Should I buy my grandparents house and put multifamily units?

Question

Hello,

I have a question about a business decision. My family wants to sell my grandparents home in Los Angeles it will be split between all the kids (grandchildren if the parent is no longer living). They are liking on Zillow and seeing a 800k price and want that split 8 ways.

About the property: No maintenance has been done on the property for over 20 years, the property is over 100 years old, 2 bed 1 bath, the chimney is falling off, the basement is flooded and the roof is sunken in. and it is near USC.

Goals: To build a multi-family apartment since I do not believe it is worth it to remodel the house.

I am confused on what is the best strategy to take. I know that I want the house appraised to get the true value of the property as well as what needs to be repaired as well as what it would cost to build a multi-family apartment. Any insight or help would be much appreciated.

Dan Sundberg · Answer

Like many of the other folks who have posted here, I think the answer depends on your experience level. Sounds like a high risk high reward type project. Pulling off a multi-family development in LA near campus could be super profitable, but will probably take a few years and an intense amount of money.

If you are a relatively new investor, and assuming you are 1 of the 8 inheritors, it would be better in my opinion to sell the house, and take your $80k - $100k as a seed fund to invest in single family and small multi-family deals. This way you could get your money working much faster and start doing projects that will let you build experience to take on progressively larger projects.

Scott Krone · Answer

@Samuel Gates - A number of years ago, our family went through this as well.  The back story.  I had purchased the property adjacent to my grandparents property.  We tore it down, built new and sold it.  When it came time to sell my grandparent's property, I suggested we tear it down, build new, and sell it.  Based upon the market the property was worth "X", our construction costs would be "Y", and we could net an additional "X" in profit.  To be clearer, if we sold "As Is", we would net "X".  If we developed, we would yield "2X".  In my mind, a home run, and it would benefit everyone in the family - grandparents, parents, and grandchildren.

Two problems:  1.  all parents were not on board (felt it was too much risk), and 2.  grandparents were offended that their property would be considered a tear down.  In fact, my grandmother scolded me and punched my shoulder when I suggested we tear down the property.  Fortunately, she was 90 so it didn't hurt : )

What really happened:  After the discussion, the property was put on the market, and sold in one day - cash for "X".  A developer bought it, tore it down, built new and sold it for the same value as I projected.  What we discussed occured exactly as predicted except the family lost out on an additional "X" in value.

The real kicker is 5 years later, when we were talking about the market, and what had transpired with the property, my grandmother chimed in, "Why didn't we build and do it ourselves?"  It took all that was in me, not to fall off my chair.

So the moral of the story.  Account Closed , and others make good points about zoning, experience, and working with a developer.  Nevertheless, unless everyone in the family is on board, it will be hard to move forward.  In our case, we were talking about an immediate sale.  Managing a MF asset for a duration of time adds another level of complexity.  Is it a good idea:  sure.  One that merits exploring.  In our scenario, I didn't see the same risk as the others, because in my mind we had "X" value of margin to break even.  If the property is held longer, risk and who the asset benefits can become more complex.  For instance, who holds the note, is there a guarantee, who manages, is there a fee for managing, when do you pull out cash, or do you just cash flow the asset.  These are the questions most family offices work through because as you get to different generations, the goals and objectives for the various family members begin to diverge.

Hope this story helps and if not a bit humorous for you!

Robert Starnes · Answer

Samuel Gates:

Have you considered taking on a partner to help you develop such a multi family project as you describe? That may be a good way to get it done. That way you or your family would retain the land (Think land lease) and have an equity stake you could negotiate in the building with a developer. Possibly something like ownership of several of the completed apartments in the finished building that you could own and live in or just rent out?

I do agree with other posters that CA is a hard area to develop in, but I think it could be done well and profitably if you took your time, got excellent legal advice and your family could either be bought out or would sign iron clad agreements to go along with the venture.

This could be an excellent way to develop a long term, multi generational wealth asset instead of a one time < $100k payout.

Good luck to you! Let us know what happens!

Seth Borman · Answer

Sell it as is. Find a broker that does deals like this, get all the due diligence information that he thinks you need, and list it.

Tom O. · Answer

In LA, it would be incredibly expensive to build a multi-unit building. Generally, new RE investors start by buying a small multi-unit and fixing it up and leasing it or selling or re-fiing it to get their money out and repeat. Or do a few light flips to get the hang of rehabbing costs.

But for a noob investors to say "I want to build a multi-unit building" in a place like LA it's like going to Hollywood, walking into a studio and telling them you want to star in a major action film.

My advice:

1. Start small.

2. Start somewhere affordable. Not LA.

3. Read David Lindahl's book "multi-family millions."

Should I buy my grandparents house and put multifamily units?

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