Hoocoodanode will be going offline for security related maintenance at 11 PM PST tonight, and may be down for several hours. Sorry for the inconvenience.
My wife and I have been renting for several years now, after having decided that house prices were only going down.
In the course of finding a rental, we carefully researched the finances and background of our landlord. Our friends thought we were nuts. But it saved us: one landlord was teetering on the edge having brought an investment property at the peak. I assume he's already been foreclosed.
Morning, Tanta. I was in this same situation last year (the renter side). All the correspondence to the owner / previous occupant from the mortgage company (good old Downey) came to the rental, probably so they could re-fi as owner occupied. One time - after the re-fi - I inadvertently opened one, and found out that the rent I was paying was over $1k less than their mortgage!
Needless to say, we didn't renew that lease. In this case, I think it was a case of accidental landlords getting in way over their heads, as they banked on the appreciation from their old house to get into the new, then couldn't sell the old, then had to refi out all the equity to make the mtg payments on both houses, etc. etc.
if you have a rental property and your struggling to pay your home mortgage, it's very tempting and perhaps even makes sense to use collceted rents to stave off foreclosure of your personal home. from personal experience, this just sounds like so many people are walking a tightrope while juggling a half dozen flaming swords. you do whatever you can to keep going, but eventually something's gotta fall. lot's of very desperate people out there teetering on the edge.
My vote is for a variation on #1: The property was not positive cash flow from the get go, but the purchaser felt that, since home prices always go up, a small negative cash flow would be offset by a large capital gains.
I have friends who walked away from their house in Florida. They went 6 months without any payments before they had to move out.
Then they rented a house and after a few months found out the house was going to be foreclosed on. My friends threatened to sue the landlord claiming they were paying rent and the money should have been used to cover the mortgage. The landlord let them stop paying rent. They've been living rent free for about 4 months now and don't know when the final foreclosure will be.
They basically got close to a year of free shelter.
I feel like a sucker paying my mortgage on time every month.
If we assume that the majority of rents are priced efficiently why would any property owner, whether an insolvent landlord or a foreclosing bank, want to kick out a tenant? Why would a property owner give up income under any circumstances?
I pick #2, and would add in people who needed to relocate to take a job and thought that "renting it out" would be relatively easy. Those people are either renting in their new location or have bought another house and couldn't sell the old one and decided to rent it. Stuck with two payments.
Because then 'investor' properties are less likely to be single-family, the renter share of households affected by foreclosure is even greater.
The National Low Income Housing Coalition estimated renters accounted for 45 percent of households in properties going through the final stages of foreclosure in Massachusetts, Connecticut, New Hemisphere and Rhode Island for 2007 and the first three months of 2008.
I agree. No one driving the bus paid any attention to the price/rent ratios. Or the boom would never have happened.
In MA, multifamily prices have plummeted from their peaks, faster than any other kind of residential property. In the gilded years, buyers overpaid for one of several bad reasons:
Expectations of explosive appreciation "justified" negative cash flow
Buyers choose owner-occupied two- to three-families so they could get onto the property ladder with help covering the mortgage--so they never did the usual calculations
Many multifamilies were bought to flip into condos. Whether renovations were completed or not, the owners are now accidental landlords.
By the way, lenders in MA have yet to show any sense during the crash, so it's little wonder they showed none during the boom.
How do you find these things in the WaPo? They write this decent in-depth article (in that it has useful facts for renters) and then I don't see it linked anywhere from the home-page, and nowhere in the real-estate section either? WTF? They have these articles, but no one can find them.
Grrrr.
The best way to determine if a rental property makes financial sense is to take a Schedule E, put it in an Excel spreadsheet and project out 10+ years in the columns to the right.
If there's a profit, there's an investment. If there isn't a profit, there's a gamble. Price appreciation/depreciation is a side show to the analysis. Cash flow is a deceptive measure (5/1 ARMs make for good cash flows...for a while).
If someone can't do that analysis, they shouldn't be a RE investor.
If we assume that the majority of rents are priced efficiently why would any property owner, whether an insolvent landlord or a foreclosing bank, want to kick out a tenant?
Indeed. If this is really happening on a wide scale, then we may have to stop assuming that the majority of rents are priced efficiently.
Or, possibly, we have to consider that these tenants were not actually "kicked out." They just thought they were. From the Post:
James Austin was stunned when a real estate agent showed up to snap photos of the house he was renting last year and casually informed him the place was in foreclosure.
Austin hastily found another house to rent in Bowie. . . .
The District has some of the nation's strongest tenant protection laws. D.C. renters can stay put after a house is foreclosed on, said Julie Becker, a senior staff lawyer at the District's Legal Aid Society.
The tenant would then pay rent to the bank until the bank sells the home. If a new owner wants to move in, it's up to him or her to evict the renter, Becker said. If the owner does not move in, the tenant has the right to stay.
"But a lot of renters don't know that," Becker said. "They get a notice in the mail, usually addressed to the owner, saying they have to move out within 30 days, and they just pack up and leave." . . .
LaToya Hall knew none of this when she and her cousin left the Manassas townhouse they rented.
Earlier this summer, the two received a mailed notice, addressed to their landlord, with the word "foreclosure" stamped on it in red letters. They called the landlord repeatedly but he did not respond. "Still, we kept thinking that as long as we paid him the rent, we would be all right," said Hall, 25.
She was not alarmed until two weeks later, when a sheriff tacked an eviction notice on their door. Three weeks later, she and her cousin lost hope that they would get their $1,200 deposit back.
In none of these cases does it appear that anyone was trying to legally evict tenants. They are either cases where the tenant just assumed (falsely) that they had to move out, or the servicer did not know that the property was tenant-occupied (the eviction was being processed on the assumption that the occupants were the owner) and the tenant did not realize that eviction notices addressed to the landlord do not apply to paying tenants under the local law.
So I hate to be a shill for the industry again, but these are not examples of lenders stupidly evicting paying tenants. These are undoubtedly cases of original occupancy fraud--the lender thought those properties were owner-occupied.
When I sold my last rental April of 2006 to my listing agent it was for 273x monthly rent. By my calculations PITI for the new owner was exactly double the rent assuming 100% occupancy. How'd that turn out? Well, they either sold or withdrew the listing a few months back with a list price some 15% lower. Negative cash flow and rapid depreciation, the investors nightmare.
1. The purchase price of the property was simply nonsensical for an investment property, given market rents.
But investors bought on the expected future rental rates. The optimism about real estate prices clearly extended to rents. In NY, some large office buildings were financed at a price above the purchase price to subsidize interest payments until rents caught up with finance costs, which was confidently expected to occur within a year or two.
People buying rental housing in this small burg were definitely buying based on this thinking. These places usually have 3-4 apartments and it was pretty simple to do the math and realize they would be cash-flow negative after PITI, not even accounting for maintenance. Flipping this type of property here was generally not going to be profitable.
Given that vacancy rates of both houses and rental units are historically high, things are unlikely to workl out as planned.
The property was not positive cash flow from the get go, but the purchaser felt that, since home prices always go up, a small negative cash flow would be offset by a large capital gains.
Anyone who did that with 2-cents worth of brains, could have written off the difference as an operating loss on their returns (assuming they had a decent accountant). That loss might have offset gains in other departments.
...If someone can't do that analysis, they shouldn't be a RE investor.
Agreed. Unfortunately that's not part of the underwriting guidelines. An investor buys a property to generate positive cashflow a speculator buys a property betting on appreciation.
I have some sympathy for the accidental landlords. Some of them. I had to move for work. I'm renting a tiny apartment in the midwest, and trying to rent out my condo in the DC area.
Right now, the rent is $350 less than the payments, and it will be $400 a month less by the time the place is rented.
I bought in 2002, for owner occupancy. And believe me, I would sell it if I could.
All of which is a long way of saying that if a 2002 era condo, that was cheap and has a perfectly respectable 30 year 6% fixed rate is loosing this much money- ANYONE who bought after that has almost no way of breaking even renting.
For owner-occupied, the line I heard re: a non-US market was "either prices have to fall or incomes have to go up. Incomes can't go up that much." Wise words.
The corollary for rental properties (speaking US now) is either prices have to fall or rents to go up. But anyone who can do the math can see that the implied increase in rents is enormous - and unlikely.
There will of course be some differential (very low end rental properties might see demand increase), but for the most part, this is only the beginning. In the US. The RoW (rest of world) will feel the pain later.
LATimes
Ex-Countrywide CEO Angelo Mozilo is under formal SEC investigation
The probe is focused on whether he violated insider-trading law and whether the mortgage lender's disclosures misled investors, sources say. SEC escalates probe of Mozilo - Los Angeles Times
...the servicer did not know that the property was tenant-occupied (the eviction was being processed on the assumption that the occupants were the owner)
Additional shill: This is more common than you would expect. There was a substantial amount of "occupancy" fraud originated over the past few years (particularly among high ltv low doc loans). All of the information that the servicer has points to the home as owner's primary residence.
"In NY, some large office buildings were financed at a price above the purchase price to subsidize interest payments until rents caught up with finance costs, which was confidently expected to occur within a year or two."
Whatever the reason for a landlord's default a tenant should not have to suffer the consequences. D.C's law is a good one though I note in many states, as part of the foreclosure procedure, tenants are required to vacate the premises.
IANAL, but it seems to me, under such circumstances a tenant should have a case in the courts to pursue the original landlord for any costs or losses they suffer as a result of their eviction. It makes no sense for a failed landlord to remain secure in their residence after a default on their rental property while their tenant is uprooted and forced to find other accomodation at their own expense.
Cara, those of us who are kicking it old school look our our front door, and there it is on the front page....
What I find humorous is that several years ago, when bubble deniers were confronted with illogical rent/price ratios, they'd blithely state that "rents will rise." No matter how many times you tried to explain why that the rental market is more efficient at price discovery, they continued to confuse the constant and the variable in the equation. As if renters CARE what your carrying costs are. Of course this article reminds us that renter's should have some concern for whether their landlord can make their mortgage.
This is the mirror image of "You can pay your mortgage or somebody else's." If your rent in insufficient to pay ANYBODY'S mortgage, something is wrong.
