Where Do All The Homeless People Come From?

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August 1995
Vol 18 No 12

Recently, Santa Ana, California passed an ordinance which prohibited vagrants from setting up housekeeping in public parks and on public roads. It outlawed dumping garbage and trash, stealing shopping cards from local markets and strewing personal possessions about makeshift ‘camping’ areas. You’d think Santa Ana’s ordinance reasonable, but not so. This expressed will of the taxpayers of a city had to be tested all the way to the state Supreme Court before it was deemed legal and enforceable. Winning cost taxpayers tens of thousands of dollars in legal fees. This illustrates how the rights of those who produce in American are being subverted to the rights of those who only consume. The Homeless are a case in point.

Homeless people are a product of our times. In the 30s, when 25% of the work force was unemployed there were no social safety nets. Prior to the inception of government employment programs such as the CCC, PWA, WPA, NYA, etc., it was common to see ‘hobos’ in every town looking for work. As a rule, they were expected to have departed by sundown. Thus, they camped in what was called ‘hobo jungles’.

WWII took millions off the streets and gave them full employment. As a general rule, in the 50 years since it ended, except during periods where certain regions of the country have experienced economic decline, most of those who earnestly wanted to work in this country have remained employed. As a nation, we’ve become better educated. Compared to the rest of the world, our economy has been a marvel to behold over most of that time. Yet, worldwide, even in very poor countries, you won’t find as many able-bodied people who simply choose not to work until the ‘right’ opportunity presents itself. Why? How? Because they’re paid not to work. In America today, we elect politicians who will provide security at the expense of opportunity. The price we’re going to pay is going to be enormous.

The most productive, lowest taxed place on earth is Hong Kong where there are virtually no economic or social safety nets. When citizens know they’re future lies in their own hands, and when their government lets them make the most of it, economic productivity grows by leaps and bounds. Witness the economies of the Pacific Rim over the past couple of years compared to our own. When the costs of social and economic safety nets require high rates of taxation and regulation, the opposite effect occurs. People work and invest less when their efforts are hobbled by regulations, and their profits taxed to support those who don’t produce.
In America, quadruple incentives exist to make producers non-productive.

(1) Profit is taxed to the point that producers opt for untaxed leisure when extra work would produce higher and higher tax rates.

(2) Government regulations increase risks and costs. They compel profit-seeking business owners and operators to use more costly and less efficient methods to produce less at a smaller profit to avoid liability in the courts.

(3) A Gordian knot of legal rules has created a morass where virtually everybody may or may not be committing a punishable crime at any hour of any day. To do business is to employ attorneys just to tell you what the law requires.

(4) If you give up and drop out, or become chemically dependent, or have a broken marriage, or too many kids to support, or are young or old, or damaged, ill or illegal, financially irresponsible; you can count on being paid for it by the same government which keeps entrepreneurs from earning  fair profit.

Someone once said that nobody is safe from harm anytime the legislature is in session. Over the years, we’ve been buffeted by new income tax laws, disability, crime control, housing ordinances and regulations which have drastically altered the state of our savings and investment. Today, real estate entrepreneurs are caught in the vise of new taxes on the one hand, and increasing operating liabilities on the other – especially with lead paint liabilities. The plight of the homeless, at least where its warm in winter, is beginning to look relatively more attractive and a lot more probable as a retirement lifestyle, particularly in view of the IRS’ 1995 audit program.

GOVERNMENT IS RAISING THE STAKES AND THE RISKS . . .

The IRS figures $127 Billion is going unreported so they’re writing new audit manuals. Their improved audit net is going to catch a lot of different fish than before. New computers and programs are going to match up lifestyle with reported income. A highly visible luxury lifestyle without a commensurate adjusted gross income will be a magnet for audits. Ditto for high-priced cruises, motor homes, boats, country club memberships, second homes in resort areas. Now, more than ever, if you’re going to live in a big house and drive an expensive luxury automobile, you’d be better off renting them or being a ‘paying caretaker’ rather than the owner, unless your reported income will support them. Of course, you could always list a nondescript trailer situated in a ho-hum mobile home park as your designated primary home and drive a 1970 Pinto.

