I know a lot of you are investors like me. A large part of my portfolio is multi-family units, so I’m right there with you as we watch the impact of the Coronavirus on the economy. There are a lot of rumors floating around, and the news seems to change constantly.
I talked with my good friend and real estate attorney David Streeter to confirm the truths we still have to work with, and dispel the myths that many people believe about how the pandemic will impact real estate.
We are in unprecedented times, and we don’t know when or how it will end. But we do know that the tenant-landlord relationship and the landlord-mortgage holder relationship are still protected by law. We will all have to do some adjusting as we try to work around the problems caused by the pandemic, but keeping the lines of communication open with our tenants, our creditors, and the government will help us get through this.
EVICTIONS DURING THE STAY-AT-HOME ORDERS
During a normal recession, we would expect tenants to still be able to work and pay their rent. The stay-at-home orders many of us are under has changed that. Every day new rumors circulate about what will happen to tenants and landlords. Tenants might be out of work and trying to file unemployment, but with the speed at which everything changed left many tenants unprepared.
Let’s start off with a truth: Most courts have issued a stay on evictions for at least 30-60 days. This means that landlords currently don’t have any way of removing non-paying tenants. However, the pandemic does not remove our contractual obligations. Tenants still have to pay their landlords and landlords still have to pay the mortgage and maintain the property. Right now though, there is no way to enforce that contract.
When the stay-at-home orders are lifted, and the court moratorium is over, things will get back to normal. It’s even possible that the courts can speed up and get to work fixing the backlog of evictions so that we can get back to normal as soon as possible. As of this moment though, you cannot evict a tenant, so everything is on hold while we wait out the worst of this.
BEST PRACTICES FOR A LANDLORD DURING THIS PANDEMIC
With 10 million filing for unemployment and the number climbing daily, it is extremely likely that some of your tenants are also unemployed. Now is the time to open the lines of communication with your tenant. Give them a call and ask them how they’re doing. Don’t wait until the rent is late to call them up. A good landlord is a friendly, proactive landlord. When you call them up, you’re not trying to shake them down for money. You just want them aware that you know times are tough, and that you’re willing to work with them if they need it.
If your tenant needs relief from the rent, this is something you’ll have to work out with them. David cautions that whatever you decide on should be written down and agreed on by both parties. Don’t rely on a casual phone call for your agreement. You’ll want to protect yourself from a he-said she-said kind of situation if you end up in court when this is all over.
Relief from rent doesn’t mean your tenant isn’t going to pay the rent. It might mean they pay some this month, and catch up in a few months. David has drafted hundreds of deferred payment agreements for landlords who are trying to help out their tenants. He suggests asking for half of the month’s rent, with some extra time to pay it with no penalties. The remaining balance of the rent can be added on to the following months’ rent. For example, in May a tenant owes $1,000, but instead they pay $500. In June, July and so on, they pay $1100 a month until they’re caught up for May.
The deferred agreement you might work out with your tenant gives you some cash coming in. As landlords, you probably have mortgage notes to meet as well. While you may not have all of your regular income coming in, a deferred agreement with your tenant will still keep some of the money flowing, and allow you to go to your creditors and work out an agreement with them.
WHAT LANDLORDS SHOULD BE DOING ABOUT THEIR CREDITORS
Just like you’d want your tenants to do to you, open up the lines of communication with your creditors right now. Call them up and let them know if you can’t make your payments. In previous forbearance agreements during the foreclosure crisis in 2007, Freddie Mac, Fannie Mae, and HUD tied their forbearance agreements with the deal landlords worked out with their tenants. David says that you should be careful about asking for relief if you’re not offering relief for your tenants.
And I mean, that makes sense to me. You’ve got to make the solution consistent for tenants and landlords. The CARES Act impacts government backed loans, so if you’ve borrowed from a non-QM lender, you’ll have different rules. You need to understand the mortgage product you have so that you can ask for relief if you need it.
At Freeland, we’re still hustling to collect payments, but we know that our borrowers are going to be pinched for a little bit. So we’re trying to be smart with our borrowers while still offering them a good deal.
HOW THE SMALL BUSINESS LOANS COULD HELP REAL ESTATE INVESTORS
Traditional small business loans require underwriting, collateral, and a lot of rules. The CARES Act seems like the government is finally using common sense to truly help small businesses through the COVID-19 pandemic. They’ve set aside a large amount of the stimulus package just for small businesses which many real estate investors could use.
Like any stimulus package, there are broad guidelines when the law is written, but as the money moves through local banks that will disburse the funds, the guidelines may narrow down based on what banks are willing to underwrite. Still, the small business loans in the CARES Act are low entry, with low fees, and in some cases, with the chance of having the loan completely forgiven.
You should contact your local bank that services small business loans to see what the rules will be for these loans. There is only a finite amount of money for these loans, and currently when the money is gone, it’s gone, and you’re out of luck.
The stimulus package was designed to offer tenants and landlords some relief. The lender gives forgiveness, the lender gives forgiveness, and the tenant gets some relief. Hopefully this will be an eight or twelve week hiccup in our year, and then everything can go back online in Q3.
If you have any questions about the CARES Act, you should consult with your own accountants and attorneys.
Be daring,
Josh
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