Welcome, new readers!

Did you come here from the always-excellent Eastsider LA blog? Welcome!

As you’ll see from reading through the posts here, I am 100% focused on the business of apartment buildings, primarily in Northeast LA (East Hollywood, Silver Lake, Echo Park, etc.).

If you’re reading, you probably own buildings already or hope to in the future. If that’s the case, I’d love to share my experience of buying, renovating, and managing more than 100 units in NELA over the past four years. Get in touch!

My contact info is here. Or, to find out about interesting apartment deals, join the mailing list here.

Why you need to request estoppels on every apartment deal

Section 9C of the current California Association of Realtors Residential Income Purchase Agreement (“RIPA”) contains a check box which the buyer must check in order to require the seller to provide tenant estoppels as part of the sale process. Make sure you check it. (And if your broker doesn’t check it for you, get a new broker!)

What’s an estoppel? It’s a form filled out and signed by the tenant that shows the tenant’s understanding of the terms of the rental agreement. It shows things like the monthly rent, the security deposit, any special rental incentives the tenant received from the landlord, etc.

Why is this so important? When you buy an apartment building, you’re buying a business. The value you pay for this business is based on the income it generates. When you write an offer on a building, you are basing your offer price on the rents the seller tells you he is getting. But you can’t be certain that the seller is telling you the truth.

Estoppels let you get at the truth. Once you have the completed estoppels, you compare them to the rent roll provided by the seller before you went into contract. If the actual rents are lower than the rents the seller advertised, you should demand (and receive) a credit against the sale price of the building.

How much of a credit should you get? Well, a good place to start would be to get a reduction equal to the GRM you offered multiplied by the annual amount of missing rent. So, if your offer price was equal to 11x annual rent, and you find out that the building is generating $100 less per month than advertised, you should ask for $100 x 12 months x 11 GRM = $13,200.

That’s a big credit, but that’s how much the missing rent impacts the value of the building. See why estoppels are important?!

Echo Park rent survey – May 2012

Just completed our semi-regular rent survey for Echo Park north of the 101, and the results are pretty interesting:

  • Median asking rents for 1 bed / 1 bath apartments was $1,450, up a whopping 26% since February
  • Median asking rents for 2 bed apartments was $1,995, down by 15% compared to February
  • Median asking rents for studios was $1,043, basically unchanged from our February survey
  • The three 3 bed / 2 bath rentals available ranged from $2,590-3,195

A few other observations:

  • As of May 25, there were only 24 units on the market in Echo Park north of the 101. That’s a really small number given Echo Park’s name recognition.
  • Many of the units look to have been renovated recently. It looks like word is (finally!) getting out among property owners that tenants are willing to pay for higher quality product

The fine print: As always, our survey looked at Craigslist postings tagged with the name of the neighborhood (in this case, Echo Park) and cross-checked against the LA Times neighborhood map. In this case, we arbitrarily removed the piece of Echo Park south of the 101, which has very different demographics and rental rates. Here’s the raw data: Echo Park Rent Survey – May 2012

When to refuse rent from a tenant

You might think that your job, as a Los Angeles landlord, is always to get your tenants to pay rent. And you’d be wrong.

There is one situation where you absolutely do not want to accept rent from your tenant under any circumstances: When you have a tenant you want to get rid of and the tenant has done something which may give you the ability to get rid of him.

For example: Say your tenant doesn’t pay rent on the 1st of the month. You post a “3 day notice” (which basically says, “pay rent within three days or move out). Three days elapse without the tenant paying rent. On the fourth day, you should not, under any circumstances, accept rent from the tenant.

Why? Because accepting rent from a tenant in that situation could be viewed by a judge as you implicitly ratifying a new lease with the tenant. By accepting the rent, you are saying “I understand you failed to do what you were supposed to do (in this case, pay rent within three days of receiving the notice) but I am accepting your continued tenancy in my building.” Obviously, that’s not what you want to say.

How do you refuse to accept the rent? You photocopy the check for your records, then send it back via registered mail (return-receipt requested) along with a letter telling the tenant you are refusing to accept the rent. Then, you proceed with whatever action you are going to take (in this case, presumably initiate an unlawful detainer / eviction action).

One more thing to keep in mind: It’s not enough for you to personally understand and internalize the above. You also need to ensure that your entire organization (bookkeeper, property manager, etc.) is clued in. Because it’s super easy for an oversight by someone who works for you to cost you the ability to get rid of a bad tenant.

[Note: I am not a lawyer and the above is not legal advice. If you need help evicting a problem tenant, I recommend you get in touch with Dennis Block.]

One phrase you want to include in all apartment offers

Almost all contracts for the purchase and sale of apartment buildings in Los Angeles are created using the standard California Association of Realtors (CAR) form.

Overall, I believe the terms of this standard contract are pretty fair for both buyers and sellers (with the exception of the seller’s ability to tie up the buyer’s deposit in bad faith – but that’s another story).

But there is at least one item that I don’t like: The ability of the seller to lease units in the property during escrow. Here is the relevant language, from section 11A of the Residential Income Purchase Agreement:

“A. Prior to Close Of Escrow, Seller may engage in the following acts, (“Proposed Changes”), subject to Buyer’s rights in paragraph 18B: (i) rent or lease any vacant unit or other part of the premises; (ii) alter, modify or extend any existing rental or lease agreement; (iii) enter into, alter, modify or extend any service contract(s); or (iv) change the status of the condition of the Property.

B. At least 7 (or ) Days Prior to any Proposed Changes, Seller shall Deliver written notice to Buyer of such Proposed Changes.”

Now, as long as the actions take place during the contingency period, the buyer does have the right to walk away from the deal if the seller does something really objectionable. But the problem comes from middling scenarios. Here’s the worst one: The seller rents a vacant unit in the (rent-controlled) property for less than it’s worth.

The buyer was presumably counting on leasing the unit at market in order to justify the agreed purchase price. And once that new tenant has signed a lease at a below-market rent, it’s almost impossible to remove him. So the real value of the building has gone down from the buyer’s perspective. But the buyer has already committed time and money to the buying process and may feel compelled to move forward with the purchase.

In order to prevent this from happening, I like to insert the following text in the Section 16D “Other terms”:

“Notwithstanding anything to the contrary contained herein, during the escrow period identified in section 18B, seller shall not sign a lease on any unit in the property.”

Risk averted.

N.B.: I’m not a lawyer and this is not legal advice.