Rent Control

Rent control is intended to solve the problem of people getting priced out of their homes and communities. The idea is that if you already live somewhere, even if you are renting, you have a right to stay there, as long as you pay your rent on time and follow the rules. The landlord has the right to raise the rent, but only at a "reasonable" rate.

In Los Angeles and many other cities, the "reasonable" rate is something like 3% per year. On the other hand, housing in Los Angeles has been appreciating at many times that rate, for the past 5 years. The data understates the discrepancy, because when a duplex is sold with tenants, the price is going to reflect the current rents, because the tenants usually can't be evicted.

To give an example, a client of ours owns a classic old 4-plex on a nice residential street near the Staples Center in downtown Los Angeles. The previous owner was a slumlord who neglected the property for about 20 years. It shows. He didn't raise the rent, either, so the tenants are paying around $280/month for each 1 bedroom apartment. Since my client has owned the property for a year, he gets to raise the rents 3%, or $8.40 per month.

You might be thinking, "Hooray for the tenants!" But this is really a lose-lose situation. The landlord figures, with annual rents at $13,843, the place is worth around $200K (about 15 times the annual rent). Hmm, but vacant? The apartments across the street rent for $1500/month. It would take $20,000 to renovate these units, but then they would easily go for $1500/month too, and using the same math the place would be worth over $1 million (a more conservative estimate is around $800K).

So, if the tenants move out, and the Landlord puts $20K into the property, he makes a quick $600K. OK, but the tenants aren't going to move out. So the landlord isn't going to put $20K into the property, and the place remains an eyesore.

I got a bright idea. Since the tenants have the power to make or break this deal, why not split the profit with them? Sell the property to the tenants for $500K, making a profit of $300K, and the tenants get a property with $300K instant equity, or they could sell it an pocket the $300K profit. I actually proposed this to the tenants (I had to explain it about 20 times to all the different family members, in English and Spanish) and gave them a written contract which included $20K for renovations, but they turned it down.

So the landlord is simply watching their every move and hoping they make a mistake. One of the tenants is planning to go to college, and I assume another one (they are all related) plans to use her room while she is away, but this will violate the guest provisions of the lease, and she could be evicted.

This is not a good situation for anyone.

How could rent control be made more neighborhood-friendly? Well, for one, there should be a time limit -- I propose 5 years per tenant per property, after which the rent can be reset to market rate. There is nothing wrong with renting, but it is supposed to be cheaper than owning in the short run and more expensive in the long run. When it becomes cheaper in the long run, it sets up reverse incentives for creating wealth. We want people to invest in their future, and in the future of the neighborhood. Tenants paying decade old prices are not doing that.

Another idea would be to apply it in phases. After 1 year the rent can be raised 3%, after two years it can be raised 4%, and so on, until the cap no longer has any impact. This would give the tenant a predictable below market rent pattern and allow for planning, but would not be so severe as to disincentivise them from ultimately buying, or disincentivise the landlord from improving the property.

The first objection to this would likely concern the elderly or disabled on fixed incomes with no assets. This is a minority of the urban population (or we are in big trouble), and it would be much less expensive to simply pay these qualified needy people some monthly amount to offset rises in the cost of living.

In the context of wealth being created by behavior, I want to take a moment to extol migration. The richest nation in the world is a nation of immigrants. All the richest cities in the world are teeming with people who come from somewhere else, and who migrated to improve their lot. In all the neighborhoods that declined in the past decades, the people who left were better educated and earned more than the people who remained. Moving to a new place is a wealth-creating behavior.

We should encourage this, especially for people who are currently economically below average. Every time real estate prices have doubled in a particular place, nearly all my friends and relatives who lived in that place have left. They go to another place, less desireable on the surface -- that's why it's cheaper -- but more desireable in the sense that they will have a better life there, because it's cheaper and poised to grow faster.

This is how people get wealthier, by constantly taking steps to improve their lot. It is counterproductive to incentivise people to stay in a place where they are less economically successful than they would be somewhere else.

So, my alternative to rent control is to allow the markets to work, and spend some more time effort and money helping people take advantage of the best opportunities available for them right now. That means looking at housing and jobs across the whole country (or why stop there, why not the world?), and picking the best ones for each individual.

