By Ben Casselman, The Wall Street Journal Online
RISMEDIA, Sept. 26, 2007-(WSJ.com)-Mark Spector was happy with his new neighborhood. Then the renters started moving in.
In 2004, Spector and his wife, Deanna, paid $350,000 for a six-bedroom house in Bridgewater, a new development in Wesley Chapel, Florida, about 25 miles north of Tampa. They moved into their home and looked forward to meeting their neighbors.
Then Florida’s once-feverish housing market started to cool. Investors who’d bought a large percentage of the properties in Bridgewater found they couldn’t flip them for a quick profit, and brought in tenants, instead. By last year, Spector estimates, close to half of the residents in the subdivision of 750-plus homes were renters.
The result, Spector says: overgrown lawns, drug deals in the park and loud parties in the “frat houses” down the street.
“You’ll see some driveways with a dozen cars parked in the driveway and on the grass,” he says. Concerned homeowners, through the subdivision’s community development district, have earmarked about $30,000 for beefed-up patrols by the sheriff’s department.
The developer, Lennar Corp., estimates the number of renters in Bridgewater at about 30%. In an e-mail, Mark Sustana, Lennar’s general counsel, said, “We have no evidence that leads us to believe that rentals are the cause of the homeowner concerns.”
In another manifestation of the housing slump, thousands of property owners across the country are now renting out homes they cannot sell. As a result, developments and condos that once were largely owner-occupied are filling up with renters who some neighbors say are less engaged in their communities and less concerned about maintenance.
Fearful of declining property values, some homeowner associations are fighting back — targeting lax landlords and renters with “good neighbor” letters, limiting the number of units that can be rented at any one time, and, in some cases, banning investors from buying altogether.
“I like to know my neighbors,” says Lyletta Robinson, who says she has had disputes with some of the tenants in her 18-unit condo complex in Chicago’s Woodlawn neighborhood. “I like to know who’s coming and going out of our building, and it’s difficult to do that with renters.”
Of course, plenty of renters cut their grass, take in the garbage cans and turn down the music at 9 p.m. And not all homeowners are model neighbors. Denise Bower, of Community Management, Inc., which manages 122 developments around Portland, Oregon, says renters are often more responsive to complaints because they know they run the risk of losing their leases if they don’t. “I have more problems with owners, by far,” Bower says. “They get stubborn.”
Home ownership in the U.S. has declined slightly since 2004, when a record 69.2% of households owned their homes, to 68.2% in the second quarter of 2007, according to the Census Bureau. More people who stretched to buy homes have returned to the rental ranks, while others, limited by tightening credit, have delayed jumping into the ownership pool. At the same time, after years of existing apartment buildings being converted into condominiums, the trend is reversing; according to Real Capital Analytics, a New York-based research company, “reversions” — condo buildings that were turned back into rentals — outstripped condo conversions in the second quarter of 2007, the first time that has happened since the 1980s. In Baltimore, for example, there have been 1,430 reversions since January, 2006, while only 430 rental units have been converted to condos.
In another shift, builders are refocusing their energy on constructing rental properties. Michael Cohen of Boston-based Property and Portfolio Research predicts that in the 54 markets they track around the country, this year will see the largest number of new rental units on the market since 2004, while the number of new condo projects will continue to drop. “Certainly, there is going to be a migration back toward rental,” Cohen says.
The uptick in rentals is greatest where the real-estate boom was strongest: Miami, Phoenix, Las Vegas and other areas where people bought up many of the new homes and condos as investment properties.
For consumers, the increase in the number of rental units has not led to a corresponding drop in rents in most markets. That’s because demand for rental units is also growing. Nationally, rents have risen 4% in the past year, according to the Bureau of Labor Statistics. In cities such as Portland, Ore., and San Francisco, where new construction was more restrained during the boom, a flood of new renters has pushed rental prices higher.
But in areas with a glut of new buildings, such as in much of Florida, vacancies are up and rents are down. In West Palm Beach, for example, the average rent was $1,057 in June, down 5% compared to a year earlier, according to M/PF YieldStar, a research firm. Rents also dropped elsewhere in the state, and were essentially flat in other fast-growing cities such as Las Vegas and Phoenix.
Not all “accidental landlords” are investors. Lindsey McMurren-Riggs says that when she and her husband moved to California last year, she spent six months trying to sell her Salem, Mass., condominium, which she bought for about $460,000 in 2005, before giving up and putting it on the rental market. “It’s not something I really wanted to do, especially from 3,000 miles away,” Ms. McMurren-Riggs says.
In fact, about a third of the 54 units in the Salem condo building haven’t sold, leaving the developer, RCG LLC, little choice but to market them as rentals. RCG principal Matthew Picarsic says the developer has tried to find renters who might become buyers, and he screens tenants carefully. Owners in the building say the renters haven’t caused many problems (although McMurren-Riggs acknowledges she’s received a few noise complaints about her tenants), but some say they are worried about what having too many renters will do to property values.
“There’s an anxiety that if a certain number of units are rentals, new buyers won’t be as interested in buying,” says Mickey Northcutt, an owner in the building. One reason is that many lenders won’t give the lowest mortgage rates to buildings with too few owner-occupants. (For example, in most cases Freddie Mac buys mortgages only for buildings with at least 60% owner-occupancy. Individual lenders often have more stringent requirements.)