Your audit selection could be triggered by sales invoices from dealers (begin to think about buying from another source), travel agency billings, or divorce disputes over assets. Credit reports and court records are also being fed into the IRS computers to discover income recipients. High profile news items about winning a polo match or yacht race might be deemed suspicious for one who reports $10,000 in income. Even large weddings might invite a visit from your local IRS office. Corporate audits are going to be up, but the real focus is going to continue to be on independent contractors the IRS wants to classify as employees. If you encounter a particularly obdurate auditor, you can contact the IRS Problem Resolution Office at 1(800)829-1040. Good luck on getting through to them. I expect their telephone lines are going to be pretty busy this year.

Meanwhile, Congress is trying to find ways to cut its budget. Many of the incoming class of Congress have HUD and the FHA in their sights. Both agencies could be phased out, merged, have their budgets cut way back, or allowed to continue on as before. But, in the meantime, bureaucrats will be out to prove that they should be permitted to continue to exist. Naturally, they’ll be seeking the broadest possible franchise among voters to achieve this. One way is to offer attractive mortgage loans to the voters.

Among these offerings are a couple of pretty good low cost financing programs under section 203 (k) for those who need financing for fixer-upper homes, and 203 (m) for those who are fixing up manufactured home communities (formerly known as trailer camps). Both of these loan programs can generate fully assumable, non-recourse financing based upon high loan to value ratios based upon the appraisal of the completed home or park. You should contact a local lender or mortgage broker, or local HUD and FHA offices to get the particulars. Of course, both are financed by taxpayers.
Speaking of HUD; lately, rumors have been flying among landlords concerning ‘politically acceptable’ (also known a legally defensible) terminology that can be used in real estate advertising versus what is not acceptable. Examples given in a rash of publications included: not advertising a ‘master bedroom’ when it connotes a servant might be on the premises. Don’t mention ‘family room’ because it could give singles a low self-image. You should avoid making any references to athletic and social recreational facilities for fear of offending the physically or socially disabled. References to nearby schools might indicate prejudice against those with no school-aged kids. ‘Bachelor Pads’ indicate a bias toward married tenants. Churches were taboo too. Now HUD has issued a letter explaining their guidelines once and for all and requesting the complaints NOT BE FILED unless they exceed the guidelines. Here’s what they say:

The Fair Housing Act prohibits the printing and publishing of advertising which on its face states a preference, limitation or discrimination on the basis of race, color, religion, sex, handicap, familial status or national origin. HUD’s Memorandum: ‘Guidance Regarding Advertisements Under Section 804 (c) of the Fair Housing Act’ goes on to say: To the extent that, in the context of the ad certain preferences might be ascertainable to some readers, but not by the general readership, the advertiser and publisher are not in violation of the Act, and no complaint should be filed. Thus ‘Christmas Special’, ‘kosher meals served’, ‘mother-in-law apartment’, ‘walk-up’, ‘sober, non-drinker wanted’, etc. are permissible in ads. You can contact Sara K. Pratt, Director, Office of Investigations at HUD in Washington, DC for further information.
AN EPIDEMIC OF LAWSUITS THREATENS US ALL . . .

Landlords, Owners and Managers have cause to be an unhappy lot. If they open their doors wide to everyone who wants to rent from them, they destroy the value of their equity because of losses due to unpaid rents and damages caused by tenants. These can wipe out bottom line profits on which cap rate values are based. To add insult to injury, one version of the proposed new tax legislation would eliminate the $25,000 passive loss tax write-off. Tenants who use or sell drugs, own attack dogs, or uncontrolled kids create liability for owners and even managers themselves. They’re now beginning to be hauled into court by other tenants and neighbors for inviting destructive tenants into an otherwise desirable living environment.

Property Managers are bound by the fair housing laws and HUD regulations just as brokers and owners are. On the one hand, as Agents of the owners, they’re responsible for placing the best tenant into an owner’s property and on the other hand, they’ve got to keep undesirable tenants out. All this must be done without violating any of the rules against discrimination. If they carefully select only the applicants with the best occupancy, employment and payment records, but establish what appear to the casual observer as discriminatory patterns in the process, they’re charged with violating the Fair Housing Act. Yet, if they don’t screen out troublemakers, destructive occupants and poor credit risks, owners can wind up losing more money than they would by just leaving a property vacant.

Twenty Five years ago we devised our widely copied rental discount scheme which rewarded tenants for paying the rent on time and for taking care of minor repairs. About 10 years ago, we switched from using a rental discount and started mailing out month ‘rebate vouchers’ the last week of the month. These represented a value equal to about 10% – 15% of the stated rent. Vouchers could be tendered along with cash to pay the rent in the next succeeding month. If the tenant paid late, or required any maintenance support during any month, he didn’t get his rebate.

