Landlord Shmandlord

There is a great guest post about Moral Hazards on Infectious Greed written by Tom Vanderwell.  It starts off with two comics:

In the post Tom describes the dangers of government bailouts and government protections for investors.  If investors do not bear the full risk of their investments, then they will make moves that they wouldn’t otherwise make (the Moral Hazzard).  This leads to various undesirable outcomes, because in the end somebody has to pay when the losses accrue.

I strongly support some of the suggestions that Tom makes, and believe that the US government should do as little of possible (with the one exception of preventing a larger market collapse).  The notion of privatizing the gains and nationalizing the losses, for example what this $25 billion dollar bailout of Freddie and Fannie would be, goes against everything our country stands for.

More inline with the first comic above, I’ve mentioned before that all of my mortgages were all done in a very sustainable way.  They’re almost all fixed mortgages, which ironically enough I took out against the recommendations of both my mortgage brokers and realtors at the time.  If I had taken their advice, and was in bad shape now, I wouldn’t deserve any government help.  But, if those who get in trouble because they chose the less-prudent, shinier path get bailed out,  I may be more likely to take the riskier approach next time.

Hey, why lose out on some extra profits a second time?

I’ve passed off the judgment to a Collections lawyer who is going to try to collect money from the settlement that my former tenants receive every year. We set up contingency compensation where they’ll receive one-third of what is collected. At this point, I just want to get this thing over with since it has been dragging on _way_ too long.

Depending on what news sites you read, you may be familiar with justin.tv (justin.tv blog). Since March 19th, 2007, Justin has been wearing a camera attached to his hat 24/7, and streaming the video and accompanying audio over the internet for everybody to watch. All of this has been run out of a single two bedroom apartment in San Francisco.

Many things have happened since the camera was first turned on. A viewer prank called the police and reported a stabbing in the apartment. Shortly afterwards, the police entered the apartment with guns drawn, amusing viewers around the world who were watching it live. The next day, somebody reported a fire and six firetrucks showed up, though to the viewers’ dismay it was not aired live (techcrunch).

Other problems are occurring too. Other tenants are complaining about the traffic at all hours of the night. Tenants have also complained that they were getting filmed in common areas without their permission (SF Chronicle).

All of this has obviously upset the landlords, Trinity Management Services, who operates over 50 apartment complexes in San Francisco. After searching the apartment a few times looking for lease violations, they eventually filed for eviction against justin.tv. Not only that, but they have stopped renting other apartments to applicants for simply knowing Justin.

As a landlord, I can completely understand why Trinity would want to get rid of these guys. It seems like the case should be pretty straightforward, if they’re violating the lease, causing the other tenants to complain, and disturbing the peace: kick them out.

However, then the situation got sticky for Trinity.

With all the publicity that the justin.tv team commands, websites sprung up to try to stop the eviction. Sites like Don’t Evict Justin were put up in an attempt to bring down the management company, using all tactics possible, including digging up dirt and court documents. Worse yet, it appears that a lot of Trinity’s business comes from young entrepreneurs/professionals, which means that by fighting justin.tv they may end up alienate a significant part of their tenant base.

I find it somewhat odd that these young entrepreneurs do not empathize more with their landlords and the other tenants. They are callously disrupting the lives of the other tenants as well as impacting the business of Trinity. It is sad to see that they’re taking the all-too-common “Landlords are Evil, Screw ‘Em” stance and ignoring everybody else.

My question for the Shmandlord readers is, what should Trinity do? How could a landlord protect themselves against this (although obviously the probability that it would happen to any given landlord is virtually zero)?

After finding my old tenants, I filed a small claims suit against them. The court date is set to February 20th, although the tenants haven’t been served yet. I spoke with the constable today and he seems to take pride in his ability to serve. He assured me that he has several tricks up his sleeve which he will use if necessary.

At this point, if I do not hear anything from the court then it means that they were served and the court date is on. If not, I’ll hear something within two weeks.

My fingers are crossed!

Well, I have some very exciting news:

I’ve located my ex-tenants. They’re living at a hotel in the neighboring town. I promptly filed the small claims suit today. It turns out that in this town there are two options for serving the papers. First, the court documents can be sent through certified mail, but this requires that the recipients sign the return receipt. I know from experience that they never sign for any of their mail, so this method is out of the question. The second method is to have the constable do it. The court clerk said that the constable is very good at finding and serving people, so I have my fingers crossed.

Unfortunately there is no way that I or another third party can serve the papers. Now I just have to wait to hear what happens. I am confident that even if they were to move again, I’ll be able to track them down. They owe me a lot of money and I feel obligated to make them pay.

