The End to the Eviction Moratarium: What This Means for Landlords?
If the return of rush hour traffic is any indication – it seems that more and more Americans are returning to work and a more normal standard is returning following the chaos of the COVID-19 pandemic.
The new ruling from the Supreme Court seems to reinstate this assumption. It was recently announced that the Supreme Court ruled to end the moratorium on evictions. This ban was initially established to protect tenants and offer support during the global health crisis. Unfortunately, landlords were not adequately compensated and left struggling to make up for their losses. It would seem that news of this ruling would be met with relief from landlords- but many only see a new set of headaches on the horizon.
Most landlords and property owners prefer not to evict tenants. However, in some cases, there is no alternative. Having a tenant who can’t make rent payments impacts a landlord’s business. For example, during the coronavirus pandemic, many landlords couldn’t pay their mortgage and had colossal property tax bills to pay. This was met with little to no help on a federal or state level. Even though tenants received rental assistance, for many it still wasn’t enough to pay rent, so their landlords were left out of pocket.
Does the end of the Moratorium mean a return to normality? Or will the crisis in the rental market continue to spell uncertainty for landlords and property owners?
Unfortunately, the answer isn’t as simple as it seems. The Supreme Court lifted the federal ban on evictions at the end of August 2021. It would seem that landlords could now take steps to evict delinquent tenants with unpaid rent. But many states continue to have their own moratoriums in place despite what the federal government has decided. For example, California will continue to ban evictions until the end of September, and New York is keeping an eviction moratorium in place until mid-January 2022. These are two of the largest rental markets in the country. Other states have limited evictions for nonpayment of rent until the end of the pandemic—a day that seems to continuously move the mark.
Why the resolve for landlords isn’t so simple…
Rather than providing clarity and relief, the eviction ban brought more confusion and frustration. Unfortunately, many landlords are still struggling with the financial hardship that the pandemic caused. Additionally, it is the small, individual investors who have been hit the hardest. According to Bloomberg, the end of moratoriums doesn’t mean the end of landlords’ financial problems.
Here are a few eye-widening statistics:
As many as 3.5 million households are estimated to be behind on rent.
Unpaid rent amounts to an estimated $17 billion.
Over 3 million households are at risk of eviction.
By the end of the year, there could be roughly 750,000 evictions.
$47 billion is available to landlords for relief. However, state and local government bureaucracy means relief is either slow to arrive or challenging to get.
What a lot of people may not know is that the eviction process can be extremely costly. Even if it is possible to evict tenants who are behind on rent, it doesn’t mean that every landlord can afford to file for eviction. The real cost of evicting a delinquent tenant can add up to thousands of dollars. It takes a lot of money to hire an attorney, pay court costs, repair the unit, and clean up after the tenant. Not to mention, this is all stalled if the tenant decides to fight the eviction in court.
In light of this, many landlords may decide to compromise and work with tenants to develop a payment plan. After all, the ban on evictions didn’t mean that rent arrears were canceled. Tenants still owe their landlords any unpaid debt they incurred during the COVID-19 crisis.
For tenants to be eligible for protection, landlords should have received a signed declaration from them stating their financial hardship. A tenant must meet the following five requirements.
They had a substantial loss of income—meaning they cannot pay the total rent.
The tenant didn’t earn more than $99,000 during 2020, or expects earnings to be less than $99,000 for 2021.
They are making efforts to pay partial rent payments.
The tenant tried seeking government assistance for housing or rent.
They have no other housing available.
Is there relief available to landlords who don’t receive rental payment from their tenants?
The ban on evictions hit landlords and property owners hard. Some commentators have suggested a plan in which the government would provide landlords an immediate guarantee of the recovery of a substantial portion of back rent so that the rental market will re-stabilize. And a loan program, rather than additional rental assistance to tenants or landlords, solves several of the underlying issues: Tenants do owe back rent. But even where relief is available for landlords, the system is riddled with flaws.
California, for instance, has the largest state rental assistance in the country to help landlords and renters. However, landlords can’t get state relief if their tenants are unresponsive or if they cannot prove that the tenant qualifies as low income.
Another example of the problems facing landlords is that tenants are slow to apply for assistance. For example, in Long Beach, California, around 14,000 renters have registered to receive rental payment assistance up to 100%. However, reports show that only about 7,000 completed forms have been sent.
The only other way to retrieve losses is through the courts. However, a claim for unpaid rent in a small claims court could take quite a long time to be settled because the courts are backed up. And, of course, there is the cost of suing a former tenant.
Before handing out a “pay or quit” notice on a tenant, it would probably be best to start with a conversation to see where both sides are. You can also ensure that the tenant is pursuing any federal or state rent assistance that’s available. Once you have a clear picture of their situation, you can make an informed decision.
Small landlords are feeling the pressure to sell.
The inability to evict in order to rent to tenants who can pay, coupled with higher vacancy rates in the rental market, as well as the requirement to maintain mortgage payments and ongoing expenses, is putting a lot of pressure on landlords to sell. A survey from Avail and Urban Institute conducted in October 2020 found that nearly 31% of the surveyed respondents felt financial pressure to sell their property, particularly among those who did not receive full rent the month prior.
There was also a significant increase in the pressure felt by landlords who carried a mortgage or earned a lower salary. Over 47% of landlords who earned $50,000 or less annually reported increased pressure to sell, versus just over 20% of landlords with income of $150,000 or more.
The STOUT Institute study also found that approximately 35% of smaller landlords are using savings to pay for expenses that are typically covered by rent income from tenants. This number is likely higher for landlords who rent to middle- or lower-income tenants, workers who have been disproportionately affected by the pandemic. Each time the eviction moratoriums are extended, landlords have to dip further into their savings to maintain the property or risk becoming delinquent on their financial obligations, including insurance, property taxes, or a mortgage.
There is a silver lining, however, for landlords that can no longer afford to exist in this financial upheaval. The residential market is the hottest it's been in nearly a decade, meaning property owners may be able to sell for high profit. The challenge will be finding the right buyer.
Residential housing is selling mostly to homebuyers right now, and with tenant and eviction moratoriums in place, the new buyer won't be able to move into the property or rent it, leaving them with the same problem as the previous landlord. This may cause landlords to have to lower the price of the property to account for the risk associated with owning a nonpaying rental property in today's market.
Investors should consider the long-term outcome of the moratoriums. There's a good chance that moratoriums or other protections are enacted even after the current expiration date, which means it may be longer than anticipated before there can be a resolution and relief for landlords. There's also the possibility of the property being left vacant because of a lack of eligible renters in the market. With millions of Americans unable to pay rent right now, landlords are in the position to potentially face new pressure: record-high vacancy rates after a flood of evictions.
Sell or Hold?
There are patient investors with the capital and ability to wait out the current moratoriums, but these investors will almost certainly expect a discount when they buy. This means investors should only sell right now if they absolutely have to. Considering the fact that you only make or lose money when you sell, a down market means the chances of losing money when you sell are higher. If you have the ability to wait until moratoriums expire, you may not have to lose at all.
Additionally, if you are an investor with the capital and experience to weather through these uncertain times- now is a great opportunity to seize properties at great values. As Warren Buffet famously said, “cash combined with courage in a time of crisis is priceless”.
