Just a Landlord

This past week, taking advantage of the moderate weather, we began our annual exterior survey of our properties a bit earlier than normal. We walk around the exteriors of all the properties to set a prioritized project list for spring/summer 2015.

The neighborhoods we operate in are the near Southside, from just north of National to Cleveland, 1st to 36th.

While the primary focus is reviewing our properties, we also get a good sense of what is happening generally in the neighborhoods.

If this was a rock band I would have called this the “Fresh Mud and New Green Board Tour” It was absolutely surprising how many properties have been bulldozed and how many more properties are boarded and abandoned since doing the fall review in Sept/Oct of last year.

Anyone who tells you the real estate market on the near Southside has or is rebounding from the 2008 housing bubble hasn’t been out much. 😉 I wrote about what I was seeing in the past  and again here.  It is much worse now.

Many of the new board ups are nice looking properties. However as they accumulate city “reinspection fees” and fines they get to the point they cannot be sold and languish until they are stripped of all value, foreclosed upon by the city for taxes and ultimately razed.

But at least the city was able to tack some fees on it. Fees that they never collected because when the City becomes the owner the only thing left to do was bulldoze  them. (The one pictured in the link is now a mud lot).  Many of these are Zombie Houses

We are seeing sale prices in Milwaukee that make Detroit almost look like a healthy market.

The sales below are listed in the Journal’s Recent Deals sales listing

$11,000: 2356 W Becher St – MILWAUKEE (01/06/15)
$4,000: 2328 S 4th St – MILWAUKEE (01/15/15)
$1,000: 1962 S 16th St – MILWAUKEE (01/02/15)
$3,375: 4624 N 29th St – MILWAUKEE (01/13/15)
$2,850: 323 E Chambers St – MILWAUKEE (12/05/14)
$2,625: 2904 N 16th St – MILWAUKEE (11/24/14)
$37,000: 3410 S 1st PL – MILWAUKEE (01/16/15) — a pretty nice neighborhood.

Let’s assume the “broken windows” theory is correct.  It makes sense – order begets order, chaos and disarray breeds more chaos.  It makes sense logically, whether or not you can quantify the results I’ll leave to those much smarter than I.

However,  Milwaukee attempts to repurpose the theory as an argument for greater rental housing code enforcement and nuisance enforcement aimed primarily at rental housing.  In doing so our city has undermined the true message, which is: For the broken windows theory to produce results an entire neighborhood must be held to a standard.  The researchers use “neighborhood order” to describe the goal.

The article is primarily about police and neighbor intervention into petty crime creates order that reduces other petty crime and larger problems.  The words landlord, rent, code enforcement, building inspection do not appear anywhere in the article. Yet, to hear Milwaukee officials speak of the broken window theory, they frame it as a landlord’s responsibly.

A walk down 5th Place, the original target for the expansion of the RIP (rental inspection program), will show a far greater number of owner occupied housing in serious disrepair* than rental houses.  Milwaukee senior assessor Mary Hennen stated under oath a couple of years ago similarly that owner occupied housing in these neighborhoods are often in worse condition than rentals.

As an apparent precursor to the RIP proposal , on September 3rd and 4th,2014 DNS sent a squadron of five inspectors down Fifth Place for a block sweep.  Although the inspectors were able to see and write up some fairly minor problems on rental homes, amazingly when it came to the owner occupied houses on this street these five inspectors missed a dozen failed roofs, half a dozen failed porches, a couple of chimneys that looked about to fall and one house that is failing structurally.  Sixteen owner occupied properties in total that were as bad or worse than the seventeen rentals on the street that received orders. They also missed the two abandoned structures that should have been sent to raze, properties with actual broken windows.  My first two trips down the block had city lots strewn with trash.  I’ll guess that they were afraid someone would point that out in a RIP hearing.  They were clean on my third and forth trip.

Of the two properties that I saw blatant drug dealing coming from on three of my trips down the block this fall, one was owner occupied and the other owned by a guy who lives in the district on 15th and Cleveland. Far from the stereotypical absentee landlord.

If the RIP as well as other code initiatives are truly about stabilizing the neighborhoods, then plans must be in place to address the owner occupied and city owned properties that also drag down the neighborhood.

