Capital Street

Accidental Landlord Loses +$50k on House Flip Gone Wrong

Before you buy your next rental property, Stop, watch this video, and take notes! This is a story filled with learning lessons about how our team here a CSM helped save an Accidental out of state landlord after they made a few crucial mistakes. 

In this financial literacy era that we’re living in with so much positive talk about why you should invest and own income producing properties, you could easily take action, find a property and become a landlord without ever Learning what it takes to be a good landlord. 

As a professional Property Management Company here at Capital Street Management, we come across a few bad situations every year, some worse than others. The situation that I’m going to share with you in this video is one of the worst situations that our team has ever dealt with and I’m sharing it to help you understand how you can avoid  putting yourself in the same position whether you’re looking to buy your first rental property or you already own multiple rental properties.

The Owner in this situation made honest mistakes that anyone could easily repeat if they forget the details of being a good landlord or if they never learn the details of being a good landlord.

First I’m going to share the story of what happened and then I’ll cover a few key principles that  you can use to protect yourself. So on to the story: 

This property owner reached out to us in March of 2021 after finding us online. Now we appreciate all incoming inquiries about our services but this one was filled with a few red flags. 
During our initial call, the owner opened up by saying how the tenants in place were taking advantage of the situation and he needed us to do something so he could feel at peace and oh btw he was also looking to sell the property but if he couldn’t sell he wanted to have us handle management.

 Big red flags: why would he need a property manager if the house was selling and what could the tenants be taking advantage of? The owner of this property went on to explain that they originally bought it to flip it. They got a great purchase price and even did some of the work themselves. (But after they couldn’t get the price that they wanted, they decided to keep it as a rental. According to some, What could go wrong?

Looking back, The first mistake in this situation was probably the Location the Owner decided to buy in.  I mean literally.. I actually came across a video a few months ago titled “most dangerous streets in Newark, NJ” and this house appeared on screen within 30 seconds”

 The next mistake in this situation was made when the Owner decided to originally list the property for rent. Now granted with the Location, I’m not sure of the Tenant pool that they had available but they ended up opting to rent out the 2nd floor to a sketchy prospect without doing a credit or background check.

The prospect did have a rental assistance voucher but it was only for a 2 bedroom apartment.  The lady applying told the owner that she “wanted to get custody of her kids again, and once she has them back, she’ll be upgraded to a 3 bed voucher ASAP. The owner figured their would  at least be some guaranteed money coming in every month. Again, What could go wrong?

Well, not only did he take a $300 monthly hit upfront from what a 3 bedroom voucher would pay, It turns out that her voucher  paid ~$1250/month and she was responsible for paying the other $350. Overtime, she never paid her portion and there were no signs she was trying to get custody of her children. This resulted in about a $650 loss every month

In the meantime, After having the 2nd floor rented, the owner went on to Rent the 1st floor to someone with a rental assistance Voucher as well. This person was coming from a situation where they had a house fire and they Needed an apartment badly. The owner allowed them to Move in quickly after paying the full deposit but they never filled out an application or signed a lease.

Within 2 weeks after moving in, the 1st floor tenant was begging for their security deposit back so they could leave because of the “crazy upstairs tenant.”

This is where the owner had their breaking point and we were called into the situation. After being briefed by the owner Initially, we thought this 1st floor person was a problem but after speaking with them in person, we started to see signs of issues looming from upstairs. (There was a full size pitbull living there even though the lease said no pets, broken things in an apartment that had just been renovated, and the first floor showed us videos that they recorded in the middle of the night of arguing and loud music coming from the 2nd floor. With all of the commotion it was clear why they wanted to leave so abruptly. 

After sharing these details with the owner we recommended filing for eviction for the 2nd floor and returning the 1st floor’s security deposit once they moved out. Without a lease in place and them now refusing to sign 1 it was best to cut ties and move on. If he didn’t return the deposit within 30 days the tenant’s case worker was willing to take the matter to court. She outlined this clearly in the 2 page email that she sent both of us.

Now with the 1st floor empty and the second floor in clear breach of their lease, we were ready to file for eviction for the 2nd floor but the owner declined this option. He didn’t want to lose the steady income and the eviction moratorium for non-payment was still in place. Trying to evict for breach of lease terms would have been a weak case. At this point, As PM, we were nullified by the owner opting to not file for eviction. There wasn’t much we could do. 

For a period of time we tried renting the 1st floor. But like you saw in the video the block was terrible, the warmer it got the more people there were standing outside 24/7. The process was a wild one for sure and we never really got close to having a tenant.  After a few weeks of little traction, we decided to take our own photos and film a virtual tour to help push listing.

