Strategy to purchase and flip property in Los Angeles

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Strategy to purchase and flip property in Los Angeles

KJ L.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 210 posts · 155 votes

Hey BP, 

So I live in Los Angeles, land of Rent Control.. There are rent control buildings that have hit the market and they sit for a really long time because either the seller doesnt want to the reduce the price enough to cover the cost of eviction (usually $30k per unit) or buyers want the property delivered vacant which drags out the RE transaction process.  In South Los Angeles, there are once-beautiful craftsman style duplexes and triplexes that resemble a large single family home (units are on top of each other and not side by side) and there are two of these down the street from us. 

My understanding of rent control is that you can you evict tenants to remove properties from the rental market in California via Ellis Act. After doing some researching this is what I've found: 

The “Ellis Act” is a state law which says that landlords have the unconditional right to evict tenants to “go out of business.” For an Ellis eviction, the landlord must remove all of the units in the building from the rental market, i.e., the landlord must evict all the tenants and cannot single out one tenant (for example, with low rent) and/or remove just one unit out of several from the rental market. The Ellis Act is included in the just causes for eviction under the Rent Ordinance.

Ellis Act evictions are for the purpose of going out of the rental business. Ellis evictions are used to convert rental units to condominiums, using loopholes in the condo law. Also, Ellis evictions are used to convert multi-unit buildings into single family homes.

So here is my question: Has anyone in Los Angeles or in California used Ellis Act to evict/remove a multifamily property to convert into a rehabbed SFR to sell or occupy? Has anyone conducted Ellis Act to convert the property into condos? Can you describe the process and/or timeline? Thanks in advance!

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Seth Borman
Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes
7y

Following!

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  • Seth Borman
    Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes
    7y

    Following!

    5Reply
  • Brandon Foster
    Los Angeles, CA · Member since 2015 · 69 posts · 75 votes
    7y

    That's a really good question.  I was wondering the same.  

    2Reply
  • KJ L.
    OP
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 210 posts · 155 votes
    7y

    @Brandon Foster @Seth Borman Ha I'm still waiting for responses. 

    0Reply
  • Brandon Foster
    Los Angeles, CA · Member since 2015 · 69 posts · 75 votes
    7y

    Well @KJ L. we are eagerly awaiting a response as well.  And remember, if you don't get a response maybe this is a technique that hasn't been used.  You'll be a pioneer. 

    1Reply
  • Brandon Foster
    Los Angeles, CA · Member since 2015 · 69 posts · 75 votes
    7y

    Still nothing huh?

    1Reply
  • KJ L.
    OP
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 210 posts · 155 votes
    7y

    Lol Maybe no one has done it? 

    0Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    7y

    @KJ L.

    CA as a whole is way too renter friendly for me, personally, to try anything like that. Just had a family member lose a property because tenants said he was discriminating based on race even though rents were raised across the board. (Primarily Hispanic tenants and they said he wanted to push all Hispanics out). He fought it for a while via a lawyer and courts but eventually it became too costly. He sold the property and cut his losses. It could work, it could bite ya. Dot your “I”s and cross your “t”s if you decide to go for it. If nobody has done it.... there might be a reason why. Good luck!

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    Never did that in L.A. but I did in NYC in 1977.  Laws change A LOT since then, we had to offer existing tenant his unit as a condo at a large discount; he didn't buy but was able to flip the unit to the end buyer.  We received about 30% less than the price we would have if we wholesaled the unit, and 40% less than retail.  As far as I'm concerned it's property confiscation with the government taking property from an owner and giving it to a tenant.  Just like rent control, rent stabilization etc.  Im not talking about voluntary rent control where a property owner voluntarily makes a deal with the city to provide below market rentals in exchange for tax breaks, right to build more units, etc.  Im talking about government seizure of privately owned property rights.  In the 1972-1988 period it was estimated that over 50% of the housing units in The Bronx, NY were either abandoned or burnt down by their owners because the rent control laws had rents priced far below the cost of ownership, not even including any debt service.  How any of this has not been declared unconstitutional by the Supreme Court is beyond my comprehension.

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  • KJ L.
    OP
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 210 posts · 155 votes
    7y
    Originally posted by @Don Konipol:

    Never did that in L.A. but I did in NYC in 1977.  Laws change A LOT since then, we had to offer existing tenant his unit as a condo at a large discount; he didn't buy but was able to flip the unit to the end buyer.  We received about 30% less than the price we would have if we wholesaled the unit, and 40% less than retail.  As far as I'm concerned it's property confiscation with the government taking property from an owner and giving it to a tenant.  Just like rent control, rent stabilization etc.  Im not talking about voluntary rent control where a property owner voluntarily makes a deal with the city to provide below market rentals in exchange for tax breaks, right to build more units, etc.  Im talking about government seizure of privately owned property rights.  In the 1972-1988 period it was estimated that over 50% of the housing units in The Bronx, NY were either abandoned or burnt down by their owners because the rent control laws had rents priced far below the cost of ownership, not even including any debt service.  How any of this has not been declared unconstitutional by the Supreme Court is beyond my comprehension.

    Thanks for your response! We've been asking our eviction lawyer about suing the city  of Los Angeles for regulatory overreach with some of the new laws regarding rent control and the airbnb regulations. Did landlords in NY sue the city or use other means (other than burning the buildings) to fight rent control? 

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    Well, never successfully.  Rent control is actually a New York State law, that municipalities with populations in excess of 6 million can adopt. LOL.  It started as a temporary law to deal with the housing shortage in 1946 due to returning soldiers, and since it only applied to properties built befor WWII it was suplamented by rent stabilization for properties built between 1946 and 1973.