Tim Ballering

Tim@ApartmentsMilwaukee.com

*I consider serious disrepair as failed roofs, dangerous porches, crumbling chimneys and structural failure.

On Nov 30, 2014, on the ApartmentAssoc Yahoo Group  Bill Lauer wrote:

The previous article entitled “Broken Windows” really isn’t about broken windows.  It is about a theory that first showed up in the early 1980s [Link] and influences many of today’s social policies that impact our businesses every day.  Researchers in New York parked a car with no license plates on it, on a busy street. In a very short period of time, everything of value was stripped from it. Likewise, if a window in a building is broken and is left unrepaired, all the rest of the windows will soon be broken. They concluded that somehow the disrepair brought more disrepair.  Likewise, if crimes like jaywalking and panhandling are allowed, then more felonious crimes will follow.

The recent public hearings on the expansion of the Rental Inspection Program indicate several inner-city alders believe that because certain neighborhoods are run down, that crime is attracted to those neighborhoods.  But if memory serves me correctly, these same neighborhoods had huge crime problems before the neighborhoods were runned down.  Could it be that something else attracted the criminal element? Could it be true that because criminals do not maintain property very well that over time, neighborhoods end up in disrepair? They see the disrepair as the fault of greedy landlords, instead of seeing the landlords as the victims of the criminals.

One Alder literally said that the RIP was a tool to break up these “hot spots” of criminal activity. This strategy scatters criminal activity into surrounding neighborhoods rather than deal with the problem where it is. The mayor’s budget hires more building inspectors and reduces the number of armed police, which is contrary to the original research which says that police presence was needed to make positive change.

For the last 20 years, as “hot spots” break up and houses get bulldozed, and criminals need housing, they move into unsuspecting neighborhoods. That is why we are seeing crime increase (again) in Bay View, West Allis, Sherman Park, St, Joe’s area, just to name a few. The strategy employed in the RIP has not worked. But a new generation of politicians refuse to learn the lessons of the past and want to try this stuff again with a new name. They continue to make the buildings the problem rather than the people who live there.

The article is a long read but makes very interesting points that are useful in our discussions with our politicians.  It gives some insight into the crazy policies that are coming from city hall. But most importantly it points to the need for landlords to organize and become vocal about our experience working in Milwaukee.

 Bill Lauer

Perhaps I wasn’t clear in the original post.

This law only affects separately metered municipal utilities in tenant occupied units. Nothing has changed in how you handle utility cost for joint metered utilities. What you are doing now is permitted as long as disclosed in advance of signing the lease.

With the enactment of this legislation separately metered municipal services can now be directly billed to the tenants by the local governments, similar to how separate gas or electric accounts are billed to tenants by WE Energies*. This makes it more practical to have tenants pay their own sewer and water with less potential that you will find their unpaid bills on your property taxes*.

This change will initially affect many single family rentals where owners already have tenants responsible for their own sewer and water bills. With minimal costs owners of duplexes can take advantage of the new law by having a plumber separate the water supply and install a second meter. Then those duplex tenants could be billed directly by the municipality.

I would be surprised if many multi unit owners will incur the costs of this work, at least initially. But just like separating gas and electric, duplexes were the first to be retrofitted followed by more and more multi unit buildings

The net result should be more conservation, that ultimately results in more rate increases. ;-(

“The additional revenue is needed to offset declining water sales in the face of rising costs, officials said.”

*This is now similar, but not exactly the same as how a WE Energies account is handled. The new law does NOT completely eliminate the ability of the municipality to place the charges on the property.

Our properties are in Milwaukee and I am scared.

The proposal to eliminate residency requirements for municipal employees will pass and will further weaken the demand for housing in Milwaukee.  The result will be more abandonment of homes in older, lower value neighborhoods as owners in the outer band of Milwaukee make concession to sell or rent homes vacated by the exodus of city employees.  You read the city can’t afford to bulldoze the stuff that needs to be torn down today.  Where will this leave us? Will we be the one city in the nation New Orleans and Detroit can look down at as a failure?

