Wholesaling or "Flipping" Rent Controlled LA Duplex

[Jonathan Liu]

Hello BP Community,

I was looking to get started in wholesaling, and was talking to a close friend who is a Realtor to help me with my business plan. As we were discussing, she told me about her client who was fed up being a landlord and wanted to just offload her property. The duplex has been listed for approximately 60 days. She has received numerous offers over listing price, but every offer requires it to be delivered vacant. The problem is that one of the two units is covered by the rent control ordinance in LA, and she cannot evict the tenant. She does not want to negotiate a buy out with the tenant, and she is willing to take a pretty substantial discount to sell the property with the tenants (about $50k).

After reviewing the ordinance, one of the permissible reasons for evicting is if the owner intends to occupy the property personally, or with a family member or resident manager. I assume there are people who are willing to purchase this property and evict (for example a house hacker, or a live-in flipper). I was also thinking of purchasing the property myself and then evicting then "flipping" it for retail once it's vacant. Has anyone tried such a strategy, or know if there are people who are interested in purchasing these types of properties? 

Thank you in advance for any thoughts or insights!

Jonathan

[KJ L.]

Hi Jonathan

We own an RSO property in LA and we're going through an RSO eviction currently (so much fun -___-). 

There are a lot more rules than I covered here in this post but double check everything against the handbook.

If the property has two units and both units are occupied, then a new owner can offer cash for keys (the easiest method) OR evict the newest tenant (or the tenant who is not over 62 or disabled and there are additional rules - check the RSO handbook) to move into the unit.

If ONE unit is vacant and both units are equal in rooms/bathroom composition, then the new owner will need to move into the vacant unit and then the owner can either evict to take the occupied property completely off the rental market (5 years off the rental market), evict to take back the occupied unit for personal use like moving in immediate family (2  years off the rental market), or they can evict given the tenant is a nuisance or conducting illegal activity (this is a harder method to evict since you have to provide evidence and have a case but if they're selling drugs and you have video footage or something, then make your moves) and there are a few other reasons for at-fault evictions. 

What I described are examples of no-fault and at-fault evictions. To conduct a no-fault eviction (taking properties off the rental market/moving in family), you're required to pay relocation fees determined by the RSO which ranges from about $5k-$21k which is determined on whether the tenant is over 62, disabled, been in the unit for over 10? years, and/or if they have minor children AND relocation fees are also based on whether the owner of the property is mom & pop owner (owns 4 units or less). IF there is a no-fault eviction, you cannot re-rent the unit within the time period required for the property which includes short term rentals like Airbnb. If you are caught, you can be fined and the city will give the tenants an option to move in to the property at the previous rent rate. Also others have mentioned this also puts a cloud or something on title because even if you sell the property or transfer it to a new owner, the new owner cannot rent the units until after the allotted time based on the eviction reason.

If you can purchase a property at a below market rate and evict the tenant for a few thousand dollars and sustain the cost of holding the property, then yes you're going to have some long term appreciation and potential rental gains. One strategy a BP member discussed was to purchase below-market duplexes with tenants, completely remove the property from the rental market (Ellis act eviction) and then convert the duplex into a SFR and flip the home.

If someone was out there tenant-flipping properties, they'd probably have a good client base (assuming the flipper isn't overcharging for the property). It's probably like any regular flipper where they have to assess the cost to hold the property, the cost to evict, and then appropriately price the property.  We purchased unit last year in South LA - we were searching from the 10FWY, East of Culver City, the 110 FWY, and down to the 105 FWY. RSO tenant occupied duplexes were ranging from $350k-$550k. Vacant & flipped duplexes in the same areas ranged from $600k-$750k. IDK what the price ranges are now for vacant & flipped duplex.  Based on our experience when searching for RSO properties, many account about $30k per occupied unit for eviction costs. Our eviction costs including lawyer, admin fees, and relocation expenses are about $15k.

When dealing with RSO evictions, consult with a pro-landlord RE lawyer (all RE lawyers are not created equal) and also be cognizant that LA, Santa Monica, Beverly Hills, Unincorporated LA, Altadena, and some other cities have different rules regarding Rent Control. Read the LA RSO Handbook many, many times. I read it at least 3 times before speaking to our RE lawyer. There are a lot more rules than I covered here in this post but read the handbook. It's online- HCIDLA Hope this helped.. sorry for the word wall. Free to message me if you have more questions.