I am personally aware that they’ve done this to several landlords before me. Do people not follow through (I understand it is a hassle, but if nobody tracked them down then why would all tenants not do this?) If anybody has evicted tenants before, did you end up getting paid? Did you have to file a civil suit?

I’ll keep you up to date.

There is a situation unfolding that has me very nervous.

The tenants who helped with the renovations are hitting some hard times. The father had an incident in early 2006 where he fell while working as a contractor, seriously hurting his wrist. He had a cast for a while and then seemed fine when it was removed, but apparently over the past few months it has become very painful. To make a long story short, he just had surgery a few weeks ago, and will be in a cast for the next four months. This presents the problem of how will they pay rent.

To flesh out the history, they own their own power-washing company. Power washing, I’ve learned, is a very seasonal business. Over the winter, they both do odd jobs to pay the bills. When the incident first occurred in January, he was unable to get another contract position and it was too cold to power wash. They stopped paying rent. I filed for eviction, and a week before our court date they explained to me that they were really in financial trouble. I let them slide on the rent for several weeks until power washing season. I was concerned that I would not collect, but they really were down on their luck and had no other options (if I evicted them, it would be unlikely they’d find another place to rent). Either way, I believed that they would pay me back and they did. Once the summer came they started giving me a check after every job, and were able to catch up within a few hundred dollars by September/October. They paid off the next two months by helping with the renovations (on which they did an amazing job).

This brings us to mid-November, whose rent they’ve only paid half. Again, the surgery was in the last week of November. Since then, they’ve been waiting for their worker’s comp checks to come in the mail, and of course it hasn’t. So I’ve been waiting, unsure how to proceed. As of today, they have still not received it, and I am basically at the end of my patience.

So what do I do?

Well, today I called the workers comp office to find out what’s really happening. The woman wouldn’t go into detail because I wasn’t authorized (I made it clear I was the landlord, to avoid any legal complications). But after speaking with her, it seems to have prompted my tenants to get in touch with her (they said they were trying, but for some reason couldn’t get in touch with her). Anyway, it looks like the first check is coming tomorrow to cover the past few weeks — since the surgery. From this point forward, checks will arrive every week. With the first check, they’re going to pay rent through the end of November. After that, they’re going to give me a quarter of the month’s rent each week from their checks.

I will still be a little behind, which I will collect when the wife gets her winter job (she couldn’t get it earlier because “she needed to take care of her husband”). Overall, I am cautiously trying to help them through. I certainly don’t want to get burned, and will protect myself. On the other hand, I would like to keep them as tenants (assuming they don’t get more behind. Enough is enough). They keep the place very neat, they fix things when needed, and they’re very nice.

We’ll see…

I know I’ve mentioned the blog before, but I cannot stop reading I am Facing Foreclosure. Just for the quick overview, Casey (the blogger) bought 8 properties to flip (not rent) with a combined value of over $2 mil. He did this by taking out over $140k in credit card debt, lied on his loan applications, and put no money down. He is now suffering the consequences.

Anyway, I just wanted to post a quote from one of his blog posts that struck me as funny. I have to admit that when I first read it, I felt a hint of jealousy, but quickly snapped out of it for obvious reasons. He is toying with the notion of renting out one of the houses that is being foreclosed:

I’m not paying the mortgage so why not collect some cash, right?

You know, I really wish I could just not pay my mortgages, and pocket the rent. Wouldn’t you? He then enumerates the reason why renting is not worth it to him.

Funny. If you have any thoughts on how I can stop paying my mortgages please let me know. However, I will not consider suggestions that result in foreclosure.

Thanks sercasey for the image.

Flooding has been in the news a lot recently, and it can (obviously) be very devastating for a real estate investor. For example, look at what happened to investors whose buildings were flooded in New Orleans due to Katrina: instantly they’re no longer collecting rents, their properties require extensive repairs, and their investments are worth significantly less than before the flood. Future investors will certainly need to factor these risks into any future purchases.

The above case is pretty easy to analyze because the risks are fairly well known. There are times when the problem isn’t so straightforward.

One such case is when flood patterns change, sometimes very unexpectedly. The Delaware River, for example, runs along the border between New Jersey and Pennsylvania. Anybody who is familiar with the Delaware and its river towns are most likely familiar with the notorious Flood of 1955, which was the worst in living memory. Afterwards, there was a long period without much flooding. Seemingly all of the sudden there have been a series of very bad floods the past few years. In fact, if you examine historical flood data, you’ll see that half of the “Major Flood Stage” crests on record occurred in 2004-2006 (For these numbers, I am using historical crest data at Riegalsville, PA. Major flood stage is 30ft.).

