I'm looking to purchase a 4 unit property in Los Angeles (rent control). Tenants are paying $300-$400 for 2-3 bedroom apartments. Crazy. I would obviously start with cash for keys strategy first but in the worse case scenario can I evict them based on Ord. No. 177,901 Eff. 9/29/06. where the landlord seeks to recover possession in order to remove the rental unit permanently from rental housing use?
What happens when I sell the property? Can new owner bring these units back on rental market?
You are talking about the Ellis Act. There are serious restrictions on the use of the Ellis Act and it is in effect to essentially let an owner to take an option to go out of business (the rental business). You can't just re rent the property as you wish. To rehab the property, you are going to have to buy the tenants out in almost any case in LA. The only way a property like this would work is if you got it at an enormous discount. The previous owners likely destroyed hundreds of thousands of dollars in value by their poor management.
Hi @Ewa Reza if the property is under rent control and you seek to evict tenants under the Ellis act, you will still need to pay relocation fees to the tenants. These can range from $7,450 per tenant (under the Mom & Pop reduced fee) to $19,300 if the tenant has been there for more than three years and is "qualified" (older than a certain age or has children). In addition, no one can rent the property for at least five years.
Clearing out properties using the Ellis act only really makes sense if you are going to redevelop it as non-rental property (like condos), move your entire family in or like @Matt Mason says, if you got the property at a huge discount (even then, the five years lost rents plus the fees would make it hard to pencil out).
If you want to get low-paying tenants out, and the rents are significant at market, you are better striking a private deal with the tenants. Even if you have to pay significantly more than the statutory relocation fees (say $30,000), you will at least be able to re-rent the properties at market immediately (and not have to wait five years).
I do know people that do these kind of deals in Los Angeles, but they pay roughly $20-$40k for each tenant to move. Combine that with a $25 - $30k per unit rehab and you are talking about an additional $250k investment so you gotta have a fair amount of cash. Like I said, they have to get them at a serious discount compared to a building where rents are at market for this to work.
Renovate the empty units if their are any and offer the tenants that are in filled units the option to move in them first with a discount for their troubles or some perk. If your doing a lot of demo some of the other filled units will probably move out due to the inconvenience any way. Not sure about the laws in your area when it comes to demo etc but this might be an option or you could agree to buy the property ONLY if it is vacant the day of closing and let the other person handle it their way so its out of your hands. Just a couple thoughts.
The seller doesn't want to deal with these tenants. Buying people out is a good option if they are not knowledgeable about their rights and I doubt these guys are. One of the units is 3 bedroom house that the tenant occupies for over 20 years and is paying $386 a month (average price in this area is $2000+. Relocation fee for this kind of tenant is almost $20K. Let's say I offer them $30K. They would be crazy to take it. I know I wouldn't :(
That's what I'm worried about and that's why I'm trying to educate myself on Ellis Act...
Everyone has a price. It may be $40k or even a little more in that instance. The seller may not want to deal with the tenants, but he is going to have to deal with a very low offer for his building for being such a poor decision maker and hardly every raising the rent. Even 20 years ago, I don't see how the rent on a 3 bed house was much less than $400 in LA. Crazy irresponsibility.
@Matt Mason I know a hearing officer who does work for LAHCID (formerly LAHD) and he sees a lot of cases with very low rents. Often times in inheritance situations. Some old school landlords didn't really need the income and had a tacit agreement with tenants of "don't bother me and I won't bother you." Then he dies and the kids inherit and want to get the rents up. It is a sad situation because there may be tenants who have lived in an apartment for decades at a certain rate, and a rent increase would drive them into the streets - but on the other hand, maybe the new owner cannot afford to maintain the property at the low rents.
@Ewa Reza I agree, I don't think it makes economic sense for people to accept buy out offers if they are thousands of dollars under market, but some people like the idea of getting a big pile of cash - perhaps it is penny wise pound foolish, or maybe it is the imputus to move to a more reasonable area to live. I one time offered a modest buy out to a tenant of an illegal unit ($5,000) and found out that they were planning to leave once they had saved up $800 for the security deposit for a new unit - they would have left on their own or perhaps for a much more modest amount! You don't know until you ask, but once you offer a certain amount, you can bet that no one else will leave without receiving at least that baseline amount.
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