This is why I always stick with professional property managers when I rent. That way I can also guarantee that something in the house will get repaired if it breaks.
My tale as a renter: moved to a new city and decided to rent for about a year while determining the right area to buy in. Went through an apartment finding service, found a place I liked, and rented it on a one-year lease -- landlord was a business (probably partnership). About a month in, the neighbor passed along some mail -- his last name matched the owner of record's first, confusing the post office. The item he opened was the first mortgage bill -- later identified to be a 100% loan at 8.5%, so our rent was less than 60% of the IO payment.
I started laying plans for an early move, including the option of buying out the landlord. About 8 months pass (with rumblings from the HOA that assessments aren't getting paid) before a lis pendens shows up on the public record from the lender. Within a few days, the landlord notifies us that he is trying to sell -- at a price above his summer 2007 purchase. I stifle my laughter, but move up my buying timeline a month.
I get an agent and identify a handful of comparable alternatives in the immediate area, but decide that avoiding the bother of moving is worth a little. Order a pre-offer appraisal of the rental, and make an offer exactly at appraisal -- $250K below asking and $210K below the 2007 price. Landlord counters $100K above our offer, so I move on to the first-choice property. Move at 11 months into the lease, with a comfortable overlap.
Just before I left, the association made a demand on the property over unpaid assessments -- that should precipitate into a crisis in a few days, if the foreclosure doesn't happen first. With it being on the market for four months at the same price, and with only about a dozen showings, he isn't going to be bought out of trouble.
Still can't figure out the plan the landlord had, however -- rent covering only 60% of IO leaves an awful large monthly deficit. He needed about 15% appreciation in the first year to avoid losing money (ignoring closing costs). A 30% drop in value certainly hurts, but he was in trouble anyway.
Perhaps not in DC. It absolutely happens elsewhere, where foreclosing lenders have a legal right to evict tenants in good standing.
But the legal right to evict paying tenants does not necessarily translate into the widespread practice of evicting legal tenants.
Do you have any links? Clear-cut cases where the lender in fact knew that the occupants were paying tenants when the eviction was processed?
You know I'm just trying to get a handle on "thousands" here. I dunno how many "thousands" we have, and I don't know how many "thousands" we have left after we subtract the ones involving occupancy fraud/naive tenants.
Historians will look back on this period and remark that we were playing Russian Roulette with five bullets in our six-guns. Very few will escape unscathed.
Typically, lenders won't accept less than a full monthly payment, so the landlords don't have the option of sending the checks directly to the landlord. Really more lender stoopidity.
Sometimes I advise clients to try it, and when the checks come back uncashed, seems to be you have an excellent defense to rent skimming. Not that anybody sues for that in Miami Dade County or South Florida. I'd never heard of it in over 30 years of real estate practice until the last 6 months.
And regrettably, I think the word of the year should be that weseally, spin-meister, phoney word "challenge".
Under DC law the Manassas eviction may not have been legal, but Manassas is in Virginia.
Right. But my point was that the lender was trying to evict the landlord, not the tenants--because the lender thought the occupant was the owner and had no knowledge of the lease. Everywhere it is legal to evict the former owner following a foreclosure.
We do not know what would have happened if the tenant had reacted by notifying the lender that she was indeed a paying tenant.
@RayOnTheFarm: Applying a rental shortfall as an operating loss against gains elsewhere is not as easy as you seem to imagine. The passive investor law passed a few years ago was designed to prevent that kind of activity. The average person who is renting out a house to cover mortgage payments (i.e. the kind of person discussed in these comments) will not be able to apply rental losses to other gains. At best you can neutralize the profit from rent over costs, but of course in this case there is no profit from rent over costs.
The rules that determine whether a person is an active or passive investor are reasonably strict.
Typically, lenders won't accept less than a full monthly payment, so the landlords don't have the option of sending the checks directly to the landlord. Really more lender stoopidity.
We assume you meant that tenants do not have this option.
May I ask why it is stoopid for a mortgage servicer to refuse to be a free property manager for an amateur landlord?
Bah! This story is just a symptom of the overall market. Now, if I see whole apartment complexes getting foreclosed upon... that would be an entirely different ballgame...
Unit 472: If the tennant has a lease, they have a cause of action against their landlord. He is in material breach of the contract. But of course people who hare having their properties foreclosed upon usually don't have large amounts of money to pay off all their creditors. That's the PROBLEM. It conceivelble in a no-recourse state that the foreclosure is sufficient to repair his balance sheet. But most of these accidental landlords had hope as a business plan and hired Prayers and Denial as their accounting firm.
I pick number 4, I see this almost on a daily basis in the L.A. area.
My company will often let tenants stay it they are co-operative for pre-marketing. Often we pay the tenants to move to mimimize possible damage CFK (cash for keys).
IMO --appears to be scams across the board. 100% financing, 1 or 2 payments made and then straight to forclosure all the while collecting rents.
Michigan Heritage Bank (MHB), a full service community bank in the Detroit area, announces the launch of their iEarn Checking Account. This account will pay 5.50% Annual Percentage Yield to customers who meet the simple requirements of the account.
"The iEarn's 5.50% Checking Account rewards rate is a half-percentage point above the prime lending rate, exceeding most savings and CD rates. The 5.50% Annual Percentage Yield is very attractive, either the highest or among the highest in the area," Raymond A. Biggs, Michigan Heritage Bank's President and CEO, noted
I like the phrase "mistakes were made" as phrase of the year. As if some ephemeral entity, not the person proferring the excuse, made a mistake.
And most usually, the "mistake" in question was a deliberate act that only became a mistake when it's effects saw the light of day in an investigation.
Back on topic: There was an article in WSJ a few months back about this sort of thing. The conundrum then, as now, is why a lender would ever want to kick out a paying tenant. Even if the rent doesn't cover the note, unless they can otherwise do better.
It should also be noted that all FNMA/Freddie loans of which I'm aware that are non-owner-occupied have a rider that explicitly assigns rents to the lender in the event of default. I know that oft-times there is ownership fraud about occupancy, but if the owners already have a home w/ a mortgage, the underwriting usually forces the property be considered as a rental, at least if it is in their same area (i.e., not a vacation home).
Thanks unit472. I was going to post just that link for Tanta. There have been multiple such articles in the Globe, and lenders have been very open about publicly opposing legislation giving tenants the right to remain. I spoke to my MA state rep, and he said his office was flooded with calls from tenants being evicted. I actually had the temerity to ask how many; sorry, I forget the number, but it wasn't 11.
@Barley: No, only if you are considered an "active" investor. And there are rules that determine that. The point is that you can't just take your rental unit loss and apply them against your income from your non-real-estate related job. That used to be true but is not automatically true anymore.
Rental operating loss is not equivalent to your mortgage interest deduction. It makes a lot of sense to discuss this with your accountant first.
The client I advised to walk yesterday is putting $200 a month out of his pocket towards the mtg, knew that and accepted it. Put about 12% down, has a fixed rate mortgage. Planned to hold on for 6 years before trying to flip. In short, his sins were venial rather than mortal. As I posted, the reason I told him to walk has nothing to do with him personally. He's willing and able to pay the small shortfall indefinitely. The problem is that there are so many foreclosures in the community, that the water bill is 8 months late, and there is no property insurance here in hurricane territory, on the whole association. He could pay separate insurance, but what good would that do if he had one fixed up unit surrounded by 399 mounds of destruction? Also, there is only 1 count 'em, ONE water meter in the whole association, and the water has been turned off once already. I suggested that maybe his building--4 units, 2 up and 2 down de facto secede from the association and try and get a separate water meter. But one unit is in foreclosure, and he doesn't think the city will allow that, anyway. He was also presented with a $2000 bill for other peoples' water, and a doubling of maintenance. I'm sure there will be other huge assessments.
I suggested he explain to his long time and excellent renter what is going on, and then stop paying everything. The situation is hopeless, unless the municipal authorities get involved, and I don't think that they are aware that they have any number of huge potential disasters in their future, that maybe could be ameliorated if action were taken now.
Jim A., this is anecdotal I admit but here in my community a week or so ago a former mortgage broker who had amassed 40 rental properties, mostly single family homes over the past few years sent in his assistant to have the gas service to his properties cut off.
I asked her why and she replied they were all being 'sold' and that her boss was starting a new 'business'. Yep, counseling others, for a fee, on how to handle foreclosure issues.
Lawyerliz,
This is why I effin' don't want to live anywhere with associations! Where we rent we've got a shared water bill through I believe some scam company. One unit in our building is empty... I don't know who gets the bill for their water, but I haven't noticed my water bill going up as a result. I think we use too much water than we should, so our neighbors are subsidizing us.
I said it somewhere else, but in tough financial times girls don't want to be prostitutes, the same way the bank doesn't want to be a landlord... maybe there's a less harsh analogy like retiree's don't want to be Wal-Mart greeters... but you've got to do what gets the bills paid.
liz - I am assuming that this is a condo association that is in trouble. Why not petition to BK the condo board/association. This would stay any foreclosures, and settle the accounts through managed liquidation and your client can gain some time.
Part of the problem with a servicer (anyone actually) accepting money from tenants, etc. is that it potentially disrupts the foreclosure time line. If they take dime one, it potentially resets the FC clock.
Same thing with landlords accepting partial rent payments. If they accept dime one, the eviction clock may reset.
Yes, we've never wanted to be part of an association. And I've never thought that condos were a good idea.
I've heard anecdotal stories about how older communities are having some, but fewer problems, so far at the bearable level. The only ones that I'd buy into now, are the ones filled with old people, who are mostly free and clear. I represent a couple of such (not over 55, just ended up that way) and those old ladies are fierce. Somebody not pay and they are immediately down their throats, asking me to write fierce letters and file liens!!
But several people have said to me: no assns in their future. Will be interesting to see how that plays out.
If anybody ever buys/builds anything in Miami-Dade again. (nearly 3 year's supply of listings)
markel: That's the point that I was trying to make. When these idiot dontwannabelandlords blow up like piñatas, there are a whole lot of people clawing on the floor for scraps. The chances that the tenant is going to actually get his damage deposit (And really, he's owed pro-rated moving expenses too...) are slim to none. They're in line behind the banks, the CC companies, the HOA, and who knows how many others that the flipper is stiffing.
