Wikinvest Wire

Reluctant landlords, then and now

Thursday, September 03, 2009

Having gone through the transition from homeowner to landlord during the early 1990s California housing bust, the concept of "reluctant landlord" is a familiar one to me.

In fact, not only were we reluctant landlords, but we completed the entire process that many are now just entering (though most of them probably think it will end quite differently) by closing the book on that ill-fated home purchase via a short-sale after having rented the place out for a year or two and watching its value continue to fall.

Believe me, it's a lot easier to throw in the towel when you no longer live there and are far less attached to the place. In fact, after a while, you can grow quite cold toward your former home, looking at only the numbers involved and quickly forgetting about the memories that were made there.

Depending upon the particulars - how large a downpayment was involved, how much the property is underwater, the chances of someday returning to live there, etc. - the decision to change from reluctant landlord to short-seller (or sender of jingle-mail) can happen very quickly, often times prompted by a phone call from your tenant informing you that they won't be renewing the lease.

That's what did it for us and it was a remarkably easy decision to make...

Of course, if we had waited another six or eight years, we would have seen the price rise back up to what we had paid for it and then, astonishingly, peak at almost double what we paid, but, in retrospect, it was the right decision.

Hanging onto it would have been a cash drain for years, a place that, today, Zillow says is actually worth less than what we paid for it in 1989 and, amazingly, recent sales of comparable homes at put the value closer to our short sale price in 1995!

Anyway, this fine WSJ report tells all about the new breed of reluctant landlords.

With housing prices still in the dumps, many Americans are finding themselves in the uncomfortable position of landlord.

Some have been forced to relocate for a job and can't sell their houses. Others have moved, but are holding on to their previous homes, hoping for prices to rebound before selling. Many are finding that rent checks don't come close to covering their mortgage payments.

Hard data are scant on how many homeowners are renting out their homes, but anecdotal evidence suggests numbers are up. In one indication of the trend: More homeowners are converting their homeowners insurance to landlord policies that cover the additional risks of leasing out a home. Allstate Corp., the second largest home insurer in the U.S., reported a 27% increase in conversions in the first quarter from the previous year.
That's funny - we managed to get our property taxes reduced due to the plunging home value, but we didn't even think to convert our homeowners insurance policy.

That 27 percent figure may be wildly underestimating the actual number.

Here's a pretty typical scenario, highlighted by the "wait a couple years for prices to rebound" approach that most homeowners naively adopt, as we did:
In Frederick, Md., Realtor Jim Bass says that because of rising demand, a couple of months ago his real-estate group started offering property-management services, tending to the rented homes of absent owners. Mr. Bass says a client recently rented out his 4,700-square-foot house after failing to sell his home, which he listed for $790,000. Now a tenant pays $2,995 per month—a shortfall of $2,000 from the $4,995 mortgage payment. The homeowner "feels that two years from now, the market will improve to the point where he can recapture that," Mr. Bass says.

Experts generally advise against becoming a landlord in hopes of recouping lost home value. In some hard-hit parts of the country, such as Florida, Nevada, Arizona and parts of Ohio, prices may not climb back to mid-2000s levels anytime soon. Landlords have to pony up money each year for property taxes, insurance, maintenance and repairs. Meanwhile, demand for rentals in many parts of the U.S. isn't strong: Apartment vacancy rates nationally are the highest in more than two decades and rents are falling in some areas, compounding the difficulty of finding a good, steady tenant.
In some ways this is like refusing to sell that stinker of a stock that has tanked - it's a lot easier to defer a decision than to make one (i.e., to take your loss and get on with things).

Of course, for many people who put virtually no money down and where plunging prices have long since made their downpayment disappear, the decision shouldn't be that difficult.
Homeowners who owe more than a house is worth in very depressed areas may be better off selling even in a short sale, whereby the bank agrees to accept less than the full amount owed on the mortgage, says economist Edward Leamer, director of the UCLA Anderson Forecast. Your credit rating takes a serious hit, but, he says, "better to take your losses and move on."
Funny story - about a year ago (June 2008) I was at an investment conference to speak on a panel about financial blogs and met Dr. Leamer.

He kind of chuckled when he read the name of my blog on my name tag.

He then went on to make a nearly hour long presentation about how we were not going to enter a recession and about how the credit crisis and housing market troubles had about peaked.

Another example that sounds pretty typical:
Kyle Becker, 27 years old, and his wife didn't feel they had much of a choice in becoming landlords. The couple and their infant son moved from Columbia, Mo., to Winchester, Va., last year so that Mr. Becker could attend pharmacy school at Shenandoah University.

Before they moved, they listed their three bedroom, two-bath ranch-style home in May 2008 for $139,000. They had bought it in 2005 for $110,000 and put $30,000 into roofing and siding. By February, they hadn't received a single bid.
IMAGE "We had only seven lookers over the course of a year," Mr. Becker says. Meanwhile, the couple was paying $1,200 a month in rent for a Virginia house. Last spring, the Beckers finally leased the Missouri house for $675 a month—$225 less than their mortgage payment.

