Category Archives: Homeowners

Buy it! Sell it! Fix it! Furnish it! But don’t get burned in the process.

Cook Eviction Stats Part 10: Series Conclusion

About a year ago I encountered several urban legends about the Chicago rental environment that circle around the idea that the system is biased against landlords. I don’t like to see assumptions go unchallenged, so I set out to find out the statistical truth behind each of the component parts. Here are the original assumptions, with their results.

  • The courts favor tenants over landlords in eviction cases. FALSE.
  • The suburban courts, especially in wealthy areas, are more favorable to landlords when it comes to eviction. FALSE.
  • The evolution of the CRLTO is making the landlord-tenant situation progressively worse. TRUE.
  • Eviction only happens to bad landlords in bad areas of town. FALSE.
  • Lawyers and Juries have a marked effect on the outcome of eviction cases. POSSIBLE.
  • The CRLTO is biased against landlords. POSSIBLE.

(more…)

Cook Eviction Stats Part 9: The Cost of Doing Business

Evictions in Cook County are a multimillion dollar industry. With close to 40,000 cases happening each year, the amount of time and energy devoted to people who don’t pay their rent is mind-bogglingly vast. In fact, today I want to take some time to discuss what the eviction industry is costing Chicago in terms of lost time and money. And tenants, if you think this doesn’t pertain to you, it does. Remember that the resources that a landlord puts into evictions could otherwise be spent purchasing and rehabilitating the apartment buildings that are currently sitting empty and inaccessible.

Long time readers will know what this means. I’m going to do math for you. Again.

Yay math time!

(more…)

Cook Eviction Stats Part 8: Lawyers and Juries

We’re talking about lawyers and juries and how they affect the eviction numbers today, along with some interesting data that I picked up along the way. This article is deviating a bit from the its predecessors in the series, in that I’m not going to be relying too heavily on the numbers I got from the Cook County Clerk. I’ve had to reach beyond to do some additional research. Instead of footnoting everything like I usually do, I will instead provided a bibliography of sources down at the bottom so you can read all of the reports at your leisure, if that’s your thing.

You can fit a couple of eviction hearings in the time it takes to cook Ramen.

I want you to imagine a scenario with me for a moment. You are a landlord. A tenant moved into your apartment in October. It is now February and you have not seen a rent check since the first month. The tenant has moved in a whole crew of additional occupants, and a pit bull. They have also apparently spent their rent money on a big screen TV, because you can see it on the floor of their apartment, leaning against the wall underneath the big hole that it left when it fell down.

You filed to evict in after the 2nd missed rent payment, in early December, like any good landlord. Due to the wait and the holiday season, your court date was scheduled for early February. You arrive in court. You’re ready to tell your whole story.

Talk fast. You’ve got 90 seconds in front of the judge. You have to split that with the tenant if they decide to mount a defense. Better know your stuff. (more…)

Cook Eviction Stats Part 7: What does this mean for tenants?

I’ve spent the past 6 sections of this study focusing mostly on what the Cook County/Chicago eviction statistics mean for landlords. It’s time to focus a little on what they mean for renters. I’m not a lawyer, and I’m not going to tell you how to win your eviction case. There are far better resources than me out there for saving your bacon. This article is focusing on the numbers.

A lot of you have been involved in eviction cases.

7 out of every 100 apartments in Chicago will be the subjects of eviction cases each year. Given that apartments often house more than one person, this means if you’re a renter in Chicago, you’ve got quite a bit more than a 7% chance of winding up involved in an eviction suit. (more…)

Cook Eviction Stats Part 6: Forcible Entry vs Joint Action

There’s two different types of eviction cases that can be filed by a landlord in Cook County. One is called “Forcible Entry & Detainer,” and the other is called “Joint Action.” In order to explain the difference I’d like to take a moment to talk to you about Buffalo wings. This will make sense in a moment, I promise.
Chicken Evictions
The Wings. The meat of the matter. What you’re really there for. Forcible Detainer & Entry. In other words, the landlord wants to get the tenant out of the apartment. This is the core purpose behind every eviction case.
Celery. The green stuff. Not a reason to go out for dinner on its own. You can make it at home. Also green stuff. The eviction equivalent would be a court-ordered demand that a tenant pay their unpaid rent. Much like celery, this is hardly ever pursued on its own at the court level.
Buffalo wings. The whole thing. Celery and dressing combine their cooling powers to the chicken to make a culinary miracle. In eviction court, a landlord files a joint action case when they want to get the tenant out AND they want the court to enforce payment of back rent.
Got it? Good. (more…)

Cook Eviction Stats Part 5: Are eviction filings increasing?