Let's see now. The financials are nowhere near recovery. The multi-nationals and tech that were doing well because of a weak dollar will suffer as the dollar strengthens. Oil is going down because of the fear of a world-wide slowdown, possibly a global recession. So obviously all this adds up to another rally on WS!
There is the possibility that the landlord/owner note was sold on the secondary market. Then it becomes a potential diligence issue in that the secondary market purchaser may not have realized/cared/bothered to check if the note they were purchasing was a single family residential note or a multi. What do you think the chances are that the secondary market was purchasing "non-performing" notes and securitizing them?
Sometimes a note holder/servicer really/actually/does screw up either intentionally or unintentionally. It's not always the borrower out to scam the system.
And of course no HOAs and four walls all my own were the two unalterables that I gave my RE agent when I bought in '99. So I don't have a garage or a dining room, (two other things that I wanted) but my irritation level is much lower.
There's something wrong with accepting a cash flow? Even if it's less than expected/contracted for?
But what good would that do?
If it's a foreclosure situation, the mortgage is going to be at least 90 days past due by the time the FC is pending.
Beginning at that point to accept a partial monthly payment from the tenant will never bring the thing current. The arrearage will just increase each month because the payment is short. It won't stop FC.
If the servicer wants to do a workout with the owner, reducing the monthly payment to the rental amount, then the tenant could send the check every month to the servicer. But you have to get to that workout first before you just start accepting rent checks.
Strangely, the bk/receiver thing was tried in another community and just didn't work. I'm not sure why.
See, the people using the water are still living there, not kicked out by the foreclosure. And the banks refuse to pay maintenance once they take title until they are forced. And it certainly isn't just one bank thats in there. For all I know, there are dozens (or hundreds) of different banks.
I don't do bk, but it seems to me that the whole thing would be incredibly expense and the assn obviously has no money. Bk attys expect to be paid up from for obvious reason.
This is just the tip of the iceberg. Or, if you prefer another metaphor, the first lapping of the first waves of the tsnami.
If there is a waiver, why would this screw up the timeline? And if the tenant is a good tenant, why not leave them there? Maybe you could sign a rent with option to buy thing after it goes REO?
If you want to take advantage of these these accidental landlords, you really have to be a fly by night renter, with little stuff to move and have a friend with a minivan who owes you some favors.
That may not mean much to the tenants involved, but it would help for public policy reasons to stop thinking of foreclosure as the "cause" of these disruptions rather than the inevitable result of such "malinvestment."
ARG that makes too much sense for a Friday morning.
The good thing it does Tanta, is get some cashflows into the hands of lenders who desperately need those cashflows, and it disrupts fewer people's lives.
Why say landlords are bad people for rent skimming if they know ahead of time that any proffered money will be rejected anyway?
They could put the money into some sort of suspense account, pending any legal problem.
The amount due would be reduced, if there was a request for a deficiency,
NOT THAT THAT IS GONNA HAPPEN. Please don't thing that this means that deficiencies are gonna happen.
...last month I moved a renter out of a lovely OC home after she found out that the homeowner was about to enter foreclosure...
she was one pissed gal because she didn't have moving expenses budgeted and she had really done a great job of taking care of the property...
when she left she took the homeonwer's furniture along with her own....
she said something about "Justice and getting even..."
so the retirees who aren't moving in '08 are being replaced by angry renters......
A second lady broke down and cried when she realized her family did not have the $4000.00 to move their furnishings to Texas.......a job loss here, a family to live with in Texas, but no "belongings" when they get back on their feet....
None of these specifically answers Tanta's questions about whether the lender is knowingly evicting a renter, but the WaPo story does say that DC has some of the strongest laws in the country, and I believe one of the stories mentions tenants being given (by whom?) 3 days to move.
Liz,
Your question reminds me of a story I heard yesterday from another consultant.
He and a team are preparing a client for a major govt audit. They spent over a month gathering documents, cross-referencing the numbers and preparing schedules. The client's internal people threw away all the documents after the consultants were finished. "We're paperless" was the reason given. I'm fairly certain those client employees might be an ADP statistic soon, but my point is that lots of things happen....because people have limitations.
That's also the beauty of having occupations like ours'. You get paid the same for digging the hole or filling it in.
lama, speaking of an Excel spreadsheet, said "If someone can't do that analysis, they shouldn't be a RE investor"
Idiot. Some of us started investing in real estate before PC's were invented. Maybe you should learn some history. Computers and Excel are relatively new inventions and real estate investors have been around a bit longer.
Thread probably dead, but in Fla, an evictee can pay part or all of rent into the court registry. And the landlord, if they win, can ask for the Money. Sometimes, the evictee does have a point--roaches holding up the drywall etc. So you pay into the Court registry as a sign of good faith.
Yeah, lama, but I like to think my efforts aren't completely futile in the Big Picture of things.
Option-ARM's were pushed hard in the investment property arena...mortgage pro's sold the 'cash-flowing' minimum payment while silently lacing the margin with copious YSP.
The resulting adjustments, be it from tripping LTV thresholds by adding deferred interest to the principle balance, and/or having the loan convert to an amortized payment schedule (after the fixed period) at the fully indexed rate over a reduced term is the epitome of payment shock...and will turn a cash-flowing property into a cash-sucking one faster than you can say 'keys please'...
I haven't rented from an individual homeowner in about 5 years, but am willing to leave open the possibility once my current lease is up.
It seems to me that the proper risk-management thing to do is to pay $200 and take a lawyer out to lunch. I'll find out what the local laws and customs are and I'll do it in advance. If something like this were to happen to me, I won't panic because I'll already know what action to take and what my options are.
I recently attended a consumer law conference in Los Angeles. Topic of the day was the foreclosure crisis and how legal aid people could help homeowners in trouble. (Not their usual clientele).
Eviction of tenants in good standing came up as a side topic. The consensus from the front line people was that this is standard business practice by foreclosing banks and mortgage associations. Tenants rights attorneys from Berkeley, Oakland and San Francisco were smug. They're going to court and stopping the banks in some cases. All others said 'yes this is happening and there is nothing we can do'.
Can anyone from the mortgage lending/ banking side confirm?
All of you guys talking about Schedule E projections, cap rate (net income / purchase price) are right-on. To show how much the rest of the country has fallen off the cliff in terms of sanity, the sober analysis that you counsel is the same as what I read in a book called "No Money Down" by Robert Allen about 28 years ago. He talked about anything below a 7% cap rate as an "alligator" eating cash flow - and the owner. I think the "no money down" and owner financing stuff that he discusses must be taken in the context of when that book was written and the prevailing interest rates at the time, which I believe were in the high teens. He emphasized cash-flow and not pie-in-the-sky appreciation fantasies. He also said something in the first few pages the the idiot bankers of today should have realized, that is the lower the down payment, the more risk there is - to the lender. Anyway his and Bill Nickerson's book from over 40 years ago were two good ones that helped me with modest rentals in that era, but I think he went way over the top in later years. I only kept my last rental, purchased 10+ years ago, doing fine, and a place where in my old age, when social security, 401-K and pension could be bankrupt, at least I could have 4 other rents supporting me on a paid-up property if/when I retire and ever decide to move in there.
Getting tenants evicted after the writ of possession is issued has lengthened considerably. I have been told by various court personell that it's because of foreclosure evictions. I assume they are evicting everybody, renters, and owners both. Next time I have reason to nag the sheriff's office about something, I'll try to find out whether the sheriffs have a feel for whether it's owners or renters being kicked out.
Hmmm... so the renters are screwed out of homeownership if they don't want to "play the game" and lie about their income to get a toxic loan, and now they end up on the streets because the greedy bums who did "play the game" are losing their rental houses. Talk about losing out no matter what happens!
The consensus from the front line people was that this is standard business practice by foreclosing banks and mortgage associations.
Well, my experience, for what it's worth, is that very few lenders just have a blanket "always evict" policy.
It really depends on the property type, the resale market for that property type, and the rent being paid. A lot of rent skimmers do actually charge below-market rents. (Why be greedy if you aren't using any of it to pay the mortgage?) If that is true, then no investor is likely to be interested in buying the REO as tenant-occupied.
For a lot of the "accidental landlord" deals, the property is a single-family in a neighbhorhood with few single-family rentals. If that is true and you think your most likely prospective buyer of the REO is an owner-occupant who wants to move in immediately, then you evict if the law allows.
OTOH, if the property is some condo unit in a building that is already 50% or more non-owner-occupied? Why would anyone want to evict a tenant there as long as they're paying some kind of reasonable rent? In that case you assume that any buyer of the REO is likely to be an investor who will pay up for having an existing tenant in good standing.
Obviously it all gets complicated by the deferred maintenance/repair issue. A lot of evictions are motivated by the lender's need to gut the place before selling it.
All,
The cash flow analysis is important. I like the schedule E analysis as it vets out poor financing schemes. At the extreme, a straight cash flow analysis would favor a 30 year mortgage over a 15, even if the interest rate were substantially higher, because the cash flow would be better.
One thing I left out is to add a line at the bottom of your analysis and pay yourself an hourly wage. If you could make more with a second job, why take the risk of RE?
About to become a renter again, I'm seeing lots of new construction/recently remodeled (accidental landlord). Seems like a great deal, but the FC issue definitely has me spooked. How does one protect themselves in a situation like this?
Generally speaking, yes, it's 'standard practice' to evict tenants, for two reasons. First, they present potential liabilities to the owner of an REO property, and secondly, it's usually faster and easier to sell a REO property in which potential buyer(s) don't have to bother with evicting people.
That said, it's not uncommon for potential buyers to make inquiries to lenders on properties early on in the foreclosure process. Some who are looking to purchase a rental property on the cheap, would rather buy one with paying tenants already in the unit(s). In these cases, deals can usually be worked out. Sometimes, it's as simple as we'll sell you the note now at "X cents on the dollar", you take up the foreclosure where we left off, take title, and start collecting those rent checks. From the the tenants perspective, nothin' special - they just have a new landlord to make their check out to.
How does one protect themselves in a situation like this?
