Benefiting from a lazy agent on the other team!

The world is full of good real estate agents and bad real estate agents. It is the luck of the draw when you enter into a transaction which one you will deal with, and what side of the transaction they will be on. We were fortunate to encounter a lazy agent on the seller’s side of our Wilmington Blvd. deal. After the initial walk thru we never heard from or saw the agent again….

In 2001 the market for income property was a bit soft with the giant gains far off in the distant future.10% down payments for investors on 2 to 4 units had just come into play. In our current environment it is 25% down or more.

I was searching the Multiple Listing service daily looking for our next deal, and out of the blue popped 4 units for $229,000 in Wilmington, our target market. In the remarks section of the listing sheet the agent stated the rents were low due to rent control. The building was grossing $26,400 per year. The price reflected an 8.67 Gross rent multiplier, (Annual rental income divided into price = GRM). The remarks also mentioned an illegal 5^th unit. I had been doing quite a bit of research on rent control for other buyers and the fact is any building constructed prior to November 1978 is rent control. The occupancy certificate on this building showed 1979.

The building was actually constructed in 1960 as 5 units and moved to its present location in 1979, when the owner simultaneously converted it to a legal 4 units. Had the listing agent gone to downtown L.A he would have found this out; all the permits for the conversion were on the record.

We immediately offered somewhere in the $220,000’s, and ended up at $225,000. We met the original owner at the walk thru. He was a sweet old man. I felt bad for him having selected this selling agent.
I rounded up 3 partners who each put in $8,500. I contributed my commission. We took over the building with a “tenants in common” ownership structure. I still have the agreement if you would like a copy. We turned the management over to Sherri whom we had used before on Sanford.  We closed down the 5^th illegal unit and merged it into one of the 2 bedroom units making it a 3 and one. The unit mix was great, two 3 bedroom one bath, and two 2 bedroom one bath.

The owner had not registered with rent control department in L.A. so we were free to fix up the building and raise rents. We went from a $26,400 gross annual income to $48,000 in the first 18 months.
The market was heating up in 2004, to the point where the gross multipliers had increased from 8’s to an average of 13’s.  I was concerned we were topping and we would not be able to hold on to our gain. We sold the building we purchased for $225,000 3 years later  for $664,000, a 13.8 GRM, We did a 1031 tax deferred exchange with our profit.


When you combine 10 to 1 leverage with increased rental income and increasing rental multipliers you can have a tremendous gain in relation to your down payment. Every once in awhile you hit one out of the park, and that is what we did on this deal!

Part two- Taking over the building and selling at profit

Taking over: The tenants were a pretty tough breed. At the time I was too intimidated to even attempt to manage the building on my own. Funny enough, I currently manage 54 units. I had heard about a good management company that was a perfect fit for the building. Call me if you need the name of a great management company in the South Bay area of Los Angeles. Anyway, Sherrie, the owner, agreed to manage our building. At the time I think rents were averaging $365 per month for our 500 Sq.Ft 1 bedroom units. Sherrie ran the building for a year with no dividends, but we did not have to put in any repair funds either. She was able to do all the repairs out of cash flow and run the building at about 95% occupancy.

Roughly 18 months into our ownership, all four partners started receiving monthly dividend checks. The dividends started at a few hundred per month and by year 4 we were each receiving $500 per month. Sherri had the building grossing over $120,000 per year and our average rents were up to $500 per month.

We had been fixing up the building out of cash flow and that was going pretty good. We did not expect the health inspector to drop by. In our case, the health inspector stood on the sidewalk and the tenants lined up with complaints and requests for new carpet, new kitchens and on and on.

We received a repair demand from the health department totaling roughly $30,000. It took a 3 man crew about a month to complete repairs. Fortunately for us we now had some equity in the building; we had been spending the cash flow. We made a decision to refinance the building, pay for repairs and take some cash off the table. We did the repairs and the four of us split $80,000.

During my pleading for extra repair time, I found myself in downtown L.A. at the “hearing room.” I was amazed at the amount of new (foreign language speaking) landlords that found themselves the new proud owner of a “rent control building.”  Over and over they voiced the same complaint: “the real estate agent never told me it was rent control!”  

We decided to put the building on the market in 2004. We sold the building for $1,040. I felt like a genius and the partners could have not have been happier. We sold to an experienced flipper fluent in the Spanish language. He added an on site laundry facility and started improving the units. He would knock on each tenant’s door, ask the tenants if they would pay an additional $50 per month if their unit was repainted and they got new carpet. The tenants went along with the program and over the course of a year between the increase in rents’ and laundry income our flipper put the building back on the market and sold it for $1,500,000! I did not realize the last half million was on the table when we sold the building to the flipper, but the market was heating up and he cleverly increased the gross income.

There is a lot of serendipity in each and every real estate deal. You start the process and roll with the punches. Sometimes it goes your way and it turns out great as in the case.

Should you have a interesting real estate purchase story to share please do. No fibbing!