The Chicago Landlord-Tenant ordinance has been amended many times since its creation in 1986. The most recent changes were in 2004, 2008 and 2010. By and large these changes have been in response to major trends in landlord-tenant behavior. For example, since 2010 landlords have had to tell their tenants the name and address of the bank where a security deposit is held. This was so that tenants could still track down their deposits if the bank foreclosed on their apartment building.

As is often the case with law changes, the general reaction to new CRLTO amendments has involved a lot of hand-wringing and fretting among landlords. Meanwhile, the economic troubles that have plagued our country in the past half a decade would theoretically cause more tenants to miss rent payments and get into situations that might prompt an eviction case. This nasty combination of tighter laws and a weaker economy made me wonder if the rate of eviction filings was getting higher or lower over time.

Evictions by Year: City and Suburbs

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Cook County Eviction Stats Part 3: Are other trials also biased?

When I started this adventure I based my concept of “a fair court system” on an ideal of 50% of cases won by the plaintiff (the landlord) and 50% won by the defendant (the tenant). Even something between 48-52% would have been sufficient. The results I got from the Cook County Eviction stats over the past 8 years indicated that 62.8% of eviction cases were won by the landlord. If I compared this to my idea of a perfectly fair system it clearly indicated a bias, and not the “anti-landlord” bias purported to exist by many Chicago landlords.

The world is not perfect. Neither is the justice system. I started wondering if my ideal 50/50 split of verdicts was even attainable outside of a courthouse run by androids and angels. What if the court system is structured so that 62.8% is as close as you can get to a fair trial in the US? I started digging to find out the verdict balance in some other types of cases.

Is it possible that the Cook County Eviction court is the fairest one of all?

Could Cook County Eviction court be the fairest one of all?

In the process I discovered several excellent sources for court data. The Illinois Supreme Court has annual reports online going back over a decade. The US Bureau of Judicial Statistics may be my new favorite site, but it’s up against the Sourcebook of Criminal Justice Statistics at the University of Albany. Of course, no online source can compare with having a law librarian for a friend – my friend Taylor has been extremely helpful in hashing out this entire project and I’m very grateful.

Evictions vs Felony Cases

A felony trial is at the far opposite end of the spectrum from an eviction trial. One is a large scale case where one side – after all, a felony is a serious crime handled by the criminal justice system, while evictions tend to be small claims matters handled in the civil system. Defendants in felony trials are far more likely to have attorney representation than tenants in eviction cases. The fines and penalties at stake are far higher when you’re dealing with a felony trial. Most people don’t wind up in jail at the end of an eviction lawsuit.

The bias is more pronounced as well.

If the stats are to be believed, you may only be innocent until proven arrested.

If the stats are to be believed, you may only be innocent until proven arrested. (No kangaroos were harmed in the process of nicking this image from 4closurefraud.org.)

According to the Illinois Supreme Court’s annual reports, from 2004 to 2011 the average annual conviction rate for felony cases in Cook County was between 67% and 74%, with the cumulative average at 72.02% convicted. Looking nationwide the conviction rate is even higher. According to the Sourcebook of Criminal Justice Studies, in 2010 about 91% of felony cases heard in US District Courts resulted in a conviction. In other words, if you’re a tenant in an eviction case you’ve got a far better chance of staying in your apartment than someone on the stand in a felony case has of staying in theirs. In fact, I’d go as far as to say that compared with felony cases, the so-called “bias” in Cook eviction cases looks downright even-handed and totally fair.

Evictions vs. Traffic Court

So, comparing evictions to felony trials is not really an apples to apples comparison. It’s more like comparing apples to airplanes. I thought I should look at something lower key, like parking tickets. While I could have done a FOIA request to find out the exact stats, the Red Eye and the Tribune have both done relatively recent studies about contesting parking tickets. (The Red Eye article is no longer available online.) I’ve had about enough of extracting research from government agencies this month so I’m going to trust their numbers even though they’re a little dated.

If you contest a parking ticket in person or by mail, you’re technically appealing your conviction of a parking violation by means of a trial at the City of Chicago’s Bureau of Administrative Hearings. If we were to get nitpicky about it, you’re a plaintiff/appellant and the City is the defendant.

