Well, the end of an historically low interest rate era has come. My recent client in escrow just locked in a 3.75% interest rate, but he’ll be the last for a while. Rates for FHA have climbed to about 4% and for investors at about 5%. While this might change our game plan, it also means a lot of middling, half-interested, opportunistic investors have dropped out of the market. That will make prices drop and opportunities for committed, patient buyers rise. I’m excited to see how the market reacts and I’ll keep you posted.
Category: Big Picture
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Interest Rates UP
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Rent vs. Own
A very important question in Los Angeles real estate is whether it’s better to rent or own your building. The answer is that it depends on what area you want to live in.I almost never advise my buyers to look at buildings in Santa Monica, Venice, West L.A., Beverly Hills or West Hollywood because rents there just don’t justify purchase prices. You’ll almost never cash flow with an apartment building in those areas. What does that mean? If you want to live in an apartment building in that area, don’t buy it, rent it.
However, if you want to live in East Hollywood, Mid-City, Echo Park, Silver Lake, or even farther east, buying is your best bet. Rents in certain pockets are just as high as Venice and Santa Monica, but they can sell for half as much.
So what if I want to live on the west side but I still want to buy a building? Simple: buy on the east, live on the west. The west side is a renter’s market. The east side is a landlord’s market. While there’s a certain pride of ownership in owning property in your favorite westside neighborhood, it’s not the most financially sound decision.
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Docusign
I imagine if I had been in real estate 10 years ago, I would be doing a lot more driving. I write up, on average, 2 offers per day, and getting signatures and initials on all of these offers would mean adding many more miles on my car than I use now. Yes, gas would’ve been cheaper, but I would have used more of it with a less efficient car. Either way, Docusign has helped the environment. Docusign is a website that allows you to sign a document simply by clicking. I upload the offer to the site, tag where you’re supposed to sign, and you just click away. It definitely helps when you have to send in offers ASAP in this market.
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Redfin
There are pluses and minuses to my clients using Redfin as a source. The plus is that sometimes they find properties that they like personally, but that I wouldn’t think to send them. (Take, for example, my client who sent me the South Central fourplex we closed.) The problem that often arises, however, is that the data is usually inaccurate and always incomplete. The listing agent will post info on the MLS, but it will take a couple days to propagate the Redfin channels, and by that time, it may be too late. Additionally, on Redfin, you’ll never get the listing agent’s private remarks, which is the good stuff.
Search real listings here. Enter the MLS’s Home Central Search. The name is clunky, but it’s actually a great portal that allows my clients to search specific criteria directly on the MLS – the website that agents use. For some clients, I’ve even programmed the portal to email them new listings based on their personal criteria on Sundays, twice a day, or every four hours, depending on how ambitious they are. Since I’m looking for the best deals all of the time anyway, there isn’t always a need for this. But you never know. Sometimes I might overlook something, or simply not know my client’s taste well enough. A client-agent relationship is really a learning, growing one, and the more interesting properties we show each other, the better I get to know you and your needs.
So if you’re using Redfin to shop for properties, stop. There’s a better way, direct from the source. Just ask.
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Specializing
When I started out in real estate I took on any clients who would have me. A condo here, a single family home there, and a units-hunter who demanded the finest property for his FHA deal. Then, when I could start to tell the difference between serious clients and dabblers, responsive clients and procrastinators, realistic clients and dreamers, things naturally fell into place. The clients who have time and again closed the fastest are those who know what they want and can act fast when they see it. Not every client has a clear plan when we have our first meeting, and that’s totally fine, but in the Los Angeles real estate market, decisiveness is key.
Now, I can afford to specialize. Unless it’s for a friend, I primarily work on 2-20 units in Los Angeles, unless a big deal takes me to Orange County or the Inland Empire. This allows me to stay on top of the best deals, build relationships with other agents in my specialty, and work with clients I understand. Because an agent divides his time among clients, his girlfriend, baseball season, and household chores, specializing also conserves time and energy. And a happy, motivated agent makes happy, successful clients.
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Hello, I’m David.