Because the home was no longer owner-occupied, Mr. Becker was unable to refinance his 6.1% mortgage when 30-year rates dipped below 5% briefly.

If he had to do it all over again, Mr. Becker says, he might have chopped the price of his Missouri house, where sales have been stagnant—with the exception of "distressed" properties in some stage of default.
When we were landlords, the rental income was about $800 a month and the mortgage was around $1,100 or so. Add in all the incidentals and this quickly becomes a drain that you can tolerate for only so long.

Once you get that phone call about having to find a new tenant, it becomes an easy decision to stop making the mortgage payment and start working on a deal with the bank.

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Ted S. said...

Interesting story.,... I had no idea that you went through that.

AJ said...

Wow, a home price under $150,000? That sounds reasonable compared to a lot of other places I've read about, like the $790,000 place.

Ed G. said...

Thank you for sharing your story. When you quit making your mortgage payment, were you worried the bank would call your bluff and sue you after a foreclosure? I am in the same boat but I cannot tolerate the risk of being a landlord... I want out but I live in a recourse state, MA. Most people seem to think the banks won't bother to sue, but I have some money and don't want to part with it.

Tim said...

I don't recall being worried about that, but things might be different in California.

You might have a look at the "You Walk Away" website. I read something recently where two of the four people featured in a story on this subject had utilized their services and they seemed happy about it.

Anonymous said...

Remember the NAR Mantra:

"You can ALWAYS Refinance"
"You can just Rent it Out"

Thieves, Liars and Pimp wanna bees.

In trouble? Dial 1-800-Landlord. They can match you up with tenants with gtreat credit for on $ 3995.00 per lease... LOL, Suckers.

Americans ARE Stupid.


Bruno T said...

Wow, I didn't know you bailed on a home. And such a tiny mortgage, too. When did this occur? What were the circumstances? I'm looking for something exculpatory here. Otherwise, this gives me pause when considering your calls on investing.

Tim said...

I wrote about this a couple years ago, see My Housing Story - Part 4 (includes links to parts 1, 2, and 3. I don't think I ever finished this series, but this should tell you everything you need to know up through the short sale.

Jones said...

That "ranch-style" home in MO is worth $80K at best. They overpaid. The reason why no one is coming to look at their shack is because the one next door is listed for $50K less. What a douche bag; you can tell just by looking at his spiky, gelled hair.

Landlords need to "walk away". Rents need to come down. All real estate is still priced far too high whether renting or buying. Deflation now! I'm getting tired of the markets being propped up / talked up. Gold is up 12% YTD and the DOW is up 40% from March, but on CNBC, they're worried about the velocity of Gold - it's almost enough to make me drive to their studios and give them a verbal thrashing or, better yet, pull the big yellow power cord that enables their broadcasts out of the wall. : )

Anonymous said...

Not everyone lost out. I had friends who bought in SF (on States Street, near the Castro) in 1989. In the early 1990's they were under water, but rented it out for a few years and were able to eventually sell at a profit (think it was 1997 or so). It probably helped that during the time they were reluctant landlords they had gone back to school and were living mostly on student loans, and in cheap student housing. But they did come out of it OK.

Tim said...

Now that brings back memories. I recall talking to someone from the Bay Area in 2000 and hearing that a "typical" house costs a half million dollars. As I understand it, due to the Nasdaq bubble, much of Northern California got a headstart on the national housing bubble that didn't really gather steam until 2003-2004. If I'm not mistaken, that's one of the reasons why Patrick (of was so early in his housing bubble call - because there was this "pre-bubble" in housing in the Bay Area in the late-90s, early 2000s.

Anonymous said...

The WSJ should sue you for stealing its content.

Anonymous said...

First time reading a blog, eh?

Anonymous said...

Kyle Becker, 27 years old, and his wife didn't feel they had much of a choice in becoming landlords. The couple and their infant son moved from Columbia, Mo., to Winchester, Va., last year so that Mr. Becker could attend pharmacy school at Shenandoah University.

There are no pharmacy schools in Columbia MO?

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Bruno T said...

Ok, I went back and read the story of your short sale, etc. Having done so, and having been on the fence regarding a subscription to your report after a trial, I am going to have to decline.

While your early mistakes regarding home valuation, etc, were honest ones coming from your admitted ignorance of how home markets worked, later on you did things that were not simply an attempt to survive but a cynical use of the sytem for your own gain. (accepting an insurance rebate instead of forwarding it to the bank that actually paid the premium on your house for you, not paying your note even though by then you had the means to do so, etc)

It seems you are as "ethically challenged" as many others in the FIRE economy and I couldn't trust your motivations.

