A go-to favorite in the Leybovich household is a romantic comedy Hitch starring Will Smith, Kevin James, and Eva Mendes. In one of the scenes early in the film Hitch, played by Will Smith, is shooting pool with a buddy at one of New York City’s high-class up-town bars. Hitch takes a shot, which rattles in and out of the pocket, at which Hitch shows frustration and tries to convince his friend that the shot should count. In response to this, his buddy gives one of the most profound “Hollywood” monologues I have ever heard; it is short but makes a lot of sense and goes something like this:
You know what your problem is, Hitch? You’re all about the short game. You pick your shots based on what you see first, and not what’s necessarily best for you in the long run…
For landlords both new and experienced, there is no better piece of advice to take to heart than the sentiment expressed in the above. In an article from a few months ago entitled It’s Not My Fault They Keep Trashing My Unit – Actually it Is, I brought forth the notion that our capacity to attract great tenants is a function of the building more so than our qualification standards or management systems. But having said this, management can definitely impact our chances of success, which is the subject for today. I am going to tackle this by describing to you a situation that I was involved-in a few weeks ago.
Those of you who have seen my article entitled How I Bought a 10-unit with 1.5% Down – Case Study know that I purchased a 10-unit apartment building on February 4th, 2013. There was a bit of delayed maintenance, however I recognized early on that the real reason the building was being sold was because the owner was completely burnt-out on landlording. In the middle of negotiations people usually try to be “cool and nonchalant” and tell you that everything is honky-dory at the building; that everybody pays on time, and nobody is out of line in any way. But this seller told me right away that he was tired of cleaning-up every time people trash his units, which he said happens consistently. He told me that he was tired of having to do evictions, and tired of knocking on doors to get the rent check. He said that he just wanted out…
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If it’s not the building’s fault, then it’s yours!
As you know, and as I’ve discussed in other articles on the BP Blog, trashed units and evictions are symptomatic of either the unit itself attracting the wrong kind of tenants, or lack of proper management and qualifying process. In this case knew that there was nothing wrong with the building. It was situated in a perfectly desirable location and the units were entirely comfortable both in size and amenities. This meant that if there were problems with the tenant base it was because the previous owner was mismanaging the application process; one way or another he was choosing tenants unwisely and they were causing grief in his life. This was my theory and I soon became convinced that I was right.
Upon my review of the standing leases as part of the due diligence process, I noticed that 6 out of 10 tenants had been in the building for less than 12 months. This could just be a simple coincidence, but turn-over did seem high for a building such as this in this location…
Who are the Troublemakers?
In my experience, there are two types of tenants who tend to be largely responsible for high turnover at a building. Some are well-meaning folks who, for the lack of better phrase, simply don’t have their “stuff” together. Due to unforeseen circumstances that should have been entirely foreseeable, they are eventually unable to fulfill their lease agreement and move-out early, either voluntarily or upon eviction.
The other type commonly responsible for high turnover is simply unscrupulous folks who choose to live very close to the edge of what you and I would consider morally corrupt. They find a way to dupe an unsuspecting landlord into giving them possession, but they have every intention of screwing the landlord from the very get-go – their moral compass allows for this type of thought process and behavior.
Well, thankfully I’ve learned that there are several red flags that expose both types, which can be seen by following-up on the information they disclose in their rental application. Thus, in an attempt to thoroughly prepare myself for what I would be dealing with after closing, I requested that the seller make available for my review the rental applications on file for each of the tenants…
The Reason He was selling
His answer confirmed what I had suspected all along. Although the seller was indeed an honest, friendly, well-reputed, and fair guy, he had made major management mistakes which were causing him terrible stress. My proof was in the discovery that he did not use written rental applications!!!
This meant that there were no Social Security numbers, which in turn meant that there were no criminal background checks; there was no income and employment verification; there were no references; there was no verification of previous residence…there essentially was no information by which to qualify tenant-worthiness. Is it any wonder that the poor guy’s stress level warranted that he should bring money to the table in order to sell a perfectly good building for less than what he paid a decade ago?!
Food for Thought: We get burnt once in a while even having done it the right way, but doing what he did virtually guarantees management heart-ache.
Segue one Month
In March, which was the first full month of my owning this building, I performed my first eviction of a tenant who decided that paying rent to the new guy was a suggestion and not a contractual obligation – don’t you love these kind of tenants? But get this. My attorney called me after having filed the eviction paperwork to tell me that the clerk at the courthouse took one look at the defendant’s name and said:
Oh yeah, we see this name come through here about every three to six months…:)
It’s a Pro…Cool!
The previous owner managed to place a “professional bum tenant” into one of his units, and now she was my problem. I had called her; I put a note on the door; I served her with a 3-Day Pay or Quit notice – all to no avail. She did not show-up in court for the hearing, and did not make any attempt to contact me. Until, that is, four days before the bailiff was to show-up at her door – she suddenly called to let me know that she had all of the money…
She was absolutely stunned and amazed when I refused – I don’t think she’d ever met a landlord that she couldn’t play this way before. She is a pro at playing this game, and here is my best guess at what her methods are:
She skips a rent-payment. She does not answer the phone, open the door, or respond to any attempts of contact. She certainly does not initiate contact, but simply waits to see what the landlord will do. A lot of less experienced can become intimidated by this tactic and procrastinate dealing with the issue, which buys her time in the dwelling free of rent. Often, by the time the landlord files for eviction and the case makes its’ way through the system, she can easily be in a dwelling free of rent for two, three months or longer.
Her primary exit strategy is to find another dummy landlord to let her in prior to the bailiff showing-up at her door. And if she can’t find another place, her back-up plan is to call the landlord and offer money, which in her experience is too much for those “greedy landlords” to say no to…
But, things did not work out for her exactly as planned this time. Her behavior has finally caught-up with her – I said NO!
Having answered the call, I politely explained to her that had she reached out early on, I would have more than likely chosen to work with her. In fact, I told her that I allow all of my tenants 2 payment-pledges per year without any late fees or penalties of any sort, so long as they act responsibly and make arrangements with me ahead of time. But under the circumstances, because she avoided me and because she only called me when it finally became apparent to her that nobody else would take her, I told her that I now believe that she is not a person with whom I can have a business relationship!
How Did She Ever Get In?
This woman’s winning formula is to FLASH the CASH. In her mind and in her value system, cash moves people more so than any other motivator. Therefore you might want to right this down:
I’ve said for a long time, and I will continue to say that real estate is not about money – it’s about people! It was beyond her comprehension why in lieu of taking her money, I would choose to assume the costs of the eviction and a remodel. But, I have my reasons. Had I chosen to accept her money (she was offering all that she was behind, plus another month upfront), I know it would only have been a matter of time before we were dancing this dance again. This proposition never appeals to me – it’s not how I run my business.
But more than this, I simply chose to deal with honorable people; they don’t have to be rich, nor do they need to be fancy, but they do need to have a clear moral compass if we are to do business together, which is precisely how I see this relationship. In short, I prefer to deal with people who know wrong from right. These are the people who pay on time, who call when something breaks, who plant flowers, who wouldn’t think of trashing my units. A building full of tenants like that constitutes stable passive cash flow today and tomorrow.
This is why I did not take her money. I realize that in picking a tenant, I am establishing a long-term relationship, and just because someone hands me the money, doesn’t mean that taking it is the best thing for me in the long-run.
My game is more about what’s good for me in the LONG-RUN, is yours?!