Can everyone win? - Posted by Frank Lessa

Real Estate Investing
#1

Posted by Frank on December 26, 1998 at 17:34:28:

Rents are certainly a function of the local
marketplace, but government is already too
involved, government has already imposed vast
costs on landlords and tenants. Where I live,
you can’t legally rent a four-bedroom house to
three unrelated individuals unless the property
has an existing, grandfathered rental license.
There’s some cliche about all politics being local,
and that applies with a vengence to the politics
and economics of housing. Where I live, the
homeowners are trying to drive landlords and
tenants out of town. When landlords complain.
the homeowners say that the marketplace isn’t
working they way they want, and when tenants
complain (about rents driven north by excessive
regulation) the homeowners say that’s economics
and the marketplace in action. You didn’t really
think there is a free market in housing, did you?

As for the marketplace controlling itself, it is
precisely that action of the marketplace which
makes winners and losers. For example, blockbusting
does a pretty good job of making losers out of
homeowners, and gentrification does a pretty good job
of making losers out of tenants.

#2

Can everyone win? - Posted by Frank Lessa

Posted by Frank Lessa on December 25, 1998 at 13:07:21:

I live in a suburban college town where real estate
investing has a poor image, especially among homeowners who
believe there is too much rental housing in town and that
the the rental market is driven largely by a handful of
"big" greedy landlords among whom rental ownership is
becoming increasingly concentrated and who have no concern
for the community, only for their bottom line. These
homeowners are succeeding in enlisting city government in
their efforts to impose a regulatory stranglehold on
landlords and tenants. Perhaps ironically, their success
is driving out small landlords, thereby concentrating
rental ownership even further in the hands of big landlords,
to the detriment of tenants who face both declinging choice
of landlords and soaring rents, and of taxpayers facing
large city legal costs in defending litigation brought by
big landlords growing in wealth and militancy.

Nearby in a larger, more urban city, homeowners are also
enlisting government in efforts against landlords, tenants,
and rental property.

I am looking for creative real estate solutions which
create only winners - homeowners, landlords, tenants, sellers, and buyers - without creating losers. (I note that
some of the success stories and strategies posted on this
site do produce losers - for example, a tenant living in
a flipped property who faces a large rent increase from
the new owner.) Any suggestions?

#3

Re: Can everyone win? - Posted by John Katitus

Posted by John Katitus on December 29, 1998 at 02:27:03:

I live in a medium size Ohio town of 60,000 where the city government has identified the enemy - and it is us, the landlords. They have pushed “Occupancy Inspection” statutes through council that the city law director characterizes as “blatantly unlawful.” Although this is not a college town, this is also done here in order to regulate the rental housing market.

Many small investors have stopped dealing in this city until the political situation changes. It has become expensive, frustrating, and time consuming, which can quickly drive small investors to paths of less resistance. Sure, the few terrible landlords with poorly-kept properties were forced to clean up or leave town, but the greatest lasting effect is the same as in your town - higher rents due to the decrease in rental housing supply and a decrease in small landlords.

The problem in your town is that the homeowners disliked the college tenants. They have designed a way to stop conversion of homes to rental units at expense, literally, of and to the students. Would they be happier if there were layoffs at the college as a result of reduced attendance due to the high cost of rental housing? Probably not, since some of them are undoubtedly employed by the college.

It would be great if there were a way for everyone to be happy and “win.” This started, however, by a group deciding they were not content. They tried to satisfy their perceived “problem” by pushing someone else. It’s not surprising that the government could not provide a solution.

Until ALL the groups involved can understand and empathize with the positions of ALL the other groups, no satisfactory solution can emerge. People cannot expect to live together harmoniously without the will to do so.

#4

Re: Can everyone win? - Posted by Rich

Posted by Rich on December 28, 1998 at 22:55:37:

I too live in a college town, where similar attempts by the city government have made being a landlord somewhat difficult. But I don’t think the regulations favor a large operator over a single property owner. Landlords pay an annual fee for each rental unit they own, and each property is inspected every other year to make sure their property is up to code. Some of the multi-property owners, who were used to doing very little to upkeep their properties, were forced to upgrade, or the doors were padlocked. As far as who determines the rent around here, I’d say the college itself is responsible. Landlords base their rent on what the student has to pay to live on campus, and slightly undercuts that price. Basic economics. ‘Everybody winning’…it’s more a case of everybody playing on an even playing field…the winner, yet to be determined.

#5

Re: Can everyone win? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on December 27, 1998 at 03:19:52:

I’ve read your post and all the responses to date, and I confess I think finding a solution where everyone “wins” by your definition is just not possible. I think you’ve set-up the problem to be unsolvable. To win, no landlord must earn less than market rent, but no tenant must face a rent increase, and no rental housing may be near an owner-occupied…

Personally, I don’t have the time to fight city hall when the city populace is behind the call for regulation. I happen to believe the majority should rule…it’s called democracy. I believe investors need to be flexible and know when it’s time to stop banging heads against the wall and go with the flow.

