CT Blue

We usually consider slums to be an urban phenomenon, with slum dwellings usually consisting of run down apartment buildings. But, thanks to Wall Street and the wonders of securitization, slums may be coming to a previously middle class, single family neighborhood near you:

One of the reasons many investors have been skeptical of the way private equity firms have gone full bore into buying distressed single family homes is that property management is a hands-on business even when it’s done it the most favorable possible setting, an apartment building. Individuals who have invested in single family home rentals almost without exception report that even when they found it to be an economically attractive proposition, it was still oversight-intensive. Admittedly, there are some private equity firms who have bought rental properties who actually do seem to be targeting markets and renters in such a way that they might be able to do a decent job of property management, for instance, by buying homes where they can rehab the kitchen and bath plumbing using the same fixtures, screening tenants in person, and then inspecting the properties monthly and giving the tenants points for passing that they can convert into credits against a purchase or take in cash.

But the biggest fish in this ocean, Blackstone, is clearly taking the opposite approach, of doing as little as they can to maintain the houses and trying to fob off the responsibility onto the tenant, even when local regulations clearly prohibit it. So managing dispersed homes is no problem if you never planned to do the job in the first place.

via Naked Capitalism

The blogger at Naked Capitalism (Yves Smith) is optimistic that local landlord tenant laws will stymie operators like Blackstone, but I'm not so sure, and this is something I actually know something about first hand, having been engaged in landlord-tenant law for many years. Smith's post quotes from the Arizona landlord tenant law that is much like Connecticut's. Our laws require that the landlord perform all repairs, but makes a limited exception in the case of single family homes. There's qualifying language. The clear intent is to allow the parties to agree that the tenant will do certain things (such as mow the lawn) or that the tenant will do other repairs (presumably in exchanged for a reduced rent). These types of arrangements can work if both parties are reasonable, but, clearly, Blackstone and its ilk will try to stretch these somewhat vague provisions beyond recognition, and they may very well be able to do so more often than not. If a tenant balks at doing the repairs they may or may not get help from local building departments, and if they withhold rent they will almost certainly end up being evicted and replaced by another tenant. Even when tenants “know their rights” there are institutional barriers to actually getting those rights vindicated, among them the fact that tenants hardly ever have access to lawyers.

The states should take a proactive approach to this, by taking a long look at their statutes and amending them to prevent abuse before it happens. There are a number of approaches you could take. One possibility is to change the law as it applies to anyone owning three or more one family rental dwellings to clearly limit the work that can be fobbed off on the tenant. Another approach is the Truth in Lending approach. That statute contains what was often referred to as a private attorney general provision. A consumer with an offending contract could bring suit against a bank and collect statutory damages (no need to prove actual damages; the amount of damages is set by the statute) plus attorneys fees for establishing a failure to disclose in accordance with the act. For several years after the act was passed many lawyers made a living out of bringing such cases, until the banks cleaned up their acts. You could take the same approach with leases. Require them to contain certain clauses, and forbid other clauses. Give tenants a private right of action with statutory damages upon proof of violation, along with attorneys fees, and let the fun begin. If the states (obviously we'll get nothing from Congress) are a little proactive, they may prevent those slums from spreading.