Avoid accidental landlords unless the rent is so attractive that you're willing to risk having to suddenly relocate, and you have the reserves to afford it while never getting your deposit back.
lama - Please accept my apology. Of course you are suggesting a great way to determine the soundness of an investment. It's just that I get so tired of all the 30 year olds that know nothing but how to operate computers...........
When I moved into my apartment in 2005, I made sure to ask my landlord what kind of mortgage he had. If he had said that it was interest-only or had a teaser intro rate (or payment), I probably would have found a different apartment.
From what I've read, it is normal for rental properties to be cash-flow negative at first. In the short-term, it is almost always better to be a renter. It is only in the long-term that owning a house is less expensive then renting. The historical average rent to price ratio is 5%. Interest rates are normally higher than that, so you are cash-flow negative on just the interest, before you add in taxes and maintenance. The books I've read suggest that in normal market conditions, you shouldn't expect to have positive cash flow in rental properties for the first 4-7 years. That is assuming that house prices and rents increase at the inflation rate.
Arrrgh! I've been dealing with this for months. The Foreclosures-R-Us services send realtors around to find out who is living in the property and encourage them to move. They inform tenants not that they have 60 days to move, but that if they don't leave within a couple of weeks, the Sheriff will boot them out. See PeonInChief: A Very Angry Woman
and PeonInChief: Tenants and Evictions in Sacramento
I may become one of these unfortunate dutiful renters who pays on time I did do some research into the house before I moved in, although not enough probably. In this are rental properties were being snatched up almost immeadiately and I mean immediately as soon as they came on the market (usually the same day), maybe all those people being forclosed on? anyway I looked up the house on trulia and it was sold in june 07 for 215 now according to trulia.com similar homes are listed for 159k in the area. Knowing the general trend in this area (California's central valley) the actual price is probably much lower. Basically this guy is potentially underwater (215k mortgage is probably more than my current rent of 1k per mo) and I may be on the hook. How can one protect himself, can I find out where the loan is, and if he is still making payments--not everyone is defaulting on their responsibilities--just looking for a little peace of mind. How can a Bitter Renter protect himself, Anyone else who can chime in is welcome.
I am as usual struck by the apparent lack of curiosity displayed here about how you can have so many foreclosures of cash-flowing rental properties.-Tanta Even though the tenants are paying, the rental payment is significantly less than the carrying costs of the property and the owner's other income is in no way adequate to make up the difference. This was a dumb loan for the owner to take and a dumb loan for the lender to make.
This sounds incredibly dumb to me too. During the boom, however, I heard the argument here in WI several times that cash flow doesn't matter. Investors said that the rent just helps offset part of the payments. You cash in when you sell it, they said, and it has gone up 12% per year. Granted some of these investors were 1st or 2nd generation off the dairy farm and not knowledgeable about business, but I think this "greater fool" speculation was even worse on the coasts where people are supposed to be more sophisticated. It was very reminiscent of the dot.com bubble in which earnings didn't matter and we needed to find new creative methods of valuation.
So I am not struck by the lack of curiosity about how investment properties ended up in foreclosure. For people whose memory only went back five years, cash flow didn't matter during the boom. I was surprised when I first of it around 2004, but I'm no longer surprised that people bought houses knowing they didn't cash flow.
What kind of liability does a PM company have to a tenant in a FC situation? I assume they vet a property before managing it, but still it's got to happen from time to time.
I see this as an example of people who are not/will not be moved or motivated by what may happen to their "credit". I suspect that many people will be glad to get out from under the mortgage at any cost. People naturally think that they will be able to make up for it or that their situation is different. So "no fear".
IMO there are many who do not have feel compelled to keep committments when things do not work out the way they hoped.
The property management company doesn't have any liability, and many don't seem to check out the landlord very carefully. However, I've heard of a few cases where the property management company allowed the tenant to quit paying rent and use the security deposit as rent payment prior to the foreclosure sale.
The soon-to-be-foreclosed homeowner, having moved out of the house, sees an opportunity for some quick cash and rents the place out to an unsuspecting tenant. A smart soon-to-be-foreclosed homeowner does this before the Notice of Default is filed.
foreclosureradar.com and similar sites let you see immediately if an NOD has been filed on the property you are renting. I know there are tenants who check every month to make sure their unit is not in foreclosure... Seemed a little paranoid to me at first but now it makes perfect sense. If you've got 1st, last and security deposit tied up with an owner who is not making payments you may as well stop paying rent too I suppose...
"Irrational Exuberance" may have been the underlying culprit. In some regions where investment purchases were appreciating at alarming rates, the investors acquired these rentals at perceived FMV. Rent vs. Buy cash-flowed. and, rents haven't adjusted abnormally in lieu of the events.
The investors may have had little or no warning that their ad valorem taxes would increase to the degrees that they did or that the cost of insuring the rental dwellings would increase to the levels that they did. Florida comes to mind.
Irrational exhuberance may have overcome the new generation portfolio hawks and quite frankly they may have lost more that their cash and equities during the last 2 years. Some may have been vocationally discarded by the abrubpt construction/housing freefall in their area.
Maybe integrity was compromised after survival became job 1. Some may have exhausted all their reserves in hopes that the turnaround was nearer than we know it to be. It is unfortunate that the renters have been added to the causualty list of the anomaly many are calling a housing contraction. It may take a genration or so to forget this lesson.
One thing is clear is that there is more to learn from this series characterized quite decently as malinvestment.
The Mortgage Bankers Association represents the cause of the meltdown
for the housing crisis which has not yet peaked. Their lender members with few regulations to control their unethical behavior in the conduct of residential mortgage lending is readily apparent by the number of foreclosures completed and in process. The Bankers protected by the politicians through lack of mortgage lending legislation has
made the "Lynch Mob" solution popular. The Bankers foreclosure the mortgage and hang the homeowner.Let the Mortgage Bankers Association defend their members right to conduct their mortgage lending with absolute impunity at the expense of all homebuyers.
If the Mortgage Bankers have not got the courage to defend their
greedy practices in a public forum let them write me at the address that follows.
Michael LittleBig
PO Box 16588, Rocky River OH 44116-3065
Hi, I like your blog. When I went to this great site Pissed Consumer - Consumer Reports, Complaints and Company reviews to post a complaint against Foreclosure I found out that I have also been scammed into signing up for something that doesn't exist. I found the complaints of other pissed customers who had the same problem. Watch out of this company!
I am a tenant who is being evicted. In my case, the property is a brand new townhouse in Sacramento. The owners are (were) the real estate developers. They purchased this land (and a lot of other land in Sacramento) at the height of the real estate bubble. They built these three-story town homes with a very luxurious touch (granite counters, 10 foot ceilings, 9 foot doors, crown moulding, luxury fixtures). The developers initially tried to sell them for $475K, but when no one bought they offered them for rent on a lease option. They successfully rented most of the units for around $1800 per month plus a very large deposit. Of course, one year later we are all being evicted. I will not get my deposit back, and I have no recourse with the bank. I have tried to make an offer to buy my unit, but the bank will not respond. In fact, the bank is bankrupt too! The only people who I can deal with is the fax machine of the liquidating attorneys handling the bank's bankruptcy. They will not talk to me, return my call, or accept an offer to purchase the property. In fact, they informed me (with a form letter) that I could not make an offer on MY unit until after I moved out and surrendered the property to them. AFTER I move my family and loose my entire deposit---THEN I can make an offer to buy. How crazy is that? Anyways, I have rented a new place and am packing up the moving truck this weekend. However, I wonder if the liquidators and their attorneys will even notice that I am out of the place! They are MIA. I imagine I could stay here for several months rent free and they would not even know or care.
Oh, and to add the final blow--about two months ago, the gas company comes to my house demanding $800 immediately from ME or they are turning off the gas for the entire building. Gas was supposed to be included in the rent, but they did not pay the bill. Since I was the first tenent in my building, the gas company wanted the past due amount from MY address. This included the balance for my unit as well as the rest of the building. In order to keep the gas on, I had to agree to pay the $800. I will have to argue with the power company and the PUC to get that money back.
The whole thing has been a night mare. The only gratification I have will be leaving my garbage in the garage for them to clean up. I figure that the attorneys can pay to haul my old Barco lounger to the dumps. After all, it seems like the attorneys are the only ones benefiting from this whole financial crises.
Hear, hear!
My wife and I have been renting for several years now, after having decided that house prices were only going down.
In the course of finding a rental, we carefully researched the finances and background of our landlord. Our friends thought we were nuts. But it saved us: one landlord was teetering on the edge having brought an investment property at the peak. I assume he's already been foreclosed.
Tenant beware.
Morning, Tanta. I was in this same situation last year (the renter side). All the correspondence to the owner / previous occupant from the mortgage company (good old Downey) came to the rental, probably so they could re-fi as owner occupied. One time - after the re-fi - I inadvertently opened one, and found out that the rent I was paying was over $1k less than their mortgage!
Needless to say, we didn't renew that lease. In this case, I think it was a case of accidental landlords getting in way over their heads, as they banked on the appreciation from their old house to get into the new, then couldn't sell the old, then had to refi out all the equity to make the mtg payments on both houses, etc. etc.
-Jaso
if you have a rental property and your struggling to pay your home mortgage, it's very tempting and perhaps even makes sense to use collceted rents to stave off foreclosure of your personal home. from personal experience, this just sounds like so many people are walking a tightrope while juggling a half dozen flaming swords. you do whatever you can to keep going, but eventually something's gotta fall. lot's of very desperate people out there teetering on the edge.
Good morning, Tanta. I love it when you use the [Austrian-school] word "malinvestment."
My vote is for a variation on #1: The property was not positive cash flow from the get go, but the purchaser felt that, since home prices always go up, a small negative cash flow would be offset by a large capital gains.
This was a dumb loan for the owner to take and a dumb loan for the lender to make.
and now their homes they do forsake.
I have friends who walked away from their house in Florida. They went 6 months without any payments before they had to move out.
Then they rented a house and after a few months found out the house was going to be foreclosed on. My friends threatened to sue the landlord claiming they were paying rent and the money should have been used to cover the mortgage. The landlord let them stop paying rent. They've been living rent free for about 4 months now and don't know when the final foreclosure will be.
They basically got close to a year of free shelter.
I feel like a sucker paying my mortgage on time every month.
