I wish we could take credit for writing this but we can’t. Great article from Mark Ainley of GC Realty and Development LLc
April 18 2020 Bigger Pockets Reprint
Author: Mark Ainley
It’s doubtful anyone in the world will make it to the end of the summer unaffected in some way by the COVID-19 pandemic. If not you personally, you probably will know at least one person who has been affected financially or been diagnosed with the virus or maybe even someone who was unfortunately defeated by COVID-19.
The tragic dilemma is many of us will end up being touched by all of the above.
Although there is a lot to take in overall during these crazy times, I wanted to provide real estate investors some insight into how we as property managers are handling these unprecedented circumstances.
As a property manager firm for over 1,000 residential units and 350-plus owners, we are currently doing all we can to be sure the owners we manage come out of this situation in the best-case scenario possible. Below are a few rules landlords should follow to have the greatest chance of surviving the next six months with a limited hit to your bottom line.
1. Follow Local & Federal Mandates
Since the middle of March, there have been many changes to what we can do as everyday U.S. citizens. Most of us have been confined to our homes and neighborhoods for over a month now because our local governors have put mandates in place at the advice of the medical experts worldwide.
It’s important for us to all do our part to stop the spread, but some of these local and federal mandates have put in place some new rules for landlords to follow. Some even stop them from going about “business as usual.” These mandates are local, so we encourage you to seek information from your community to ensure you are compliant.
The CARES Act
On March 27, 2020, the U.S. government passed the CARES Act, which lays out many rules for landlords to follow, as well. The act put in effect a moratorium through July 24, 2020, which prohibits a landlord from not only filing evictions for nonpayment of rent or other amounts due under the lease, but also from charging late fees, penalties, or other charges related to nonpayment of rent.
Under this act, however, not every landlord is included. The CARES Act only applies to a property occupied by a tenant pursuant to a residential lease if the property participated in a covered housing program or other housing voucher program like Section 8. The other exception is anyone that has a federally-backed mortgage loan like Fannie Mae. Review the act in detail to see what else may apply to you.
State Tenant Protections
Even if your property doesn’t fall under the CARES Act, your local city or state may have a moratorium on eviction filings, late fees, and sheriff evictions. This is why it is important to understand what is going on locally and for how long.
For example, here in Illinois, we are not allowed to have open house showings, and you are not allowed to show a tenant-occupied rental unit to prospective new tenants. Real estate is, however, still considered essential. These types of decisions were made by the Governor’s Executive Order that most states have in place. But again, details will vary state by state.
2. Have Empathy
If you’ve been poking around on the internet, you’ve probably read about landlords that are attempting to manage a property with a “business as usual” mentality. They want to enforce the lease and rent deadlines and are not open to making exceptions or concessions. From what I’ve observed, this method doesn’t seem to be working for those landlords, and they may actually trigger the opposite outcomes with their tenants.
As mentioned in the beginning, everyone is being touched by this pandemic in some form. Trying to aggressively or forcefully get what you want may not be the best approach in these times.
As a property management company, we hoped our tenants would be the exception—they wouldn’t be suffering financially or physically from coronavirus. But at the same time, of course, we went into April prepared for some tenants to be facing financial hardship.
We wanted to collect every dollar we could for our clients, but we realized right away it wasn’t going to be the usual 97 percent collected by the 5th of the month in the upcoming months. We first prepared our clients, the landlords, for this reality, and then went to work on how we can be flexible with our tenants while still maintaining the goal of collecting 100 percent of the rent eventually.
Going into April was difficult because we had yet to write a clear process for how to handle every scenario. But the framework for the process we did create started with the desire to work with people and approach each tenant’s scenario with empathy and consideration for their level of setback caused by the pandemic. We understand we are not the tenant’s only monthly bill, and paying rent is not always the first priority.
Over the last few weeks, we have seen all the ways in which our tenants have been affected by the pandemic and stay-at-home order. We have seen some tenants laid off with the inability to file for unemployment yet. Some are small business owners whose income has disappeared in recent weeks. Others fear losing their job. This is why it is crucial to keep in mind that many are likely dealing with bigger issues.
No matter what the current circumstances are for our tenants, we want them to hang up the phone or finish reading our emails with a little comfort in knowing we understand what they are going through. In addition to understanding, we want them to know we are here to help them get through the next few months.
There was an article published on CNBC recently outlining how to respond with empathy to a tenant. The article even provides a great template that you can use to create your own letter.
3. Know Your Options
Like our tenants, landlords are facing similar challenges and uncertainties in how to maneuver these next few months. It is important that all landlords are being proactive as opposed to reactive.