Or perhaps you're innocent until proven double-parked?

Or perhaps you’re innocent until proven double-parked?

According to the Trib research, in 2007 62% of tickets contested by mail were dismissed, and 56% of the tickets contested in person were dismissed. Fast forward to 2009, after privatization of the Chicago parking meters, and 72% of the contested tickets were dismissed. If the trend has remained consistent, this means that you’ve got a better chance of winning when you contest a parking ticket than you do if you’re a landlord trying to evict a deadbeat tenant.

But wait a minute. If felony cases AND parking cases both make it easier for the plaintiff to win than eviction cases, does that mean that the courts may be biased against the landlord after all? If every other scenario gives you a 72% chance of winning, while you’ve only got a 62% chance in an eviction case, then yes, I’d say so. However, we’ve got another even more precise scenario to consider: national statistics for contract disputes.

Evictions vs. Contract Cases

On Wednesday I paused for a moment to mention that we’re only looking at situations where the landlord sues the tenant for non-payment, and largely neglecting situations where the tenant takes the landlord to court for negligence or other matters. The latter type of lawsuit is considered to be a contract dispute, and fortunately the Bureau of Justice Statistics has a whole lot of information about those. In fact they’ve got so much info that I’ve been able to make a handy chart with three years of data, comparing the verdicts in all types of contract disputes.

NOTE: The “rental/lease agreement” cases here refer largely to situations where the tenant is suing the landlord. They are not evictions.

Wow that’s a lot of data! There’s several very important things we can learn from this chart.

First of all, if tenants think their chances of losing an eviction case are pretty bad after yesterday’s news, the scenario for homeowners involved in foreclosure cases is downright bleak. Anywhere from 72-89% of foreclosure cases were decided in favor of the plaintiff. That’s the bank. A finding for the plaintiff in a foreclosure case has the same result as one in an eviction case: the sheriff is going to be paying a call to throw someone out of their home.

Secondly, we learn that anywhere from 55-65% of all contract trials nationwide are found in favor of the plaintiff, and the numbers have increased over time. Also, the lion’s share of these cases have averages over 50%, indicating that when it comes to contract trials the idea of a 50/50 fully balanced court system is a pipe dream. Only employment discrimination suits are hovering anywhere close to the 50% mark that would indicate a completely fair court.

Thirdly, we finally have some data on what happens when the roles are reversed! I mentioned on Wednesday that we weren’t going to spend too much time talking about what happens when tenants sue landlords, but in this case the USBJS Reports made it nice and easy for me to pull some numbers. They couldn’t be more perfect.

When a landlord files an eviction case in Cook County, 62.8% of the landlords eventually win.

When a tenant sues their landlord nationwide? Anywhere from 62.5 and 64.9% of the tenants win.

Dang that feels good.

Dang that feels good.

Nothing could prove my point better. This isn’t about landlords and tenants. It’s about the entire justice system, with landlords and tenants caught up in the chaos.

Chicago Evictions vs New York Evictions

I had this article all set to go to print when an email from Chicago Landlord Tenant attorney Rich Magnone sent me in an additional direction. He wondered how the stats held up against other local counties that are purported to be more friendly to landlords. I wasn’t able to find that particular information – for all that Cook County made my quest for knowledge a challenge, they were far more forthcoming than the suburbs. I did, however, find a great article on New York city housing court (PDF)with a fantastic chart.

Courtesy of the New York City Rent Guidelines Board.

Courtesy of the New York City Rent Guidelines Board.

This is a fantastic chart and I wish we had this kind of data for Chicago. In New York not every eviction case winds up with a court hearing. Many settle out of court. The ones that don’t, and wind up going to a court date are considered to be “calendared.” This means that this chart eliminates everything except for those cases which made it all the way to the judge.

The line that really demands attention is the lower grey one – that’s the percentage of cases that were successful on the part of the landlord. Remember that in Chicago we’re looking at 62.8%. In New York City it’s apparently been hovering around a 20% success rate since the early 90s. You want a system that’s unfairly biased towards the tenant? You got it. Chicago is ridiculously tilted towards the landlord by contrast.