Some developments have sought to limit the number of renters by requiring owners to register with the condo board before taking on tenants and by limiting the number of rentals permitted. Metropolis, a 498-unit condominium complex in Atlanta, allows 25% of the building to be rented out.
Others are going further. Park Highlands, a planned community in North Las Vegas that expects to eventually total about 15,000 homes, will ban all buyers from renting out their homes in their first year — a move aimed at blocking, or at least sharply reducing, investor-owners. “You can’t buy it with the intention of renting it out,” says North Las Vegas Mayor Mike Montandon, who helped broker the deal.
On the other hand, capping the number of renters allowed in an already established community can prove difficult. Jan Hirsch, an attorney who is president of her Portland, Ore., homeowners association, says her 112-unit complex considered such a cap last year. The proposal sputtered, in part because even current owner-occupants didn’t want to give up their ability to rent should they need to do so. “It’s a restriction on their right to use the property,” Hirsch says.
Some developments are taking a different approach. When Susan McDonald began seeing an influx of renters in Elk Grove, Calif., just outside of Sacramento, she cofounded a community group, the Franklin Reserve Neighborhood Association. The group writes “good neighbor” letters to problematic tenants and landlords, organizes forums to discuss a variety of issues and holds block parties to encourage residents, both owners and renters, to get to know one another. Local high school students have even cut the grass on unkempt properties. For the most part, the steps have helped, Ms. McDonald adds, and when they haven’t, community members have been willing to be even more aggressive.
Elk Grove resident Tim Chan, a Sacramento police officer, called the local police repeatedly to complain about loud parties, piled-up garbage and to report what he suspected was gang activity involving the renters next door. When that didn’t work, he wrote a two-page letter, also signed by 21 of his neighbors, to the out-of-town landlord.
“All of these items disturb the peace and quiet of our neighborhood and cause discomfort and annoyance to all that live on this street, as well as reducing the quality of life and safety of our children,” Chan wrote. The letter, which was sent to city officials and also threatened legal action, got results: The tenants are gone, and the house is being fixed up.
McDonald and Chan both blame the majority of the Elk Grove’s problems on absentee landlords, not the tenants. “You don’t just rent a property and assume that it’s going to be taken care of,” McDonald says. “Come and see if the lawn is being taken care of. Come and talk to the neighbors.”
Denver, Colorado, resident Neval Gupta says that when his 63-unit condo complex began running into problems as the number of renters grew, the board stepped up enforcement of its rules, including bans on storing bicycles on balconies and doing auto repairs in the parking garage.
“We really crack down on the owners now to be accountable for their renters,” says. Gupta, the president of the condo board. “We do have a problem with some owners who put any renter they can find in there.”
Gupta and other residents say such vigilance has helped cut down on some problems. But it has also created new ones. Craig White, who bought his unit as an investment and rents it out, says his last tenants left when they got tired of being “harassed” by over-zealous owner-occupants. “If you put your bike out [on the balcony] for a day or two, you’re going to get a phone call,” White says.
Crossing the Threshold
Sometimes, even the prospect of having renters move in is enough to set neighbors on edge. This month, when Ken Franklin couldn’t sell his house in Meridian, Idaho, he hung out “for rent” signs. When he went back to check on the house recently, the signs had disappeared. “It is a nicer area, and I don’t know that people want to have it looked at as a rental market,” Franklin says.
Shirley Gore, an appraiser outside Atlanta, says having too many rentals can hurt property values, even if the renters are responsible neighbors. A handful of rentals won’t have much impact, Gore says, but if an area crosses a threshold, about 10%, in most cases, values will take a hit.
In Spector’s community in Florida, where the 10% threshold is long since breached, the sheriff’s department has an inch-thick stack of incident reports: Aggravated assault, stolen cars, neighborhood disputes, even a drive-by shooting. “For a brand-new community in those priced homes, we do see a lot of activity,” says Doug Tobin, the department’s spokesman.
Then there are the problems that never reach the police but do reach the Bridgewater homeowners association through a form on its Web site. “They are always parked in the street,” one owner wrote. “This afternoon, we had to call a tow truck because our driveway was blocked.” “Cars as well as guests lined the street all night, with several breaking bottles,” wrote another. “They won,” another homeowner wrote. “We’re selling.”
For Accidental Landlords, here’s some advice for novices from property managers, agents and other experts:
Talk to the neighbors: Make sure they know you’ll be renting and encourage them to tell you about any issues that come up. Then check back in from time to time to make sure everything’s working out.
Know the laws: State and local governments regulate everything from how many smoke detectors must be installed in a house to how long landlords have to return tenants’ security deposits. Failing to know the rules can lead to lawsuits, civil penalties or worse.
Keep up with maintenance: Many owners assume that since a property is a rental, they don’t need to worry about routine maintenance. Not so, say experts. Keeping up with repairs will help draw better tenants and will prevent bigger maintenance bills down the line.
Study the market: Rental agents say many landlords set their rents based on their expenses, rather than on what the market will bear. Then they wonder why their units don’t rent.
Vet prospective tenants: Credit scores alone aren’t enough. Dig into credit reports, verify income and make sure to call references. But make sure not to run afoul of discrimination laws, which bar landlords from rejecting tenants based on age, marital status and other factors.