The closest thing to win/win that I can think of on a personal level would be to change investment strategies. If I own rentals, and legislation is passed that limits my ROI to below my standards, I’d look into converting the rentals to owner-occupied housing. The strategies that would seem to benefit the first time home-owner the most would be to lease-option, or to sell with low down and carry the paper, making it as easy as possible to get them into a house. And there are special loan programs that could be used to help first-time home-owners get in. Even still many renters would not qualify, so many would lose by your definition. This is as close to REI altruism as I could come, since it’s my money that’s at stake.

Stacy

#6

Re: Can everyone win? - Posted by Irwin

Posted by Irwin on December 26, 1998 at 17:33:58:

I have written some lengthy posts in the past on my rather strong feelings about government intervention in the real estate market place. I think your posting points up the problem quite well. If you can’t find a way to keep the bureaucrats out of it, THERE ARE NO WINNERS. EVERYBODY GETS SCREWED. EXCEPT ONE CLASS. The big guys. They beome the only ones who can afford to operate in the regulatory climate.
It’s a gosh darn shame that we’ve raised a generation of people who still think that the answer to every problem is some kind of new governmental control.
You mentioned that you’re in a college town, and I suspect that’s part of the problem. Lots of eggheads running around thinking they can solve every problem from dandruff to runny ketchup.

#7

Re: Can everyone win? - Posted by JPiper

Posted by JPiper on December 26, 1998 at 14:24:57:

I?m always fascinated by posts of this type.

Are you really in the real estate business to make certain that everyone wins??? How do you define ?win??? Who will decide when someone wins?.you???

You really better be in this business to make a profit. If you aren?t, you won?t be around long to make sure everyone else is winning.

Who gave you the right to decide for all the other participants what ?winning? is?? If I am the seller and I?m about to lose my property in a foreclosure action, will I win by dumping my property at a low price?? If you pay too high a price, so that the seller thinks he wins, will you still be in business a year from now??

Come on?.let?s get real. Why don?t you go out and make a profit. Decide for yourself what deals make sense to YOU. As to the others, don?t do them. I promise, no one will deal with you unless THEY think that based on THEIR situation there is a reason to deal with you. YOU don?t need to decide for them. You don?t need to protect the rest of the world. Just do the things that make sense for you to do?.the rest will take care of itself. A transaction ONLY occurs at the point when all the participants to it perceive that they are winning?..by their own definition.

By the way, raising the rent to a tenant does not necessarily mean they lose. No landlord can raise the rent higher than what someone is willing to pay. Rental prices aren?t set by landlords. They are set by landlords AND tenants. If the tenant in question thinks his rent is too high, he is welcome to move. This does not make him a loser. Are the landlords able to rent the property at these new higher levels?? Hmmm, must not be so high huh?? Some one is willing to pay the rent.

My take on all this is that it is not my job to make sure you win. I?ll leave that up to you to decide. I can only decide for me. If you feel differently, that?s OK. But I?d give some thought as to whether you will be in business for long. This business is about profit.

JPiper

#8

Re: Can everyone win? - Posted by MilNC

Posted by MilNC on December 26, 1998 at 07:17:42:

I am curious to know on what grounds the small landlords are being sued? Is that individually, or is
the city trying to be like a condo where they like
to regulate the percentage of units that are rented vs owned. Is the city trying re-zone so that there are
fewer rentals? Was that what you meant by lawsuits? I’d sure like to know how how they can do that legally.

Also, aren’t landlord/tenant laws state laws?

I also doubt that the city or other homeowners are
not also looking at their bottom line.

This just doesn’t make any sense to me. I’d sure like
to know more.

As for everyone winning. Yes, that’s possible. The
rents don’t have to be raised suddenly and dramatically.
Are you talking about single fam houses or apt bldgs, or what? I am not experienced enough to understand the issues here.

#9

Re: Can everyone win? - Posted by Frank

Posted by Frank on December 27, 1998 at 13:40:36:

“I happen to believe the majority should rule…
it’s called democracy.”

Homeowners are definitely NOT a majority here. (But
they have succeeded in convincing most tenants that
landlords are the bad guys in town.) Would
rent control be “okay” if that’s what the majority wants? Is regulation “okay” because there are more
homeowners and tenants than there are landlords? When
does regulation stop being okay and start being confiscatory?