Another aspect is much of your income do you spend within a few miles of your home.  I buy most of my groceries a mile from home.  I shop at the Walmart that is a mile and half from home and the Target that is a mile in the other direction.  As people move out there will be less sales in those stores and they will require less employees resulting in more of my tenants going from barely making it to failing.  City workers in general make an above mean wages so this will be a dramatic impact.

You live in the suburbs or your properties are there so you think this will be a good thing.  But in reality you should be as concerned as me.  Suburban school districts will have to expand their schools to accommodate the influx of former Milwaukee residents.  That will adversely impact your taxes.  The only alternative will be to  diminish the quality of the suburban  schools as they become more crowded and understaffed.  All the while they will be shuttering MPS schools

School teachers that wish to remain teaching in Milwaukee should be the largest group opposing this as the first group to leave will be city employees with children who are not satisfied with MPS. This will reduce job opportunities at MPS.  Carmen and I lived in Milwaukee for a while, but ruled Milwaukee out when we bought a new house due to problems her daughter and son had at MPS.  We moved to Greenfield.  Schools are good and safe. But I am so close I can walk to Milwaukee in ten minutes.  We have a very responsive police department.  Our water and sewer rates are much lower than the city  that provides the service ironically.

City workers in general will see layoffs, reduced opportunities  and lower employment as people leave.  They will now have to fight for jobs with those who already live outside of the city, but would not take employment in the city as they did not want to or cannot for economic reasons move to Milwaukee. So although they are the ones pushing for this they too will be paying a price.

You are saying:  “Sure Tim, I agree and would love to contact my Senator and Representative but I’m too busy unplugging toilets and fixing broken windows to keep up with politics”  Well. fear not.  You can find who your state legislators are at:  http://legis.wisconsin.gov/Pages/waml.aspx

The Journal is reporting:

Over the next three years, Barrett said raze orders in the city are expected to grow to 1,600 homes, with a cost of $24 million.  “We have a very severe problem right now,” Barrett said.

No kidding we have a “severe problem ”  This a problem that continues to grow rather than moderating.  The number of abandoned and foreclosed houses was bad nine months ago and with fresh snow on the ground you can see even a greater number of unoccupied properties than ever before. At least here on the Southside of Milwaukee these numbers are far worse than what is being reported by the city.

How much of the $24 million of anticipated razing costs could be avoided by making it more favorable to rehab properties and restore them to the tax rolls?

Perhaps the city would do better by working with, instead of against people willing to invest their own money, time and effort into putting foreclosures back in service.  I’m not even suggesting a hand up, just not the current beat down attitude. Not only would there be less spent on bulldozing, but more of the tax base would remain plus the positive economic impact for the community due to spending by owners to maintain and operate this housing.

Between taxes and the sewer and water bills the city gets  at least $5-6 million per year from 1600 functional properties. In the three year period Barrett defines this is a potential of $18 million in city revenue if the buildings were returned to occupancy. Add this to the $24 million to bulldoze and you are north of 40 million dollars.

Can every property that is deemed to be worthy of razing able to be salvaged, of course not.  But many that are in the pipeline today can be.  Every day that a property sits unattended is a day closer to the wrecking ball being the only option for that property.  There are many properties sitting vacant today that are worthy of repair, but will not be so six months or a year from now.

Additionally every time someone like you or I take on the challenge of putting properties back in service the local economy sees a benefit through the wages and materials we pay to get the job done.  All but one of my employees live in the city.  While the money you spend at the Home Depot doesn’t stay in Milwaukee,  the person who is employed by the Home Depot lives in the area and spend their wages here.

A downside for us, but an upside for the community is a greater amount of housing stock available holds rents down.  A more competative market also forces owners to do more to properties to get and keep them rented.

Once the property is back in service ongoing maintenance similarly impacts the local economy in a positive manner. It is estimated that repairs and improvements to rental properties represent $90 -120 million a year in the city of Milwaukee alone.   (These numbers are derived from our company’s experiences, the experiences of other long term owners that I’ve discussed this with and data from the Census Bureau’s Property Owners and Managers Survey.  Our data and that of many other owners indicate a slightly higher number than the Census)

Our company has the capacity and had the will to do 10-12 such projects a year without any government monies.  Heck if the environment was more favorable I could see us doing two properties a month.  We have not made an offer in MIlwaukee since November due the unfavorable policies adopted by the city. See my prior post on buying foreclosures in Milwaukee.  I talk to a lot of other owners with similar capacities that say the same thing.

