Smoke detectors are cheap.  As a landlord, there is no excuse to not install smoke detectors!  The National Fire Protections Association states that “minumum protection requires a smoke detector outside each sleeping area and on every level of the home.”  Follow the manufacturer’s recomendations  on proper placement of the detectors. 

Leave the smoke detector instructions for the tenant.  It will be up to the tenant to report beeping and other malfunctions.  It is also a good idea to check smoke detectors as part of an annual inspection of the unit.

Things to consider when buying or selling a business:

1. Purchase price is not the only payment issue.  Most purchases are not all cash.  Decide on initial deposit, payment plan, interest rate, etc…
2. Form of ownership of the business.   Corporation, LLC, etc… 
3. Inventory-  Many people say everything is included that has to do with the business.  GET IT IN WRITING.  Do an exhaustive inventory of the business assets.
4. Consulting/ Training-  The purchaser is going to need answers from the seller.  Get that in writing.
5. Agreement not to compete-  The purchaser does not want the seller to open a shop next door and compete. 
6. Lease, Purchase or Real Property-  Sometimes the real property is sold along with the business.  However, usually a lease is involved.  If the business location is important (retail, restaurant, etc…), the buyer should get a lease with the landlord during escrow.  The purchase should be contingent on the purchaser obtaining a lease.

MacFarlane Real Estate, Inc. handles business transactions.

The typical clause is as follows:  “In the event of a default, lender shall be entitled to accelerate all sums due under the loan secured by deed of trust and is authorized to enter into and upon the property for the purposes of collecting the rents, issues and profits from the property.”

At MacFarlane Real Estate, we often take control of a property before the trustee sale (foreclosure).  Basically, once the Notice of Default is filed, MacFarlane Real Estate seizes the rental income for our hard money clients.  At this point, the borrower has to make up the payments owed without help from the rental income.

Recently, I had an email exchange where basically, the investor was trying to get around rent control.

Initial Question:
Hi Mark

I found your blog, which is great, while looking for an answer to a LA rent control question. Am hoping you can help me:

My partners and I own a rent controlled apartment building in Silverlake.

We are paying tenants to move out.

One tenant has offered to move out at the end of the month, but wants all of the money ($11,500!) up-front.

My building manager thinks this is ok, so long as the tenant signs a receipt and an “intention to vacate” form.

I am worried the tenant will keep the money and not move, and that I will then have to evict.

If I have to go to court and I can show the payment and the signed intention to vacate form, will a judge evict? In other words, does an intention to vacate form plus proof of payment have any legal standing?

Happy for you to use my question on your blog - but pls don’t use my name!

Separately: Would love to get to know you and your team. We currently own two 16 unit buildings and will probably buy two more in the next six months.

Kind regards,

Annonymous

My Initial Response:

Thanks for emailing. RSO (Rent Control) only allows a landlord to recover possession legally if the landlord seeks in good faith to occupy the unit (Immediate family and Resident Manager qualify) or if the landlord seeks to perform at least $10,000 of work per unit. Even then, there are requirements of returning the unit to market at the same rent controlled rental amount.

If the conditions above are not in “good faith,” LAHD may get involved and force you to allow the tenant to stay.

I need more information about the specific situation. But, from what you told me… No judge would proceed with an eviction as the relocation is in violation of the RSO.

If you want to proceed with a cash for keys type negotiation, you are probably just rolling the dice on whether you will get caught. A qualified tenant (Elderly, Minors or Handicapped) is entitled to $17,000 relocation. LAHD seems to easily find that the grandmother lived with the tenant (or some other person) and thus, the unit is “qualified.” The penalty if caught is 150% of the relocation. It seems as though LAHD always says a landlord has to pay $25,500 per unit if the landlord tried to get around RSO.

I always advise people to catch tenants on 3 days. That is a sure fire way to evict and you don’t pay relocation. However, you have to be prepared. Registered with RSO, etc… Otherwise, you will lose the unlawful detainer case. I have some other approaches.

I won’t use your name but, I will certainly post your question and my response.

As far as purchasing more properties, my suggestion is to look at smaller buildings right now. There are gold mines out there right now at the 4-8 unit size. No resident manager unit. Section 8 is paying great money for these units. Do you work with a broker? Are you a broker?

Let me know how I can help.

Thanks for the email.

Mark E. MacFarlane, Esq.
MacFarlane Real Estate, Inc.
2500 E. Foothill Blvd., Suite 205A
Pasadena, CA 91107
(P) (626) 578-1948
(F) (626)389-0563

Clarification Requested:

Thanks for responding.

