400: Virus Update – What Happens if Tenants Stop Paying Rent?

SHOW NOTES FOR EPISODE 400: VIRUS UPDATE – WHAT HAPPENS IF TENANTS STOP PAYING RENT?

When it was recently announced that renters would temporarily be exempt from eviction as a result of the Covid-19 pandemic, many landlords shuttered.  The thought of losing income when many real estate investors are facing other financial challenges has caused many to be concerned.  In today’s podcast, Bill addresses this issue and offers proactive steps landlords can take to help alleviate and perhaps prevent the impact.

The Market

The main question most people in the real estate world are asking right now: will the market crash? My gut says the market will not crash, but no one knows for sure what will happen. There are too many unknowns for anyone to predict what will happen.

How can I think the market won’t crash when so much is going on with the coronavirus? The main reason is the real estate market was solid before all of this happened. Were prices high? Yes, but they were/are high due to strong demand and low inventory.

Real estate crashes do not happen very often. The last crash was the worst in the history of the United States. That crash happened for a number of different reasons: horrible loans, too much building, and fraud. None of those factors exist now.

There is a lot that could happen and prices could decline but that does not mean they will crash.

The Virus

The coronavirus is not something to take lightly in my opinion. There are people who feel it is nothing more than a bad cold and those who feel it is the end of the world and we are all going to die.

I believe the truth lies somewhere in between. The virus is serious and it could kill a lot of people. I think we should all be taking precautions and practicing social distancing. We should limit social interactions and those who are sick should be quarantined.

Some people think we should do more and others less. That is where the unknowns come into play. 7 states in the United States have been put on lockdown so far and more seem to be locking down their citizens every day. People are allowed limited movement but most can’t work and the economy has ground to a halt.

The scary thing is we don’t know exactly how long these lockdowns will last. It could be a couple of weeks or a couple of months. The longer they go on, the more our economy will be hurt. We have already seen the stock market crash, will all of this bring down real estate as well?

Impact on the Real Estate Market

It would seem obvious that the coronavirus would negatively affect real estate. People aren’t able to work so how can they buy a house? This is true but in Colorado, we are still seeing buyer and seller activity. Colorado has not been locked down either.

Houses are being put up for sale and buyers are setting up showings. I am a real estate broker but I mostly deal with my own investments. I bought a commercial property last week and I sold a house flip as well. I tried to buy a couple of flips but got beat out or could not make the numbers work.

Almost everyone I have talked to wants to work. They want to make money. They don’t want to be told to stay home by the government. There are some people who want to wait and see what happens. There are some people who are hoping for a crash to get good deals. I have not seen the desperate people who could cause a massive drop in prices.

The last crash was caused by a massive amount of foreclosures. But will that happen this time?

Evictions and Foreclosures on Hold

I had to evict someone right before the coronavirus scare. I also had an eviction put on hold after evictions were halted in our area. These were not my tenants in rental properties I own, but tenants I inherited on properties I just bought. My plan is to flip the properties so I want them vacant in order to fix them up.

The government and states have pretty much halted all foreclosures as well. If there are no foreclosures there will most likely not be a massive crash. There may be some sellers willing to sell fast for a discount but many will simply wait. If people wait to sell their houses it may decrease inventory even more. There could be fewer buyers as well with the scare but the market may stay somewhat stable just with less activity.

This projection is based on the restrictions lasting 30 days maybe a bit longer.

If the problems drag on longer and people need to sell to access money we could see prices start to drop. If we see the foreclosures allowed again and many people lose their jobs we could see prices drop.

What About Lending

Another thing that can impact the real estate market is the availability of lending. The federal reserve lowered interest rates to 0, which most people think would make mortgage rates lower.

However, mortgage rates are not directly tied to the federal reserve interest rate. We saw rates drop to record lows for a short period of time, but then they rose! They rose because there was so much demand for refinances that the lenders could raise rates and still do as many loans as they could handle.