Evictions and FOX News: Fair and unbiased, for certain definitions of “fair” and “unbiased”

While our 62.8% average for cases found in the landlord’s favor is technically biased when viewed in a vacuum, it’s pretty much as fair and unbiased as you’re going to get once it’s put next to its closest judicial relatives. Compared with the defendant’s chances of winning felony trials, foreclosures and Chicago traffic court, the 1 in 3 chance of a defendant renter winning an eviction case seem downright rosy. Compared to the situation in the New York housing courts, Chicago landlords have a cakewalk.

Overall what we’ve learned here is that any bias existent in Cook County eviction cases is not related to the evictions themselves. It’s reflective of a nationwide inherent bias towards the plaintiff seen at many levels of the system. The judges don’t hate landlords. If anything, they hate defendants.

It isn’t my place to criticize the entire justice system. It’s based on a long history going back to the Classical era and I am merely a housing nerd with a quiet fancy for “Law and Order” reruns. As much as we know deep down that it’s an unbalanced system, it’s the best we’ve got right now. Rich Magnone wisely pointed out in his email to me that any landlord who’s willing to go through the filing process probably has a good case. This is a valid point, and I think it carries over into the court system in general. Winning and losing is not a matter of luck. This is not a casino. If you can sustain your righteous anger long enough to press charges and get in front of a judge, chances are you’ve got a very good and believable reason.

So, if you’re a landlord or tenant, maybe hold off a bit on complaining about the state of evictions in the Chicago area, because it isn’t all about you guys. A 50/50 split is probably impossible.

Monday we’ll take a pause in this saga and enjoy the first installment of Rent Bacon in its new form. Wednesday I’ll be back to dissecting the eviction data with a focus on location, location, location. Cook County has six different courthouses. Do you get a better result at one over another? Come on back and find out! (In the meantime, please share this series with your friends? It would mean a lot to me.)

This is part of a series on Chicago evictions. You should probably start at the beginning. Here are the rest of the articles:

Cook County Evictions Part 2: Yes, Virginia, there is a bias.

OK that was mean of me. I gave you a teaser at the end of Monday’s article, indicating that there was definitely a bias in the Cook County courts when it came to evictions. I even gave you a pie chart with the numbers intact but the categories redacted.

When I did my small-scale analysis in May 2012, I came to the conclusion that the system was biased when it came to money judgments but basically fair when it came to getting possession of apartments back from deadbeat tenants. Landlords stood to win their cases about 50% of the time, which is exactly what you’d expect to see in an unbiased system. However, once I obtained the large-scale data from 8 years of eviction history and crunched the numbers, a different picture emerged. This picture will allow us to temporarily put to bed the pervasive urban legend that the courts are biased against landlords.

That’s right. 222,323 cases were found in favor of the landlord. 131,423 cases were found in favor of the tenant. The division is consistent across all six districts and consistent regardless of if you filed for possession only, or for possession and money. So if you’re a landlord, you’ve got just about a 2 out of 3 chance of winning your case. So there. Ha.

Maybe Not. (more…)

Dear Piggy: Should My Condo Association Raise Assessments Every Year?

I’m involved with a local support group for board members of self-managed condo associations, since I am one myself. I generally try to participate from a civilian perspective and only put on the Realtor hat when it’s absolutely necessary. However, one of the members specifically asked me to provide some objective information about best practices for raising assessments on an annual basis. I think she was hoping that I’d dig up an article written by someone else, but I figured I could do a blog about it myself.

What Does an Assessment Pay For?

In Chicago, monthly assessments can cover any number of expenses for the publicly shared parts of a condo development. According to the Illinois Condominium Property Act, they must pay the repair and replacement cost for at least the following items:

  • Structural components
  • Mechanical components
  • Surfaces of the building
  • Common areas
  • Energy systems

… In other words, pretty much all of the areas of the property outside of the individual condos and the other sections of the building assigned to specific owner, such as parking spaces and storage lockers.

Additionally, Chicago assessments tend to cover water and sewer costs, building insurance, maintenance costs for the grounds, and electricity for the common areas. We’ll call these the “basic condo package.”

Other common add-ons for a “deluxe condo package” could include heat, doormen, cable, wifi, trash collection, elevator maintenance, and community benefits like business centers, pools and health clubs. Co-ops will also often include property taxes in the monthly dues. But for today we’ll just look at the “basic” package, since it will apply pretty much citywide.

Why should we increase our assessments?

Costs are rising.

Looking at the “basic condo package,” the cost of every item has increase substantially over the past ten years.

