no one else is buying. This we did right… we were buying stuff in Silver Lake for $75-90k / door, which is totally impossible now.

3. Don’t be too picky. I rejected a lot of deals because the numbers were not quite good enough to meet our threshold. Now, I wish I had bought everything that was semi-reasonably priced, because all of those prices went up. If you hit the timing right, the other stuff can work itself out.

4. Focus on acquisitions, not re-positioning. I spent too much of my time improving the properties we had, instead of buying more. Big mistake. When prices are cheap, buy everything. You can always work on improvements later, when there isn’t as much to buy.

5. Never have to sell. Because I was in a rush to sell before the end of the year (for tax and IRR reasons), I allowed one buyer to chip price by a material amount, even though the deal was off-market. This was because kicking that buyer out of escrow and putting the property on the market would have dragged the process past the end of the year, and I didn’t want to do that. So I folded on price when I shouldn’t have.

6. Don’t sell anything if you can avoid it. Even leaving aside the price chip above, I wish I could have avoided selling. When you’re into a newly-renovated property at a very low basis, you are sitting on a gold mine. If you can avoid it, why give up the mine (and pay a lot of transaction fees to brokers and the government in the process)?

While I’ve never personally lost money on a deal (knock wood), most people in our business have, and I’m sure it will happen to me, too. When that day happens, I imagine that my investors are going to have two questions:

1. Did you do a thorough job investigating / underwriting the deal?
2. During the whole process, were you a good steward of our money?

I know damn well that we have #1 covered. After all, no deal gets done in our organization without Jon and my intimate involvement.  We may get things wrong, but it’s not because we weren’t careful.

It’s #2 where culture comes in. Inevitably, there are parts of each deal that Jon and I can’t do alone. We need bookkeepers, property managers, leasing agents, etc. to help us. And these people need to understand and buy into the idea that we are, at the end of the day, only in business because people trust us to be good stewards of their money.

If we screw up, that’s it. Career over. And I don’t plan on having another career. So everyone who works with us needs to get on board with the idea that we treat other peoples’ money as if it were our own.

We’re growing and looking to find great people for two new positions within our organization. If you recommend someone and we end up hiring her / him, I’ll pay you $250 or donate $500 to the charity of your choice.

Property manager:

• Help us manage a portfolio of approximately 100 units in the Silver Lake / Echo Park areas
• Keep the units full, the properties in good shape, and our owner delighted
• Some experience is preferred, but it’s actually not essential. Intelligence and a lot of energy can sometimes trump experience.
• Opportunity to help us continue to grow the business, with a real financial stake in that continued growth

Bookkeeper / office manager:

• Part-time position at our Downtown LA office (something like half-days, three days per week)
• Help us keep the books for our own properties, the investment funds we run, and the properties we manage for 3rd party owners
• Prior experience working with a property management or development company is required for this one

If you or someone you know fits the bill for either of these positions, get in touch.

Have been traveling the past week and have been lax about writing.

Am going to do a big post on what we accomplished in 2012 and then one setting out some high level goals for 2013.

Meanwhile, hope you had a wonderful holiday and best wishes for success in the New Year.

I’ve written before about how Prop 13 and rent control both slow down development.

Here’s a real life example: The shootings this weekend in Echo Park, one on Mohawk and the other on Echo Park Ave.

Echo Park has come a long way from its past as a real hub of gang violence in the 1980s and 1990s. However, there are still plenty of aging gangsters living in the neighborhood, some in the apartment buildings on Echo Park Ave. directly north of Sunset and some in single family homes on Baxter.

I know about the ones living in apartments because I walked away from an earnest money deposit a few years ago rather than buy a building where a bunch of them lived. It was an interesting building, one that definitely would have been a great project. In another city, you could just buy the building, ask the tenants to leave, renovate it, and, in the process, improve the neighborhood. But, because of rent control, there was no way for me to get the scary guys who lived in the building to move out, so I canceled the deal.

The single family homes are an example of the Prop 13 problem. A lot of these guys bought their houses in the 1980s for nothing. Prop 13 limits the increase in their property taxes, even though the values of their properties have increased dramatically. In another city, increases in the property taxes would presumably have forced these wonderful human beings to sell their homes. In LA, they get to stay in them and terrorize an otherwise-improving neighborhood.

Eventually, the gangsters will age out of the violent demographic, get killed, or go to jail. In the meantime, it would be nice to see the City Attorney’s office roll out some gang evictions (the laws are already on the books) to clear out those apartment buildings. Sadly, there’s not much you can do about the houses.

Regular readers know that I don’t necessarily hold my own profession in the highest regard. Yes, there are plenty of great people brokering real estate deals. But there are also tons of mo-mos. And, when I see a mo-mo move repeated over and over again, I get frustrated enough to write a post. So here goes…

The mo-mo move that’s getting my goat recently is brokers listing incorrect property sizes on the MLS. This often happens when a property comprises multiple structures. So, for example, for a property with three 1k sq ft detached bungalows, a mo-mo broker might list the sq footage on the MLS as “1k sq ft” instead of “3k sq ft”.

Why is this such a big deal? Many buyers use a price per square foot screen to quickly weed out over-priced properties from their searches. If the listing broker has mistakenly reduced the square footage of a property, it will be weeded out incorrectly.

For example: Say the property above was listed for $600,000. A buyer quickly cruising through the listings would see the $600k price and the 1k sq ft size, calculate a price per square foot of $600, pause for a moment to think “what a delusional seller”, and then quickly move on to the next property.

Had the broker done his job properly and listed the accurate square footage, the buyer would have calculated the square footage as $600k / 3k square feet = $200 / square foot, taken the time to examine the property closely, and possibly put in an offer.

What irks me about a broker who screws this up is that he is eventually going to get paid anyway. Eventually, a smart buyer is going to look closely at the screwed-up listing, realize that the actual price per square foot is reasonable, make a low-ball offer, and win the deal. The seller will be bummed about the low price but will probably sell anyway, never knowing that the mo-mo broker prevented him from getting more offers and, most likely, a better price.

A lot of times, the mistakes brokers make come from ignorance. This one is just failure to check work, or, in other words, incompetence.

Am looking for a lawyer who is also a native Chinese speaker to help me with a tenant negotiation in Los Angeles.

We’re probably talking about 3-6 hours worth of work total and I’d be willing to throw in a bonus for success.

If you know of anyone who might fit the bill, please shoot me an email or call.

Thanks!

This week, we’re looking at rents in West Hollywood. Keep in mind that West Hollywood is its own city, separate from Los Angeles and with its own rent-control law. Also, West Hollywood has historically had a fairly progressive view on development, meaning that the city is dense and there are lots of apartments.

All of that said, let’s check the rents for November 2012:

• Median rent for a studio apartment was $1225 / month, with 50% of the units having parking
• Median rent for 1 bed / 1 bath apartments was $1599. There was quite a range – the cheapest 1/1 was $1195 and the most expensive was $3550;
• Median rent for a 2 bed / 1 bath was $1900. Supply was limited, with only nine units on the market when we checked.
• Median rent for 2 bed / 2 bath was $2298. Almost all units had parking and there were plenty to choose from, with 34 units on the market
• Finally, for families, there were five 3 bed / 2 bath units on the market with a median rent of $3200.

The fine print: Our survey was based on a search of Craigslist apartment listings using the keyword “West Hollywood” on 11/4-5/2012. We checked all addresses to ensure the units were in West Hollywood (as defined by the LA Times neighborhood mapping project); any units without an address specified were removed from the survey. For the raw data, click here: Final West Hollywood Rent Survey – Nov. 2012