When you write a blog like this and the stats report 20+ views a day from the same sources, you start to wonder who these people are. Some of you are from TheEastsiderLA or Curbed or Trulia, some googled “Income Property Los Angeles,” and then there are my Facebook friends. You all are interested in a new perspective on real estate and I hope I’m at least providing that. If you feel like reaching out and letting me know how you found the blog, send me an email at david@adaptiverealty.com. (Part of the reason there are no comments is because there’s so much spam I gave up filtering through it all.) I’d love to hear how you found me and what you think. Or just keep reading anonymously. That’s always good, too. 🙂 -
Neighborhoods & Appreciation
A client of mine emailed to ask how he should research L.A. neighborhoods to best guess appreciation. This is how I responded:
Honestly, everyone has their own opinions on the future. I like Highland Park, Atwater Village, certain parts of Glassell Park, and Mid-City for units. I like Montecito Heights for single family houses. I think Eagle Rock and Mt. Washington have already been mined. Lincoln Heights and Boyle Heights have the longest to go, but they can be had for cheap and will get there eventually.
I’d recommend going to lunch on a Sunday in each of these places and driving around. Take a look at the parks, the major streets and see what kind of stores are there. What you won’t be able to see on those tours is nightlife, but, relatively speaking, nightlife is sparse in these areas. You have Verdugo Bar in Glassell Park and The York and Johnny’s Bar in Highland Park, and Atwater Village is well developed. However, Mid-City is a short distance to Miracle Mile, West Hollywood, Hollywood, and Culver City, so it’s valuable at minimum for its proximity. Also, Paper or Plastik café is a new cornerstone of culture and gentrification in that neighborhood on Pico just east of Fairfax.
While market trends are a good indication of what the future holds, you have to get a feel for these neighborhoods yourself and, ultimately, your own gut is the best to trust.
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Leverage
One important aspect to negotiations is knowing who has the leverage. Because a good real estate agent follows the market and understands the standard purchase agreement inside and out, 9 times out of 10 we can advise correctly on what your next negotiating move should be. Here’s how it works:
In a seller’s market, sellers have the initial leverage if they own good property. We have to understand what the seller wants and give that to her, as long as we’re not giving much more than any other buyer. That’s why a good buyer’s agent will call the listing agent to get the scoop.
If we’re lucky enough to get into escrow, the leverage shifts. The seller chose our offer over 4-10 others, and wants to close. Going through escrow a second time is the last thing either the seller or her listing agent wants. Now we have the leverage, within reason. Remember, our leverage is to cancel escrow, and while that’s a pain in the butt, it’s not financial life or death to the seller.
Seller’s obligations need to be fulfilled for the seller to regain some leverage. They need to turn in Estoppels, rent statements, disclosures, etc, or else their property is tied up indefinitely. Once their obligations are completed, we have our limited time frame to either perform or cancel escrow, or they can cancel escrow and potentially keep our earnest money deposit, which is bad news.
Finally, when escrow has the grant deed and all of the seller’s paperwork, nothing can stop us from closing if we want to. Recently, I got a request to extend escrow so that the seller could complete his 1031 exchange. Extending escrow would mean loss of rental income for my buyer. So I asked escrow if the grant deed and all of the paperwork was in, and since it was, I demanded that she close escrow before we helped them with their 1031. This saved my clients at least $500 and the potential to have escrow continue indefinitely.
As you can see, understanding leverage is what negotiations are all about. A good agent will know when to press and when to accommodate, while always staying in the (relatively) good graces of those with whom we’re working.
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New Philosophy for Poor Investors
I write this with zero condescension. And it’s really not complicated, either. If you’re an FHA buyer, especially, I used to promote that you buy the most expensive property you can qualify for, with as much leverage as possible, because if the rents securely cover the mortgage, your small down payment will balloon into the full value of the property in 30 years. I still like that philosophy and it has worked for clients; it’s just not entirely applicable in this market.
In today’s market, you need to buy with more foresight. The current strategy for poor investors is to find the future hotspots in L.A. and buy the gem of that neighborhood. Pretend that it’s the current hotspot and you’re getting an amazing deal on the best property around, if that makes you feel more comfortable. This means you might be investing a few thousand into your property for the first five years with no cash flow, but you’re banking on the appreciation, and, your own intuition. We’re searching for buildings with solid bones, a good lot, a great location for the neighborhood, and lots of potential.
If you’re not one of those investors with loads of cash, you have to do a little imagining. It’s not the most profound insight, but it’s opened a lot of doors that competitors aren’t yet entering.
