E-Renter News

A new study indicates that Americans prefer to rent units in houses than high-rise (or low-rise) apartment buildings. A CoreLogic economist analyzed data from the U.S. Census, and found that nearly 21 million rentals are in homes with one to four units, compared to 17 million in rental properties with five or more units.

As home ownership in the U.S. continues to decline, the numbers are expected to skew even more toward renting in homes. Former homeowners, it seems, are more likely to move to a house than to an apartment.

Property investors should take note of this trend. As more Americans lose their homes to foreclosure, and the job market remains lackluster, plans for buying a home will likely be delayed for millions of people. There could be real opportunity in the single-family rental market for the foreseeable future. Large hedge funds have been buying up thousands of foreclosed homes and hiring local property management companies to oversee them.

Some investors say that while single-family rental homes are more difficult to manage than apartment buildings, the rock-bottom prices in many markets make the scenario more palatable.

Are your rental property holdings concentrated in multi-family buildings or single-family homes? Do you plan on expanding your business by purchasing foreclosed homes in the near future?

Legal disclaimer:
The contents of this article are intended for general information purposes only, and should not be relied upon as a substitute for obtaining professional financial or investment advice applicable to your situation.

A real estate investor in Memphis, Tenn., found the biggest mess imaginable after a hoarding tenant moved out of his rental property. His lesson to other landlords? Check in on tenants more frequently. He admitted that he didn’t do regular inspections of his rental home, which may have cost him greatly.

Here’s what happened: after asking the tenant to move out, the landlord checked on the house and discovered his seven-year tenant, a schoolteacher, had severe hoarding issues. She apparently could not throw anything away: not garbage, nor newspapers, nor her cats’ used kitty litter. In fact, she couldn’t even flush her toilet, the details of which are too disgusting to share.

Every room in the house was filled knee-high with mounds of garbage. It was nearly impossible to walk through the house, and flies and bugs were everywhere. The tenant had simply walked away, leaving the mess for the landlord to deal with.

It took several hazmat experts an entire day and three trailers to empty the home of garbage. Then, the house needed to be decontaminated, which took another two days. Subsequent renovation cost the landlord over $10,000.

In the meantime, the tenant checked herself into a mental health institution, according to her family. The landlord expressed concern for the tenant’s condition, and was happy to hear she is getting help. While many people would be angry and frustrated at this situation, this landlord’s attitude is admirable. He said he was grateful that he could afford to fix the property, and for the reminder that his life is “pretty good.”

He plans to be “more vigilant” about the new tenants who are moving in.

In Toms River, New Jersey, a landlord and his tenants are at odds over a rental property the tenants say is haunted. The tenants fled in the middle of the night after living in the three-bedroom home for just one week.

The landlord, Richard Lopez, contends that the tenants have negatively affected his ability to lease or sell the house in the future, and he’s filed a lawsuit for $15,000 in damages. He claims the couple can’t afford the rent, so they moved out. Meanwhile, the couple hired a team of “ghost busters” to prove their claim.

The tenants have countersued, demanding that the landlord refund their $2,250 security deposit. They assert that the landlord initially agreed to release them from their one-year lease and return the deposit after they told him about what was happening in the house, and then changed his mind. Among their claims:

• Clothes and towels were spread all over the floor while they were away from the house.
• Doors would open and slam shut on their own.
• Footsteps could be heard in the kitchen after the couple and their children were in bed.
• They heard sounds of strange voices whispering and something being dragged through the basement.
• Lights turn on and off on their own.

The landlord’s claim that he would be unable to sell or rent the house stems from disclosure laws that would require him to inform future prospective tenants or buyers that previous tenants claimed the house is haunted.

The story has sparked international attention, with an appearance by the tenants on ABC’s Good Morning America. The syndicated show The People’s Court is reported to be interested in having the litigants settle the matter on the program.

The U.S. Supreme Court has declined to hear a Manhattan landlord’s case regarding New York City’s tough rent stabilization laws. We’ve been watching this case since December. That’s when the landlord—who claimed that his tenants could afford to pay market rent but he was hindered by law from charging it—decided to take his challenge against rent regulations to the highest court in the land.

