Drop in Sales Price for Boyle Heights Multifamily Units

12 Replies

Greetings All,

I have noticed recently that multifamily properties in Boyle Heights are being listed for sale at very competitive prices. At surface level it seems like the general pricing for Multi's have declined in Boyle Heights since 2016. Not exclude , I see that the Multifamily's are listed at lower prices because they are being sold as is, fully occupied, and rent controlled. The pricing makes sense when considering these factors but do Appraisers factor in the same variables? Would a Quadplex sold for $700,000 under these circumstances hurt the value and potential equity of a triplex that was purchased, fully vacant, for $650,000, 1 year prior? Do appraisers price in these circumstances or do they only care about the selling price, square footage, lot size, and number of units?  I am starting to think about my next maneuver and I am a little concerned about the effect that these competitive prices will have on my investment. Thank you very much.

Best,

As interest rates rise cap rates will decompress and building values will fall.

Yes, the market will definitely have an effect on the pricing, but I guess my question was whether or not Rent Control (vacant or occupied under rent control), and its effect on the sales price, would be factored in by an appraiser. Rent control, I feel, becomes an additional "market factor," and it seems to be the icing on the cake of these units for sale in Boyle Heights.

@Jacqua Le Fleur Interesting observation.  Yes for the older multis in LA rent control can make or break the deal for a cash flow-seeking investor.  This is why when I was looking for a multi I eventually purchased in a non-rent controlled area.

@Logan For what its worth, I've noticed this too. Boyle Heights has been on my radar for the past few months since the MFR fit my budget. Are there many buildings in that area built after Oct 1, 1978? This would make it not subject to the City of LA RSO (Rent Control).

Originally posted by @Logan Allec :

@Jacqua Le Fleur Interesting observation.  Yes for the older multis in LA rent control can make or break the deal for a cash flow-seeking investor.  This is why when I was looking for a multi I eventually purchased in a non-rent controlled area.

 Rent control is never a make or break issue. You ability to negotiate tenant buy outs is.

If you can get the vacancies you can get the cash flow.

I think you are referring to "cash for keys," be it through a formal rent control method,  or through ad hoc agreements with the tenants (cash and free rent for "x" period of time, etc..). This method of creating a wanted vacancy is possible and frequently completed in Boyle Hts and other rent controlled areas of LA. But this brings me back to my original question and general observation on Boyle Heights. It looks like property owners are reducing their sales price because they are "building" in that extra cash outflow that the new owner will have to pay to vacate the current units. Its an informal discount to entice a would be buyer to go through that process, a process that we see can backfire (Rent strikes, collective bargaining by tenants opposed to relocate ). So dont the lowered sales price affect all other comparable sales in the area? What if I paid more for a triplex because it was delivered bacant from the get-go, wont these "discounted" fully occupied properties for sale hurt my equity? 

@Jacqua Le Fleur The short answer to your question is YES if you are talking about appraisals based on recent sales prices. Appraisers don't necessarily know if previously completed sales (comps) were delivered vacant or fully occupied. But you likely benefited from the same forces when you purchased your place...as even if it was vacant, the price was anchored by all the previous sales of fully rented units....BUT, for any multifamily, appraisers also value based on CAP rates which WILL reflect if places are selling for less because rents are low...versus an empty unit that will have a higher price because it will be based on the pro forma rent. That's how I see it.

When pricing a multifamily property like a 4 unit, looking at comps is a major key but also when evaluating the property, we do have to look at what the current rents are AND what the upside potential is (proforma). So we have to use our better judgment. If the building is fully occupied at a GAI of $120K, and the tenants are paying below market, that means there is upside potential IF you were able to buyout/relocate the tenants. So if proforma gross annual income is $165k after buyouts and upgrades, we will reflect that in the ask price. If a building has a 3 cap with the potential of a 4.5/5 cap than damn sure the price will be competitive based on the amount of "upside potential".

Hey @Jacqua Le Fleur ! Came by this post along my usual browse of BP and thought I'd share my 2 cents as well. Seth, Logan, and everyone else who commented brought up great points. I did a few appraisals in LA so I can say that what Roy said was very spot on. Comps do play a major factor in dictating the valuation of the property but like he mentioned, comparable cap rates is what is a large factor which boils down to the rents you obtain. There are formulas and spreadsheets used to back out into the valuation price of a property and this does include pro forma rates, but the current leases you hold that gain you rents NOW is the major factor in calculating a price value. 

Boyle Heights was in most people's lists of gentrifying and appreciating areas and I personally think that is still very much the case. The only real issue I've been seeing is that there is somewhat of a backlash from the community that currently resides there pre-gentrification. There was a fair amount of gang activity there which caused quite a bit of trouble for a lot of the developers there initially but once they started hiring a lot of them and getting them off the streets, the resistance has improved a fair amount.

@Seth Borman 's comment regarding cash for keys is a great option to keep the rent controlled properties as prospective investments. There are numerous investors who thrive in that market, but it definitely has been hard to buy out the tenants in Boyle Heights because of this backlash from the original pre-gentrified residents. Quite a few of the rent controlled units there, have tenants that were there since childhood so buying them out could become quite the costly endeavor. A great option like that is to just find a deal that cash flows and is not rent controlled, like what @Logan Allec mentioned.

For example, I just picked up a fourplex in Boyle Heights right by the Guisados on Cezar Chavez. It was only a block or two away from a police station and was a 5.7% cap which had me cash flowing right away. Brand new construction 2016 non rent controlled.

If you have any more questions or want to know more about the turnkey off market multi's in that area, I know a few developers that work that area so can be of assistance. Feel free to reach out and hope you have a great day BP'ers!

-Geo

Great insight @Geo Tan . Thanks for sharing, and yes, the push-back from the community definitely has an impact. On one end, I would appreciate the quickest "appreciation" of my property (pun intended). But on the other side, I wouldn't mind seeing if Boyle Heights could create a positive renaissance age that is led by both it's own community and the newcomers. Although property appreciation would take a bit longer, the experience of a renaissance would be a once in a lifetime experience. 

Exactly Jacqua. Hopefully Boyle Heights becomes a Silverlake rather than an Arts District.

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