A recent article on NPR stated that homeowner’s insurance premiums were projected to increase by 10% in 2012 due to increased severe weather nationwide.[1] The price of water in Chicago has increased from $9.02 per 1000 ft3 in 2002 to $18.75 per 1000 ft3 in 2012, and costs have been approved to increase further to be $28.52 per 1000 ft3 by 2015. Sewer costs are increasing to match.[2] The cost of electricity increased from $0.1026 per kW/h in 2001 to $0.1599 per kW/h in 2011, an increase that would have been far greater had rates not been frozen from 1995 to 2009.[3]

The cost of something like landscaping or repair services is tougher to determine, but for most services of that nature the primary cost to a company is labor. The Department of Labor can give us the income history for most professions. For landscapers and groundskeepers in Chicago, the average hourly wage has gone from $10.68 in 2001 to $12.73 in 2011.[4] The cost for highly skilled and/or licensed labor, such as electrical work or tuckpointing, is certainly higher. The cost of the materials they use has not lowered, nor is it likely to. One can only presume due to the wailing and gnashing of teeth seen from the small business owners due to rising employee costs that these numbers will only go up in the foreseeable future. There is no doubt that maintenance costs will increase across the board.

While savvy condo associations can negotiate lower costs for bulk electricity, cable or trash pickup, they won’t be able to stem the tide of rising costs forever. Like it or not, you will need more money in 5 years to do the same things you’re doing now.

The IRS says you should.

You have to go to the doctor more as you get older. Your building will need more frequent "checkups" too.

You have to go to the doctor more as you get older. Your building will need more frequent “checkups” too.

It’s commonly accepted that the value of a property decreases as it gets older. The costs required to maintain an old building are far higher than those required in a new one. In fact, when it comes to commercial property, the IRS gives you a number you can use to calculate how much more you’re going to have to spend on your property as it ages. It’s called depreciation.

According to the IRS, a multi-unit apartment building will fully depreciate over 27.5 years. Most condo buildings in Chicago started their lives as apartment buildings, so we can go on the same scale. This means that just to cover the increased demands of aging, you should be increasing your reserves by at least 3.6% each year.

Cutting amenities may lower property values.

Of course, an association can remove services in order to keep assessments at a consistent rate. Many condo residents have voted to scale back on things like doormen and pools in order to keep their monthly bills low. However, the IL Condo Property Act specifically states that assessment costs should take into account both the impact on owners and the impact on market value.

Downgrading your association from a deluxe condo package to a basic one does have an effect on the value of the home. The cost per square foot difference between a full-amenity condo vs a basic one is not just due to location. Besides, these are the common areas we’re talking about. Cutting costs too far can reduce curb appeal and increase the chances that a home inspector will find major structural issues that prevent a new buyer from purchasing in your development.

Everybody Else is Doing It.

The most popular condos have no fear of raising assessments. How do we know they’re popular? Because people bought them. No article of this nature on StrawStickStone would be complete without a trip to the MLS for some sales stats. True to form, I went and checked on the monthly assessments for 2 and 3 bedroom condos in smaller associations that sold successfully in the past 10 years. Since the question in this case came from a Lincoln Square property owner, I based my search in Lincoln Square.

The chart below shows the median monthly condo assessments.

The chart shows the median, which went from $133 at its lowest to $203.5 in 2012. The maximum went from $300 to $470 in the same timeframe.

They went up! In fact, they went up by quite a bit. And I should note, the sample size for each year was anywhere from 175 to 430 units, so this is not a small bit of fluky data.

Increases are built into the Illinois Condo Property Act

While the ILCPA doesn’t give a condo board totally free rein over the monthly costs, annual increases up to 14.99% are permitted without allowing the owners at large any means of fighting it. If you increase more than 15% the owners can petition the board for a vote on the hike, but anything below that and you’ve got clear sailing as far as the state law is concerned.

Other sources of income have gotten scarce.

The ILCPA also suggests that associations consider bank account interest and the ability to borrow money as considerations when setting monthly costs. Both of these alternate source of income have seen decreasing yields over the past 10 years.

It used to be that an association could reliably make a decent buck from interest payments on their reserves. Back in 2000 an association could get over 6% interest by stowing their funds in a 6 month CD. However, with rates currently at 0.32% on that same 6 month CD, this source of alternate income is not an option that will keep pace with rising costs.