In January, the court indicated it was interested in hearing the case, but yesterday, it decided to let the city’s rent regulations stand.

The landlords, James and Jeanne Harmon, inherited a brownstone near Central Park nearly 20 years ago; they rent out six apartments in the building. Tenants pay about $1,000 per month, which the landlords claim is 60% below market rent. Harmon had petitioned the court to ban rent regulations that keep rents artificially low, based on a clause in the 5th Amendment that prohibits the government from taking private property for public use without just compensation.

In a statement, Harmon said, “We still believe the Constitution does not allow the government to force us to take strangers into our home at our expense for life. Even our grandchildren have been barred from living with us. That is not our America.”

A lawyer for the city commented that the court “properly left it to the elected state and city officials to decide [rent regulation’s] future.” Officials had urged the Supreme Court to not hear the case, defending rent regulations as a necessary response to housing shortages. The vacancy rate in the city is 5%, the required minimum to keep regulations in effect—which they have been for 40 years.

The president of the Rent Stabilization Association, a landlord group, said the court missed an opportunity to “at least have provided an opportunity to have a policy debate. This law needs to be revisited and directed towards those who need it… [not to those who] can well pay their fair share in terms of rent.”

Some involved in the case say rent regulation helps low- to moderate-income tenants, while others say it creates more shortages by discouraging people from entering the rental business.

In New Bedford, Mass., a multi-agency task force has been formed to enforce more aggressive codes for rental housing. The task force will focus on absentee landlords, in response to tenant complaints about everything from missing windows to broken stairs.

Bi-weekly sweeps of neighborhoods will begin, in an effort to take a more proactive approach to cleaning up the blight in some neighborhoods that residents have “never seen before in New Bedford,” according to the mayor, Jon Mitchell.

One resident, who rents from one of the city’s “most notorious” property owners, was happy about the news. She said she complained multiple times to the city, but the problems were never fixed. The landlord, she said, paid his fine and that was it.

The task force will be directed by the assistant city solicitor, and will include two inspectors from the city’s building department, and some city council members. The mayor indicated that new ordinances are being considered to make fines more expensive for repeat offenders, as well as to add unpaid fees to property tax bills.

A New Bedford landlord claimed that the problem is not the property owners, but rather the tenants who are irresponsible and difficult to evict. The tenants, he said, have more rights than the landlords.

A new report by the National Association of Realtors points to an increase in the number of renters, as well as a transition in their demographics, in the United States. According to census data, 34% of households are now renting, compared to 29% five years ago. Not only are there more renters, but perhaps surprisingly, they’re not all young people just establishing their first households.

Proportionally, there are more renters in the 30- to 64-year-old age group. The economy, bursting of the housing bubble, foreclosures and job losses have all contributed to the increase in older renters. In fact, there has also been an increase in renters older than 65, both because that population itself is increasing, and because of lifestyle choices of this group. They are downsizing, traveling and many wish to be free from the responsibilities of homeownership.

One group is missing from the new renters: the very young. Twenty-somethings are having a difficult time getting started on their own. Many are moving home after college, and waiting until they find stable employment before leasing their own apartments. In fact, five years ago, 1 million new households were formed every year; now, that number is down to 500,000.

What does this mean for landlords? Your typical tenant is changing. What works for young people might not work for a couple in their 50s. Plus, the pent-up demand could mean a very healthy rental market as the economy continues to improve. Are you ready?

Last week, Bank of America announced a new program that took many by surprise. Its pilot “Mortgage to Lease” program will enable some homeowners at risk of foreclosure to stay in their homes as renters.

Program qualifications:

• Homeowners must have their mortgage through BofA;
• They must be more than 60 days late on their home loan;
• With no other liens on their property, and
• A high loan balance to property value ratio.

In addition, those chosen for the program must have an income high enough to afford the rent on their former home.