How about neighborhood and homeowner associations
gaining more control over their neighborhoods by
handling (for a nominal fee) property management for
small landlords? I don’t see any down side for the
landlords, and while it would require some of the
homeowners to actually do some work, in the long run
it might not be as much work effort as they have been
putting into their quest to run all the landlords out
of town. What do other landlords think of this idea?

#10

Re: Can everyone win? - Posted by Frank

Posted by Frank on December 26, 1998 at 23:10:01:

“college town…part of the problem…lots of eggheads
thinking they can solve every problem…”

25 years ago, this was a very upscale place to live.
Today it’s pretty much average or just slightly above
average. A friend who grew up here says that the
biggest “hot button” middle class people have is
loss (real or imagined) of status, and that’s what’s
going on here. The local schools are no longer the
cream of the crop they once were, many neighborhoods
are avoided by young families with children, until
the latest ordinances kicked in, landlords were
outbidding homeowners for houses as they came on the
market. Even conservatives who ought to support
free markets are against landlords and rental housing
here. They see their status slipping and by golly
they’re doing something about it.

#11

Re: Can everyone win? - Posted by Frank

Posted by Frank on December 26, 1998 at 16:01:59:

“If the tenant in question thinks his rent is too
high, he is welcome to move. This does not make
him a loser.”

It is apparent to me that he has already lost the
instant the rent increase was effected: he is worse
off than he was before the rent increase. If the
tenant pays the higher rent, he is worse off by a
readily measurable amount of dollars. If the tenant
moves, he incurs costs associated with moving
(landlord tip: raise rents annually by an amount just
below moving costs) and probably will have to accept
inferior options elsewhere. If the tenant moves out
but is unable to find a new place to move into, he
is very much worse off. If you were a tenant and
someone came along and flipped the property and your
rent was doubled, would you be happy? Would you say
that doesn’t make you a loser? When you’re the one
doing the flipping, what do you say to the tenants?
“Don’t worry, this doesn’t make you a loser?”

What I’m trying to accomplish here is to get the city
government off our backs, and the only way I can see
to make that happen is to stop creating losers who
run to the city for help. As long as we’re looking
only at the bottom line, we shouldn’t be surprised
when government steps in and roughs us up.

#12

Re: Can everyone win? - Posted by Frank

Posted by Frank on December 26, 1998 at 15:33:00:

What’s happening is that a lot of single-family
homes have been bought by landlords and converted
to rental properties over the past, say, 20 years.
This is driven by changing consumer (student)
preferences - 20 years ago, it was common for students
to be doubled and tripled up in small dorm rooms, but
today everyone wants their own bedroom in an apartment
or preferably a house. With college students come
alcohol, excessive binge drinking and partying (a good
house party with alcohol can attract hundreds) late
into the wee hours, to the great annoyance of many
resident homeowners who have gotten the city to
change the zoning rules to make it effectively unprofitable to convert any more homes to rentals
(the new zoning regs limit unrelated occupancy to two,
while the old rules permitted four, and except for the
handful of small two-bedroom owner-occupied homes
in town, rental conversion will not be profitable
unless either sales prices fall or rents rise substantially). So while some rentals revert upon
sale to owner-occupied homes, very few new rental
licenses are being issued, resulting in a shrinking
supply of rentals which is what the homeowners want.
In 1992, city voters approved an initiative charter
amendment prohibiting the city from discriminating
against any person on the basis of marital or family
status - this was intended to invalidate the zoning
rules which allow greater occupancy by family members
than unrelated individuals. The city has refused to
bring its zoning regs into conformity with the amendment, and has continued to enforce its “unrelated
occupancy” regs against both landlords and tenants,
so a number of landlords joined in a lawsuit against
the city in an effort to invalidate the unrleated occupancy limits and to force the city to have one
set of occupancy limits for everyone, and to have
pending overoccupancy charges dropped. Also, the
city has been tweaking the housing code with the intent
of ultimately separating “bad” landlords from their
properties by tightening “terms and conditions” on
"problem properties" which in turn make it easier
for the city to revoke a rental license. The homeowners want “neighborhood stabilization” and
ultimately all the rentals to go away. Homeowners
seem to be winning, but landlords and tenants are losing.

#13

Re: Can everyone win? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on December 27, 1998 at 14:35:38:

Frank, my point is, if the majority of the people in your city believe more regulation is needed, it’s not only “okay”, it’s our form of government. I can’t remember the last time I voted for a president that actually won, but so be it. The majority rules. Doesn’t mean I like it, but yes, it’s OK. I believe in the system. As flawed as it is, it’s the best in the world.

Tilting at windmills by trying to convince homeowners and tenants that landlords are good is a waste of time. The movement has started, momentum is not on your side. Asking the homeowners to pay for management fees will just get you laughed out of the place. Where’s their incentive?

