On Friday, I posted an article about unemployment among tenants, and how to preemptively address the huge difficulty that brings for landlords.
And as always, the best thing about this blog was not the article I posted, but the comments you left. There was a vigorous discussion among a number of experienced landlords versus a couple of people who felt that faltering tenants should be addressed with a softer touch.
This is similar to another issue faced in real estate investing: how to deal with people going through foreclosure. Some people feel that the best help that can be given to a foreclosure victim is to buy their house – even at a steep discount – and prevent the foreclosure from happening, whereas others feel that, at the very least, a pre-foreclosure victim should be allowed to rent back their property after selling it, and maybe should even be given a “fair market” price for their foreclosure property.
Generally speaking, people who espouse less strenuous treatment of noncompliant tenants or foreclosure victims cite “compassion” or “fairness” as justification for their opinions. For example:
- Everyone is having a hard time right now – why don’t landlords just show a little compassion?
- The tenant lost their job and can’t pay, so is it fair that they should be evicted?
- Foreclosure is bad enough, and you shouldn’t take advantage of their bad situation.
This is where I’d like to open it up to you, my thousands of esteemed readers. What do you think? What role do “compassion” and “fairness” have in our business? And more importantly, what do these words actually mean?
What do you think? As always, thank you for your thoughts, and for reading RealEstate.BryanEllis.com.
Compassion and fairness are loaded words.
Dictionary.com defines compassion as “a feeling of deep sympathy and sorrow for another who is stricken by misfortune, accompanied by a strong desire to alleviate the suffering”.
Fairness is defined as “free from bias, dishonesty, or injustice”.
Based on these definitions – with which I agree entirely – compassion and fairness both should be very high on the list of considerations for real estate investors.
For example: If a tenant does not make their rental payments, the fair (unbiased, honest and just) thing to do is to follow the agreement made with them, which likely means that they should be removed from the property (whether by eviction or mutual consent).
I might feel deep sympathy and strong sorrow (compassion) for them, but feelings of compassion do not overrule reason.
Furthermore, those who suggest that “compassion” and “fairness” are good reasons to give free rent to non-paying tenants are usually the same people who believe that landlords are inherently bad, evil or unjust simply because they are trying to better themselves.
I, for one, am sick of the whiners who misuse the words “compassion” and “fairness”.
How do you explain you not be willing to help people who lose their job? That is selfish.
If I had a rent house, I would be very compassion. If my customer lose job, I let them pay late. This is what jesus thinks.
you are not fair to do these things. we all need help each other.
Remember the flight attendant’s instructions to secure the oxygen mask over your own mouth and nose before assisting young children and disabled. I think you can draw your own conclusions…
While definitions of the terms can be easily found, how they are applied is shaped by our individual circumstances. I would contend that those that have been in the real estate investing business longer (and thus have probably been involved in more transactions)probably are a bit less compassionate after having seen and heard more reasons/excuses.
A good example of these terms being tested is doing a short sale. I recently completed my first short sale. After reading a lot of horror stories re short sales, I would say my transaction went pretty smoothly. HOWEVER: I think the owner had fallen behind on his payments for legitimate reasons (divorce, loss of job) and I came away thinking: if the lender is going to let me buy “short” why wouldn’t the lender work with the previous owner to renegotiate the same terms that I received?
Malika,
I understand your seemingly Christian ideals but I’ve also done it that way and the results weren’t as you’d hope for. I provided my tenants with a late notice and then an eviction notice and then they managed to scrape up enough to make up the back rent. The next month, same story, longer time. The third, no payment, skipped out, left me with $22,000 in damages. So, while helping them out, as you say and I tried, is admirable you must remember that this is a business. They signed a contract with you and when things are tough you can let them slide another day or week or whatever you want, if you so choose, but if you give an inch most tenants will take a mile. The reason is that they typically don’t handle their finances well and if they lose their job they will need to live off their non-existent savings until they get on their feet. You should be fair and if you provide additional compassion, that’s fine, but remember that your compassion is costing you money and if they leave you with damages the months you spend repairing your property the mortgage company won’t show you the compassion you think you should get. It’s nothing personal.
As a business owner, you have a responsibility to your business and anyone who is supported by your business, to be profitable and viable.
If you have a long-term tenant who has recently fallen on bad times, it is possible to allow a one-time late, or even forgiveness (after all, don’t we offer free month’s rent as incentives at times?) However, they need to show you a plan for meeting future rents or YOU will be out of business and missing payments on YOUR mortgage.