I call this the Macklowe Syndrome.
He just did it on a slighly larger scale. Have they taken his yacht yet?
If we assume that the majority of rents are priced efficiently why would any property owner, whether an insolvent landlord or a foreclosing bank, want to kick out a tenant? Why would a property owner give up income under any circumstances?
I pick #2, and would add in people who needed to relocate to take a job and thought that "renting it out" would be relatively easy. Those people are either renting in their new location or have bought another house and couldn't sell the old one and decided to rent it. Stuck with two payments.
Because then 'investor' properties are less likely to be single-family, the renter share of households affected by foreclosure is even greater.
The National Low Income Housing Coalition estimated renters accounted for 45 percent of households in properties going through the final stages of foreclosure in Massachusetts, Connecticut, New Hemisphere and Rhode Island for 2007 and the first three months of 2008.
Seriously Tanta...
There wasn't a single property sold in America in 2005 that was priced at a proper multiple such that the rent covered overhead.
Residential real estate was approaching the 3 cap level - which basically is enough to cover real estate taxes and insurance ONLY!
I agree. No one driving the bus paid any attention to the price/rent ratios. Or the boom would never have happened.
In MA, multifamily prices have plummeted from their peaks, faster than any other kind of residential property. In the gilded years, buyers overpaid for one of several bad reasons:
By the way, lenders in MA have yet to show any sense during the crash, so it's little wonder they showed none during the boom.
How do you find these things in the WaPo? They write this decent in-depth article (in that it has useful facts for renters) and then I don't see it linked anywhere from the home-page, and nowhere in the real-estate section either? WTF? They have these articles, but no one can find them.
Grrrr.
Thanks for the link!!!!
The best way to determine if a rental property makes financial sense is to take a Schedule E, put it in an Excel spreadsheet and project out 10+ years in the columns to the right.
If there's a profit, there's an investment. If there isn't a profit, there's a gamble. Price appreciation/depreciation is a side show to the analysis. Cash flow is a deceptive measure (5/1 ARMs make for good cash flows...for a while).
If someone can't do that analysis, they shouldn't be a RE investor.
If we assume that the majority of rents are priced efficiently why would any property owner, whether an insolvent landlord or a foreclosing bank, want to kick out a tenant?
Indeed. If this is really happening on a wide scale, then we may have to stop assuming that the majority of rents are priced efficiently.
Or, possibly, we have to consider that these tenants were not actually "kicked out." They just thought they were. From the Post:
James Austin was stunned when a real estate agent showed up to snap photos of the house he was renting last year and casually informed him the place was in foreclosure.
Austin hastily found another house to rent in Bowie. . . .
The District has some of the nation's strongest tenant protection laws. D.C. renters can stay put after a house is foreclosed on, said Julie Becker, a senior staff lawyer at the District's Legal Aid Society.
The tenant would then pay rent to the bank until the bank sells the home. If a new owner wants to move in, it's up to him or her to evict the renter, Becker said. If the owner does not move in, the tenant has the right to stay.
"But a lot of renters don't know that," Becker said. "They get a notice in the mail, usually addressed to the owner, saying they have to move out within 30 days, and they just pack up and leave." . . .
LaToya Hall knew none of this when she and her cousin left the Manassas townhouse they rented.
Earlier this summer, the two received a mailed notice, addressed to their landlord, with the word "foreclosure" stamped on it in red letters. They called the landlord repeatedly but he did not respond. "Still, we kept thinking that as long as we paid him the rent, we would be all right," said Hall, 25.
She was not alarmed until two weeks later, when a sheriff tacked an eviction notice on their door. Three weeks later, she and her cousin lost hope that they would get their $1,200 deposit back.
In none of these cases does it appear that anyone was trying to legally evict tenants. They are either cases where the tenant just assumed (falsely) that they had to move out, or the servicer did not know that the property was tenant-occupied (the eviction was being processed on the assumption that the occupants were the owner) and the tenant did not realize that eviction notices addressed to the landlord do not apply to paying tenants under the local law.
So I hate to be a shill for the industry again, but these are not examples of lenders stupidly evicting paying tenants. These are undoubtedly cases of original occupancy fraud--the lender thought those properties were owner-occupied.
We don't have a crisis, we are climbing peak stupidity and the top is still a long way up.
When I sold my last rental April of 2006 to my listing agent it was for 273x monthly rent. By my calculations PITI for the new owner was exactly double the rent assuming 100% occupancy. How'd that turn out? Well, they either sold or withdrew the listing a few months back with a list price some 15% lower. Negative cash flow and rapid depreciation, the investors nightmare.
1. The purchase price of the property was simply nonsensical for an investment property, given market rents.
But investors bought on the expected future rental rates. The optimism about real estate prices clearly extended to rents. In NY, some large office buildings were financed at a price above the purchase price to subsidize interest payments until rents caught up with finance costs, which was confidently expected to occur within a year or two.
People buying rental housing in this small burg were definitely buying based on this thinking. These places usually have 3-4 apartments and it was pretty simple to do the math and realize they would be cash-flow negative after PITI, not even accounting for maintenance. Flipping this type of property here was generally not going to be profitable.
Given that vacancy rates of both houses and rental units are historically high, things are unlikely to workl out as planned.
The property was not positive cash flow from the get go, but the purchaser felt that, since home prices always go up, a small negative cash flow would be offset by a large capital gains.
Anyone who did that with 2-cents worth of brains, could have written off the difference as an operating loss on their returns (assuming they had a decent accountant). That loss might have offset gains in other departments.
...If someone can't do that analysis, they shouldn't be a RE investor.
Agreed. Unfortunately that's not part of the underwriting guidelines. An investor buys a property to generate positive cashflow a speculator buys a property betting on appreciation.
I have some sympathy for the accidental landlords. Some of them. I had to move for work. I'm renting a tiny apartment in the midwest, and trying to rent out my condo in the DC area.
Right now, the rent is $350 less than the payments, and it will be $400 a month less by the time the place is rented.
I bought in 2002, for owner occupancy. And believe me, I would sell it if I could.
All of which is a long way of saying that if a 2002 era condo, that was cheap and has a perfectly respectable 30 year 6% fixed rate is loosing this much money- ANYONE who bought after that has almost no way of breaking even renting.
(FYI- I paid $135k)
For owner-occupied, the line I heard re: a non-US market was "either prices have to fall or incomes have to go up. Incomes can't go up that much." Wise words.
The corollary for rental properties (speaking US now) is either prices have to fall or rents to go up. But anyone who can do the math can see that the implied increase in rents is enormous - and unlikely.
There will of course be some differential (very low end rental properties might see demand increase), but for the most part, this is only the beginning. In the US. The RoW (rest of world) will feel the pain later.
Ah, maybe "Counterparty Risk" does have a chance at word of the year for 2008.
But it's technically two words. And I still prefer 'Baseltooey' anyway.
In none of these cases does it appear that anyone was trying to legally evict tenants.
Perhaps not in DC. It absolutely happens elsewhere, where foreclosing lenders have a legal right to evict tenants in good standing.
LATimes
Ex-Countrywide CEO Angelo Mozilo is under formal SEC investigation
The probe is focused on whether he violated insider-trading law and whether the mortgage lender's disclosures misled investors, sources say.
SEC escalates probe of Mozilo - Los Angeles Times
...the servicer did not know that the property was tenant-occupied (the eviction was being processed on the assumption that the occupants were the owner)
Additional shill: This is more common than you would expect. There was a substantial amount of "occupancy" fraud originated over the past few years (particularly among high ltv low doc loans). All of the information that the servicer has points to the home as owner's primary residence.
Ah, maybe "Counterparty Risk" does have a chance at word of the year for 2008. -- Shnaps
How about Whocoodamalinvested?
Bob in MA wrote:
"In NY, some large office buildings were financed at a price above the purchase price to subsidize interest payments until rents caught up with finance costs, which was confidently expected to occur within a year or two."
Multifamily residential too.
All your malinvestment are belong to us
Mark, what is better than one home you cannot afford? Why of course, TWO homes you can't afford.
Whatever the reason for a landlord's default a tenant should not have to suffer the consequences. D.C's law is a good one though I note in many states, as part of the foreclosure procedure, tenants are required to vacate the premises.
IANAL, but it seems to me, under such circumstances a tenant should have a case in the courts to pursue the original landlord for any costs or losses they suffer as a result of their eviction. It makes no sense for a failed landlord to remain secure in their residence after a default on their rental property while their tenant is uprooted and forced to find other accomodation at their own expense.
Cara, those of us who are kicking it old school look our our front door, and there it is on the front page....
What I find humorous is that several years ago, when bubble deniers were confronted with illogical rent/price ratios, they'd blithely state that "rents will rise." No matter how many times you tried to explain why that the rental market is more efficient at price discovery, they continued to confuse the constant and the variable in the equation. As if renters CARE what your carrying costs are. Of course this article reminds us that renter's should have some concern for whether their landlord can make their mortgage.
This is the mirror image of "You can pay your mortgage or somebody else's." If your rent in insufficient to pay ANYBODY'S mortgage, something is wrong.
This is why I always stick with professional property managers when I rent. That way I can also guarantee that something in the house will get repaired if it breaks.
I malinvested in FNM and all I got was this lousy bailout.
My tale as a renter: moved to a new city and decided to rent for about a year while determining the right area to buy in. Went through an apartment finding service, found a place I liked, and rented it on a one-year lease -- landlord was a business (probably partnership). About a month in, the neighbor passed along some mail -- his last name matched the owner of record's first, confusing the post office. The item he opened was the first mortgage bill -- later identified to be a 100% loan at 8.5%, so our rent was less than 60% of the IO payment.
I started laying plans for an early move, including the option of buying out the landlord. About 8 months pass (with rumblings from the HOA that assessments aren't getting paid) before a lis pendens shows up on the public record from the lender. Within a few days, the landlord notifies us that he is trying to sell -- at a price above his summer 2007 purchase. I stifle my laughter, but move up my buying timeline a month.
I get an agent and identify a handful of comparable alternatives in the immediate area, but decide that avoiding the bother of moving is worth a little. Order a pre-offer appraisal of the rental, and make an offer exactly at appraisal -- $250K below asking and $210K below the 2007 price. Landlord counters $100K above our offer, so I move on to the first-choice property. Move at 11 months into the lease, with a comfortable overlap.
