All Forum Posts by: Adam Phebus

@Angela Fisher, do mean $300k out of pocket for the down payment, closing/holding costs, and repairs, while financing the remaining balance of the purchase price? 

Hey @Account Closed said, our property tax in LA is about 1.25% Ad Valorem, meaning it's based on the value of the transaction. Your figure seems low, so maybe it's the tax the current owner pays which will be reassessed upon transfer, or perhaps there is some tax incentive such as historic preservation?  

Here is a link to the IRS page on rental property depreciation: https://www.irs.gov/publications/p527/ch02.html

Consult your CPA to understand what impact this will have on you specifically. 

Good luck! 

Hey @John Boby, 

As @Michael Boyer said, it depends on the market, but the terms of the lease, the applicant, and the quality of the unit play a role as well. Since I don't know your specifics, this will be generalized based on price and terms. 

In LA, you can charge up to 2-months rent for an unfurnished unit, or up to 3-months rent for furnished, not including additional deposits such as for pets. Furniture is a huge curve ball, but I assume your unit is unfurnished and will speak to that. 

In my experience across the rent spectrum ($4k-$40k/mo), the higher security deposit will filter out candidates, some of whom are very well qualified but just don't want the opportunity cost of someone else holding all that cash. 

Does that mean you shouldn't require the full allowable deposit? 

Well, we have a serious dearth of rental units in LA, so if you're asking market rent, then you should have a large enough tenant pool to draw from that the filter won't effect you. 

That said, consider your market rents in so much as whether the average qualified applicant could afford to be out of pocket an additional month's rent. This typically looks like a bell curve, where people at one (lower)end of the rent spectrum ($1-$2k/bedroom/month) are less likely to have that additional savings to hand over, and people at the opposite (higher)end of the spectrum scoff at the idea that they could cause tens of thousands extra worth of damage. The people in the middle tend to be able to spare the deposit and are still in a price point where the quality of finishes vs extra month deposit make sense. Prospects in the higher-end will likely try to negotiate all terms, including the deposit, so don't be afraid that you'll scare them off by asking for it initially. 

Also, consider the length of the lease. If this is a short term (< 3mo) rental, then most tenants will resist the maximum allowable deposit. 

Are they paying monthly or in 1 lump sum up front? If the tenant pays monthly installments, then you have a risk of default so it may be wise to hedge with a higher deposit, whereas, if they pay in full in advance, your risk is lower so you may not need it. You may be asking monthly and should expect most applicants will want to pay as such, but you would be surprised by how many people in LA offer to pay in-full up-front, especially as you move higher up the price ladder. 

Who's responsible for utilities and other maintenance requirements? If the tenant is responsible for charges but pays you because you keep accounts in your name, then it would be wise to charge the higher deposit so those expenses can be deducted if the tenant defaults. This goes back to risk.

Screen applicants well and consider their quality. How many people will be living there? Does they seem responsible, or at least solvent enough, based on their job, credit, public profile, team (business managers, attorneys, agents), references, etc...? If you had to sue them for damages or try to collect arrears of rent, do they currently have enough income/assets to increase your likelihood of success to a tolerable level?  

The size of the deposit could be irrelevant if you make a deduction and the tenants fights it. So, regardless of how much you charge, please do yourself a favor and document the move-in/move-out condition properly. Take photos of every surface, inside and out, including close-ups of every defect and imperfection. Note the condition of every room and system, including everything that's in good/satisfactory condition, and everything that's not operable, defected, damaged, or in any way sub-standard, and have the tenant review/sign it. When performing the move-out inspection, compare the property to the move-in photos and notes. The burden of proof will be on you, so leave no room to question. In my experience, the higher up the rent ladder you go, the more likely you will need this. 

If you want to talk specifics, send me a PM and I'll be happy to help. 

Thanks for posting, @Alex Parish. I'm basically here as a spectator as this is outside my wheelhouse, but I have an idea that may/may not help to verify rents - Have you asked if you could review the deceased owners tax returns to verify rental income? 

Best of luck. 

My pleasure, @James Slaughter. Good luck to your friend, and congratulations to you on your in-process purchase. Sounds like you've got good velocity. Keep it up! 

Thanks, @Eric Dowling, but I'm pretty sure I have to credit @Brandon Turner for sharing that genius idea on one of the earlier podcasts. Hope to see you around town. 

Hey @Matt Casey,

Welcome to BP, and to real estate. I'm newer to the BP site as well, and like you, I've been devouring the podcasts, which are brilliant. You may already do this, but a good trick is to listen at 1.5x speed, so you can pack more into one sitting.

I see you're in Playa Del Rey, which is one of my favorite places in LA and a big focus of my business. I'm a residential RE agent with Partners Trust in Beverly Hills. I've been in the sales business a little over 5yrs, and now I'm working on growing toward development and multi-family B&H.

I'm in the Playa area often, so let me know if you want to meet for coffee, or beach volleyball/frisbee sometime to chat.

Feel free to background check me first. My website is www.buoyLA.com. 

Hi James,

I'm a real estate agent in CA and I've represented Buyers in new development transactions. Personally, I felt like my role as an agent was limited. In my opinion, a Buyer's agent on a new development transaction could even be superfluous.

Why?

As Jennifer said, in my experience, developers typically don't negotiate on the purchase price, but they may negotiate on closing incentives, and on upgrades (finishes/amenities/landscaping) for unfinished units. In this case, I think the benefit of an agent depends, in part, on their level of expertise, and also the supply/demand in the development.

The builder will likely have a custom purchase agreement and escrow instructions that they will not amend. The processes I've experienced were strict/systematic, but there were aspects that differed from a normal resale transaction which I helped my clients navigate. For instance, in CA, contingencies are customarily Active, meaning a Buyer needs to actively remove them in writing. However, contingencies in builders contracts are generally Passive, meaning the contingencies are automatically waived after a certain amount of time if the Buyer doesn't raise objections or cancel prior. I could only "translate" the purchase agreement, outlining my Buyers responsibilities and timeline for them, rather than negotiating these terms upfront as I usually would.

We had to use the builder's escrow and title companies for closing, so I could only oversee the process in an effort to ensure there were no delays. The builders purchase agreement will likely include penalties for closing delays, and in one case I was able to help my Buyer by negotiating reduced fees when they were responsible for delays.

As in any transaction, I helped decipher the prelim title report, HOA docs, warranties and disclosures, but Buyers should read those carefully anyway. As for the aforementioned warranties, in CA, builders warranties are determined by state law, and I have yet to see a builder agree to anything above and beyond what's mandated.

In a resale transaction, Buyers usually have an inspection contingency period, during which time they perform their due diligence and often negotiate repairs and/or a credit in lieu of them. In a new development, the Buyer usually just goes through the property with the builder to create a punchlist of repairs for the builder to make. The Buyer should absolutely still have inspections, but the repairs may be handled differently.

If your friends have already visited the development then this may all be for naught, as Developers typically require the Buyers agent accompany them on their first site visit in order to qualify for commission. 

Since Sellers typically pay the commission, a deft agent can create immense value for a Buyer with nothing out of their pocket. Sure, it's possible that a Seller could be willing to give the Buyer extra concessions/incentives if they're not paying commission to a Buyer's agent, but I still advocate for Buyers to work with an agent who will vigilantly represent their best interest. I think it's a case where the risk outweighs the possible reward.

All of this is strictly my opinion, based on my experience in CA. It may not pertain to you and should not be construed as advice. Please consult a licensed real estate professional in your area.