Add 40% for Zest

spencer-rascoffs-former-homes-historical-zestimates-768x621According to this recent article that’s been going around my office, Zillow CEO Spencer Rascoff sold his Seattle home for 40% less than its Zestimate this year.

Why are real estate agents happy? Because one of the most common obstacles we face in pricing a house is the owner saying “but my Zestimate says [40% higher than the actual price].” Now there’s ironic proof that Zillow plays games with us.

Why does Zillow inflate prices? If you think your house is worth more, you’re more likely to sell with them. This is the fallacy: “If the Zillow agent thinks my house is worth X => he is more likely to get me X.” I know agents at other firms who are famous for this, as well. To them, if they win the listing, they don’t mind having their name outside your house for eight months while you reduce the listing price down to its actual price, eventually. It’s free marketing for them, and in the end, they still get the commission.

Why don’t I do that? My clients are smart, and finding actual comparable sales is part of my job. When the evidence is there in front of you, I don’t have to do any convincing. I don’t stress about Zillow or Redfin or any of that. I’m not a flashy agent so I know my clients come to me for knowhow and honest feedback.


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Speaking of Single Family Homes

If anyone knows someone in the market for a mid-century modern classic in Brentwood, 1115 N. Norman Place is on the market for $2,450,000.

If you ask any Brentwood agents, this property will move fast. Check out for details.


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Land is not income property until it’s developed upon. When you buy land with the intention to hold it, you’re gambling. You’re gambling on how valuable that parcel will be to a developer in the future who doesn’t exist in the present.  You’re betting on how attractive this neighborhood (and this particular stretch of the neighborhood) will be when monorails and zip lines and hover crafts transport us around Los Angeles.  Either that, or you’re hoping to one day come into money and become a developer yourself.

Either way, when you buy land you have to think like a developer. If it’s a 7,500 sq. ft. lot zoned R3, how can you max that out?  Here’s what you can do “by right,” with that parcel:

  • Build 9 units
  • Must have 1.5 parking spots per 1-bedroom and 2 parking spots per 2-bedroom unit
  • Can build as high as you want
  • Normally, your total square feet cannot exceed a ratio of 1.5:1 with your land size

With a population density bonus for building affordable housing units, you can:

  • Build 13 units
  • 1 has to be “affordable”

So when you’re considering buying a property, it’s good to consider the underlying land value. You may think you’re buying a duplex, but a developer sees that duplex as rubble she’ll have to clear. This may give you some peace of mind when you’re paying asking price in a hot neighborhood. The seller may not have considered the land value that you now understand.

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Main StI just closed a property in an area I never expected to work: South Central Los Angeles. I have fearless buyers who are focused on the bottom line, and the bottom line pointed them very far south of the 10 freeway. We closed 8306 S. Main St. at $395,000 with rents at $4,120 per month. That’s a GRM of 7.99! You can’t find that in Echo Park, Highland Park, or even Boyle Heights.

What are the trade-offs here? The plus is you have excellent income with nice tenants. Three out of four tenants have Section 8 help, so the government cuts you a good paycheck every month and stays on top of them. We paid all cash and my clients stand to make 9.6% on their investment per year. If they refinance they’ll make over 17.5% on their cash per year.

The negative is that it’s not a high-growth neighborhood and there’s more crime. However, that doesn’t mean there won’t be appreciation. The previous owners bought the property for $250K in 2010 and just saw a 63% return in two years. That’s not bad.

What’s the lesson here? Do what you’re comfortable with. But if your true focus is the bottom line, a good investment is a good investment.

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One thing to consider when deciding on your best and final offer for a property is the zoning. If you’re buying a duplex on a 8,000 sq ft lot, the zoning makes a huge difference in terms of the property value. If it’s R2, the duplex is all you’ll get, so there’s not much hidden value beyond the obvious: rents, appreciation, future market rents.  If the zoning is R3, a developer can build one unit for every 800 sq ft of lot space.  So in this case, that’s 10 units.

There are other restrictions involved. Here are some basics:

– Max height = 45ft.

– Setbacks = 15ft. front and back. 10% of width on the sides.

– 1 parking space per 1-bedroom apartment; 1.5 parking spaces per 2-bedroom apartment

For more details, see the L.A. City Zoning Appendix.

Our sample lot here is 160 feet by 50 feet.

One parking space is 10 feet by 20 feet.

Unless our developer is building 3 stories or an underground parking garage, we can only truly fit 8 1-bedroom apartments here because of the parking requirement and driveway.

So a reasonable estimate for the value of this new property will be:

8 units X $1,600 monthly rent ($19,200 yearly) = $153,600

11 X GRM = $1.69 million

If a developer buys the duplex for $400,000, builds for $840,000, that’s a $460,000 profit.

So if you’re bidding $360,000 (12x GRM) on a duplex with a rent roll of $30,000 / year, remember what the developer paying all cash stands to make.  The good news is, that developer might be there again when you sell.

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Favoring 2-4 Units (financing)

I’ve touched on this before, but another compelling reason why 2-4 units can be more desirable is because of the types of loans you can get.

We’ve discussed the down payment before:

– 25% for 2-4 units (20% if you’re an owner-occupier) vs. 30% for 5 or more units.

But in this market, with interest rates so low, you want a 30-year fixed loan whenever possible. If you have 5 units or more, you can’t get more than 5-10 years guaranteed, and your interest rate might even be half a point higher.

This is why we call 5 units the no-man’s land for income property financing.  Unless you’re buying with cash (and hope to sell for cash), you’re better off going bigger or smaller.

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