1. 38.85 ft on 1955/08/20
2. 35.90 ft on 1903/10/10
3. 34.07 ft on 2005/04/3
4. 33.62 ft on 2006/06/29
5. 32.45 ft on 1936/03/19
6. 30.95 ft on 2004/09/19

The first question that comes to mind is, why all of the sudden have there been so many floods. Proposed reasons include (source):

• Poor management: floods could be minimized by regulating flow into and out of reservoirs that release water upstream
• Overdevelopment and construction, both along the main stem of the river and its tributaries.
• Bad luck. Too much rain, too quickly.

A friend of mine lives on the river in what was thought to be a 50-year flood-plain (this means that he has a 1/50 chance, or 2%, of having his house flooded in any given year). The river entered his house in each of the three floods listed above. Each time, he has had to refinish walls, replace appliances, landscape his washed-away driveway and yard, etc. His house was worth upwards of a few million dollars in 2003, and he believes that these floods could have eaten away over 30% of this value.

His flood insurance does help somewhat, however each flood still ends up costing him thousands of dollars, not to mention the hours of work preparing, evacuating, and then restoring. He personally believes that upriver construction is primarily responsible for the problem, and is interested in selling the property if he can get what he believes it is worth. He acknowledges that this will most likely require him to wait for an extended period without floods.

As an investor, how can you prepare for a situation like this? Should you simply avoid buying a place anywhere near rivers or lakes? If not, how do you prepare for the potential financial hit? How about other natural disasters, like earthquakes in California?

Personally, each of the places that I’ve purchased are in areas where it is highly unlikely that they’re going to have problems with a flood, and I am certainly comforted by this. I can appreciate how desirable water-front property is, but I believe that in order to purchase it as an investment you need to have a very large slush fund set aside (making it much less lucrative).

(Note: I took the above picture in Lambertville, NJ in April, 2005. If you would like to see more, check out this guy kayaking in his backyard, a submerged river-front shop, or an image of the Lambertville Station (there are two parking lots under there.)

Now that my troubled tenants are out and I know the place isn’t too damaged, I can post this without being as wary! Reuters is carrying a bizarre story about an evicted tenant that blows up his landlord’s flat:

LISBON (Reuters) - An 80-year-old man blew up his flat on Monday to retaliate for being evicted by his landlord, bringing down part of his five-floor central Lisbon block and setting it alight.

“He had threatened neighbours that he would blow up the place if he ever got kicked out,” Carlos Pinto, a fireman with the Lisbon fire brigade, told Reuters. “I guess he kept his promise.”

He said neighbours had reported that the man had threatened to pour petrol on his floor and set it alight, and one reported seeing him with a bottle of petrol moments before the explosion.

The man suffered severe burns. No other casualties were reported.

At least my recent situation didn’t get this out of hand.

Well, today at noon I met the Court Officer at my property to finally evict my tenants. When I arrived, he had already placed a note on the door reading:

NOTICE By order of: The ****** County Special Civil Part, Tenants of these premises have been evicted and the plaintiff placed in full possession thereof. NO TRESPASSING.

He knocked on the door several times, there was no response and no sign of the dogs. I unlocked the door and we went upstairs…

The place was a mess. The first thing that I noticed was that they pulled up the rugs in the hall and the master bedroom, the rugs that I had paid them to put in about 10 months ago (at a good price including time and materials, and when I inspected soon after installation looked good).

They left most of the large furniture including queen size mattresses, several dressers, and cabinets. Besides that, they left an old television, an old microwave, piles of books, a huge bag of garbage, and tons of other items scattered all over the place. According to the neighbor, they moved yesterday by carrying the things that they wanted out in pillow cases.

Other than the junk, there were a few problems, but thankfully nothing permanent. Problems like three broken windows, lights, and door knobs.

Obviously, this is going to be an ordeal to fix, but I’m happy they’re out. First I need to talk to my lawyer to figure out 1) Do I have to store the remaining stuff, or can I assume that they do not want it? 2) Should we pursue any criminal charges? 3) How should we approach small claims?

I am definitely going to take them to court to get a judgment, then work to get reimbursed.

As far as the apartment, one of my other tenants has a business that does jobs like cleaning apartments after tenants move out, painting, and sanding/staining floors (There are hard wood floors underneath the carpets, which I’m thinking about just fixing and leaving. What are the advantages to hard wood vs. carpets in rentals?)

The next few weeks will still be interesting, but at least I know where things stand and I don’t have to worry about being liable for those vicious dogs. Unfortunately, I do not think that the apartment will be ready for September 1st, but hopefully by the 15th.

The line of the day goes to my friend’s girlfriend, when she came up with today’s theme song:

Who kicked the dogs out?

Rick, Rick, Rick Rick.