Competing Buyers Protect Sellers

In any financial transaction, the party with more information has an advantage.

Say I am selling you my house, and I know about the midnight airport noise but you don't.

Sellers often have this advantage regarding problems with the property, since they have had more time to discover them. Disclosure laws, which force the seller to answer certain questions about the property, attempt to remedy this inequity, protecting the buyer.

But who protects the seller from getting ripped off? The answer is competing buyers.

Some real estate agents do protect their sellers. But unless you know real estate better than your agent, you will never know whether your agent is cheating you. It is too easy for them, and, under the current laws and industry practices, totally commonplace and acceptable (read "Freakonomics" by Stephen Levitt, in which he proves that real estate agents pervasively and systematically cheat sellers). What's worse, the agent listing your house often doesn't even know he is cheating you. It takes a fair understanding of economics and/or game theory to make sense of the situation, and few agents ever studied any of that.

The bottom line is that unless you are a savvy investor and can figure out for yourself what your house is really worth (in which case you are on a level the playing field with your listing agent), your only hope is to advertise your house to as many potential buyers as possible and have them bid against each other. This is relatively easy to do in active markets. Here's how.

1) List your property on the MLS with a discount service like "Help-U-Sell" Realty, which charges a flat rate of something like $200-500. Or call dozens of "full-service" agents until you find one that will sell your property for the lesser of 2% or $5000 (with the same amount for the buyer's agent). In my experience, about one in eight agents will do this, though the other seven will swear that the eighth doesn't exist. You can save several thousand dollars by calling around for an hour, so unless you are a rock star, it is totally worth your time.

2) If you sign a listing agreement, make sure it expires in less days than the Average Time On Market (ATOM) for your property type in your area. Friendly real estate agents will tell you the ATOM over the phone for free. If they refuse, call someone else. You don't want to work with someone who keeps information from you, or makes it difficult to get all the facts. It's already difficult enough. If the market is hot, agents tend to be flexible, but still half of them will say "no" to any modifications of their listing agreement. You must be firm. Call someone else, who says "yes". Do NOT sign a listing agreement for longer than the ATOM, and do make it clear that if the agent doesn't sell the house in that time, you are going to take it off the market and not relist it with them.

Do NOT list your property with anyone you already know. The moment you think of your sister-in-law the agent and feel a little guilty or generous, go online to your ftd florist and send her flowers, the huge deluxe $200 ones with a vase and a "thinking of you" note. Or send your agent college buddy or neighbor a check for $200 with the note, "Thanks for not listing my house." You will be glad you did.

[The only exception to this is if your neighbor the agent completely owns your neighborhood and continually lists and sells dozens of houses there. In that case they might be the best choice, but still, only if they agree to your terms.]

2) At the same time as listing on the MLS, advertise your property in craigslist.org, other online sites that allow you to post for free, and in the local newspaper or a circular that carries dozens of homes-for-sale-by-owner ads in your city. Pay the $70 or whatever it is, for a descriptive ad. You stand to gain many thousands by attracting the right eyeballs.

3) Price your property high. If your listing agent says it's priced too high, call around to other agents and ask them what they would list it for. Pick the highest one and add some on top of that.

4) If you get more than 1 offer in the first week, you probably priced it too low. If you like the offers anyway and just want to get it over with, counter back to all of them saying there are multiple offers and they have one more chance to give their highest and best offer.

5) If you get lots of interest but no offers in the first week, then wait another couple weeks, up to about half the ATOM.

6) If there are no offers by half the ATOM, and you advertised it aggressively as advised above, congratulations, you really did price it high! Note that you can never know what the market will bear unless you price it too high and they say no. This gives you valuable information. If you still want to sell, drop the price, but not below what you think it is really worth, based on what similar properties are listed for in your area. Put "REDUCED--Priced to Sell!!!" in the ads.

Note that Appraisers like to use only "sold" properties as the basis for comparison -- they don't trust "available" listings. Buyers, however, who are the ultimate decision makers, care much more about other available properties than already sold ones.

7) If it doesn't sell by the ATOM, take it off the market, cancel the listing, and relist it with another agent, which you find in the same way as you found this one. Repeat this process.

