PRELIMNARY RESEARCH
Before I start pricing a building I need to pull the general property data for your building. I need to really understand and know your building so I can your building sold quickly and efficiently and educate potential buyers about your building. These are the sources I use.
Zimas: Zimas is an acronym for the Zone Information and Map Access System. This L.A. City site has all of the pertinent information on every Los Angeles property including zoning, neighborhood council district location, historical status, planning, use code, rent stabilization, seismic hazards, and if it is in an economic development zone. All of these factors come in to play on any property and help determine how to price and market buildings. You can access Zimas here.
Zoning: It is very important to check the zoning for any potential property that I am analyzing. Various properties have certain lot size and zoning combinations that will allow for development. Many properties I look at are better suited to development due to their lot and zoning characteristics. I check this as part of my due diligence when looking at a building.
Soft Story Retrofit: in 2015 Los Angeles passed a new ordinance mandating seismic retrofitting for 4 or more units that have “soft story” construction. This is any living space built over garages aka “tuck under parking”. If you have 4 or more units you may be on the city’s list of targeted properties. I will check the LA Department of Building and Safety to see the status of your building.
Rent Control: Los Angeles, Santa Monica, Beverly Hills, and West Hollywood are four cities that have enacted rent control. Single-family homes are not under rent control in these cities. Condos, duplexes, two units or more are subject to rent control.
As I write this article in November 2019, the California legislature has just passed a Statewide Rent Control Ordinance know as AB1482. If you own a building that was under rent control before this new law passed, nothing changes for you. If your building is newer built after 1978 and was not under rent control, your building now falls under state rent control. The new regulations say that these newer buildings are exempt for rent control for 15 years after the certificate of occupancy was issued and then revert to rent control.
Other cities including Inglewood, Culver City, Glendale, have recently enacted some form of rent control. It can seem confusing with all of the new changes, but I am up to speed to help determine where your building now falls in terms of rent control and will advise potential buyers and agents accordingly.
Permits: I always check permits that are on record for any building that I am looking at. I need to know what permits are filed with the city whether it is the original building permit or any subsequent permits for alterations, additions or major repairs. Los Angeles and surrounding LA County cities usually have permits online at the Department of Building and Safety. Here’s where you can search permits for your Los Angeles building online: http://ladbsdoc.lacity.org/idispublic/
Certificate of Occupancy: Also know as the C of O, this document is important to have in hand as it is confirmation as to the status of your building. It will confirm the number of units on the property. It is especially important for older buildings that may have had units added on or square footage that was added on.
Citations: The city of LA is famous for issuing citations against properties for substandard conditions. If you are one of the unfortunate landlords who gets caught up in the system you may at some point have a citation filed against your property. I always check with the Dept of Building and Safety for this.
Title Check: Checking the title of a property is part of the basic due diligence in researching a property. I always order a preliminary title report and see if there is any incorrect title information. It is very common to see ex-spouses or ex-partners who are still on title when they should not be. Another common situation I see is people who have inherited a property through a trust. Often times the heirs haven’t filed the change of ownership paperwork or submitted a Certified Death Certificate with the county so the property still shows up in the decedents name. If there are any problems my title officer can clear things up free of charge.
Lien Check: I also check to see if there are any recorded liens against the property. Things like mortgages, home equity lines of credit, state tax liens, unpaid property tax liens, NOD’s, and judgments. You wouldn’t believe what turns up sometimes. For example, lots of times the mortgage company does not re-convey the mortgage properly when you pay it off. This results in the old mortgage still appearing on the title report. Another lien I see appearing on title is a lien for “Soft Story Retrofitting” for those owners that have been sent a letter to comply but have not yet done so. If any erroneous information does appear on the title report, I will be able to work with my title officer to remove it.
PRICING YOUR BUILDING
Comparables: The first thing I do when pricing a building is to pull all of the comparable properties that are on the market, are in escrow, or have sold in the last 6 months. I pull from 3 sources: The Multiple Listing Service (MLS), Co-Star, and the title company.
