By Francyne Shapiro Lambert, Lambert Investments, Inc.
You have owned your building for decades. The roof has held up, the pipes are in good shape, and you still have an insurance policy in place. All is well, except your tenants are “ruling the roost.” Most apartment building owners have had a bad tenant or two or even more depending on the size of your portfolio. We have all read the articles on how to identify, manage and prevent the bad tenants that seem to multiply in this arena. These difficult tenants often put you in an unexpected and difficult position when making the choice to sell and enjoy the fruits of your hard-earned labor. These problem tenants have the ability to devalue your investment and even have the benefit of free legal services. Don’t allow bad tenants to control your investment.
A Cautionary Tale for Owners
Let’s assume that “Owner A” has an apartment building with tenants who have installed laundry equipment in their unit, driving up the utility bills and not sharing in the cost of the additional
expense. The tenants have barricaded what once were common areas. They intimidate and talk poorly about the building when showing a vacancy. The gardeners cannot even do their job because there is so much clutter in the common areas that it remains a mess.
Owner A has entrusted a long-time tenant to assist with various duties on the property, all for naught when he received a letter from an attorney about the tenant being overworked and underpaid. Owner A then decides to sell the building and has a broker put the property on the market. During the time the property is on the market there are several price reductions as the rents are so below market and several prospective buyers don’t want to inherit tenants who are ruling the roost. When the building does sell, it sells for about 20% less than initial anticipated value thanks to the entitled tenants who devalued the investment and an owner who felt he was being fair by nearly always accommodating the tenants.
“Owner B” has a property management company and a building with tenants who follow the rules and regulations of the property. The management company issued rent increases as soon as the COVID-era moratoriums were lifted, and they conduct regular inspections of the property. When tenants ask for certain liberties over and above reasonable accommodations, the management company declines;
not to be disagreeable, but because they have the foresight to know what those liberties can mean in terms of the building’s equity over time and the complications it can present in a sales environment. Here, the property manager is looking out for the owner’s building with higher standards than the owner ever could. The management company uses discretion when renting a vacant unit knowing it is prudent to wait to rent to a responsible tenant and more costly to have a bad tenant. Owner B puts his building up for sale because he’s ready to enjoy the fruits of his investment and gets top dollar for it despite this current market posing challenges for financed buyers. No reductions needed.
So ask yourself…Which owner are you, or which owner would you prefer to be? Say you are Owner A and you have decided “enough is enough” and want your time back, so you start taking the steps to hire a property manager or sell the building. But how do you know which one is right for you? The answer could be…both.
We recently sold a building for an owner who is just like Owner A. At that point, the owner had phased out many of the available buyers because of the tenants devaluing the property. In today’s market, it may be challenging to sell, let alone a property who could use professional management in place.
The truth is, property management is more complex than ever. It used to be your property manager would look after the “tenants and toilets” but today’s property manager must be more experienced. A skilled property manager has a tremendous effect on your equity; from managing your rent increases to protecting your building from tenant negligence and being up on code enforcement. In contrast, and for those that are self-managing, you could be hurting your own equity in the name of ignorance (which is not bliss when it comes to your equity.) Property values may decline due to the negative reputation associated with a building known for housing disruptive tenants, making it difficult for owners to attract responsible tenants or sell their buildings at a desirable price.
Selling your building after a property manager has removed your headaches can put your property in the best light, sell faster and get the best price. Those that continue to let their tenants decide their equity for them may face difficult challenges in any market.
Francyne Lambert has been a real estate broker since 1979 and is a specialist in brokerage of commercial properties and apartment buildings on the Westside of Los Angeles and surrounding areas. In 1986, she joined Lambert Investments, bringing her wealth of experience in Westside real estate along with her proven negotiating and closing skills. For more information, go to https://www.lambertinc.com/ or call (310) 453-9656.
This article has appeared in the Apartment Age Magazine And Apartment Management Magazine
