More on dumb brokers

Further to my earlier post on dumb brokers:

I am working with a couple now who came to me through this blog (hi guys!). They were previously working with another broker who had them in contract on a small building in the Miracle Mile area.

The broker they were working with neglected to inform them that the property was in REAP (the Los Angeles Housing Department’s “Rent Escrow Account Program”), despite having been informed himself by the listing broker.

Let’s pause for a moment to review the consequences of buying a property in REAP:

  1. There is a cloud on title placed there by the City of Los Angeles preventing you from re-selling the property;
  2. Some or all of the tenants are paying 50% of their rent into a city account instead of to you;
  3. Despite this decreased cashflow, you need to fix all of the issues with the building, requiring you to pay both for the actual work and the cost of permits through LADBS;
  4. Once everything is fixed, you need to go through two rounds of inspections, one by an outreach contractor and one by LAHD;
  5. Once you pass the inspections, the city council has to vote your property out of REAP;
  6. While this is going on, the city is billing you a REAP administration fee of something like $50 / unit / month, plus extra for additional LAHD inspections;

In short, for a mom-and-pop investor, having a property go into REAP is a disaster. It’s not just because of the money involved in solving the problems and getting the property out. The aggravation from dealing with two different city departments, two different inspectors, etc. is enough to give even an otherwise healthy adult a life-threatening stomach ulser.

If you’re an experienced multi-family broker in LA, you know all about the REAP program. If you’re a numbskull, you don’t, and you put your clients in danger of losing a lot of money and years off their lives.

You know what the amazing thing was? These are such nice people that they felt bad about stopping work with the agent in question, because he’s a friend of a friend. That’s, like, Mother Theresa territory. I’d be prepping the tar and feathers, but that’s just me.

Buying REOs (bank-owned properties)

Recently, I’ve written offers on REOs (“real estate owned” – this is short for “owned by a bank because they foreclosed on the last owner”) for three readers of this blog. A lot of people are interested in these kinds of properties, either as potential flips or to fix up and hold as income properties. Why? Because they’re generally cheap.

But here’s the problem: Everyone knows that REOs are cheap and can be good deals. When we were buying in 2009-10, there was little-to-no competition. Now there’s tons. So your offer needs to stand out from the crowd.

If you want to buy an REO property (and especially if you want to work with me to do it) here’s what you absolutely, 100% have to do:

1. Come in strong

This isn’t 2009 when the banks were desperate to sell and there were no buyers. There are a hundred other guys just like you, with the same amount of money you have, who can all see the profit to be made in the deal. So you’re not going to steal the property. Figure out (or let me help you figure out) what the maximum amount you can sensibly pay is and offer that. There’s no prize for making 100 offers on properties and never getting one.

2. All cash offer with proof of funds

Put yourself in the position of the asset manager at the bank. Imagine you have 20 offers all around the same price. Are you going to accept the offer from the guy who’s offering all cash or the one who is offering to put down 20% and then hopefully get a loan? You know the property is in bad shape; you suspect that a lender might balk at loaning on it. So your answer is obvious: choose the guy offering all cash.

3. Short contingency period

Once a bank decides to sell, they want the property gone yesterday. The listing broker also wants the thing gone and his commission paid. So you can’t ask them to let you tie up the property while you take three weeks to make up your mind. You need to offer to remove contingencies after seven days. I know this sounds crazy; that’s why you need to work with a broker who comes prepared to help you evaluate the opportunity quickly and thoroughly. When I do one of these deals, I have my entire inspection team there, all at once, within a day or so of going into contract.

4. Quick close

If you’re buying all cash, there’s no reason to extend escrow much beyond the end of the contingency period. After all, all you’re doing at that point is wiring in the cash and closing. So I recommend offering to close in 14 days total (including the seven day contingency period).

Remember: Even if you do all of the above, you’re still going to miss on most of the REO properties you bid on. But, when you do get one, it can be like a license to print $50-100k. Not bad, right?

Brokerage Etiquette

I’ve got an offer out on a 4 plex for a couple I’m working with.

It’s a pretty amazing REO (bank-owned) property in Miracle Mile. Knowing that the list price was a bit low for the area, we offered $115,000 ABOVE list for the property. We also jumped through a series of increasingly annoying hoops set up by the broker, including, inter alia,¬†writing a letter setting out the comps for the property and guaranteeing that we’d make up in cash for any shortfall caused by the property’s failure to appraise.

It’s been around 10 days since we put the offer in and we haven’t heard a word from the broker, despite following up 3-4 times by phone and email.

I know that REO brokers are busy people, because they have loads of listings to service and offers to review / counter / etc. But some of them manage to do a great job of communicating throughout the process. And, of course, some of them (like this guy) are pretty lousy. And because they do a lot of volume, the bad ones can manage to alienate a lot of people over time.

I wonder if, over the long term, alienating a lot of other brokers is bad for business?