Patience tends to pay off handsomely, especially when the market is rising. If you are desperate to sell, or the market is falling, follow the same procedure, except cut all the timeframes in half and lower the prices a little.

Seek and you shall find

I am very good at finding things.

Let's say mom has misplaced her car keys again. Normally, we would "look for" the keys; that is, we look at an object and compare it to our mental picture of "mom's keys". If it matches, Eureka! If not, look at another object, and so on.

The problem with this approach is there are too many objects. A spoon is an object, a fork is an object, and a fork and spoon stacked together make a third object. Lumps in the upholstery are objects, pictures in the newspaper are objects. A fire in the fireplace will cast shadows on the wall creating millions of fleeting objects. This is why the "looking for" method often seems kind of endless and hopeless.

Elimination, on the other hand, is the opposite of "looking for" the keys. I know how big the keys are, and I have an idea where they might be, so I start in the most likely places, and prove that the keys are not there. Rather than "looking for" the keys in mom's purse, I prove to myself that the purse is key-free. Same with on the table, on or in the sofa, on the family room floor, in the entrance hall closet. Sometimes this can seem ridiculous, probing and shaking old shoes and such to prove the keys are not in there, but it's quick and guaranteed to work. The best part is that after eliminating a room, I no longer have any interest in looking there. If I eliminate the whole house, I am confident the keys are not at home, and I can proceed to check the grocery store, grandma's house, or wherever mom could have left her keys recently. In the positive "look for" approach, I'm always wondering, perhaps the keys might still be there, hidden.

This same principle works when seeking jobs, dates, apartments, investment opportunities, or anything else that can be hard to find. Here's how I apply it to real estate.

Assume that a great deal on real estate could be anywhere. By "great deal" I mean a great property at a great price which I can afford. I start by eliminating all the places that are too expensive. Then I eliminate the places that are too cold, too hot, too dark, too sparse, too polluted, too dangerous, too dilapidated. What I am left with are great deals. If my criteria are too stringent and no place on Earth qualifies, then I can relax my criteria and try again, confident that there is no deal available which is THAT great. With this approach I will identify the best deals available.

Compare that with the normal method, looking at deal after deal in search of a good one. Not only does it take longer, but when I find a good deal by the "look for" method, I am not sure how good it is, relative to what's available.

Managing Renovations

Creating nice housing on a tight budget is not an easy task for most people. There are several skills one needs in order to be good at it.

1. Spacial Imagination. You have to be the kind of kid who builds intricate Lego structures that aren't in the instructions. You have to imagine different options, e.g. where you could put a staircase or a closet or a microwave.

2. Design Ability. You can match colors and shapes and textures.

3. Bargain Hunting Talent. There are so many options for every product and service relating to housing, and the price variations are enormous. You comparison shop and get good values.

4. Investor Instincts. Timing and cashflow are crucial. So is the ROI (determined by the price paid by the final renter or buyer).

While most people don't have these skills, there are lots of people (of all income levels) who do. Here's how I would test for them.

1. Spacial Test: Give them 50 Lego blocks from different sets, and tell them to build something. Say they get extra points if they use all the blocks. Judge their structure on the following merits: a) stability, b) complexity, c) length of longest dimension, d) number of dots showing (extra credit for extremely many or extremely few).

2. Design Test: Give them a big pile of paint swatches and tile and carpet and upholstery and cabinet samples and half a picture out of Better Homes and Gardens or Architectural Digest. Ask them to select items for the other half of the photo, and compare with what the experts selected.

3. Bargain Test: Give them a copy of Consumer Reports and tell them they have a $50,000 shopping spree for items in that issue, and they can buy any number of each item. The winner will pick items with the highest ratio of trailing to leading derivative in the curve of value vs price. To make it more interesting add random volume discounts to each item.

4. Investing Test: Give them a budget of $1 million, and a random list of houses and apartments each with different rents and amounts of required renovation, and different expected appreciations and timeframes for renovation projects (all the numbers can be random). Ask them to make a month by month plan to invest the $1 million.

A person who scored well on all four tests would make a great Renovation Manager, provided they also had basic project and people management skills.