We found our vouchers drastically reduced collection problems and lowered requests for repair support. Sometimes though, when tenants have concealed needed repairs, it has backfired, necessitating higher maintenance when houses had to be readied for the next tenant. In May of this year, one such tenant moved out after over 8 years of occupancy, leaving behind three thousand dollars of accumulated repairs. About half of these were due to normal wear and tear, but the rest of them represented pure neglect or abuse of the property. That’s one part of the story. The other part is that, over the rental period, he paid me over $50,000 to rent a property which has a market value of about $75,000 and which only cost $15,300 many years ago. In the meantime, I didn’t have a single call for maintenance support.

An example of our rebate voucher can be found in our little ‘Superlease’ booklet. We’ve been apprehensive about allowing our ‘Superlease’ language out into the general public for fear that someone would try to enforce it without first learning the essentials of good management techniques which we taught for fifteen years. Now it appears that a class action suit has been filed in Baltimore because of deceptive advertising. The plaintiff has charged unfair and deceptive trade practices based upon a newspaper ad in which the actual rent was $100 higher than the advertised rent. Apparently, the non-paying tenant is charging that the discount is a disguised form of late charge, which is deceptive. When using either a rental discount or rent rebate voucher approach to management, the above defendant, to avoid trouble, should have advertised the full top-market rent, but then added: ‘$100 discount (or rent rebates) for on-time rents and minor maint’.

ALL-PRO MANAGEMENT IS WORTH ITS WEIGHT IN GOLD . . .

Managers of real estate, whether owner/operators or professionals, are going to have to become more business-like in their approach to advertising, screening tenants, maintenance, collections and evictions if they hope to succeed over the long haul. Thorough knowledge of the landlord and tenant laws, health codes and minimum housing standards in your area is essential. So is establishment of objective standards, applicable to all comers. This may be the only defense you’ll have against potential litigation and claims for damages lodged by tenants. With the advent of lead-paint disclosures, disclaimers and tenant waivers; the importance of the rent-up interview and getting the tenant prospect to initial all the critical paragraphs can’t be overstated. Especially where the courts are stacked against you.
One area in which Managers can initiate action to protect themselves, the properties and the owners is with increased vigilance over needed repairs. Tenant damage and neglect of the premises costs less to repair when it is detected early. By using a detailed entry checklist, signed by the tenant, then arranging at least one scheduled and one unscheduled inspection during the year, the Manager can reduce hazard liability and can take corrective action before neglect becomes a major problem. Had I done this with my 8-year tenant, I’d have avoided almost half the costs of refurbishment and sent a signal that I intended to hold my tenant strictly to his agreement to perform minor maintenance.

Informal management practices can still work in areas where the courts have a history of protecting property rights, and also with reasonable tenants who appreciate having access to affordable and decent housing. But, as the welfare cut-backs begin to put pressure on subsidized tenants, you can be certain that the most obvious target for retaliation will be the hapless manager or owner, or both. It makes good sense to start now putting your house in order while you have time.

David Tilney of Keyper Corp. in Colorado Springs is an excellent manager who also teaches a property management seminar. David has been producing top quality management materials for many years. Now he’s designed an employment contract with his principal which is reiterated on all tenant applications. In so many words it states that the best, not the first applicant will be selected to occupy a rental based upon an objective grading system which weighs a variety of tenant factors. This is a good idea for everyone. If you ever get a chance to attend one of his seminars, I recommend it without exception.

A common oversight among good owner/managers is that they don’t look around the market to find other properties that they can lease at one price and sub-lease for a profit. Let’s look at a real example. In my area there are two entrepreneurs who use their management skills in different ways to increase their profits. One of them uses management skills to leverage a share of the equity. Typically, he’ll locate a good deal, negotiate zero interest rate financing terms, and then contact a passive investor to lend him half of the down payment, secured by his half interest in the property to be bought. He attracts investors by leasing the property back at market rates. His equity in some 80 houses is growing tax-free at almost $100,000 per year. He lives off his half of the cash flow from rents.

The other fellow net leases properties at 90% of market rents, less repairs and maintenance. His growing property base is producing 10% cash flow spread on rents. In many cases, he’s making more profit than the owners of the property. They don’t mind, because he’s a good manager who wrings the last dime out of rents while keeping properties full and in good repair. His income has grown so much that he’s been able to fund a budding rehab program for even more cash flow. He uses his combined profits to buy houses for his own portfolio. He too is rapidly building his estate.

 

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