    The AirBNB regulations are of course more recent.  Essentially, municipalities have legislated minimum rental periods for home rental, usually 30-60 days.  Combination of misguided socialistic housing advocates and hotel industry and some large apt owners have pushed this legislation.  All a taking of property rights by the government.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    2Reply
  • KJ L.
    OP
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 210 posts · 155 votes
    7y

    This post does not request information on how to "skirt" HCIDLA/RSO. It is not illegal to conduct condo conversions nor is it illegal to Ellis Act a property as long as the rules are followed and the property isn't turned into a rental within the 5 year time period. The question is whether someone has taken a RSO multifam, Ellis act/evict tenants and converted property into an SFR and if so, share their experience.

    1Reply
  • Brandon Foster
    Los Angeles, CA · Member since 2015 · 69 posts · 75 votes
    7y

    Yeah I think @Account Closed is right.  It's not worth the headache even though there's nothing illegal about it.  I can see why many landlords would prefer to invest in other states rather than update the properties they have in Los Angeles.  It's disappointing to drive around Los Angeles and see so many properties in rent controlled areas in disrepair.  The main question should be how do we get tenants to become owners rather than just keeping them tenants their whole lives. 

    0Reply
  • Eric Carr
    Real Estate Broker · Los Angeles, CA · Member since 2017 · 658 posts · 293 votes
    7y

    Might have ultimately been answered but check this out

    The Ellis act has been used to vacate a building, to perform substantial rehab and work, but more often than not, to essentially tear down and build more density. The city has requirements to replace a certain percentage of RSO units in the new building. 

    You can offer cash for keys, offer they payout you described, however, the tenants are not required to accept the offer. You can also vacate a single unit by paying someone to move out if you or immediate family intend on occupying a unit, I believe the same goes for an onsite manager. Now if you and all your family try to do this, I'd expect to have issues. 

    When you use the buyout to occupy method, you have to take the property off the market for something like 5 years. I believe the same sort of thing applies to the Ellis act. If you decide to rent before the 5 year term is up, you have to offer the unit to the previous tenant, at their last rental rate, first. 

    a lot of the homes you described started out as single family homes. You can use the Ellis act, however I would expect a lot of costs, possibly court costs. And if any of the tenants are in a protected class, your payout costs go way way up.

    1Reply
  • Alvin Uy
    Rental Property Investor · Los Angeles · Member since 2019 · 284 posts · 184 votes
    7y
    Originally posted by @KJ L.:
    Originally posted by @Account Closed:

    @KJ L.

    I've seen you posting on these forums multiple times with questions regarding evicting tenants in rent controlled properties for profit in Los Angeles.

    I live in LA, I rent in LA, and I'm well versed in tenants rights as well as what groups they can contact for help when dealing with rent control flippers.

    I'm sympathetic to real estate investing for sure- but when it comes to trying to skirt HCIDLA and the rent control laws, not only is it lousy for the tenants of this city, you are playing with real fire, especially if you do this with the wrong tenant or make a pattern of it. 

    Pursuing this as an investing strategy will open you up to being sued as soon as you run into a determined tenant who reaches out to the right organizations. I know this first hand, from a tenants perspective. Our lawyers were incredible and didn't charge us until we won.

    The fraud and retaliation lawsuits alone will cost you enormously more than the 30k you were thinking for eviction costs. 

    If you owner occupy a rent controlled unit in Los Angeles and that tenant follows up correctly, and you do not live there as your primary residence for 2 years, or sell it before then, their lawyer will sue you for fraud. 

    Regarding Ellis Act Evictions, talking to your attorney, calling the city, or even a little googling will show you that the property will have to remain off the rental market for 5 years. 

    "Ellising" a building to turn into condos is not exactly rare, but you'll have to deal with the city for permission and they will be taking local vacancy rates into consideration. Again, with determined tenants, you will be looking at a long and expensive fight, even if you can pull it off.

    Do what you want, but there are plenty of non-rent controlled properties for you to invest in, and if you insist on trying to flip rent controlled properties, get a good lawyer. Best I can advise you.

    For anyone else in Los Angeles who is a tenant in a rent controlled building, dealing with landlord evictions/problems, feel free to contact me regarding where you can go for rock solid, experienced lawyers with excellent track records in court vs landlords. You may be surprise what rights you have, how effective the tenants groups can be, and the quality of legal representation available to you if you choose to pursue it. 

    This post does not request information on how to "skirt" HCIDLA/RSO. It is not illegal to conduct condo conversions nor is it illegal to Ellis Act a property as long as the rules are followed and the property isn't turned into a rental within the 5 year time period. The question is whether someone has taken a RSO multifam, Ellis act/evict tenants and converted property into an SFR and if so, share their experience.

    I was this close to doing this..... I found a duplex not too long ago in Eagle Rock that was on the market with Ellis Act invoked by previous owner to remove tenants.  Though it was a good deal below market price and "all cash" buy because it was very distressed, I ended up walking away from it because it did not fit my buy and hold strategy at the time as a rental unit.  (I was already in escrow on another property that seemed like a better deal and less headache)  Also, having to offer the unit to the previous tenant, at their last rental rate, first was something that truly concerned me and was too risky for me since I was not too familiar with the laws around Ellis Act"

    In retrospect, I keep kicking myself and thinking I should have bought it, converted it into a 5/3 SFR and flipped it instead.... and likely would have made a decent profit.

    1Reply
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