As a fiduciary of our investors’ money, we are often faced with tough challenges in our affordable housing model. On one hand, we are compassionate capitalists who seek to reduce transiency in schools by keeping rents low, so we can keep families in place. During the COVID-19 pandemic, we had true hardships where people lost jobs or could not work. The eviction moratorium gave those less fortunate a chance to pay past due rent during the crisis.
In past articles, we discussed what we called a “professional tenant”
Tristar hosts an “eviction lab” at our properties where we regularly go through the rent delinquencies to recognize mischievous behavior vs. true hardship in order to affect a game plan. The bad actors have evictions filed on them. They are playing the system and with no plans to leave under any circumstances, unless dragged out. (They will miraculously disappear the night before the marshall arrives, often having been in place for over a year.) This is more likely due to poor behavior in the community and nonfinancial lease violations, as much as it is due to failure to pay rent. Likewise, we recognize those tenants who would benefit from a payment plan or assistance to get them current. They can be in unique situations where they are in between jobs or their Social Security check was stolen. A resident who has been with us for multiple years with no history of payment issues or other lease violations, is worth helping out for many reasons. So, what to do with the rest of the problem renters while still being a prudent fiduciary for your investors?
Normal times will see a period of 4-6 months to file an eviction and have a tenant removed from an apartment. COVID-19 has backed up the court system, and it may be 8-12 months before we can recapture a unit and return it to income production. While waiting for the eviction to wind through the court process, the owner knows they will never get back rent paid, and they will wait until the court eventually has the tenant evicted. This is very costly, not to mention the cost to turn a unit, which can be $800-$5,000 dollars. Tenants tend to take their anger out on their unit, causing lots of damage.
Cash for Keys – knowing you have delinquent rent that is unpaid, and likely not to ever be paid, and you may have 6-12 month on the horizon and 1-2 months to turn a unit before you can have it leased again, is there any way to speed up the process? Step 1 is to try to create a payment plan. Step 2 is to try to ask them to walk away with the promise not to report them to the credit bureau and damage their credit score (not effective). Step 3 is “cash for keys.” If you knew you may not collect rent for 6-12 months, and that there is a waiting list for your unit, how much would you pay them in cash to leave immediately? This is painful, because in your mind, they owe you money so why would you ever pay them and forgive their debt? Simple math: giving tenants money to get out may be the best way to recover after COVID-19 eviction moratorium. It never feels good, but in a very logical manner, this is the best way to get the property leased to consistent rent payers and to recover financially. It is better to give a tenant $2,000 to leave for a $1,000/month apartment, than wait six (6) months to have them evicted. Everyone has a price.
The compassionate capitalist hates some of the reality of the affordable world, but even the best philanthropist must be realistic and prudent.