When it comes to returning a tenant’s deposit when he vacates a property I have tended to go down one of two paths. I either a) return 100% or b) keep most/all of it. I don’t tend to have a lot of cases that fall in-between.

I’m usually leaving some money on the table when I return 100% of a tenant’s deposit, but for me that’s ok. If a tenant leaves the house clean and the landscaping looking nice then I won’t charge him just because he left a few coat hangers in the hall closet.

But unfortunately I’ve had a couple of cases recently where I had to keep 100%. In my experience these tend to fall into one of three categories:

• The tenant slinks into the night. This will happen when the tenant knows he’s trashed the place and doesn’t bother to contest the fact that you’re not returning the deposit. Note that if you do owe the tenant the deposit back you’re not relieved of this obligation simply because he doesn’t leave a forwarding address – so make sure your documentation is in order in case he decides to come back for the money.
• A negotiated deal where you retain the deposit in lieu of legal action. I had a recent case of a tenant who broke their lease and abandoned the property with unpaid rent due. It’s always advisable to have a strongly worded clause cautioning the applicant that the deposit cannot be considered security for unpaid rent. In most states the property code provides the protection to landlords (in Texas it does). Having this language helps you to negotiate from a position of strength. After a series of threatening pay-or-quit letters we signed an amendment via which I agreed to forego legal action in return for retaining the tenant’s pre-paid last month’s rent and the deposit plus a pro-rated charge for the last month that they stayed.
• The tenant howls. This is the one you need to be prepared for. Take photos. Keep itemized receipts. And within the 30 day window (check your state’s property code) present the ex-tenant with a neat statement detailing your charges. The best defense, in these cases, is simply to act as if you expect to be taken to court. Take this philosophy and you’ll end up clear, transparent, solid statement of charges that will probably take the wind out of your complaining ex-tenant’s sails.

Related Links

• Dealing with Deadbeat Tenants

At Thanksgiving our thoughts invariably turn toward our men and women in uniform when they are in harm’s way somewhere in the world.

Our current all-volunteer armed forces is the most effective that our nation has ever seen, but compared to the eras of WWII, Korea and Vietnam, today’s military is further removed from society at large than ever. During conscript days most citizens had a father, brother, uncle or cousin in uniform - whereas today's ubiquitous motto “support our troops” has become an abstract theme for many.

And it’s a theme which is used at every turn by our politicians as they attempt to promote/defeat whatever partisan bill congress happens to be debating at the time. I understand that most Americans who have a “support our troops” ribbon stuck on their bumper do so through genuine solidarity with our military, but it is a slogan that I’ve personally grown to dislike. It is rarely spoken with sincerity by our representatives in Washington, and generally translates into a show of support for a particular position on the ongoing war, not (as it purports) for those who have to fight it.

I’m a veteran, but I’ve opted to keep the bumper of my car slogan-free. So in lieu of a magnetic ribbon, here are three faces and stories of soldiers who have made the ultimate sacrifice for our country. Real faces, names and stories.

• MAJ Bill Hecker: West Point obituary
• 2LT Emily Perez: West Point Mourns a Font of Energy Laid to Rest
• MAJ Guy Baratteiri: Ex Seattle Policeman and Green Beret Killed in Iraq

I choose these three simply because they’re three people who happened to be close to me – family or West Point company-mates. But their stories are no more important than those of the thousands of other soldiers, sailors, airmen and marines who have given their lives. Thinking about them today helps me remember how much I truly have to be thankful for.  Thank you.

Much has been written on the ongoing push for legislation to protect consumers in the wake of the unfolding sub-prime collapse.  The House of Representatives recently passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007.  Commentary on this legislation most often focuses on the restrictions that it would place on lenders seeking to make loans. 

But there is another important feature in this bill which will be of interest (concern) to investors.  In case of foreclosure, the entity reclaiming the property will have to honor all preexisting leases.   And you thought that banks used to be annoyed about that REO bouncing back onto their books - now they get the property and the tenant. 

This, potentially, is a two-edged sword for investors.  On the bright side, while a tenant-occupied property is a pain for a bank, it can be a good thing for an investor (assuming the tenant is one that you'd want to keep).  Furthermore, it restricts the bank's options for selling the property - your competition in bidding for the property is pretty much restricted to other investors. 