As for obtaining loans, any home buyer or developer will tell you that the money for large scale property matters is not plentiful these days. While the interest rates for payback are as low as they’ll ever be right now, the hurdles required to get a lender to work with you have multiplied since the housing crash.

If you were living anywhere else, your costs would increase too.

The monthly payment on a 30 year fixed rate mortgage doesn’t increase over the life of the loan. That’s a real nice, but it’s the only part of your monthly expenses that stays consistent. If you were living in a single family home your costs would increase regularly. If you were renting an apartment, your rent would most likely increase every year. There is no reason why you should be exempt just because you’re living in a condo association.

Is there a limit to how high we can go?

Yes. There is a limit. Not a firm one set by law, but a limit of credibility and viability for the owners of the property. Of course the ILCPA has that 15% break point after which the owners can officially challenge an increase, but even below that there’s issues to consider.

A board who raises assessments too high will risk more than dirty looks from their neighbors. An owner who cannot afford rising monthly payments is likely to stop paying altogether. If a condo development has over 15% delinquency on assessments, no lender will touch it with a 10 foot pole. If the association has to evict someone for non-payment, that means court costs and time spent, not to mention the risks and higher insurance premiums that come with having renters in the building. Oh, and recent eviction lawsuits may have the same effect as delinquency when it comes to how lenders look at your HOA.

When I was doing the MLS study above, I took a look at maximum assessment costs as well. None of the sold condos in the area have gone above $471 in the past 10 years. Now, this is a far cry from some of the lakefront full-amenity high rises, where the monthly dues for a 2 bed condo exceed $600 on a regular basis. The point is, you need to scale your increases to fit the income brackets in your building.

Yes, people notice high condo assessments. (via Curbed Chicago x2 plus Redfin forums)

Cutting amenities may hurt your property values, but people also notice when assessments get too high. (via Curbed Chicago x2 plus Redfin forums)

Recommendations

It’s tempting to set a consistent amount to increase assessments each year. However, associations are incorporated as not-for-profit entities. A big surplus means refunds at the end of the year, which makes it tough to turn around and ask for more money later. The better approach is to increase annually so that people get used to the idea, but for only the amount that you need.

Here’s how I do it. Two months before your annual meeting, I contact our vendors and obtain estimates for the coming year. This lets me run the actual numbers and still get the new budget into the hands of the association the requisite 30 days ahead of time. I also take into consideration how expenses have increased from year to year historically, but there’s nothing like actual estimates to prove your point. When presenting your increase to the board, make sure you can back up all of your numbers with evidence. This will make it a lot easier to swallow.

Oh, and no matter how much you cut corners, make sure you’re allotting at least 10% of your budget to reserves each year, and make sure it’s a line item in the budget. A reserve study performed by experienced engineers will let you know exactly how much you should be saving, but regardless of the outcome of the study, at least 10% is required so that new owners can get mortgages when they buy into your building.

So yes, increase every year, but not by an arbitrary amount. As is the case with every article here, a little research and a little math will tell you how to proceed.

  1. [1]Homeowners Insurance Rates Rising in 2012, NPR.org
  2. [2]Know My Water and Sewer Rates, CityofChicago.org
  3. [3]ComEd Historical Residential Rate Monthly Averages, Info-Trex
  4. [4]Department of Occupational Employment Statistics, US Bureau of Labor Statistics

PSA for the Accidental Landlord: Profit is Not Guaranteed

The alternative of renting your home in a slow market has become increasingly viable in the past few years. I’ve worked with a number of buyers lately who have mandated that their new home be viable as a rental further down the road. Even though the market is improving, there are also still sellers out there who don’t want to short sell and turn to rental as an option. I call it “accidental landlording.” As one of the few Realtors in my office specializing in rentals I pick up several of these each year as referrals from my peers. With at least a quarter of the accidental landlords I meet, I have to have the following conversation:

Me: “Based on the current market, I’m thinking we could get $X per month for renting this property.”

Client: “But my monthly expenses are $X+500!!! We have to ask at least $X+600 so that I can turn a profit on this rental.”

Me: “I wish I could say it worked that way.”

Me, internally:

Logo from an indie film that failed to get funding. So Sad,Analogy Time!

So let’s say you’re 25 and you are living in Rogers Park without assigned parking. Poor you. You need a car, though, so you buy a little 5 year old Jetta second or third hand. You can parallel park anywhere and not pay too much. It serves your purposes. You have your brother paint it purple so you can pick it out in the mall parking lot. You cover it in bumper stickers. It’s unmistakeably your car, through and through.

