Wednesday, October 12, 2011

Selling or Buying a Short Sale Rental Property in a Rent Control Neighborhood

Be careful when you are selling or buying a short sale rental property in a rent control neighborhood.

Below is a list of California Bay Area Localities With Rent Control Ordinances:
City of Campbell
City of East Palo Alto
City of Berkeley
City of Fremont
City of Hayward
City of Oakland
City of San Leandro
City of San Jose
City of San Francisco

Before buying or selling a rental property in a city with rent control, you should consult a real estate attorney familiar with the Rent Control Board of the particular city in which the rental property is located.

For example, what happens if in the months leading up to the short sale, the tenants threaten to move out and in response the landlord drastically reduces the tenants' rent? Will this set a new monthly rental base with which the new owner must use in calculation of his future potential monthly rental rate? Or does a long history of higher market rental rates take precedence over a few short months at the drastically reduced rental rate? One real estate attorney associated with the Oakland Rent Control Board stated that as soon as the owner dropped the rent, he created a new rental rate that was subject to rent control.

The new owner would inherit the drastically lowered rent as his base and could not raise the rent for the existing tenants back to market rate. This killed off any interest from real estate investors.

In one case study, the seller did drastically lower the rent to his tenants soon after putting his investment property on the market. Did the seller unwittingly hurt his own chances of selling? Maybe that was exactly what the seller wanted. It was a short sale, and the seller might have simply been trying to collect as much rent as possible before losing his property to the bank.

To the seller faced with renters who are threatening to leave, then it might be in the seller's best self interest to lower the rent. This has two advantages in the mind of the short sale seller. #1) Better to collect some rent rather than no rent, and #2) The owner collects free rent for longer before losing his home. Making the property less attractive to buyers effectively delays the sale of the property. Since the deal no longer appeals to real estate investors, it will take longer to find a buyer. Only buyers willing to buy and live in Oakland as their primary residence will still be interested.

Every extra month of delay is extra rental income for the seller. However, when faced by an owner attempting such tactics, the banks would probably save a lot of money by simply foreclosing, booting out the tenants, and selling the property as a vacant unit. That seller is counting on his hope that a bank will not respond in this manner.

Disclaimer: I am not a real estate attorney. This discussion is just so you know what issues to think about and what questions you should ask. The bottom line is whether you are selling or buying a short sale property in a rent control neighborhood, you should consult a real estate attorney familiar with the Rent Control Board of the particular city in which the rental property is located.

1 comment:

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