Off-Market Duplex Los Angeles -- Deal or No Deal?

Question

Hi BP,

First-time investor, new to BP.

I've been searching for a Duplex/Triplex to be my first RE investment in Los Angeles. My plan is to purchase as Owner-Occupant (FHA), rehab and add the max number of ADUs, bring rents to market and hold. I work as an architect, and am very familiar with the value-add process, permitting and construction.

A potential deal fell into my lap and I'm wondering whether it's worth proceeding with.

Brief Summary:The property was listed and taken off the market after it failed to sell for $720K. The owner informed a real estate professional friend of mine (who's company is managing the property), that he would absolutely sell if my friend could find someone willing to pay $660K. Comps for similarly sized remodeled duplexes with ADUs in the area clock in between $1.2M and $1.4M.

The Catch:Property is RSO with both units occupied. Currently pulling in $2K rent combined. If the current rents are maintained, I'd be losing about $2400/mo with my mortgage, MI and taxes. I don't currently have the cash reserves for the significant relocation payments that HCIDLA will require. It also seems I'd be on the hook for them anyway, even if I manage to get an Owner-Occupy eviction. Plus...the eviction moratorium right now.

Unless the current owner delivered the units vacant, I really don't see any way this pencils out.
It's a real shame because I'm insulated from the mad bidding wars going on here and could actually pay a fair price.

Am I just in denial of the obvious at this point?Or is there something I'm missing?

Thanks for your input!

Shiva Bhaskar · Answer

Hi Peter, as @Jon Schwartz said (and you know) the reason this is selling for that discount is that both tenants are in at such low rents. In normal times, you could look at doing an eviction which is not due to tenant's fault (owner occupancy of a unit is grounds to move out a tenant, though you owe relocation fees in most cases).

Right now, it's tougher. One option is to put it under contract with a contingency that you're able to negotiate a buyout of one unit during escrow. Since in Los Angeles, tenants have a 30 day period to back out of a buyout, you'll need a longer escrow period. Seller may agree to it given the issues he's having with selling.

You will need a nice chunk of cash though. If you like, having an attorney or tenant buyout specialist negotiate with tenants can help. I know two who are quite good, and have done this many times before. If you want to send a colleague request, can share their information, and you explore your options with them.

We do cash for keys often, but these are on somewhat larger properties, and we have a longer timeframe to reach an agreement. Doing it in a shorter period of time is possible if you're willing to pay.

Jon Schwartz · Answer

@Peter Trettl, hate to say it, but you're in denial of the obvious. The duplex is available for $660K because it has tenants paying a combined $2000/month. If the seller could vacate the units, he would, and then he'd sell the property for $1M.

Without a vacant unit for you to occupy, you won't get approved for an owner-occupant loan. With owner-occupant relocations on hold due to the moratorium, and you don't have a good path to getting this property with an owner-occupant loan.

Also, earnest question here: if you don't have cash for relocation fees, how will you get cash to renovate and build two ADUs?

Best,

Jon

Charles Renn · Answer

@Peter Trettl, Thanks for asking. This includes principle, interest, taxes, and insurance. This isn't a safety margin, but a requirement through FHA for 3 & 4 unit properties. Let me know if you have any further questions.

Peter Trettl · Answer

@Charles Renn That's good input for a safety margin, I'll keep that in mind. When you say 'mortgage' are you referring to all expenses (mortgage, taxes and insurance) or just the principal/interest?

Charles Renn · Answer

Hi @Peter Trettl,

Lots of great advice here. If I can add anything, if you find another deal, 3-4 unit properties, keep in mind that the property must pass the sustainability test: 75% of market rent must cover 100% of the mortgage. Another result of the panademic.

Hope this helps!

Peter Trettl · Answer

Thanks for the reply @Jon Schwartz

Sounds like it’s just what I suspected.

As for the rehab money: I have some limited friends and family funding I can tap into.

But since that isn’t a bottomless pocket, I’d prefer to use that for actual capital improvements, not relocation fees.

Off-Market Duplex Los Angeles -- Deal or No Deal?

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