Milwaukee acts like they are the only girl at the dance – as though real estate investors need to accept their petty obstructions and poor treatment because they are the only game in town.  But there are many other places to invest that treat owners much better.  One of our members is doing a big rehab in Beloit.  When I asked his project manager how it was going with the city he said they were unbelievably nice and truly seem they want to see the project succeed.  We are actively looking at the South Florida market today.

A few notes:

These 1,600 properties must be city owned or near to being city owned.  If they were bank owned the city could and would force the banks to demo the properties on the bank’s dime.  A growing trend is banks that  simply walked away from the mortgage rather than be subjected to the bad side of city regulations and fees. In another instance I spoke to an owner who the bank sued- he thought he lost the properties to foreclosure only to find out later that it was a money judgment only suit.  This adds to the zombie housing effect.  And you though only borrowers walked away.  😉

Our police chief is in the news speaking about the link between foreclosed and abandoned housing and crime.  I am certain he is correct on this.  But the Milwaukee Police do not do what they should in cases of property vandalism. See my prior post on property vandalism and the lack of police response.  This vandalism accelerate the rate of properties that are no longer viable for rehab.

Real Estate For Ideas 2013 Part Two

What can be done collectively to improve our businesses, save costs or generate additional revenue?

On January 1st I posted a list of ideas that I had that some of us could consider to collaboratively work on.  I intend to pursue one or two of the ideas presented and may entertain partnering with the right person or persons.

This post is the second of my more in depth notes on the ideas.  I will post others over the next week or so as time permits me to clean my notes into coherent sentences. If any of the topics interest you comment either on the list or directly to me at:Tim@ApartmentsMilwaukee.com

Part Two:

More Effective Maintenance Labor/Contractors/Service Providers

As mentioned in part one, maintenance, replacements and improvements to rental housing represents nearly $100 million per year in the city of Milwaukee alone. A savings of even 1% is a lot of money

More Effective Maintenance Labor/Contractors/Service Providers

The ability to have skilled, cost effective maintenance available on demand is typically a missing element for small owners.

If all of your unit preps are done two days after move out you will have far less vacancy income loss. If you can respond quickly to emergency repairs less tenants will move.

Even larger owners such as our company can’t do this efficiently with typical staffing. Either you have too few workers the first week of the month or too many the rest of the month.

The million dollar question is ‘How do can you have an on demand workforce without the risk of uninsured “contractors” who may later be deemed employees by taxing authorities or injured and not covered by your property insurance?’

A couple of years ago Affordable Rentals rolled out Rental A Worker, where we ‘rent’ other owners our maintenance people by the hour for small or large jobs. We benefit as we can have a larger workforce to meet the up and down demands of maintenance, while being able to share them when our workload is lighter.  We can also justify having highly skilled people on staff full time, such as certified heating techs.

The big advantage this offers other owners over hiring Joe off the street is our people are insured and have taxes withheld. There is a real danger and expensive otherwise. For the longer version read: Your Handyman-Cheap Contractor or $60000 Mistake?

The real vision for Rent-A-Worker is to expand it to a temp like service where there is an on demand workforce that can ramp up when there are a lot of preps etc and then can work for another temp agency on slow times.  This would hold an advantage for our company as well as other owners who participate.

Such a system would have a worker rating system, whereby the owners would grade them and their opportunity to work and future pay rate would be based on those grades.  So the best workers would achieve full time employment at a decent wage.

All the workers, whether they are laborers or small uninsured contractors would be treated as employees with the temp agency withholding taxes, maintaining worker’s comp etc., thereby eliminating a potential career ending risk for owners who were hiring “handymen” for cash.  The guy in the Cheap Contractor or $60,000 mistake went under.  I assume this was the cause

I pursued the temp angle a bit a year a half ago.  We hired a college grad who was formerly a manager a temp agency that moved out of the area. Excellent resume and references. I held a lot of hope for him to do well at this, but in the end it did not work out. By that time I was distracted with the purchase of a commercial property in Hollywood FL to house my wife’s businesses.  The basic software framework exits as well as some operating procedures.