We were hoping to see rates lower again but they actually rose again because the government has said foreclosures will be stopped and some borrowers may not have to make payments during the coronavirus scare.

Some banks have stopped lending because they are worried about the capital they will need if people stop making payments on their loans. They have also increased rates because there is so much uncertainty about what will happen.

If lending continues to slow down it will hurt real estate as well because it will greatly limit the number of people who can buy a house. The buyers will be limited to investors who can pay cash or use non-conventional loans. If people have to sell, they may have to sell at a steep discount. We could see prices drop if lending stops.

The big question is if lending stops and prices drop, how long will it last? If it lasts a month, prices could pop right back up when lending starts again. If it lasts 6 months it may be tough to recover and we could see a prolonged drop in prices.

If you are concerned that you might have difficulty paying your mortgage because rents stop, you might want to look into the possibility of seeking Forbearance from your bank or mortgage company.  This is a provision that provides temporary relief from your mortgage obligation in times of  national emergencies or crisis that impacts your ability to pay your mortgage.  This can give you up to a 3 month break from paying your mortgage (of course, you will still be responsible for paying the 3 mortgage payments) where they will not take action on foreclosure during that time period.

What’s Ahead?

As I mentioned last Friday, it is so hard to know what will happen because we don’t know exactly how bad the coronavirus is or how the governments will react. If it is really bad we could see a horrible economy for months and that could really hurt the housing market. If this lasts a month or two, we could see a temporary drop and slow down, but we may not see significant price drops because there will still be low inventory and strong demand.

I don’t think we will see a crash but I do think there will be a slowdown. I will keep buying properties and selling them knowing prices may be lower than they have been. I don’t want to hold vacant properties hoping things get better because there is no guarantee when or if that will happen.

Proactive Steps to Prevent Rent Loss

• Send a letter, email, text or phone call to your tenant. Use whatever method of communication you always use with them.
  • Inquire about them first.  Ask them how they are doing and how this is affecting their life. Ask about the family and if they are all well.  Be empathetic to their situation.
  • Explain to them that even though there is a mandate for no evictions in place, the rent is still due and their obligation to the lease is still in effect.  The rent will still be due and will accrue over time.
  • Offer today, for anyone that pays their rent by the 1st of the month, a 10% discount in rent. That 10% will mean a lot to them. It will show them you care and are offering good will. This also gives you the cash flow to make your mtg payment and meet your obligations.
  • For those that do not pay on time, on the 5th of the month, reach out to your tenants and tell them that you understand the situation and offer them to pay you weekly. Break down their rent for them and give them a number. Waive the late fee.
• Answer all maintenance calls just like you always do. Show the tenants that you care about them and your property.
• Appreciate your tenants, especially the ones that stayed the course with you and paid their lease. Give them a gift card for takeout at a restaurant, grocery card, or gas card. Show your kindness to your inner circle.

General Tips for Your Tenants

• Good Communication
  • Tell them, unfortunately, there may be a shortage of toilet paper because people went out and bought 400 rolls and a just a good friendly reminder that napkins, paper towels, wipes. These things are not meant to be flushed down the toilet. And if they cause a backup that’s going to cause damage and even worse issues. So do not flush those items down the toilet. That is definitely worth reaching out to your tenants about just on that alone.
  • Number one is to send out letters to your tenants to is managing tenant fears.
• Hygiene
  • Again, also thinking about things in terms of being a landlord with your tenants. You want to consider if there’s anything that you can be doing to help safeguard, especially if you have multi-unit properties. Just kind of putting out some best practices and, you know, just reminders to people to keep their hands clean.
  • Recommend a no guest policy at this time and no congregating in the halls, laundry area, etc

In Summary

The coronavirus will impact the real estate market but no one knows for sure how much or for how long. I don’t think a crash is coming but that is based on my gut feeling that we will get through the coronavirus situation sooner rather than later or at least we will cope with it and get people back to work sooner rather than later.

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

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