I think the best thing to do would be to change strategies. Small landlords are working in a hostile environment not conducive to their choice of strategy. Any good business person is flexible and changes with the business environment, or they don’t survive.

Stacy

#14

Re: Can everyone win? - Posted by JPiper

Posted by JPiper on December 26, 1998 at 22:16:30:

Frank:

I disagree. The tenant has not lost the instant the rent is increased. Rather, he lost the instant he entered into a rental agreement that made his status that of a tenant, and did not protect him against rental increases. It appears that you would like to blame this on the landlord, rather than have the tenant accept the consequences of his decisions. One thing that none of us will be able to do in this life is to help anyone evade the responsibility for their own decisions.

I would suggest that you contact your government to suggest that it is improper philosophically and against our origins in a capitalistic society to interfere in the manner that they evidently are doing. Why not campaign against the appropriate party, the government, rather than trying to lay the blame off on the landlord for raising his rent to the appropriate level, or wanting the tenant not to experience the consequences of rental increases that all tenants subject themselves to by virtue of their status.

JPiper

#15

Re: Can everyone win? - Posted by DJ Busch

Posted by DJ Busch on December 26, 1998 at 20:14:04:

Frank,

You make a point of stressing the effect a deal has on the tenant, but let me ask you this: Exactly what does the tenant have to do with the deal? There are three very distinct pieces of the deal: The buyer, the seller and the property. The current tenant has absolutely no input on the deal (in most cases) and no reason to be a part of the transaction. As Jim pointed out, if the tenant feels that the rent is too high, he has the option to move any time he feels like it.

Regarding your reference to the government “roughing us up”, let me offer you a quote from a movie…but one that is very much true:

“They can change the rules, but the game goes on.”

The government can regulate and restrict all they like. The rich will find ways to work around the regulations and restrictions, and they’ll keep getting richer. They’ll keep winning, and there isn’t a darn thing the government can do to stop them.

If that tenant wants to make a real change, he should get out and buy his own home.

Hakuna Matata

DJ Busch

#16

Re: Can everyone win? - Posted by phil fernandez

Posted by phil fernandez on December 26, 1998 at 17:09:23:

Frank,

This making the tenant a loser thing is a misguided statement. The landlords, JPiper, myself and people flipping properties do not get together and establish rental rates. Rents are rather a function of the local marketplace.

If I raise my rents too high my tenants move out and I have a vacancy problem. I see that for the local market my rents are too high so I lower them to a level where potential tenants are again interested in renting my unit. The rents are all based on nothing more than local supply and demand. That is economics 101. The marketplace controls itself ( unless the government gets too involved ). It’s got nothing to do with winning and losing.

#17

Re: Can everyone win? - Posted by Rich

Posted by Rich on December 28, 1998 at 23:13:16:

This sounds a lot like where I live. Where is this?

#18

Re: Can everyone win? - Posted by Frank

Posted by Frank on December 26, 1998 at 22:49:46:

Actually, I’ve been harping at my government about
these things for a long time, but the prevailing
opinion among homeowners and politicians here is that,
hey, we’re just trying to preserve our neighborhoods,
and if that means rental supply goes down and rents
go up, hey, that’s between tenant and landlord, that’s
not our problem. And when they see rents go up, it
only encourages them to point more fingers at the
"greedy" landlords and to turn the regulatory screws
even tighter. The homeowners and politicians are
denying responsibility for the problems they are causing and throwing huge sums of legal fees and other
funds at the problems - and they are entirely willing
to entertain the cost if it ultimately drives the
landlords out of town.

Now you say that the tenant lost the minute he entered
into a rental agreement which made his status that of
a tenant and did not protect him against rent
increases. This is certainly true, but how many
landlords here would entertain a long-term rental
agreement which protects the tenant against rental
increases? Except perhaps in cases where the owner
or property is particularly distressed, I have never
seen much negotiation in a residential rental
agreement, it’s usually a solidly one-sided agreement:
how many tenants do you see drafting their own rental
agreement and asking you to take it or leave it? Could
you give me your opinion as to why residential rental
agreements tend to be as one-sided as I think they are?

#19

Re: Can everyone win? - Posted by Frank

Posted by Frank on December 26, 1998 at 22:57:43:

“If that tenant wants to make a real change, he should
get out and buy his own home.”

Some of them do, and quickly become part of the
paroblem: it is often the most recent homebuyers -
those with minimal home equity - who are the most
vocal in efforts to regulate the rental market.

Some of them don’t, and become worse off over time as
rents go up and up and ownership becomes a more and
more remote possibility for them. This place is
for “creative” real estate, so I gotta ask, how does
a tenant with no money and no credit and a lot of debt
get out and buy his own home? There’s a lot of talk
here about No Money Down, but how does someone with
very few resources actually get into that game?