Property Grunt

Thursday, December 30, 2004


If you are interested in investing in real estate particularly in the New York City area you should read this article below since it displays the mistakes this landlord made along with my comments.

A Landlord's Lot Is Sometimes Not an Easy One

So ignorant was I of New York real estate that I was barely aware of the Great Landlord-Tenant War of 1997, which was then raging. The Senate majority leader, Joseph L. Bruno, had pledged to end rent regulation and the Assembly speaker, Sheldon Silver, in alliance with various tenant advocacy organizations, had sworn to preserve it.

The sentence that sticks out for me here is this

So ignorant was I of New York real estate.

You cannot afford to be ignorant of real estate especially New York Real Estate therefore you must educate yourself. Being ignorant of real estate in New York City is as dangerous of being ignorant of combining gasoline and a lit match.

In my rookie season as a landlord, I quickly discovered I had little kinship with the barons of the industry, who had management companies to supervise their buildings, with an on-site superintendent and several porters for each address. Even small buildings need a super, and while big-league landlords can afford a factotum, someone exceptionally handy who saves them money on repairs, their small-time counterparts cannot.

This is very true. If you don't have the money to hire people to cover repairs and other costs you better have the know how to fix it yourself.

In my case, I hired a cheerful, obliging native of the Balkans who was already in charge of several buildings on the block and who had a solution for every problem: leaks ("You need plumber."), shorts ("Better get electrician.") and faulty deadbolts ("You call locksmith.").

A super is supposed to save you money. Not waste it. A super should be able to fix any problem before calling in the heavy artillery. If all the super does is give you lip service the super is useless. I have a live in super who I consider a God among Supers since he has fixed so many problems in a more than timely fashion with only his bare hands. If I could I would clone him.

Like all landlords, large and small, I soon found that in any apartment house, plumbing is by far the biggest source of grief. A handyman can replace a rotted out washer or install a new shower head, but if a pipe ruptures in a wall or ceiling, you have to swallow hard and send for . . . a licensed plumber.

A leaky pipe can cause a tremendous amount of damage in an apartment and become an insatiable source of aggravation for the owner. Never underestimate the damage they can cause.

Not that anyone of this description will ever actually show up: expect a "plumber's assistant" instead. However small the job, this surrogate is guaranteed to hand you a bill that will buckle your knees. But you must remember that you are paying not only for the work he did but for the boss's overhead — his insurance, payroll tax, office supplies, coffee, bagels, etc.

A plumber can eat you alive if you do not know what you are doing. Of course if his super had these skill sets this genius of a landlord would not be at the whim of the plumber.

All plumbing breakdowns are potentially serious, but a landlord's most perilous dramas occur in the boiler room. Our boiler, though brand new, was so erratic I nicknamed it the White Devil. As if in response, it inflicted its own brand of Jacobean tragedy, shutting down more than once in the dead of winter.

What does brand new mean? Was it just put in or 4 years ago? If the boiler has problems then it is not brand new. It’s either defective or too old. This was a critical mistake on the buyer's part. What he should have done was researched the boiler to see if it was still functional if it wasn't then he could have negotiated it to have it replaced or a price reduction to make up for a new boiler.

People who see all landlords as creatures of insatiable greed do not understand that for thousands of small-building owners obscene profits are not in the cards. We are more vulnerable to a sudden jump in oil prices or the turbulent effects of utility deregulation than the industry goliaths.

Boilers are the heart of a building that fires 24 hours a day 7 days a week. Oil is their blood that fuels them. One might argue hydrogen fuel cells or solar energy are better choices but those alternatives are either too expensive or unreliable at this time. Oil is a reliable source of energy but as the articles states it is always a target of increases. All that needs to happen is another oil crisis which will eat up a landlord's profits.

For the small-building owner, a further barrier against prodigal wealth is debt service. Your larger brethren will, of course, face monthly mortgage payments that dwarf your own, but, then, so do their assets. Moreover, banks cut their biggest customers the best deals.

There is a tremendous amount of debt management involved in real estate. Not only are you dealing with your mortgage payments but also any debt incurred by expenses including heating, water and other fun things that eat into your profit margins. And if you don't have a tenant in your apartment that is going to take a huge chunk out of your cash reserve. Don't even think of telling the bank you can't make the mortgage due to vacancies.

The meter in my head told me we were probably up around $700 by now. But when Frank checked the line, it was still not clear. Uh-oh. The going rate for clearing a stoppage before sundown on a weekday was $100 to $120, so on a Saturday night, it could cost . . . mmm, maybe it was better not to know.

No. You should know. You want to know how much money it is going cost.

A little after midnight, I waited in my vestibule while Frank wrote up my invoice, including $300 for the snaking. Well, I thought, it took him almost 15 minutes. The final tab was $1,028, which capsized my budget for months to come.

However some problems are completely unforeseeable but he should have realized that sooner or later plumbing would be an issue especially for a building of that age and prepared for the inevitable by finding a plumber through references who would give him a good deal. But hindsight is 20/20 this is the reason why you need at least a reserve fund of cash in case of an emergency.

If you are out-of-town rubes like us, however, with newly hired and inadequate counsel, you may soon find yourself locked into a penal loan agreement. Our lender, a major player in New York real estate, feigned generosity by requesting only a 10 percent down payment, then hedged its bets by requiring liens on two of our other properties. The interest rate, 9.25 percent, was so high that it might as well have been called "the vig."

First of all he can't blame counsel for incompetence since he was the one who hired the lawyer. What he should have done was scour Manhattan for a good lawyer. Before signing the agreement he should have investigated the bank's proposal to see if it made sense and if there were any alternatives that were overlooked. This what is known as due diligence He could have accomplished this by talking to brokers, lawyers, landlords and other banks.

Every clause in our agreement was a windowless cell, and any request to be released from one was met with the same response: "You signed an agreement . . . you signed an agreement." One of the clauses compelled us to turn the first and second floors of the building into a duplex and get at least $4,000 in rent for the new space. (Small apartment buildings, I learned, are more valuable if, by virtue of at least one luxurious unit, they have the potential to be owner-occupied.)

Once again, due diligence.

I wrote a polite letter to the bank president suggesting that it made more sense to rent two floor-throughs at $2,000 to $2,500 apiece than to try to squeeze double that amount from one duplex. When the answer eventually arrived from Mount Olympus, it read, "You signed an agreement."

When you sign that piece of paper it becomes all she wrote. It takes an act of God to invalidate it. It’s not in the best interest for the bank to change the agreement since it would take more money and time on their part. Their stance is if it ain't broke don't fix it.

Now our landlord decides to take advantage of the low interest rates and refinance his mortgage.

Her response: "We can offer you a five-year balloon, fixed, at 7.5 percent, with an option to renew, or an adjustable-rate loan."

All I needed to hear was the word balloon. Balloon mortgages are the most dangerous mortgages around because when the policy ends you need to either sell, pay off the loan or foreclose.

Real estate is a great business but if you do not make the effort to protect yourself you will quickly become your own worst enemy. I am curious to see how this landlord will do in the next 10 years. Maybe his property will be up for grabs. When I first read this article I had just completed my 45 hours of real estate school and I did not even do my first deal yet I saw all of his errors. My words are harsh but the mistakes this landlord committed were atrocious.