Just before I left, the association made a demand on the property over unpaid assessments -- that should precipitate into a crisis in a few days, if the foreclosure doesn't happen first. With it being on the market for four months at the same price, and with only about a dozen showings, he isn't going to be bought out of trouble.
Still can't figure out the plan the landlord had, however -- rent covering only 60% of IO leaves an awful large monthly deficit. He needed about 15% appreciation in the first year to avoid losing money (ignoring closing costs). A 30% drop in value certainly hurts, but he was in trouble anyway.
In none of these cases does it appear that anyone was trying to legally evict tenants.
I'm not so sure. Under DC law the Manassas eviction may not have been legal, but Manassas is in Virginia.
Virginia and Maryland laws are less renter-friendly, basically leaving tenants at the mercy of the new owners once a foreclosure is final.
"the lender thought those properties were owner-occupied"
add if : if the lender thought those properties were owner-occupied
or change this to: if the lenders were told those properties were owner-occupied
With respect, I suspect the frothy market led to a donÂ’t ask donÂ’t tell mentality.
Renters are victims of friendly fire
Perhaps not in DC. It absolutely happens elsewhere, where foreclosing lenders have a legal right to evict tenants in good standing.
But the legal right to evict paying tenants does not necessarily translate into the widespread practice of evicting legal tenants.
Do you have any links? Clear-cut cases where the lender in fact knew that the occupants were paying tenants when the eviction was processed?
You know I'm just trying to get a handle on "thousands" here. I dunno how many "thousands" we have, and I don't know how many "thousands" we have left after we subtract the ones involving occupancy fraud/naive tenants.
Historians will look back on this period and remark that we were playing Russian Roulette with five bullets in our six-guns. Very few will escape unscathed.
I will be very happy if we can make "malinvestment" the word for 2008.
Typically, lenders won't accept less than a full monthly payment, so the landlords don't have the option of sending the checks directly to the landlord. Really more lender stoopidity.
Sometimes I advise clients to try it, and when the checks come back uncashed, seems to be you have an excellent defense to rent skimming. Not that anybody sues for that in Miami Dade County or South Florida. I'd never heard of it in over 30 years of real estate practice until the last 6 months.
And regrettably, I think the word of the year should be that weseally, spin-meister, phoney word "challenge".
Tax law encourages negative cash flow if you expect appreciation.
Under DC law the Manassas eviction may not have been legal, but Manassas is in Virginia.
Right. But my point was that the lender was trying to evict the landlord, not the tenants--because the lender thought the occupant was the owner and had no knowledge of the lease. Everywhere it is legal to evict the former owner following a foreclosure.
We do not know what would have happened if the tenant had reacted by notifying the lender that she was indeed a paying tenant.
@RayOnTheFarm: Applying a rental shortfall as an operating loss against gains elsewhere is not as easy as you seem to imagine. The passive investor law passed a few years ago was designed to prevent that kind of activity. The average person who is renting out a house to cover mortgage payments (i.e. the kind of person discussed in these comments) will not be able to apply rental losses to other gains. At best you can neutralize the profit from rent over costs, but of course in this case there is no profit from rent over costs.
The rules that determine whether a person is an active or passive investor are reasonably strict.
Typically, lenders won't accept less than a full monthly payment, so the landlords don't have the option of sending the checks directly to the landlord. Really more lender stoopidity.
We assume you meant that tenants do not have this option.
May I ask why it is stoopid for a mortgage servicer to refuse to be a free property manager for an amateur landlord?
Bah! This story is just a symptom of the overall market. Now, if I see whole apartment complexes getting foreclosed upon... that would be an entirely different ballgame...
@ R
"Applying a rental shortfall as an operating loss against gains elsewhere"
It is my understanding however you can offset personal income (as opposed to gains). Right?
Massachusetts foreclosure crisis places renters at risk - The Boston Globe
Unit 472: If the tennant has a lease, they have a cause of action against their landlord. He is in material breach of the contract. But of course people who hare having their properties foreclosed upon usually don't have large amounts of money to pay off all their creditors. That's the PROBLEM. It conceivelble in a no-recourse state that the foreclosure is sufficient to repair his balance sheet. But most of these accidental landlords had hope as a business plan and hired Prayers and Denial as their accounting firm.
I pick number 4, I see this almost on a daily basis in the L.A. area.
My company will often let tenants stay it they are co-operative for pre-marketing. Often we pay the tenants to move to mimimize possible damage CFK (cash for keys).
IMO --appears to be scams across the board. 100% financing, 1 or 2 payments made and then straight to forclosure all the while collecting rents.
O/T (sorry Tanta)
Michigan Heritage Bank (MHB), a full service community bank in the Detroit area, announces the launch of their iEarn Checking Account. This account will pay 5.50% Annual Percentage Yield to customers who meet the simple requirements of the account.
"The iEarn's 5.50% Checking Account rewards rate is a half-percentage point above the prime lending rate, exceeding most savings and CD rates. The 5.50% Annual Percentage Yield is very attractive, either the highest or among the highest in the area," Raymond A. Biggs, Michigan Heritage Bank's President and CEO, noted
I like the phrase "mistakes were made" as phrase of the year. As if some ephemeral entity, not the person proferring the excuse, made a mistake.
And most usually, the "mistake" in question was a deliberate act that only became a mistake when it's effects saw the light of day in an investigation.
Back on topic: There was an article in WSJ a few months back about this sort of thing. The conundrum then, as now, is why a lender would ever want to kick out a paying tenant. Even if the rent doesn't cover the note, unless they can otherwise do better.
It should also be noted that all FNMA/Freddie loans of which I'm aware that are non-owner-occupied have a rider that explicitly assigns rents to the lender in the event of default. I know that oft-times there is ownership fraud about occupancy, but if the owners already have a home w/ a mortgage, the underwriting usually forces the property be considered as a rental, at least if it is in their same area (i.e., not a vacation home).
Thanks unit472. I was going to post just that link for Tanta. There have been multiple such articles in the Globe, and lenders have been very open about publicly opposing legislation giving tenants the right to remain. I spoke to my MA state rep, and he said his office was flooded with calls from tenants being evicted. I actually had the temerity to ask how many; sorry, I forget the number, but it wasn't 11.
@Barley: No, only if you are considered an "active" investor. And there are rules that determine that. The point is that you can't just take your rental unit loss and apply them against your income from your non-real-estate related job. That used to be true but is not automatically true anymore.
Rental operating loss is not equivalent to your mortgage interest deduction. It makes a lot of sense to discuss this with your accountant first.
The client I advised to walk yesterday is putting $200 a month out of his pocket towards the mtg, knew that and accepted it. Put about 12% down, has a fixed rate mortgage. Planned to hold on for 6 years before trying to flip. In short, his sins were venial rather than mortal. As I posted, the reason I told him to walk has nothing to do with him personally. He's willing and able to pay the small shortfall indefinitely. The problem is that there are so many foreclosures in the community, that the water bill is 8 months late, and there is no property insurance here in hurricane territory, on the whole association. He could pay separate insurance, but what good would that do if he had one fixed up unit surrounded by 399 mounds of destruction? Also, there is only 1 count 'em, ONE water meter in the whole association, and the water has been turned off once already. I suggested that maybe his building--4 units, 2 up and 2 down de facto secede from the association and try and get a separate water meter. But one unit is in foreclosure, and he doesn't think the city will allow that, anyway. He was also presented with a $2000 bill for other peoples' water, and a doubling of maintenance. I'm sure there will be other huge assessments.
I suggested he explain to his long time and excellent renter what is going on, and then stop paying everything. The situation is hopeless, unless the municipal authorities get involved, and I don't think that they are aware that they have any number of huge potential disasters in their future, that maybe could be ameliorated if action were taken now.
But it won't be.
If the tennant has a lease, they have a cause of action against their landlord.
That's a worthless right. If you ever get a day in court, two years from now, have fun collecting.
The disruption of having to suddenly find a new apartment in Boston is huge and immediate.
@ R
Thx. Now I'm confused. Gotta make a phone call.
Jim A., this is anecdotal I admit but here in my community a week or so ago a former mortgage broker who had amassed 40 rental properties, mostly single family homes over the past few years sent in his assistant to have the gas service to his properties cut off.
I asked her why and she replied they were all being 'sold' and that her boss was starting a new 'business'. Yep, counseling others, for a fee, on how to handle foreclosure issues.
40 tenants all being evicted!
Tanta, I'm not suggesting they act as property manager, just that they accept money. From the landlord or the tenant. Pending foreclosure.
There's something wrong with accepting a cash flow? Even if it's less than expected/contracted for?
Somebody (me!) could argue waiver, but a non-waiver form could be asked for and signed.
Lawyerliz,
This is why I effin' don't want to live anywhere with associations! Where we rent we've got a shared water bill through I believe some scam company. One unit in our building is empty... I don't know who gets the bill for their water, but I haven't noticed my water bill going up as a result. I think we use too much water than we should, so our neighbors are subsidizing us.
I said it somewhere else, but in tough financial times girls don't want to be prostitutes, the same way the bank doesn't want to be a landlord... maybe there's a less harsh analogy like retiree's don't want to be Wal-Mart greeters... but you've got to do what gets the bills paid.
@Barley: Here is a link, I am sure you will find more.
http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._469._Passive_activity_losses_and_credits_limited
liz - I am assuming that this is a condo association that is in trouble. Why not petition to BK the condo board/association. This would stay any foreclosures, and settle the accounts through managed liquidation and your client can gain some time.
Liz,
Part of the problem with a servicer (anyone actually) accepting money from tenants, etc. is that it potentially disrupts the foreclosure time line. If they take dime one, it potentially resets the FC clock.
Same thing with landlords accepting partial rent payments. If they accept dime one, the eviction clock may reset.
Yes, we've never wanted to be part of an association. And I've never thought that condos were a good idea.
I've heard anecdotal stories about how older communities are having some, but fewer problems, so far at the bearable level. The only ones that I'd buy into now, are the ones filled with old people, who are mostly free and clear. I represent a couple of such (not over 55, just ended up that way) and those old ladies are fierce. Somebody not pay and they are immediately down their throats, asking me to write fierce letters and file liens!!