I still believe an available,  flexible workforce  is the brass ring for our industry; seeing so much benefit for my company as well as many other owners. This may be the top new project to aggressively pursue this in 2013. The open question on this is does Obamacare make this in anyway less practical today if the number of temps exceeds 50.

What can be done collectively to improve our businesses, save costs or generate additional revenue?

I will post my in-depth thoughts on these topics over the next week or so as time permits me to clean my notes into coherent sentences. If any of the topics interest you comment here or email me at: Tim@ApartmentsMilwaukee.com

• Reduce Maintenance Costs
• Become better at sharing our collective knowledge
• Group purchase of a distressed block or two
• IT meets real estate

Reduce Maintenance Costs

Improve supply sourcing: ‘How can we use our collective shopping experiences and buying power to improve our bottom-line on a daily basis in 2013?’  More thoughts on better material sourcing.

More effective Maintenance Labor/Contractors/Services The ability to have skilled, cost effective maintenance available on demand is typically a missing element for most small to medium sized owners. Read more on  effective maintenance labor solutions that could change our industry.

Become better at sharing our collective knowledge

The ApartmentAssoc@YahooGroups.com is good beginning. But the idea could be greatly expanded upon. Perhaps a Wikipedia style “Best Practices” Guide* for Milwaukee rental owners. It would include everything that a property manager may run into.

Similarly a Mastermind Group could reap benefits if the right people were involved. Here is an overview of the Mastermind concept.

Also look at what groups like StartUpMKE are doing in the tech field.  Read my thoughts on increasing the sharing of knowledge.

Group purchase of a distressed block or two

Choose a very small geo area of Milwaukee. Think something on the terms of both sides of a block or two maybe three at the max. It should be depressed, as in make Detroit look like a nice place to live, depressed.

Apologizes to Detroit, but many people know of Detroit’s challenges and fewer of the challenges of Milwaukee.

Yes, unfortunately, there are many areas like this in Milwaukee and the numbers are increasing as foreclosures work their way through the system.

The plan would be to assemble a group of investors and turn the area for fun and profit. My  expanded thoughts on group purchasing of a distressed block.

Tech meets real estate

There certainly huge opportunities for software/web solutions to things that cause frustrations for owners and perhaps tenants.

Some ideas:

• Setting rents to market. How much are you losing because your rents are too low or how much have you lost due to your rents being too high and your vacancies languish? Me, too. ;-(
• Property acquisition tools Look at what sites like http://www.spotproperty.com/ are doing elsewhere, but not here.
• Vacancy filling Craig’s List used to work, but now there is too much spam and fraud. What about a system where the tenants need to prequalify before actually applying. While pre qualifying by an individual owner may be problematic from a fair housing standpoint, a proper third party system could work.
• Custom Management tools My company’s secret sauce is our highly customized management software. Nearly every task is one or two clicks and the computer makes many mundane management decisions on its own.
• Put your solution here

You can read my thoughts on tech and real estate here

Conclusion

What? This is not enough ideas for one year? Then post yours on the comments!

Shy, then email directly at: Tim@ApartmentsMilwaukee.com either for my review only or to repost anonymously as you direct.

With apologies to the Steve Miller Band for the title …

This past week we received a notice of  a $52.05 “fee” being assessed for “improper care of a discarded electronic device” at one of our properties.  Wow! They revert to five dollar words to say you put a radio in the garbage can.

Upon review it seems  our tenant put a radio/CD player in the green garbage cart.   Either a scavenger or DPW took it out of the cart and left it in the alley.

As I drove around the Southside this weekend I noticed a bunch of small electronics laying next to garbage carts with little orange stickers. So despite the bill saying the property was posted, it appears the only posting were these stickers that mostly face away from the house.  To make it worse the property owner does not get notice by mail until the fee is assessed.

This must be one helluva profit center for the city.

I really wish city officials were there to hear the tenant’s reaction to having this charge passed on to them.

Milwaukee Code:

79-2-13-b. No person may place an electronic device in mixed municipal solid waste or discard or otherwise dispose of an electronic device except by delivery to an electronic device collection or recycling facility.