The same day that we took the virtual tour was probably our best opportunity for scheduling apartment tours as well, it turned out to be Easter Sunday Morning. The block was immaculate!!! Church people were in their Sunday best walking to the church on the corner without any illegal activity in sight. I literally stood on the front porch in amazement for a few seconds taking it all in. But literally within a few hours after church had ended the block was back to normal

Now mind you, the property was still listed for sale this entire time. After a few more months on the market and a few price drops, a buyer was secured and the owner started with the sale process. Our team assisted the listing agent, coordinating showings, and keeping the outside of the property clean. and just when it looked like this situation would be over, literally on the day of the appraisal. Things took a turn for the worst.

One of our handymen got there an hour early to open up the 1st floor, he noticed the window broken on the back steps. He sent me a picture and I Called the 2nd floor. She said she didn’t hear or see anything…. 🤔 wow? You’re the only tenant in the building and you didn’t hear or see anything in the common area that now only you have access to? I was pissed for the owner.

She wasn’t paying her rent, she drove out the 1st floor tenant and now this!? The first thing in my mind was Ok, if this sale falls through we’re filing for eviction by all means. Handyman is great, took out the window, took it to the local glass shop on (street) and got the glass repaired in 30 minutes for $65, and popped it back in before the appraiser got there. Saved the day, appraisal good, we’re in the clear waiting for a clear to close.

To prevent this from happening again, the owner asked if we could keep a close eye on the property. We had a better option. Handyman has a cousin new to the states, was staying with family, he was willing to stay in the apartment for the meantime to prevent more Damage. Cool, paid him a small fee each week to look after property 7pm-7-am

 

Within a few days He confirmed everything the old 1st floor said. Loud at night, quiet all day. He Witnessed 1 incident when the tenants’ significant other broke a small window in the front of the house after a full night of arguing. Cops came etc. The next day we put up a piece of plexiglass for $25. Everything was fine and then boom, a few days later, travesty again 

Mid day on a Sunday the 2nd Floor Tenant madly Kicked in the back door and started breaking windows with her bare hands screaming, Open the windows, Open the windows.   Luckily as this happened, Paul was in the front of the apartment and he was able to stop her from going through the rest of the house. As he stopped her, a guy from her apartment heard the noise and came down to get her,

Shortly after the police were called and an ambulance came to treat the lady and take her away. There was blood and broken glass everywhere.

Handyman went asap, called me and I told him to send me pictures and to have Paul file a police report. As Paul and Tony spoke w/ police it was then discovered that… The 2nd floor Tenant had a mental illness. The police said they knew of her and had been there on more than a few occasions. Because of her condition they weren’t able to arrest her. She could be admitted to hospital but would be eventually released.

Owner pissed, shocked, considered bringing the issue to her case worker but didn’t want to risk the pending sale which should have been closed any day now. At his request we Fixed the windows again, cleaned up glass and blood, and the property was sold 2 weeks later.

Now This was a lot to take in but bear with me. There were 2 critical mistakes that led to this situation unfolding

1st was deciding to buy in a bad location.

No matter how good the numbers look on the deal you’re analyzing you must take into account where it’s located. It’s the first “Rule” of Real Estate, Location, Location, Location!

The 2nd mistake was choosing not to screen a tenant just because they have a rental assistance voucher.

By screening this tenant it could have been discovered that they didn’t have steady income to meet screening requirements. What most people don’t know is that even with a rental assistance voucher like section 8, most tenants will need to pay a portion of the rent depending on their unique situation. A Voucher isn’t an automatic payday for landlords, you’ll most likely still need to collect some part of the rent from your tenant. By still screening potential tenants who have vouchers you’ll give yourself the ability to see the full picture without taking a blind risk.

These 2 mistakes cost this investor Tens of Thousands of dollars in equity by not being able to sell for top dollar in a bad location and it also Costed this Investor over $6,000 in monthly rent lost in just 1 year.

Looking back at this situation, the Best thing that this Owner decided to do was probably hire professional help. Even though there wasn’t much we could do after the initial mistakes were made, Imagine if this Owner had to deal with all of this on his own while living out of state. With a Property Management Company onboard, we were able to help him get out of a terrible situation by the skin of his teeth.


If your an investor or landlord with a portfolio in Northern NJ, and you would like to Avoid having to deal with middle of the night emergencies, chasing down rent, evicting people from your property, tenants who wreck your property, and to overall have Less stress, More freedom, and Free up more of your time – give us a call. We’ll discuss your situation and needs and figure out if it makes sense for us to work together. I’m Albert with Capital Street Management. Thanks for watching this video

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