But several people have said to me: no assns in their future. Will be interesting to see how that plays out.
If anybody ever buys/builds anything in Miami-Dade again. (nearly 3 year's supply of listings)
markel: That's the point that I was trying to make. When these idiot dontwannabelandlords blow up like piñatas, there are a whole lot of people clawing on the floor for scraps. The chances that the tenant is going to actually get his damage deposit (And really, he's owed pro-rated moving expenses too...) are slim to none. They're in line behind the banks, the CC companies, the HOA, and who knows how many others that the flipper is stiffing.
Let's see now. The financials are nowhere near recovery. The multi-nationals and tech that were doing well because of a weak dollar will suffer as the dollar strengthens. Oil is going down because of the fear of a world-wide slowdown, possibly a global recession. So obviously all this adds up to another rally on WS!
There is the possibility that the landlord/owner note was sold on the secondary market. Then it becomes a potential diligence issue in that the secondary market purchaser may not have realized/cared/bothered to check if the note they were purchasing was a single family residential note or a multi. What do you think the chances are that the secondary market was purchasing "non-performing" notes and securitizing them?
Sometimes a note holder/servicer really/actually/does screw up either intentionally or unintentionally. It's not always the borrower out to scam the system.
But that's just people like me thinking...
And of course no HOAs and four walls all my own were the two unalterables that I gave my RE agent when I bought in '99. So I don't have a garage or a dining room, (two other things that I wanted) but my irritation level is much lower.
There's something wrong with accepting a cash flow? Even if it's less than expected/contracted for?
But what good would that do?
If it's a foreclosure situation, the mortgage is going to be at least 90 days past due by the time the FC is pending.
Beginning at that point to accept a partial monthly payment from the tenant will never bring the thing current. The arrearage will just increase each month because the payment is short. It won't stop FC.
If the servicer wants to do a workout with the owner, reducing the monthly payment to the rental amount, then the tenant could send the check every month to the servicer. But you have to get to that workout first before you just start accepting rent checks.
Strangely, the bk/receiver thing was tried in another community and just didn't work. I'm not sure why.
See, the people using the water are still living there, not kicked out by the foreclosure. And the banks refuse to pay maintenance once they take title until they are forced. And it certainly isn't just one bank thats in there. For all I know, there are dozens (or hundreds) of different banks.
I don't do bk, but it seems to me that the whole thing would be incredibly expense and the assn obviously has no money. Bk attys expect to be paid up from for obvious reason.
This is just the tip of the iceberg. Or, if you prefer another metaphor, the first lapping of the first waves of the tsnami.
If there is a waiver, why would this screw up the timeline? And if the tenant is a good tenant, why not leave them there? Maybe you could sign a rent with option to buy thing after it goes REO?
If you want to take advantage of these these accidental landlords, you really have to be a fly by night renter, with little stuff to move and have a friend with a minivan who owes you some favors.
ARG that makes too much sense for a Friday morning.
The good thing it does Tanta, is get some cashflows into the hands of lenders who desperately need those cashflows, and it disrupts fewer people's lives.
Why say landlords are bad people for rent skimming if they know ahead of time that any proffered money will be rejected anyway?
They could put the money into some sort of suspense account, pending any legal problem.
The amount due would be reduced, if there was a request for a deficiency,
NOT THAT THAT IS GONNA HAPPEN. Please don't thing that this means that deficiencies are gonna happen.
"think"
...last month I moved a renter out of a lovely OC home after she found out that the homeowner was about to enter foreclosure...
she was one pissed gal because she didn't have moving expenses budgeted and she had really done a great job of taking care of the property...
when she left she took the homeonwer's furniture along with her own....
she said something about "Justice and getting even..."
so the retirees who aren't moving in '08 are being replaced by angry renters......
A second lady broke down and cried when she realized her family did not have the $4000.00 to move their furnishings to Texas.......a job loss here, a family to live with in Texas, but no "belongings" when they get back on their feet....
You're doing a heckuva job, Bushie!
Links to stories on renters in Cleveland ending up in homeless shelters:
from the Plains Dealer,
from an AP story,
and a Bill Moyers report on the subject.
None of these specifically answers Tanta's questions about whether the lender is knowingly evicting a renter, but the WaPo story does say that DC has some of the strongest laws in the country, and I believe one of the stories mentions tenants being given (by whom?) 3 days to move.
Liz,
Your question reminds me of a story I heard yesterday from another consultant.
He and a team are preparing a client for a major govt audit. They spent over a month gathering documents, cross-referencing the numbers and preparing schedules. The client's internal people threw away all the documents after the consultants were finished. "We're paperless" was the reason given. I'm fairly certain those client employees might be an ADP statistic soon, but my point is that lots of things happen....because people have limitations.
That's also the beauty of having occupations like ours'. You get paid the same for digging the hole or filling it in.
lama, speaking of an Excel spreadsheet, said "If someone can't do that analysis, they shouldn't be a RE investor"
Idiot. Some of us started investing in real estate before PC's were invented. Maybe you should learn some history. Computers and Excel are relatively new inventions and real estate investors have been around a bit longer.
Thread probably dead, but in Fla, an evictee can pay part or all of rent into the court registry. And the landlord, if they win, can ask for the Money. Sometimes, the evictee does have a point--roaches holding up the drywall etc. So you pay into the Court registry as a sign of good faith.
Yeah, lama, but I like to think my efforts aren't completely futile in the Big Picture of things.
Option-ARM's were pushed hard in the investment property arena...mortgage pro's sold the 'cash-flowing' minimum payment while silently lacing the margin with copious YSP.
The resulting adjustments, be it from tripping LTV thresholds by adding deferred interest to the principle balance, and/or having the loan convert to an amortized payment schedule (after the fixed period) at the fully indexed rate over a reduced term is the epitome of payment shock...and will turn a cash-flowing property into a cash-sucking one faster than you can say 'keys please'...
I haven't rented from an individual homeowner in about 5 years, but am willing to leave open the possibility once my current lease is up.
It seems to me that the proper risk-management thing to do is to pay $200 and take a lawyer out to lunch. I'll find out what the local laws and customs are and I'll do it in advance. If something like this were to happen to me, I won't panic because I'll already know what action to take and what my options are.
Tanta
I recently attended a consumer law conference in Los Angeles. Topic of the day was the foreclosure crisis and how legal aid people could help homeowners in trouble. (Not their usual clientele).
Eviction of tenants in good standing came up as a side topic. The consensus from the front line people was that this is standard business practice by foreclosing banks and mortgage associations. Tenants rights attorneys from Berkeley, Oakland and San Francisco were smug. They're going to court and stopping the banks in some cases. All others said 'yes this is happening and there is nothing we can do'.
Can anyone from the mortgage lending/ banking side confirm?
lama @ 9:32 -
Thanks for that little explanation.
Wife has asked if we should buy a rental, to which I'm soundly responding "no." At least, not for several years.
That said, that's a straightforward way of ballparking buy/not.
All of you guys talking about Schedule E projections, cap rate (net income / purchase price) are right-on. To show how much the rest of the country has fallen off the cliff in terms of sanity, the sober analysis that you counsel is the same as what I read in a book called "No Money Down" by Robert Allen about 28 years ago. He talked about anything below a 7% cap rate as an "alligator" eating cash flow - and the owner. I think the "no money down" and owner financing stuff that he discusses must be taken in the context of when that book was written and the prevailing interest rates at the time, which I believe were in the high teens. He emphasized cash-flow and not pie-in-the-sky appreciation fantasies. He also said something in the first few pages the the idiot bankers of today should have realized, that is the lower the down payment, the more risk there is - to the lender. Anyway his and Bill Nickerson's book from over 40 years ago were two good ones that helped me with modest rentals in that era, but I think he went way over the top in later years. I only kept my last rental, purchased 10+ years ago, doing fine, and a place where in my old age, when social security, 401-K and pension could be bankrupt, at least I could have 4 other rents supporting me on a paid-up property if/when I retire and ever decide to move in there.
lama, speaking of an Excel spreadsheet, said "If someone can't do that analysis, they shouldn't be a RE investor"
Idiot.
Name calling is so kindergarten.
lama did not say you had to do this analysis in a spreadsheet. If you are more comfortable with an abacus go ahead.
Getting tenants evicted after the writ of possession is issued has lengthened considerably. I have been told by various court personell that it's because of foreclosure evictions. I assume they are evicting everybody, renters, and owners both. Next time I have reason to nag the sheriff's office about something, I'll try to find out whether the sheriffs have a feel for whether it's owners or renters being kicked out.
Hmmm... so the renters are screwed out of homeownership if they don't want to "play the game" and lie about their income to get a toxic loan, and now they end up on the streets because the greedy bums who did "play the game" are losing their rental houses. Talk about losing out no matter what happens!
The consensus from the front line people was that this is standard business practice by foreclosing banks and mortgage associations.
Well, my experience, for what it's worth, is that very few lenders just have a blanket "always evict" policy.
It really depends on the property type, the resale market for that property type, and the rent being paid. A lot of rent skimmers do actually charge below-market rents. (Why be greedy if you aren't using any of it to pay the mortgage?) If that is true, then no investor is likely to be interested in buying the REO as tenant-occupied.
For a lot of the "accidental landlord" deals, the property is a single-family in a neighbhorhood with few single-family rentals. If that is true and you think your most likely prospective buyer of the REO is an owner-occupant who wants to move in immediately, then you evict if the law allows.
OTOH, if the property is some condo unit in a building that is already 50% or more non-owner-occupied? Why would anyone want to evict a tenant there as long as they're paying some kind of reasonable rent? In that case you assume that any buyer of the REO is likely to be an investor who will pay up for having an existing tenant in good standing.
Obviously it all gets complicated by the deferred maintenance/repair issue. A lot of evictions are motivated by the lender's need to gut the place before selling it.
lama, liz:
That's also the beauty of having occupations like ours'. You get paid the same for digging the hole or filling it in.
My favorite lawyer line from a movie:
"Yes Bill, but my question is, can we depreciate the hole as we fill it up?"
