Tuesday, October 30, 2007

Can I Pay You to Move?

Rental applicants were screened so carefully through the local apartment association background company that I rarely had any problems with tenants. I wrote earlier about the bad tenants we had at one property, who ended up breaking their lease early and left. So I don't have real horror stories, just some interesting anecdotes that I'm sure will come out in future posts.

In 2005, we wanted to sell at the top of the market in order to trade for income producing properties (aka, the fateful apartments). However, we did have the poor timing of listing a couple of homes with leases intact. Initially, we went on LoopNet.com and tried to unload, ahem, I mean, sell them to investors as occupied properties. But, in California, the CAP rate would have been negative 12%, at least. That didn't go over very well. So, we found ourselves in a predicament of trying to sell properties while still under lease to tenants.

The first time we did that, the tenants, who were responsible homeowners waiting for their house to be built, gladly showed the home in immaculate condition, sold it, and agreed to live out their lease in another vacancy of ours. I felt bad, but I also knew that this was a temporary arrangement for them.

When it came time to sell four in order to buy those apartments from h--l, it didn't go quite as smoothly. We tried to convince one tenant to move out early. She wasn't willing to do that. Then I offered her $1,000 to leave. By her reaction, you would think that she just won the $34,000,000 Power Ball. She moved out so fast and cleaned up the place so well that it was worth every penny.

Another tenant wasn't quite as cooperative. They did not want us to list it for sale at all, even though their lease was expiring in three months. Due to the 1031 requirements based on several sales (your time starts ticking at the first sale, which had already occurred), we couldn't wait three months to start marketing the property. I told them that they would receive the required 24-hour notice of entry and that I would be present at every showing to ensure that no one left with any of their furniture (having my agent there wasn't good enough for them). They were less than thrilled and wouldn't cooperate in making the home ready to show.

What's a landlord to do? Throw money at them, of course. Things sold quickly in 2005, so I told them that I would give them $100 for every showing. All of a sudden, the house showed beautifully and there were no teenagers in bed when the buyers came in. It worked and we sold it. Lucky for them, the buyer was another investor who agreed to lease them the property. He should have asked me if they had been paying the rent on time first.

Initially, we wanted to sell five homes for the trade. However, one older tenant, who we still have, would cry every time I brought up selling the home. She even contacted our lender to see if she would qualify to buy it. She had taken care of the home like it was her own and paid the rent on time every single month (actually we would receive it several days early). I would call telling her how we needed to sell because the house wasn't providing an income for us and we couldn't afford to keep it anymore. She cried. She would call me . . . and cry. Finally, I told her that we wouldn't sell it at that time, but, if she wanted to buy it, she'd better do it soon. That was 2 1/2 years ago. Now the house is worth about $50,000 less than it was then. She's still paying the rent early each month, and, since her first academy award winning performance, we bought and sold the apartments--and lost almost everything. But we still own her house, which has doubled in value.

I'm glad we have a good rental property with a tenant who isn't afraid to cry.