I think I wasn’t clear:

The tenants in this unit have agreed in good faith to move out for $11,500 - so I can’t see how RSO is involved.

We’re not forcing them out and we haven’t told them they have to take the deal.

We want to hand them $11,500 in exchange for them signing a contract saying they will leave by a certain date.

I’m trying to figure out if that contract is enforceable or not.

Is that clearer?

Anonymous

My Final Response:

I can’t give legal advice without seeing the full file, having a signed engagement letter, etc…. But, courts will not enforce an illegal contract. From what I have heard… Your contract may violate the RSO and thus, be illegal and unenforceable.

Mark E. MacFarlane, Esq.
MacFarlane Real Estate, Inc.
2500 E. Foothill Blvd., Suite 205A
Pasadena, CA 91107
(P) (626) 578-1948
(F) (626)389-0563

If an investor looks purely at the numbers (Rental Income Verses Expenses) of an investment property, apartment buildings in low-income areas are shining jewels!  That’s right!  The money is in the hood!  Haven’t you heard of “slumlords” making tons of money?  Well, I don’t suggest being a slumlord.  But, I do suggest looking at the numbers of a low income apartment building in comparison to other investments. 

Let’s look at three scenarios; a single family home, a Class A 4-Plex, and a 14 Unit Apartment Complex in a low income area.  All three properties are worth $1,000,000.  A single family home worth $1,000,000 is likely to rent for about $3,500.  4 Units in a nice area of Pasadena are likely to rent for about $1,600 each, for a total of $6,400 of income.  A unit in a low-income area is likely to rent for about $900 per unit, with 14 units… there is a total income of $12,600.  

It is definitely more work to manage a 14 unit low-income apartment building than a 4 unit class A apartment.  Turn that work over to a professional management company for 6% of gross rents!  As an investor, you probably don’t want to manage any apartment building, class A or low-income.

What would Warren Buffet do with $1,000,000?  I think he would prefer low-income apartments! 

Let me preempt some of the normal resistance to low-income apartments. 

“Low Income tenants are harder on apartment units.”  Thats true!  However, less expensive maintenance and repairs are acceptable in low income apartment buildings.  The expense is only slightly higher in a low income apartment building. 

“I will have more evictions and turn-over.”  Go Section 8.  Have the government pay the rent and the tenants will practically never leave.  Little evictions and little turn-over.  In fact, the class A  apartment has turn-over because people end up buying houses, students graduate, etc… 

“I invest in commercial properties with business as tenants because they are professional and take care of my property.”  Businesses are failing.  The vacancy factor is sky high.  Businesses are not paying their rent on their office/retail space.  However, the owners are doing everything they can to pay for their home!  

Apartment deals start at about $500,000, making the investment accessible to many!  MacFarlane Real Estate, Inc. is finding investment properties that are great deals.  If you would like a complimentary property search, just call!  We are attorney-brokers that provide legal review and brokerage for the same brokerage commission.  Buy an apartment through us and you get the first year management for free!

The housing market is tough for sellers.  Foreclosed properties are piling up and banks need to discount the properities in order to sell.  Lets face it, if you want to sell today…  you have to sell at a bargain. 

Many homeowners don’t realize that there is a boom in the rental market.  Thats right!  Every foreclosure produces another tenant.  First time buyers that would normally buy a house…  are waiting.  Thats more renters!  Vacancies in Los Angeles for RESIDENTIAL properties are low.  So, why not turn your house into an investment?

There are a number of benefits to renting your home.  Rent can often cover the mortgage until the housing market returns.  You can report losses against your income.  Historically, rental properties have been one of the best investments.  After all, where else are you going to invest?  Atleast you know your house is not a Madoff Ponzi scheme!  You can always move back into the house in the future. 

What are the drawbacks of renting your home?  You must first prepare yourself to rent out your home.  It is now an income property.  Tenants probably aren’t going to care for the property the same way you did.  That is okay as long as you have an adequate security deposit.  Are you ready for calls at midnight from your tenant?  If not, you probably want professional management. 

Landlords must also prepare the home for a renter.  The heater must work.  Proper smoke detectors must be installed.  Trip and fall hazards should be removed.  The house should be empty and clean.  Insurance may be an issue.  A call to your insurance agent is a must! 

The big issue is LAWSUITS.  There are a number of ways landlords get sued.  Discrimination, mold, trip and fall hazards, etc…  My suggestion is to hire professional management.  For approximately $150 per month, a professional management company should prevent many of the potential lawsuit scenarios and take care of the midnight maintenance call. 