All,
The cash flow analysis is important. I like the schedule E analysis as it vets out poor financing schemes. At the extreme, a straight cash flow analysis would favor a 30 year mortgage over a 15, even if the interest rate were substantially higher, because the cash flow would be better.
One thing I left out is to add a line at the bottom of your analysis and pay yourself an hourly wage. If you could make more with a second job, why take the risk of RE?
About to become a renter again, I'm seeing lots of new construction/recently remodeled (accidental landlord). Seems like a great deal, but the FC issue definitely has me spooked. How does one protect themselves in a situation like this?
Swedish Chef -
Generally speaking, yes, it's 'standard practice' to evict tenants, for two reasons. First, they present potential liabilities to the owner of an REO property, and secondly, it's usually faster and easier to sell a REO property in which potential buyer(s) don't have to bother with evicting people.
That said, it's not uncommon for potential buyers to make inquiries to lenders on properties early on in the foreclosure process. Some who are looking to purchase a rental property on the cheap, would rather buy one with paying tenants already in the unit(s). In these cases, deals can usually be worked out. Sometimes, it's as simple as we'll sell you the note now at "X cents on the dollar", you take up the foreclosure where we left off, take title, and start collecting those rent checks. From the the tenants perspective, nothin' special - they just have a new landlord to make their check out to.
How does one protect themselves in a situation like this?
Avoid accidental landlords unless the rent is so attractive that you're willing to risk having to suddenly relocate, and you have the reserves to afford it while never getting your deposit back.
Tanta: Would it be realistic to ask for language added to a lease agreement that requires landlord to pay tenants moving costs in case of FC?
lama - Please accept my apology. Of course you are suggesting a great way to determine the soundness of an investment. It's just that I get so tired of all the 30 year olds that know nothing but how to operate computers...........
Would it be realistic to ask for language added to a lease agreement that requires landlord to pay tenants moving costs in case of FC?
People in FC don't have any money. Is the problem.
Most tenants in this situation can't even get their security deposit back. I dunno how you think you're going to get relo costs.
When I moved into my apartment in 2005, I made sure to ask my landlord what kind of mortgage he had. If he had said that it was interest-only or had a teaser intro rate (or payment), I probably would have found a different apartment.
From what I've read, it is normal for rental properties to be cash-flow negative at first. In the short-term, it is almost always better to be a renter. It is only in the long-term that owning a house is less expensive then renting. The historical average rent to price ratio is 5%. Interest rates are normally higher than that, so you are cash-flow negative on just the interest, before you add in taxes and maintenance. The books I've read suggest that in normal market conditions, you shouldn't expect to have positive cash flow in rental properties for the first 4-7 years. That is assuming that house prices and rents increase at the inflation rate.
Arrrgh! I've been dealing with this for months. The Foreclosures-R-Us services send realtors around to find out who is living in the property and encourage them to move. They inform tenants not that they have 60 days to move, but that if they don't leave within a couple of weeks, the Sheriff will boot them out. See
PeonInChief: A Very Angry Woman
and
PeonInChief: Tenants and Evictions in Sacramento
Negative cashflow! Make it up on appreciation! Alligators aren't just in Florida, they're all over the US.
I'm guessing if you asked some of these investors to subsidize someone else's rent, they'd be horrified. And yet that's what they're doing.
CR, Tanta
I may become one of these unfortunate dutiful renters who pays on time I did do some research into the house before I moved in, although not enough probably. In this are rental properties were being snatched up almost immeadiately and I mean immediately as soon as they came on the market (usually the same day), maybe all those people being forclosed on? anyway I looked up the house on trulia and it was sold in june 07 for 215 now according to trulia.com similar homes are listed for 159k in the area. Knowing the general trend in this area (California's central valley) the actual price is probably much lower. Basically this guy is potentially underwater (215k mortgage is probably more than my current rent of 1k per mo) and I may be on the hook. How can one protect himself, can I find out where the loan is, and if he is still making payments--not everyone is defaulting on their responsibilities--just looking for a little peace of mind. How can a Bitter Renter protect himself, Anyone else who can chime in is welcome.
I am as usual struck by the apparent lack of curiosity displayed here about how you can have so many foreclosures of cash-flowing rental properties.-Tanta
Even though the tenants are paying, the rental payment is significantly less than the carrying costs of the property and the owner's other income is in no way adequate to make up the difference. This was a dumb loan for the owner to take and a dumb loan for the lender to make.
This sounds incredibly dumb to me too. During the boom, however, I heard the argument here in WI several times that cash flow doesn't matter. Investors said that the rent just helps offset part of the payments. You cash in when you sell it, they said, and it has gone up 12% per year. Granted some of these investors were 1st or 2nd generation off the dairy farm and not knowledgeable about business, but I think this "greater fool" speculation was even worse on the coasts where people are supposed to be more sophisticated. It was very reminiscent of the dot.com bubble in which earnings didn't matter and we needed to find new creative methods of valuation.
So I am not struck by the lack of curiosity about how investment properties ended up in foreclosure. For people whose memory only went back five years, cash flow didn't matter during the boom. I was surprised when I first of it around 2004, but I'm no longer surprised that people bought houses knowing they didn't cash flow.
What kind of liability does a PM company have to a tenant in a FC situation? I assume they vet a property before managing it, but still it's got to happen from time to time.
Tanta,
I see this as an example of people who are not/will not be moved or motivated by what may happen to their "credit". I suspect that many people will be glad to get out from under the mortgage at any cost. People naturally think that they will be able to make up for it or that their situation is different. So "no fear".
IMO there are many who do not have feel compelled to keep committments when things do not work out the way they hoped.
LA Seller--
The property management company doesn't have any liability, and many don't seem to check out the landlord very carefully. However, I've heard of a few cases where the property management company allowed the tenant to quit paying rent and use the security deposit as rent payment prior to the foreclosure sale.
For those interested in these topics, you can find NLIHC's Renters in Foreclosure research page here:
NLIHC: National Low Income Housing Coalition - Special Topic: Renters in Foreclosure
My experience in possession court in the UK is that it's almost always #4.
foreclosureradar.com and similar sites let you see immediately if an NOD has been filed on the property you are renting. I know there are tenants who check every month to make sure their unit is not in foreclosure... Seemed a little paranoid to me at first but now it makes perfect sense. If you've got 1st, last and security deposit tied up with an owner who is not making payments you may as well stop paying rent too I suppose...
Tanta,
"Irrational Exuberance" may have been the underlying culprit. In some regions where investment purchases were appreciating at alarming rates, the investors acquired these rentals at perceived FMV. Rent vs. Buy cash-flowed. and, rents haven't adjusted abnormally in lieu of the events.
The investors may have had little or no warning that their ad valorem taxes would increase to the degrees that they did or that the cost of insuring the rental dwellings would increase to the levels that they did. Florida comes to mind.
Irrational exhuberance may have overcome the new generation portfolio hawks and quite frankly they may have lost more that their cash and equities during the last 2 years. Some may have been vocationally discarded by the abrubpt construction/housing freefall in their area.
Maybe integrity was compromised after survival became job 1. Some may have exhausted all their reserves in hopes that the turnaround was nearer than we know it to be. It is unfortunate that the renters have been added to the causualty list of the anomaly many are calling a housing contraction. It may take a genration or so to forget this lesson.
One thing is clear is that there is more to learn from this series characterized quite decently as malinvestment.
The Mortgage Bankers Association represents the cause of the meltdown
for the housing crisis which has not yet peaked. Their lender members with few regulations to control their unethical behavior in the conduct of residential mortgage lending is readily apparent by the number of foreclosures completed and in process. The Bankers protected by the politicians through lack of mortgage lending legislation has
made the "Lynch Mob" solution popular. The Bankers foreclosure the mortgage and hang the homeowner.Let the Mortgage Bankers Association defend their members right to conduct their mortgage lending with absolute impunity at the expense of all homebuyers.
If the Mortgage Bankers have not got the courage to defend their
greedy practices in a public forum let them write me at the address that follows.
Michael LittleBig
PO Box 16588, Rocky River OH 44116-3065
Hi, I like your blog. When I went to this great site Pissed Consumer - Consumer Reports, Complaints and Company reviews to post a complaint against Foreclosure I found out that I have also been scammed into signing up for something that doesn't exist. I found the complaints of other pissed customers who had the same problem. Watch out of this company!
I am a tenant who is being evicted. In my case, the property is a brand new townhouse in Sacramento. The owners are (were) the real estate developers. They purchased this land (and a lot of other land in Sacramento) at the height of the real estate bubble. They built these three-story town homes with a very luxurious touch (granite counters, 10 foot ceilings, 9 foot doors, crown moulding, luxury fixtures). The developers initially tried to sell them for $475K, but when no one bought they offered them for rent on a lease option. They successfully rented most of the units for around $1800 per month plus a very large deposit. Of course, one year later we are all being evicted. I will not get my deposit back, and I have no recourse with the bank. I have tried to make an offer to buy my unit, but the bank will not respond. In fact, the bank is bankrupt too! The only people who I can deal with is the fax machine of the liquidating attorneys handling the bank's bankruptcy. They will not talk to me, return my call, or accept an offer to purchase the property. In fact, they informed me (with a form letter) that I could not make an offer on MY unit until after I moved out and surrendered the property to them. AFTER I move my family and loose my entire deposit---THEN I can make an offer to buy. How crazy is that? Anyways, I have rented a new place and am packing up the moving truck this weekend. However, I wonder if the liquidators and their attorneys will even notice that I am out of the place! They are MIA. I imagine I could stay here for several months rent free and they would not even know or care.
Oh, and to add the final blow--about two months ago, the gas company comes to my house demanding $800 immediately from ME or they are turning off the gas for the entire building. Gas was supposed to be included in the rent, but they did not pay the bill. Since I was the first tenent in my building, the gas company wanted the past due amount from MY address. This included the balance for my unit as well as the rest of the building. In order to keep the gas on, I had to agree to pay the $800. I will have to argue with the power company and the PUC to get that money back.
The whole thing has been a night mare. The only gratification I have will be leaving my garbage in the garage for them to clean up. I figure that the attorneys can pay to haul my old Barco lounger to the dumps. After all, it seems like the attorneys are the only ones benefiting from this whole financial crises.