There are two categories that I put comps in: On market comps and off market comps. On market comps are properties that are in the MLS, Loopnet.com, or Co-Star. Off market comps are properties that never went on the market via the MLS, Loopnet.com, or Co-Star. There might have been an agent involved or it might have been a direct buyer seller transaction with no agent. Most agents don’t bother do use off market comps. However, they are very important. Just because it wasn’t in the MLS does not mean it isn’t a good comp.
Three Metrics: There are three pricing metrics I look for; Price per door (or unit), price per square foot, and gross rent multiplier (GRM). I will also occasionally use another metric, number of bedrooms and bathrooms. Note: I use these metrics usually for 4 units or above. For a small duplex or triplex or rental house I would just use a comp comparison. Let’s discuss these metrics for multifamily buildings.
Price Per Door: This is simple. Take the price of the building and divide by the number of units. That gives you the price per door. I find that this number is the most common metric used by many investors.
Price per square foot: Take price of building and divide by the square footage of the building.
GRM: Take the price of the building and divide by the scheduled gross annual income. So a $1,000,000 priced building with $100,000 gross income has a GRM of 10 (1,000,000/100,000=10)
What I want to find is the averages of these three metrics and then apply them to your building that I am analyzing. So if I know that the average price per door in Venice Beach for example is $500K and I am looking at your Venice 10 unit building, it’s base value is $5,000,000 (500k x 10 = $5,000,000).
I do the same for price per square foot and GRM. I plug in the data from the comparables that I picked in to my pricing spreadsheet. Once I have these averages I plug in the data for your building, and come up with an approximate baseline price for your building.
Variables: Ok let’s talk about the variables that affect the price of your building. They are income, year built, type of rent control, type of units, vacancies, condition, location, visual appeal, and size.
Income: Of course more income is always better all things being equal. If a building is generating rents at 50% of market value and it is under rent control, that building is not going to be as valuable. A new owner will not be able to raise rents and might be stuck with these tenants for quite some time.
Year built: Generally newer is better. Most investors will place more value on a mid 60’s building than a 1920’s building. Those older buildings have smaller bedrooms, tiny closets, inadequate garages, and sub standard electrical if it has not been upgraded. Obviously newer buildings will have more intrinsic value because of larger sizes and more amenities.
Type of units: The unit type is also a factor in pricing. If your building has townhouse style units or loft style units or en suite bathrooms your building will fetch a premium in the market compared to a building with average every day basic type units.
Vacancies: Buildings with vacancies can also fetch a premium price. Many investors love to get vacant units that can be rehabbed and rented for premium prices. Although lots of vacancies can create financing problems, most investors look favorably at buildings with vacancies.
Condition: Obviously a building in tip top condition with fresh paint, new roof, copper plumbing, new windows, and remodeled interiors is going to get a premium price compared to a run down building with galvanized plumbing, original windows, and un-remodeled units.
Location: This is another fairly obvious pricing variable. Better location equals better price.
Visual Appeal: The visual appeal has a definite factor in pricing. It pays to keep your building looking nice!
Size: Size is a factor since two 5-unit buildings for example could very greatly in square footage. One building might have very small units and no dining area while the other one could have large spacious units with large dining rooms.
Bedroom and bathroom count: Another factor that sometimes comes in to play is the number of bedrooms and bathrooms. If you have two 10-unit buildings and one has 3 bedroom and 2 bedroom units and the other one has all singles and 1 bedrooms the larger building with a better bed and bath count with command a premium price. The larger building will also have much higher potential market rents.
So once I have the baseline price per door unit, I will adjust the price I feel your building should sell for. I look at the condition of your building, location, bed and bath count and all of the other factors I discussed. I closely look at the other properties on the market and see how your building stacks up and then I come to my conclusion. This part of the analysis is a lot of my “gut” feeling. I’ve been in real estate for 35 years now and I have an intuitive feeling for pricing buildings. It’s what I do.
I also use the building analysis when I am pitching your building to an investor or an agent. If a buyer says Derrick the property is too expensive I can show him my analysis and let him know the average price per door and then the variables that make your building worth every nickel!
I hope this document helps you to understand how I go about analyzing buildings for my sellers. Please feel free to contact me direct at 310-308-3174 or email me at [email protected] and lets have a conversation about your situation. I’ve been in the business for 35 years and I sure I will have some great advice and counsel on your options depending what your goals are. Thank you very much.