We have tenants sign a contract for a reason. If you have enough wiggle room to allow a “discount” for services (eg: if there are minor repairs or maintenance needed…services you pay someone else to provide) a new, temporary contract, with clearly defined limits should be drawn.
However, nowhere in contracts does it state : “charity”. It is a slippery slope if you let someone play on your emotions…they will pay everyone else who is holding them to their agreements, and have nothing left to pay you.
I know it sounds harsh, but it is a reality in business. If you have trouble with this concept, maybe dealing with tenants isn’t your strong suit, and either hire a management company or put your energies into another aspect of investing that lets you sleep at night.Not all of us are cut out to be landlords.
That sure was a question I had, why wouldn’t the lender work with the original owner especially in certain circumstances or are they just looking to find someone who is financially stronger at that time.
I admit I would want to be more compassionate, but what I’m learning from more experienced people is that being too compassionate will simply kill your business and leave you bitter.
Thanks
interesting that Malika said “if I had a rent house”. I find it interesting how people that have never been in this business want to tell those of us that do it for a living, what we should be doing differently.
As usual, there is so much food for thought on this website. I agree with you Bryan, that it is important to consider these issues before you have to face them in reality. As a new investor, I am always thinking of ways to toe the line between compassion and fairness– particularly when it comes to money. As investors, we provide people with a much needed service. And while we have to make serving others our priority, we cannot really do that if people are dishonest. People have mnay needs but for some reason, the other needs usually require payment “up front” while the need for shelter can often be fulfilled without distress. Can you get food, gas etc when you don’t have a job? If not, then you take measures to correct those conditions. The same should be the case for shelter.
Dalene is the one that hit it square between the eyes, and actually everyone is right so far to one degree or another. It all too often depends on the circumstances of both parties invovled.
As for the question about short sales and banks one has to look to the regulations. The regulations make it a crime for the bank to work with the mortgage holder. It is a crime for the bank and any of the mortgage holders family to renegotiate the loan. It falls under a fraud statute.
Now this is “an unregulated industry” according to some of the talking head idiot politicians out there, like the new one in charge. When in fact the reason things are so much in a mess right now it because of the regulations put into effect over the last 30 years or so.
The reason the banks and credit are not fixed and don’t really have any sign of being fixed now or any time soon is because of some of the idiotic regulations in effect right now. “Mark to market”, being one of the biggest problems right now.
If you want to see a true conspiracy in progress, one of the biggest in history, look at the regulations governing mortgages over the last 30 years. It has been talked about a little bit and swept under the rug by the media and congress but it is still there if you want to take the time to read the information available.
For anyone that is curious look up redlining, mark to market and black lists, as related to real estate. What a total mess you will find. There are more but they will make you upset enough for now.
Chris B
There’s nothing wrong with helping your tenant find new employment, or a cheaper apartment, or trading for their personal property or services, if it helps to cut your losses. There’s also no obligation to provide free stuff. Following the contract (lease) is best for both parties, in the long run.
We are facing very tough times because we have been too fair. Too fair with fellow investors, tenants, family members. I am gasping for financial breath and seeing all the people I’ve helped doing okay. I believe that what goes around comes around and in the end it will work out okay, but in the future, I am going to be a little less compassionate, and more fair to myself.
As an income property business owner, you can and should show as much compassion as your written agreement with your tenant will allow, but you have the responsibility and obligation to see that all parties perform as agreed.
Can we provide information, networking resources, and encouragement to the tenant that has lost his/her job? Absolutely, and we should all do whatever we reasonably can. Can we provide free housing? Not if we are a for-profit business.
If you are a non-profit, charitable operation, you can show as much compassion as you like, until you run out of resources.
As for fairness, well, you and the tenant have already agreed in writing as to what is fair. ( There seems to be a new definition of fairness, however, according to the President-Elect, but for a short while longer, we are still a free enterprise capitalistic economy, and for those that think they can run a business and prosper under a socialistic system, well, let us know how that’s working for you).
Are you a business, or a charity? If you run your business well, you can afford to contribute to charity in some fashion. If you turn your business into a charity, you will soon be out of that business. If you have extremely deep pockets, and decide to provide rent-free housing, that is commendable, but I would guess that there are very few here that are in a position to do that, and at that point, you are no longer a business, but a charity.