10 years pass. You’re still driving that Jetta, but now you’re working for a catering business in Elk Grove Village, and you have two kids. You finally have to bite the bullet and give up your beloved compact. The folks in town don’t look kindly on your old John Kerry ’04 bumper stickers and there just isn’t room for your life in your car anymore. Back when you were 25 you never thought you’d be in this situation. You didn’t consider if the Jetta would suffice if you wound up in a situation where you had to haul a lot of stuff and small people around.

I had a lot of trouble finding pictures of VWs covered in bumper stickers. Lots of Toyotas, but not a lot of stickered VWs with an acceptable reuse license. VW owners don't like to share their pics.

I had a lot of trouble finding pictures of VWs covered in bumper stickers. Lots of Toyotas, but not a lot of stickered VWs with an acceptable reuse license. VW owners don’t like to share their pics.

A single-purpose purchase will not necessarily serve well when faced with new tasks. The more something is customized, the harder it is to make it change gears (pun intended).

The same thing goes for your home.

Why did you buy your home?

If you’re currently a homeowner, chances are that you didn’t give much though to the rental value of your home when you bought it. You might have thought a bit about resale value, but not about whether or not it would make a good apartment. Likewise, if you took out secondary loans on the property you probably didn’t think about having some poor renter cover that cost on your behalf further down the road.

You probably considered how you could customize the house, the caliber of the kitchen appliances, the color of the wood floors and the size of the yard. You ensured it would suit your particular needs for light, space, and storage. You thought about whether it fit within your monthly budget. You probably didn’t consider whether or not it would generate positive cash flow 8 years later.

There’s a lot of investors out there who won’t purchase a property until they’ve analyzed whether or not it will generate positive net cash flow. They think about what will appeal to the largest number of renters. How long those renters will stay. The cost of gas to drive back and forth to the property. The breakdown rate of the appliances. The value of parking spaces. The depreciation. And when it comes to apartments, there are more owned by investors than by “accidental” landlords. Investors set the market rent rates.

A purchased home should be like the cast of "Star Trek" - very good at playing their specific roles.

A purchased home should be like the cast of “Star Trek” – very good at playing their specific roles.

Meanwhile, a good apartment needs to be like the Saturday Night Live cast: able to do a decent impersonation of any type of home for a short period of time.

Meanwhile, a good apartment needs to be like the Saturday Night Live cast: able to do a decent impersonation of any type of home for a short period of time.

Going back to the car analogy, let’s suppose you tried to lease your 10+ year old Jetta for $180 per month when you were done with it. Laughable, right? Who on earth is going to sign a fourth hand lease on a heavily customized car? And who on earth is going to pay the same for it as they would for a new 2013 Jetta at the dealer?

Why should you expect that your home, bought for and customized to suit your needs, will work well when repurposed as a means of generating ongoing income?

Agents Can’t Force the Market.

If I’m trying to list your home as a rental, I want to list it for as high a rent as I can possibly get. I’m working on straight commission here. Your profit is my profit. However, “possibly” is the real operative word in that first sentence. If it’s priced too high, your home will not rent. Nobody will even see the ads.

Most renters don’t care about your monthly expenses. The general opinion of a landlord is that they’ve got bottomless pockets full of money, especially if they own a fancy condo with granite counters and stainless steel appliances. After all, you have two homes and they have none.

If I deliver a number that’s lower than your cost of ownership, the question should not be “can I find some idiot renter who’s willing to pay $500 over market rates.” After all, that type of renter is not likely to remain financially solvent for long in any respect, and an insolvent renter is a renter headed for eviction court. Rather, the question should be, “which will cause less damage to me in the long run?”

Short selling your home has its problems. It affects your credit, your tax returns, your buying power, and your self esteem. You may face long market times. You’re at the mercy of the banks. Renting frees you from all of that. For some it may be easier to write off a $500 loss each month than a $300k loss all at once. The market times will probably be shorter. The banks don’t have to get involved.

However, renting doesn’t free you from the property itself, and you may find that dealing with tenants and the Chicago rental laws for a year is far worse than dealing with a bank for 60 days on a short sale.

The better approach is to expect both the sale price and the rental price quoted by your agent to be below what you paid for the property, especially if you bought in during the 2000’s. Rather than weighing just the money values, think first as to the benefits of the entire scenario before making your decision.