The bank will be selecting homeowners to participate in the limited pilot program. Up to 1,000 homeowners in Arizona, Nevada and New York will be eligible. If the program is a success, it could be expanded. Homeowners may not apply for the program; they will be selected by the bank.

How the program will work:

• The homeowner transfers the title to their property to the bank.
• The bank forgives the outstanding mortgage debt.
• The former homeowners may lease their home for up to three years at current market rents.
• BofA will retain ownership at first, but will eventually transition ownership to investors.
• Property management companies will supervise the rental properties.

But, what happens after three years? Does the house then get sold to an investor? Do the tenants get kicked out of their home? Are they allowed to extend their lease? Can they buy their home back from BofA?

Has BofA come up with a way to earn income for three years while waiting for the market to improve, so they can sell at a profit?

In Columbus, Ohio, city officials are thinking about changing a procedure where the city pays displaced tenants $650 to relocate after their rental housing is deemed unsafe. Last year, over $20,000 was paid to people forced to move after safety hazards were discovered in their rented homes and apartments.

Now, the city is thinking about putting forth an ordinance that would require the landlords to pay the expense of moving tenants from their substandard housing. There is no current legal precedent to force landlords to pay anything.

In one recent case, a family was forced to move from a rental house after code-enforcement officers ordered it vacated. The house had no heat. In addition, leaking gas lines inside the house compelled the natural gas company to shut off the gas. The landlord who owns the house also owns one where three people died in a Christmas Eve fire. It, too had no heat, and the tenants used a space heater to stay warm. The home had been ordered vacated in 2009, but the landlord leased it anyway. Now, the city is re-inspecting vacated homes every 30 days to ensure they are empty.

The displaced family indicated that finding a new home to rent was difficult, because landlords were not willing to allow the city to inspect their properties—a requirement of using city funds to relocate.

Landlords, What Do You Think?
Should landlords who allow their rental properties to fall into such disrepair that they are unsafe for habitation be required to pay tenants’ relocation expenses?

As we reported last July, the Obama administration has indicated it would transition foreclosed properties into rentals. And now, private equity firms are jumping on board and investing heavily in acquiring single-family distressed homes to manage as rentals.

The founder of GTIS partners, Thomas Shapiro, says the his firm will spend up to $1 billion by 2016, because they see a “billion dollar opportunity to buy rental housing.”

This announcement follows that of a $1 billion investment by GI Partners and $450 million from Oaktree Capital Management, LP.

Federal Reserve Chairman Ben Bernanke recently said that increasing rentals may reduce lenders’ losses on foreclosed and underwater properties. He also indicated it could stop the continuous slide in home prices.

The Federal Housing Finance Agency will be offering some of its 180,000 properties to private investors as rental properties in the first quarter of this year. And the Federal Housing Administration will be involved in the project, as well.

The program will possibly include rent-to-own opportunities for tenants and private/public partnerships, where the government guarantees financing.

With average annual returns of 8.1% since 1990, it’s no surprise that private equity firms would be interested in the strong rental market. And often, renting a property will reduce losses more than reselling a foreclosed home in a down market.

According to reports, GTIS expects to hold the home it buys for about five years. They expect that by then, housing prices will recover and they can sell at a profit. The firm will hire staff in each area to manage their rental properties, starting in Nevada, Arizona, California and Florida—all states with high foreclosure rates.

Back in December, we reported on a Manhattan landlord who has had enough of New York City’s rent stabilization laws, which prevented him from raising the rent on a property his family has owned for 40 years – with three tenants who have lived there for 30 years each.

The laws keep half the rents in the city artificially low. Many say they have also kept the supply and quality of rental housing low. James Harmon petitioned the U.S. Supreme Court to hear his case that the practice should be prohibited under the Constitution. Two lower courts refused.

Harmon’s case is based on a clause in the 5th Amendment to the U.S. Constitution, which prohibits the government from taking private property for public use without just compensation.

The Supreme Court has expressed an interest in the case, by asking New York State and the city of New York to respond to his argument. However, the Court has not yet announced whether it will hear the case.