THE BLOG
02/24/2014 03:47 pm ET Updated Apr 26, 2014

The For Rent Ad in 2017

They say that the Web is forever. Don't publish anything on the Internet that you will not want someone to read back to you years in the future. With that in mind, making predictions about real estate markets three or more years down the road is risky, but I can hope that if I'm too far off the mark you'll just never see this. I want to talk about the "nation of renters" articles and the mass purchases of foreclosures by financial institutions.

Blackstone Group, through its subsidiary company Invitation Homes, has purchased more than 40,000 foreclosure homes according to one estimate. The company is turning them into rental homes as quickly as they can be made habitable. Other financial firms are doing the same, just in somewhat smaller volume. If that were the only thing going on with these mass rental initiatives, there wouldn't be as much to write about.

However, an article by Laura Gottesdiener over at Tomdispatch tells us about a whole new wrinkle and makes me wonder if we're in for a bit of real estate crash Déjà vu. In November of 2013, Blackstone Group released a bond issue to investors to be collateralized by mortgages on rental homes. Investors would be paid from the rental income profits. It was the first of its kind rental-backed security. However, other bulk buyers of foreclosures are indicating they will follow Blackstone's lead. By issuing these bonds, Blackstone Group gets more cash to keep stocking up on foreclosures while prices are low.

According to the Tomdispatch article, the documents sent to investors presented a cash flow analysis that assumes 95 percent occupancy at all times with an average rent of $1,312/month. As a real estate investor for many years and an owner of rental homes, I can tell you that those aren't fairy tale numbers, IF you are a responsive landlord, charge competitive rents, carefully screen tenants, and you keep your tenants happy with good service and rapid response to maintenance requests. I made that IF big for a reason.

It's that pesky property management thing that gets landlords into trouble and creates higher vacancy rates and credit losses. If the trend is like one Atlanta tenant's experience, there could be problems meeting those income numbers. This tenant signed a two-year lease and says she wishes that she had not done so. Problems immediately surfaced with insect infestations, and she says multiple complaints were filed but ignored. This included a call to the company's repair hotline which wasn't answered.

Things only got worse when an email marked URGENT arrived. Invitation Homes had apparently failed to withdraw part of her rent payment from her bank account. It appears to be due to insufficient funds, and the company wanted a personal delivery of the remaining rent plus a $200 late fee and a $75 insufficient funds fee. Though she delivered the balance of the rent, the tenant complained about the other fees and eviction was threatened. She responded with a threat of legal action and the company decided to accept her rent without the penalty fees as a one-time courtesy.

If those are the rules, then those are the rules, and tenants should be made aware of and abide by them. However, the combination of poor management response to service requests and tough penalties that include taking time off work for personal delivery of money can combine to create a lot of unhappy tenants. And, unhappy tenants create a lot of news. A lot of negative news makes new tenants tougher to find.

That 95 percent occupancy number means 95 out of 100 units occupied continuously, OR it means that 95 percent of the year all properties are occupied. If 95 out of 100 are occupied, but a significant number are locked in legal proceedings for months to evict, then vacancy losses turn into credit losses and it can be really bad for profits. Legal judgments against tenants do not pay bond and interest payments.

I'm wondering if rental ads in a few years might not read something like: "House for rent, $1400/month, first month, last month and penalty fee deposits required up front. Minimum balance in bank account required to assure successful automatic rental withdrawals or all rents to be hand-delivered in cash or money order to management by due date. Two-year lease required. Maintenance requests accepted on third Wednesday of each month only."

Don't laugh, as if they own the majority of rentals in the area, you'll at least see some of that wording and worse in the lease.