State law that defines what an electronic device that is prohibited from being placed in the garbage:

1. A peripheral, as defined in s. 287.17 (1) (j).

3. A facsimile machine.

4. A digital video disc player.

5. A digital video player that does not use a disc and that is not a camera, as defined in s. 287.17 (1) (a).

6. A video cassette recorder.

7. A video recorder that does not use a cassette and that is not a camera, as defined in s. 287.17 (1) (a).

8. A covered electronic device, as defined in s. 287.17 (1) (f).

9. A telephone with a video display.

10. Another kind of electronic device identified by the department under s. 287.17 (10) (i).

I was having a conversation with a buddy today about the accuracy of the most recent City of Milwaukee assessments and where values are truly headed. I thought it was relevant enough that I turned my email to him with links supporting my views into this post.

The Milwaukee Journal quotes Alderman Mike Murphy who believes our housing market has hit bottom:

“I do think we’ve hit the bottom,” said Ald. Michael Murphy, chairman of the Common Council’s Finance & Personnel Committee. Murphy, Mayor Tom Barrett and Assessment Commissioner Mary Reavey all said they were hopeful that property values would start to slowly rise again over the next few years.

It would be wonderful if that in fact was correct, however there are many indicators that the bottom may still be a ways off.  The Feds are considering forced reductions of mortgages to appraised value.  This will allow owners to sell for less than today and remain financially  unscathed.  Previously if you owed $150k on your home you would fight like heck to get at least $150k, otherwise you would have to pay out of your pocket to sell.  If this becomes policy it will allow owners to sell for much less than they owe today, creating a general downward pressure on all home prices.

Then there is the phenomena of  people who can pay their mortgages, but are simply walking away.  It used to be dishonorable not to pay your debts.  Now it has the cute name of “Strategic Defaults.”  This along with short sales undermine our entire economic system as well as real estate values.  There just isn’t the social pressure to pay what you agreed to anymore.

Finally there is a large shadow market of homes and other real estate that are foreclosed but not on the resale market.  As these enter the market it will further drive down prices. If you want to see the shadow market in action write down the addresses of the obviously foreclosed buildings and homes that do not have broker signs in front of them, look up the ownership on the city site, then look for the property on MLS.  Many will be lender owned, but not actively marketed.

The Milwaukee Journal article reports the Assessor claims the decline in values over last year to be a meager 2.4%  One reader of the Journal article makes a very valid comment:

“Ask any realtor, appraiser, banker, buyer or seller of a home over the past 24 months how much values have dropped, 2.4% is a joke they need to remove the decimal point the acutal number is closer to 24%.”

I concur with this person that the real values of properties, at least in the neighborhoods we own in are dramatically less than the assessed values.  Milwaukee has typically overvalued the lower value neighborhoods in what I believe is a regressive tax scheme to lower the taxes of the more affluent white neighborhoods at the expense of these who can least afford higher housing costs.  The city assessor justifies this by excluding many comps as invalid, while being quite happy to use those homes purchased by first time buyers using down payment grants etc. that hid the true value of the purchase.  Today many of those homes are in foreclosure.

So while Milwaukee officials are hopeful that the end of the decline is nigh, and I too wish this was true as I happen to have a large financial interest in this subject, it probably isn’t so.  Many well studied economist and others believe that the Milwaukee area home prices will return to 2007 values in the fourth quarter of 2017 These same experts found that we are currently 15% off the mark today, not the 2.4% the Assessor has given.  They also predict the slide won’t stop until fourth quarter 2011.

But the city has strong motivation to artificially keep assessed values inflated:  That of course is to maintain artificially high property taxes while at the same time being able to claim that have only raised the mil (amount per thousand dollars of assessed value) by a small percentage.

So while many, including the city officials and  me, “hope” for a housing price recovery soon, hope is not a workable strategy. Please post your comments and challenge my views.  We all have a lot riding on making he best guess here.

A couple property owners approached me stating they have received notice from the Milwaukee Department of Neighborhood Services (DNS) that they must obtain new occupancy certificates on properties they purchased a couple of years ago.  In both cases the properties had been in foreclosure.

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