property management shop
Don’t Board the Crazy Train
by Marc Wilson
Q. We are having a particularly tough time with one of our tenants. She is habitually angry, combative and accusatory. Routine repair requests and other ordinary dealings inevitably deteriorate into a nasty discourse. What strategies would you suggest with regard to difficult tenants?
Also, I know that you have been predicting the demise of the apartment building sales market for the last couple of years. Are we there yet? Is now the time to buy?
A. Your questions remind me of the old joke where the restaurant diner says, “The food here is horrible—and there’s not enough of it!” It’s funny that no matter how challenging, no matter how frustrating the apartment building ownership business becomes we are always looking to increase our holdings, add to our responsibilities and descend deeper into a lifestyle that most people would not and could not tolerate.
Why is this? I can’t really say. The answer is probably steeped in a primal desire for independence—both financial and emotional—no matter what the cost. I think that apartment building owners and managers are the hardest working people I know, and I know a lot of hard working people.
Is it worth it? When I consider the alternatives, when I gaze across the broken and busted landscape of the banking industry, gutted retirement programs, worthless stock certificates, mass layoffs, furloughed government employees and the resulting grotesque loss of financial security, independence and pride, I become all the more thankful for this industry. There simply is no business like the housing business. Now is an especially good time to be thankful that you are in a real business that provides a real service. You do more for the average San Franciscan before you read the morning paper than all the supervisors, city employees, Wall Street minions and social workers combined will do in a year. You provide housing for San Franciscans at great personal and emotional cost, and for that you should be proud.
This Food Is Horrible …
Clearly, this is not an easy business. Plumbing problems, roof leaks, window issues, boiler malfunctions, water bills, insurance premiums, noise complaints, late rent payments, no rent payments, lawsuits, ignorant politicians and obnoxious tenants all conspire to make for a bumpy road. I was getting an earful from a crazy tenant (I had the temerity to change her locks back to the master system after an unauthorized lock change) in the presence of my locksmith last week. At the conclusion of the tenant’s awful diatribe, the locksmith turned to me and said, “I could never do what you do for a living.” All I could think of at the time was how little the tenant was bothering me. Actually, I was also wondering how embarrassed the tenant’s parents would be if they could just see their daughter in action. Will my son ever behave like this? Will he end up an angry, dysfunctional San Francisco tenant? Or worse, a tenant attorney in San Francisco?
There are some benefits to getting older. Yes, with age comes some wisdom, the wisdom to simply not get on every emotional roller coaster that pulls
into your station. The most important strategy with regard to difficult tenants is not to personalize their antics. Stay above the fray. Do not board their
roller coaster.
Why do difficult tenants act the way they do? For the worst possible reason: because they can. Think about it. Virtually 100% of your other relationships are voluntary and discretionary. All, and I mean all, of your other relationships may be unilaterally terminated at any time for any reason. Your cable television provider, your gardener, your bank—even your marriage—can be terminated at any time with or without cause. But not a tenancy. The cold reality is that acting like a deranged lunatic is not considered a just cause for eviction in San Francisco.
A San Francisco tenant can say whatever she wants and act any way she wants without fear of retaliation or, god forbid, tenancy termination. It is a pure testimony to the good nature of mankind that more tenants don’t ride the dysfunctional bus when it comes to their landlord and/or property management relationships. The good news is that seriously dysfunctional tenants comprise a very small percentage of the total. I manage almost 400 units and can think of only four or five tenants who obviously did not get enough love when they were young.
The key to successful dealings with dysfunctional tenants (and all tenants for that matter) is the complete, total and permanent lack of verbal communication. The law says that you have to provide housing; the law does not stipulate that you have to verbally interact. Never, ever verbally communicate with dysfunctional tenants. If you have something to say, say it in writing. If your tenant has something to say, she can say it in writing. Take a gander at the list of forms available on the California Apartment Association’s website. Are they missing anything? I don’t think so. No matter what you want to say, no matter what you want to communicate, there is a form for you. Make it a part of your job description to review this vast inventory of forms on a yearly basis. You should incorporate an addendum into your standard rental agreement that absolutely mandates that all non-emergency communication be in writing. If a tenant forgets and calls or approaches you in the hallway with a question, comment or repair need, insist politely that they put it in writing. No verbal communication ever.