The rest is just a rant, feel free to bail out now………
The reality is, this is a business, and while we certainly feel compassion for our tenants, we still depend on the income from the property to pay the mortgage, the taxes, the insurance,repairs, replacements, utilities, and other overhead on the property. If we do not make those payments, we will lose the property, our credit rating, our reputation, and the ability to do the business of providing good housing to those that can afford it, not to mention, we will lose the ability to provide for ourselves and our families. Most of us, I suspect, simply cannot afford to expend the time, cash, and credit to find, analyze, finance, repair, advertise and then provide a free home for someone to live in.
If the tenant can’t pay, we still have to pay the overhead. If we provide free housing to the tenant, we, in turn are not going to get the mortgage holder to make our loan payments for us, nor will the tax assessor, the insurance company, the utility companies, repair persons or property managers provide goods and services to us for free. You won’t find the grocery store, gas station, dentist, doctor, clothing store, or utility companies lining up to provide ‘compassion’ and free goods and services to us or our tenants. Nor should anyone expect them to.
If you are going into the business with the intent to show compassion in the form of reduced or free rent, just remember to calculate those numbers in when analyzing your deals.
This is a business. There are contracts and obligations. If you have to wrestle with that concept, you may want to consider another path in life, or at least hire professional property management.
For the record, I have 30 years in the business and am speaking from my experience. Your mileage may vary, of course. I’ve had good tenants and bad tenants. The bad tenants led me to meeting a lot of new friends… the local beat cops, the drug enforcement task force, the fire department, city building inspectors, the health department, and the Dept. of Social and Health Services.
I think those tenants had an underground network and secret meetings, as they all used the same list of excuses when they didn’t have the rent money, and they all had wrinkled 12th generation zerox copies of all the forms they needed to file to fight eviction as long as they could, after which they would vanish in the night, just hours before the Sheriff was scheduled to arrive at their door. I have broken my own business rules and given people deals, breaks, and even bartered with them, in response to their sad, sad stories, out of compassion. With almost no exceptions, that cost me dearly in time, cash, and trashed properties.
As for foreclosure properties, all of the sellers I have dealt with were happy and relieved that I prevented a foreclosure on their credit. None expected to lease-back the house, other than a short-term holdover while they moved out, as they had pretty much figured out they were losing it because they couldn’t make the payments for that property, rent, lease, mortgage, or otherwise.
As to giving them ‘fair market price’, when we went through what they owed, what fix-up and selling costs and commissions would be, plus a reasonable discount for an immediate sale, if they didn’t agree that my offer was fair, we didn’t do the deal.
Bottom line, it’s appropriate to be compassionate and fair in business, but that does not mean you forget why you are in business, or your obligations to your lenders, your suppliers, your business and your family.
Here is what I think about the whole thing. I have 2 rental units, used to be 3 until a tenant burned it down. I have one property that just went vacant due to the womans husband passing. She tried to move family in to the property to help her out with the payments, however that did not happen, she just moved out due to the fact that she could not afford the rent anymore. I just found this out from my property manager today, now in my viewpoint here was a woman who took care of my property and was always ontime with rent. Now because of hard times she decided to move on. Now what do I have a vacant house with a mortgage on it that I have to pay, I have to do in and do some cleanup, even though it is minor it is still money out of my pocket. I would have worked with her had I known the situation for many reasons. First and foremost who wants vacancies especially now, She was taking good care of my property and even making improvements, and thirdly she was an elderly lady who had hit hard times just like everyone else in the world, so yes I think there are certain times when they deserve a break.
We do need to keep in mind though there are alot of winner tenants out there who are going to be crying the blues everytime you see them, so as for them no I would throw them out as soon as look at them because the bottom line is I have a family to feed as well and bills to pay and noone is going to care if I can’t make the mortgage.
So summing it up I would have to say it really is a case by case basis, if the tenant is doing right by you and maintaining the property that can be worth way more then a couple hundred bucks you might get from the next guy who will only be there for 6 months and beat the crap out of you house and leave you with thousands of dollars in repairs.
Just my thoughts
I agree with all of you.
Besides that, when you give them your heart. They without common thoughts, always tear everything apart or not follow the terms of the contract. And leave you with thousands of dollars of damages, when they only give you a months or two’s rent.
This is just not right.
And you still have a heart with the question of what Bryan is asking. ? ? ? ? : /
I read a great comment in a Real Estate investment book that said, If you want to help someone give them some money but don’t rent to them for free. Giving free rent is the same as giving money. So would you just hand them hundreds or thousands of dollars? And if you would, well go ahead but still evict them.