Like many of you, my first rental property portfolio was a bit risky. As the sole-proprietor, I carefully managed my acquisitions and deposition, mainly pay cash for deals but occasionally doing partnership deals. Since there were no mortgages on the properties and my expenses were extremely low, I was able to survive on the cash-flows.
My investment strategy focused on properties in the same class and price range. Generally, these deals were in the same neighborhood and, when possible, adjacent to each other.
My competition was fierce. Concessions and special provisions dominated the market. Utility and transportation costs were outrageous. After initial funding, my banker was friendly but stingy with additional funds. Taxes, the prospects of jail-time, and pure happenstance were always threatening.
The market rents were fixed, the cap-rates suspect, and my rent collection erratic. I was quick to evict non-payers and took great pleasure when my renters declared bankruptcy. Success depended on pure chance, a roll of the dice.
The D/FW rental real estate business is such a small world. I have discovered that many of my AATC and AAGD colleagues either rented or owned some of these same properties.
My first rental properties were: St. James Place, Tennessee Avenue, New York Avenue, Kentucky Avenue, Indian Avenue, and Illinois Avenue. Reds and Oranges were my winning strategy. I avoided the Greens and never won while owning Park Place and Boardwalk.
It may surprise you to learn that Monopoly was originally called “The Landlord’s Game.” Now that we are all playing Monopoly for real, seeing renters declare bankruptcy is not near the fun as it is in the game.
COVID impacted our industry in many ways during 2020. As we move into 2021, we anticipate resident bankruptcy to be one of the pandemic’s most onerous lingering effects. All signs indicate an increase in the volume of tenant-bankruptcy claims. This increase mainly reflects a rise in consumer debt, coupled with outstanding rental balances. If a tenant owes their landlord $10,000 in past due rent, $25,000 to credit card companies, $2,000 in delinquent car payments, etc., and they have lost their job or had their income dramatically reduced, then bankruptcy is a potential option.
The good news is that AATC member attorney Jim Floyd recently taught a class for AATC on how to handle tenant-bankruptcy. Please contact Gregory Ann Goldrick with AATC email@example.com to receive a copy of Jim’s presentation. You can also contact Jim directly at (817) 926-1500. The bad news is that, like pauper affidavits, most tenant-bankruptcy claims are merely eviction delay tactics.
To help you better understand how to respond to a resident’s bankruptcy, read the TAA REDBOOK article “Debtor Dilemma” by Houston Apartment Association General Counsel Howard Bookstaff.
In this article, Bookstaff explains that most renters filing for bankruptcy do so under “Chapter 7” or under “Chapter 13”. In a Chapter 7 bankruptcy, the debtor’s assets (minus those exempted by the state) are liquidated and given to creditors. Many of the debtor’s remaining debts are canceled, giving the debtor what is known as a “fresh start.” In a chapter 13 bankruptcy, the debtor is put on a repayment plan for up to five years.
Any debts not addressed by the repayment plan don’t have to be paid.
Under bankruptcy law, a tenant’s petition operates as a stay. In other words, all court action stops—including evictions. Bookstaff says that if a resident files bankruptcy: “don’t panic.” The law contains a procedure under which the stay can be lifted to allow you to proceed with the eviction.
You’ll need to get an attorney to represent your interest in the bankruptcy court. Your counsel will need to file what is known as a motion to lift stay with the U.S. Bankruptcy Court. The good news for Tarrant County owners/operators is that the U.S. Bankruptcy court for all North Texas is in Fort Worth (501 W. 10th St., Fort Worth, TX 76102 (817) 333-6000).
The entire process to lift the stay usually takes about 30 to 45 days. The result of a favorable ruling from the bankruptcy court is that an order lifting the stay will be granted. That order can then be taken to the judge in the eviction action, and the eviction can proceed.
It is absurd that the resident gets to stay in their unit rent-free before you can evict them –whether they live on Baltic Avenue or Boardwalk!
John Gillespie, WAK Property Management, is the AATC Government Affairs Committee Chair.