MacFarlane Real Estate, Inc. is always looking for new clients!  Give us a call to discuss renting your house.

A deficiency judgment is the assessment of personal liability against the seller for the unpaid balance of the mortgage debt when the proceeds of a foreclosure or short sale are insufficient to satisfy the debt. Such liability is typically crushing for a seller who in all likelihood is already facing financial difficulties. Therefore, any seller considering the short sale option or facing foreclosure must examine the potential for a deficiency judgment. California addresses this issue within CA Code of Civil Procedure section 580, et seq.

The crucial determination is whether the loan at issue is considered “recourse” or “non-recourse” debt. See the below definitions:

Non-Recourse Debt

In the event of default by the borrower, the lender is restricted to recovering the property, without any right to proceed against the borrower for any deficiency after sale. The lender is prohibited from seeking any of the borrower’s assets separate from the subject property. Of course, if any fraud, misrepresentation or other illegal acts are discovered on the part of the borrower, exceptions will apply.

In California, debt is treated as “non-recourse” under the following two loan scenarios:

1) when loan is made to purchase residential dwelling of four units or less, where borrower occupies at least one unit; OR

2) any seller carry back financing secured by subject property.

Recourse Debt

In the event of default by the borrower, the borrower may be personally liable for the deficiency and the lender may choose to reach to the borrower’s personal assets such as bank accounts, wages, and any other assets the lender can locate.

Examples of recourse loans are refinancing of existing loans, commercial property loans, or H.E.L.O.C. loans.

Determining whether you may face a deficiency judgment as a result of a potential short sale or foreclosure is an essential analysis. Of course, there are a variety of other important considerations such as potential tax consequences and effects on credit ratings.

One of my clients, a 30 year veteran of apartment investing, forwarded a complaint against him by the Department of Fair Employment & Housing for violation of the Fair Employment and Housing Act. Just a short while ago, the Department of Fair Employment & Housing required offending parties and their managers to attend Fair Housing training. Fair enough! I think it is great for everyone to be educated on the issue.

However, the Department of Fair Employment & Housing has a new demand. BIG MONEY. The Department of Fair Employment & Housing settled for 10% of their initial demand.

It was obvious that the settlement made financial sense. However, the client felt as though he had been the victim of a “shake-down” lawsuit by his own state government.

It is the wild west in California’s housing and mortgage industry. The new, latest and greatest service offered in the real estate industry is LOAN MODIFICATION. Companies are springing up everywhere as self proclaimed loan modification experts. However, this is the wild west and there are no experts. Every bank is different. In fact, the servicing agents within the banks have different terms and guidelines and those guidelines are changing every day. Nobody is truly an expert! Every loan modification agreement must be analyzed closely.

Borrowers should get answers before signing the loan modification… What are the tax implications? What are the fees? What do the new terms actually mean? What are other options?

Many borrowers desire a lender to forgive or cancel a portion of the debt. Prior to 2007, the IRS considered forgiveness of debt as taxable income. The Mortgage Debt Relief Act of 2007 created a homeowner exception for debt incurred by buying or improving real property. However, Loan Modification is not buying or improving real property. Thus, forgiveness or cancellation of debt as part of a loan modification has tax implications!

Loan Modification agreements charge attorney’s fee, loan modification administrative fees, late fees, etc… All are negotiable!

Another aspect of Loan Modification… The Truth In Lending Act and Predatory Lending. Was the loan properly documented at the inception? If not, certainly the borrower has serious negotiating power! Loan documents should certainly be reviewed prior to any Loan Modification.

A Loan Modification Attorney can also leverage the threat of litigation and bankruptcy to secure a more favorable loan modification. Often, the lenders elevate the negotiations to their in house counsel once a borrower “lawyers-up.” Thus, the run-around ends and borrowers get results!

Based on my discussion with the potential client, I thought I would share one important piece of information when it comes to evicting tenants in Los Angeles when the subject property has been accepted into the REAP program.  Among the many legal steps a landlord must take before, during and after an eviction action, REAP introduces a handful of other considerations.

Prior to initiating an eviction action against a REAP tenant, the landlord must request verification in writing from the Los Angeles Housing Department (LAHD) that the tenant has not paid rent into the REAP account.  LAHD must respond within three (3) business days.  The landlord shall not initiate any actions to evict on the basis on nonpayment of rent without making this inquiry.  Naturally, if the landlord receives confirmation that the tenant has paid the rent to LAHD, no eviction action shall be initiated based on nonpayment.