On the flip side, though, this will make the banks take a second look at their policies for lending money to investors.  This change represents an additional risk and cost for the banks, and they're gonna pass it right along to you and me. 

If you're interested you can read the press release and the bill itself, along with a related article from the New York Times. 

This week's Fortune magzine featured an interesting article that puts an interesting spin on the housing market that takes a page from the real estate investor's playbook. 

Followers of the equities market will be familiar with the P/E ratio, the most often quoted financial ratio calculates a company's share price as a multiple of its earnings.  A high P/E ratio is evidence of the market's collective assessment that earnings are poised to grow dramatically, whereas a low P/E ratio tend to stick to companies with poor growth potential. Sky-high P/E ratios are not sustainable.  Either the companies blow up (pick the dot.com of your choice as an example) or they mature, stabilize, and earnings "grow into" the stock price (Ebay, Microsoft, etc.)

So what's the P/E ratio for the property market?  It's the relationship between property values and rents. 

Again, for investors, this is pretty intuitive.  How much do you want for that starter house?  $500 thousand you say?  And it should rent out for $2,000 per month?  Hmmm....I don't even have to plug that one into my economic model to figure out that those numbers don't work.  The only way that investment will pan out is if the market races along for another couple of years at double digit rates of appreciation.  If that's your belief and you're willing to put your money where you mouth is then by all means go ahead and write that earnest money check. 

But, like P/E ratios in the stock market, sky high price-to-rent ratios are not sustainable (which is why, for the time being, Jeff Brown is sending his sunny San Diego investors hunting for deals in the Great State of Texas).  The article quotes Yale economist Robert Shiller: "Like P/Es, price-to-rent ratios are mean-reverting."

There is a little bit of good news hidden in this analysis, however.  Once the price-to-rent ratio gets out a whack there are two ways for it to drift back in line: a) property prices fall or b) rent rates go up. 

Fortune crunches the numbers for the major metropolitan areas and they stack up pretty much how you'd expect them to.  The article isn't online so you'll have to hit the newsstand and plop your $4.99 down if you want the details. 

Nationwide Foreclosures are up 30% in the third quarter, compared to last quarter - and up nearly 100% over this time last year, according to RealtyTrac.

At the top of the list is Nevada, with one fourclosure filing for every 61 households, up over 200% from this time last year.  California is in second place, with 1 filing for every 88 homes. 

Investors will keep a close eye on their local situation in making investment decisions, but there are some interesting national trends forming.  Notably, 45 out of 50 states experienced year-on-year increases in foreclosures.  This, along with tightening credit, increasing oil prices and declining consumer confidence have the potential to have a broad national impact.  This is "the tide that lifts/lowers all boats."  So even though we may view national headlines with a shrug, smart investors in Oklahoma and Virginia realize that what's going on in California and Nevada really does matter. 

The Fed is caught between a rock and a hard place these days.  On the one hand Bernanke is now making much more direct statements about his concerns for the housing market, however with oil prices inching steadily into the $90 range there are also persistent concerns about inflation.  But today when the Fed had to choose between stepping on the gas (easing rates) and putting on the brakes they chose the former, to the tune of a quarter point rate cut. 

The challenges facing the economy are complex, and to a large extent they're still looming in the shadows as opposed to impacting us directly.  But the pessimistic scenario has American's holding on to their spending dollars as they fret about decreasing equity in their homes, compounded by sub-prime losses trickling throughout the banking sector as blue-chip firms like Merrill Lynch who bellied up to the mortgage-backed securities trough back when times were good start to see the chickens come home to roost. 

We all have our crystal balls tuned to different frequencies, but mine is telling me that now is the time to take off your speculation hat and put on your investor hat.  Cashflow is king when you're confronted with a skittish market and an uncertain immediate future.  And that, ladies and gentlemen, is what we're facing right now.  But medium term I'm still optimistic (even though my Countrywide trade isn't doing all that well) and I'm firm in my belief that investors who make smart investments during the downturns will fare well over the long term. 

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• Investing vs. Speculating
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