Underwater Landlords: Should You Rent from Them?

[rockclimber]

Sold my SD house last summer, live overseas and it’s looks like I’ll be coming back to “Sunny SD”. Of course I’ll be renting…

I found the old thread about rent prices interesting. I’d like to hear your opinion on the pros and cons of renting from a landlord who is “underwater” (i.e. the rent does not cover the cost of the house.)

rock

[North County Jim]

I think you’ll find that just about every rental house you look at the landlord will be cash-flow negative unless the owner has owned the place at least four years.

During our search, we could obtain sales data for all but two (the county website keeps them for two years). Running generous numbers, none of the recently purchased houses were anywhere close to cash-flow positive.

One potential landlord even told me what his monthly outlay was on the place. Even with rental income, he was bleeding $1,500/month.

If you have a lease, the landlord cannot sell the house out from under you. If he’s foreclosed, I would think your lease would complicate matters.

Any legal opinions on this?

[speaker]

I have posted this story before but I will post it again as a follow-on.

My friend just moved his family into one the giant Mc-Mansions in San Elijo. He is paying only HALF!!! of the owner’s mortgage. How does my friend know this? BECAUSE THE OWNER TOLD HIM SO!!! I’m sure this Mc-Mansion was purchased near the 1 Mil mark so you can imagine what the mortgage must be.

Unbelieveable. Well, since my friend doesn’t want to have to move his family again anytimg soon he signed an 18 month lease. Stop and think about that for a second: the owner is committing himself to a 50% loss every month for the next 18 months. The owner can’t sell the house because there are 3 other homes with the exact same floorplan on his street that haven’t sold in months.

“End of line.”

[powayseller]

I am also concerned about this. My landlord bought this place about 2 – 3 years ago, so he is losing about $1K every month.

I was talking with a couple other neighbor ladies the other night, and told them I was wondering what the landlord might do if the bank foreclosed on him. One said she didn’t think it would happen, that he had so many rentals, that he’s really rich. I said that would make him even more vulnerable, as the prices on all those investments start to fall.

She said he probably put a lot down. I didn’t tell her this, but I saw how my previous landlord financed her house (bec. I took her to Small Claims Court to get my deposit back – P.S. she has to pay back the deposit plus a penalty to me). That lady took a home equity line from her own house to buy that rental.

So the landlords are highly leveraged, in my opinion.

Now my landlord was a little too smart, and he outmaneuvered me. The lease is for 6 months, with a monthly option. So he is not locked in. Furthermore, he made me initial a box in the standard CAR Rental Agreement, which allows him to put the house on a lockbox. This happened 2 days before we moved in, our house was closing escrow, and I just went along with it. That may have been a mistake.

Your post is making me think that I need to call him to lock in the rental for a lot longer. On the other hand, if he thinks he “has us”, he may become less cooperative on the repairs.

Oh, and the other rental in our neighborhood ($300 more than mine, same floorplan but bigger yard) is still vacant. And another house is listed.

Any real estate lawyers reading this? What happens to the tenant during a foreclosure? I heard that a new buyer has to buy out the lease or continue the rental contract. But a foreclosure?

And if speculators dump their rental properties, will that increase the rental costs, as fewer properties are available? It’s better to lock in for a long lease, right?

[San Diego]

Foreclosures trump any leases.

The lease would survive a sale of the property.

Make sure that your Security Deposit is safe.

[powayseller]

Good point about the security deposit. I think I’ll just not pay the last months’ rent when I give my 30 day notice. Then I can just pay him for any damages I caused after I move out, instead of having him deduct it from the deposit. I know I’m honorable, so I can live with that. Besides, this landlord and I last one play games with the security deposit anyway; they try to keep it in violation of CCC 1950.5.

[Author]

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