Talk to Your Lenders
In these last few weeks, lenders and loan servicers have been scrambling to do what they can to prevent a collapse in their operations. The last thing the government and lenders want right now is for the stay-at-home order to set off any sort of downward spiral of troubled loans. Prevention measures being taken by lenders are a good thing for borrowers and can be a source of relief for landlords experiencing timely rent collection issues.
If you have a loan on any of your properties, you should call your loan servicer to see what programs they are offering. Many lenders are offering payment deferment or forbearance programs and/or short-term loan payment conversion to interest-only. We have even seen reduced interest rates for the next three months to lower the borrower’s payment short-term.
Most lenders have a plan for how they can help their borrowers, but most of them will not call or email about what they can do for you. It is up to you, as the borrower, to reach out to the lender to find out your options.
Landlords that have loans backed by Fannie Mae and Freddie Mac may have some of the best options available. You can visit the Fannie Mae website, KnowYourOptions.com, to understand all that is there to help both you and your tenant.
The unemployment rate is at its highest level since the Great Depression, and it is getting worse with each weekly report on the number of people filing. The CARES Act states that independent contractors can now be eligible for receiving weekly unemployment benefits. These changes to the current unemployment eligibility requirements may be an option for landlords.
Many landlords are also real estate agents, and for the first time ever, real estate agents that are not W-2 employees can now receive these benefits. Check with your state unemployment website to see if you qualify. Realtors looking for more information can visit the NAR website.
The process to file for unemployment can be stressful in and of itself, but fortunately, the date your benefits begin will be retroactive—even if it takes you a week to get into the system.
4. Don’t Try to Evict Your Tenants
Evicting your tenants is not even an option in most places right now. Even if you can start the process, you may hit a roadblock in the weeks to come when a state or federal mandate brings the eviction to a halt.
For more on eviction and rent payment protections covered by the CARES Act, check out CRS Reports.
One scenario where we feel for the landlords right now is those who have properties with tenants-gone-bad before the pandemic hit. These tenants didn’t lose their job, get sick, or have a reduction in hours. They were just tenants struggling to meet their lease obligations.
Many landlords that were trying to work things out or be lenient with tenants in March are now stuck with that tenant in a legal system that is pretty much shut down. The new mandates have left those landlords with little power to remove the tenant at the current time.
Consider Cash for Keys
So, what do you do with a tenant that already owes you a few months’ rent and knows they cannot legally be removed through the eviction process?
Here in Chicago, we are still able to negotiate with tenants using the “cash for keys” option. This is a legal agreement between the tenant and landlord drafted by an attorney, which offers the tenant a specified amount of money to vacate the premises on a certain date.
In these cases, we lay out the total expenses a landlord may incur between now and when we could utilize the court system to remove this tenant, then negotiate a number that is less than that.
How you remove a tenant that was already behind going into March or a tenant that is violating the lease in other ways is of course determined on a case-by-case basis. It is important to consult with an attorney on what options you have locally, in addition to potential risks you may open yourself up to. Make sure you have a plan you can see through to the end before you start executing it, because these are uncertain times. The legal system may not have too much empathy for landlords trying to remove tenants, even if it is a justifiable circumstance.
Seek Legal Advice Locally
Everything stated above, like most other info you can find on the internet, is not legal advice. This blog is merely a framework for options you should explore but still have confirmed by the legal community.
If you don’t have an affordable attorney you can consult for legal advice, it’s very important you start building professional relationships in the industry like these. Ultimately, it will benefit your career. If you have a property manager, ask them about someone you can talk to in their network.
Most leases are not built to be accountable for a global pandemic, so the decisions you have to make may go outside the boundaries of your current lease guidelines. Therefore, the decisions you make over the next couple of months just might lead to legal issues down the road.
As a landlord you should make sure that you or your property manager are seeking legal advice on decisions, forms, and negotiations that are happening throughout this situation. While attorneys might not even have exact right or wrong answers to questions pertaining to the coronavirus crisis, they can assist you in reducing long-term risk by guiding you through short-term decision-making.
It’s very important to remember that during this difficult time of fear and confusion, we are all in this together. Typically when a tragedy or natural disaster occurs, the effects are limited to a city, state, or country. When something happens, we hear about it in the news or read about it online and think about how horrible it is that it happened.
We may even relate it to something that has happened close to us. But almost immediately we return to our own day-to-day with the overall event having little short- or long-term effect on us. In this instance though, there aren’t many corners of the world that will not be affected by this pandemic, which means everyone is truly in it together.
As investors and property managers, we hope all of this passes as quickly as possible, and we genuinely believe we all have the ability to work together for the best possible outcomes. Please remember to be kind to one another, be responsible, and most importantly stay healthy and safe.