As my parents told me as a child, just because 'everyone is doing it', it doesn't make it right. I'm beginning to see that your blog may be motivated by a desire to assuage your guilt by blaming what happened on easy money, low lending standards, etc. I guess there is strength in numbers.

Stiffing someone who lent you money for tens of thousands and then retiring a decade later tells me you could have honored your debt easily, you just didn't want to.

That may pass as ok with most these days, just not me. Believe it or not, there is more to life than money.

Bruno T said...

One more thing. My wife made a 1.5 hour one-way commute for 4 years to her various jobs so we could honor our debts. During 3 of those years we lived apart due to work situations and I drove 840 miles every other week to visit her and she flew to where I worked about 25 times a year so we could spend 3 nights together a week. Needless to say that wasn't exactly cheap. She would depart work at 5 on Friday, get on a plane, and be 'home' by 11pm. She would wake at 3am on monday, get on a plane and be at work at 9am Monday after a weekend 'home'. I would depart sometimes from 'her place', drive 7-8 hours, then work till midnight that night working to make up the time I lost from my business going to see her.

So you see, the idea that you were somehow justified in screwing a bank out of their money because your commute suddenly got 30 minutes longer doesn't really impress me all that much. To some of us, 'incovenience' doesn't trump doing the right thing.

The fact that you remained gainfully employed at a relatively high wage during this entire period only solidifies my decision.

Good blog, though.

Tim said...

I have a hard time reconciling bad ethics with the fact that this was a non recourse loan:

Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the difference between the value of the collateral and the loan value becomes a loss for the lender.

It's not like we borrowed the money and then didn't pay it back and that was the end of the story. The original deal was that if we didn't pay the money back, they get the house, and, like many people today, we were OK with that, given the circumstances.

As for the insurance payment, though this was not mentioned in the story, that was small compensation for having to work with an uncooperative lender at tax time, a lender that our tax preparer believed was "gaming the system" on our particular loan in order to report a much larger loss than they actually took.

We never did get proper tax documentation from the lender but, fortunately, we had enough other paperwork to substantiate the figures that we reported.

oilwelldoctor said...

Nice story, thank you.

CS said...

You were far too kind to Bruno T who obviously suffers from an Ozzie and Harriet or Leave it to Beaver complex and has yet to join the rest of us in the 21st century.
We live in a much different world today where, when it comes to money, if you don't act in your own self-interest you'll just be left poorer. This doesn't mean you should screw your neighbor who kindly loaned you some money, but since banks are all too eager to legally screw their customers, turning the tables once in a while seems fair to me. It's a sad commentary about the world we live in but, I'm a big believer in "understanding the things that you can't change" and acting accordingly. If Bruno sleeps better at night knowing that he paid the bank in full when he didn't have to, then, more power to him. Sleep is important.
Having raised the issue of subscribing to your newsletter in a public forum makes him "ethically challenged" in my estimation. That would have been handled much better via private correspondence than in a public forum and I have to wonder what he was trying to accomplish. Did he want to punish you after he disagreed with you?
Though I don't care for the tone used to tell your short sale story, coming at a time when so many people are going through similar tribulations with much less favorable outcomes, how this relates to investing 15 years later is beyond me.
I think Bruno has some kind of a cross to bear and should maybe seek counseling. You managed to push some of his buttons, which was unfortunate for the rest of your readers.

Bruno T said...

Dear CS,

Thank you for superbly illustrating my point. It's now "ozzie and harriet" to have a strong sense of honor. "Getting yours" and "winning" becomes more important than doing the right thing. Does it occur to you that your attitude, and a world run by those with your attitude, just might be why the economy is in the mess it's in right now? But don't feel bad, you are certainly in the majority. I find it ironic you use the phrase "cross to bear". I wonder if you stopped to consider that the guy who did literally bear a cross may be observing and disappointed in your attitude. But I guess that makes me some "wacko" to bring that up, right?

Tim has a good point about the non-recourse loan. The bank did know what they were getting into. Tim is not a terrible person. Still, some of us live on a higher plane than "the norm", and have a higher standard of behavior than just getting by on the letter of the law. I simply want to invest based on the advice of someone who sees the world more like I do, that's all.

Think how difficult life would be if, in every activity you engaged in, the other person did only what was legally required of him, not what was right. Think how hard it would be to conduct business. Contracts would be dictionary-sized instead of done on a "handshake" basis. By assuming that attitude you are no better than a bank that uses "mice type" to screw over borrowers. Do you want to live in that kind of world? The sad thing is, I think you already do. And you need desperately to justify that to yourself, because you need to see yourself as a good person to be able to continue without that nagging guilt making you unhappy. Signed, Ozzie.

charles said...

I agree with Bruno T comment dated 15th September, that what you did may pass as ok with some people these days, but there are still allot of us who believe you should honourer your debt, however I to believe that lending standards were forgotten about so good bonuses could be assured. I am a strong believer in the saying what goes around comes around, and treat other people as you would like to be treated.

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