Secondly, always and I mean always, enforce each and every aspect of your rental agreement. There is no part of your rental agreement that is not worth enforcing. No excuses. Get yourself familiar with the Notice to Perform Covenants or Quit; this is the quintessential “Stop That or I Will Evict You” form. Use this form. Love this form. There is absolutely no single word, item, paragraph or term within your written rental agreement that is not worth enforcing every step of the way. If you have never used a Three-Day Notice to Pay, Notice to Cure Habitual Late Payment, Notice to Perform Covenants or Quit or any of the other myriad of available forms, then you are denying yourself the most essential tools in your toolbox.
… And There’s Not Enough of It
Is it time to buy yet? I don’t think so. We are all painfully aware of what happens to building prices when rents are going up, building values are appreciating and lenders don’t care about the security of the money they lend. Frank and Walt Lembi taught us everything we will ever want to know about paying 16, 17 and even 20 times income for apartment buildings. At the end of 2006, I wrote: “The Lembis just completed a historical acquisition binge of large apartment buildings at 3.5% cap rates. Do you know what the operating numbers look like when you buy highly leveraged apartment buildings with a 3.5% cap rate and an 8% cost of dept? Not pretty. Skyline Realty is like an anaconda that just swallowed a heard of water buffalo, horns and all.”
Fast forward a short 24 months and the Lembis have given 51 apartment buildings (roughly 1,500 units) back to one of their lenders (UBS). It turns out that the Lembi family and UBS are poster children for the consequences of reckless lending, borrowing and buying when it comes to San Francisco apartment buildings. In a normal world, a world with consequences, now would be the perfect time to be a buyer. In the old days, UBS would be shuttered and their real-estate-owned portfolio would be sold a building at a time by government regulators at current market prices. In a normal world, I would be working 20-hour days making offers on and representing buyers for these properties. I (and brokers like me) would be making a living and establishing current values for these properties. Contractors would be remodeling units, prudent bankers would be lending on these properties and painters would be painting these buildings. In short, the economy would be humming—notwithstanding a highly probable 40% to 50% reduction in
sales prices.
Unfortunately, this is not the world in which we live. We live in a new world, a world where politicians don’t have the guts to let bad banks fold. We live in a world where zombie banks are propped up by taxpayer dollars. Why sell foreclosed assets to fortify your balance sheet when the government will shower you with taxpayer dollars? Why take the pain? Why go out of business when you don’t have to? Why not just become a government employee?
Do you want to know how truly sad this situation has become? Not only is UBS not selling these foreclosed assets; they have hired the buyer in default to continue managing these assets. Who in the world is managing UBS? When is the last time a lender signed a management agreement with a borrower in default after taking back the security? I have never seen such denial. UBS says that they are waiting for a more advantageous time to sell these assets. Are you kidding me? Any lender dumb enough to originate these loans in the first place is not qualified to manage the liquidation of a hot dog stand, let alone 51 apartment buildings. UBS needs to go out of business. Believe me when I say that its lending spree in San Francisco is not an isolated incident. It has done this across the playing field, with other people’s money.
So what’s the point? The point is that no one will know the true value of a San Francisco apartment building until UBS (and all of the other lenders in this mess) start to sell these foreclosed assets one building at a time. We know the value of these assets in a deranged, madly appreciating market with one overly optimistic buyer and a handful of lunatic lenders. What we don’t know is the value of these assets when rents are going down, building values are plummeting and lenders are finding religion.
I’ve got a little piece of advice for any institutional vultures out there looking to buy distressed apartment buildings or their associated debt in bulk: don’t be optimistic about the resale value of the underlying apartment buildings. I have been selling apartment buildings in this town for 25 years, and you can believe me when I say that you won’t find many buyers here stupider than you are. You want to double your money? Fold it in half and put it back in your wallet.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Marc Wilson has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2009 by Black Point Press. All rights reserved.