by Luke Jones
Posted 11/12/2012 12:00 am
Updated 6 months ago
We’ve all heard it: “You wouldn’t want to live there. It’s dangerous.” Sometimes, it’s so dangerous that the government steps in. Management is fired. Residents are evicted. Buildings are razed.
How does a property get to this point, and what can landlords do to prevent such a downward spiral?
Jason Bolden, a real estate attorney and a former president of the Little Rock Landlord Association, said it’s a snowball’s path down a steep hill and the good decisions need to happen at the top.
“There’s only one factor: bad management. Period,” Bolden said. “If you had great management in place, those kinds of mistakes don’t happen.”
Longtime Little Rock residents may remember “Sin City,” a group of apartments near Chicot Road that were a hive of violent crime in the 1980s and 1990s. In 1995, the apartments were closed, and this year the city board of directors voted to spend $70,000 bulldozing the abandoned buildings.
Now, a similar story is unfolding at Valley Heights, a 198-unit complex at 6900 Cantrell Road where rent ranges from $480 to $725 a month for one- to three-bedroom apartments. After a string of burglaries allegedly by apartment residents, the city of Little Rock sued in June to declare the apartments a nuisance. Nearby residents cite the apartments as a source of constant crime. The complex’s owner, Henry Management Inc. of Little Rock, has faced a hail of mismanagement accusations during the past year.
But 10 years ago, or 20, or 30, the average Valley Heights resident might have said, “This is a great place to live.”
“When they first built it, Valley Heights was more like a young couple’s property,” said Howard Warren, legislative director for the Little Rock Landlord Association.
Success for a place like Valley Heights needs to start at the investment level, Bolden said.
“If you’re an investor, you’ve got to make sure you’re buying right,” he said. “You’ve got to make sure you’re not overpaying and you’re not paying too high of an interest rate. If you have good financing in place, at a good purchasing price, the likelihood of problems is greatly reduced.”
If an investor overpays for a building, Bolden said, it makes it harder to recover once tenants start leaving and cash flow becomes an issue. Lack of cash flow turns into lack of apartment upkeep, which leads to issues like power outages, sewage problems and environmental damage. Then a landlord can’t be as strict about tenant quality.
“If you’re really cash-strapped, it makes it a real challenge to say you’re not going to accept a tenant because of background issues,” Bolden said.
Warren said 90 percent of the battle is screening tenants.
“Frequently, you have a landlord who allows bad tenants, and they treat the place badly,” Warren said. “Then the rent received does not begin to cover repairs.”
One bad apple spoils the barrel — a cliché, but, Warren said, “ultimately, it’s true. If you have a murderer living at your place, and you have a single mom living with a kid, she’ll think, you know, ‘I need to move.’ That goes for anybody with a family. Who wants to live near where murder happens or armed robbery happens?”
Tenants who see crimes in progress won’t always contact management, Bolden said. Instead, they’ll vote with their feet.
“Then you have a bad property with good tenants, and they’ll go somewhere else,” Warren said. “The landlord has been boxed into a corner. He can’t get new tenants except bad ones, and he can’t fix what the previous bad ones did.”
The Section 8 Challenge
Landlords must keep their properties full for them to thrive, and at this point, some turn to Section 8, the housing assistance provided by the U.S. Department of Housing & Urban Development.
This is true of Valley Heights and other blighted Henry Management properties.
“There are just bad apples in the system that feel entitled to be able to destroy your property,” said Jordan Haas, owner of Rental Realty Inc. in Little Rock.
“You’ve got a lot of people, a lot of owners, who won’t deal with HUD housing at all, since there’s been a bad taste left in their mouth.”
It doesn’t help when local Section 8 authorities are wrapped up in their own problems, either.
For example, Little Rock’s Metropolitan Housing Alliance fired its executive director, Shelly Ehenger, in August after numerous accusations of nepotism and document falsification. The help landlords get from the organization often depends on the people running it.
“It’s a real political game you play [with] them; they can fail or pass your house based on their personal agenda with you,” Haas said. “It’s pretty wild.”
“There are a number of landlords who refuse to take Section 8,” Warren said. “When you get into the complexes that start taking Section 8, they statistically have more crime, the rent is being paid at a lower rate, quality of the payer is less, and therefore good tenants don’t come there. It’s a vicious, downward cycle.”
From there, it’s a long fall to the bottom.
“It can be a snowball effect,” Haas said, “especially if the management company doesn’t have any money to do renovation and repairs.”
“Unfortunately, as you go down the economic ladder, you have more troublesome tenants,” Warren said.
“I’ve heard a lot of folks talk about the broken window policy,” Bolden said. “If you have one broken window on a street, you might have a problem. That’s all it takes. Once you have one property starting to have a problem, it can pull a whole neighborhood down. That’s magnified in an apartment complex setting.”
The Turnaround Potential
But it doesn’t always have to end like it did for Sin City.
“The biggest thing to do, especially in that scenario, is you want to renovate, to get people out who are the bad apples,” Haas said. “You’ve got to eliminate them completely. I mean, completely.”
Then, Haas said, renovations need to happen, and management should be extra strict when letting new tenants in.
“That doesn’t mean you have to raise your rent or anything like that,” he said. “It all comes back to the quality of people renting, and also the quality of the management company that’s there.”
Bolden said turnarounds like this are not as rare as one might think.
“The transition happens regularly,” he said.
“At some point, people run out of money. The banks work through a short sale, new management comes in that really understands what needs to happen and those communities can be turned around. I have no doubt that any of those properties struggling now can be turned around.”