Kicking out Bad Tenants - a Loophole?

I received the following question after one of my earlier posts about dealing with tenants and lease-breaking:

This is off topic and I know it may vary from state to state but have you ever encountered a situation where you have a bad tenant who is late or owes you rent, you're trying to evict them, and they lock themselves out. By law, you are not legally allowed to lock your tenants out but are you obligated to open their doors too? I know that most if not all landlord usually charge a fee for having to come out and unlock a tenant's door for any reason and this also adds to the fact that they already owe you rent and you're trying to evict them. So basically I want to know if you guys have been in a similar situation or know of anything like this and whether or not you can refuse to unlock the door and have them pay a locksmith to come out and unlock it for themselves or do you have to unlock it for them? I mean legally you are not changing the locks or locking them out yourself...

The core issue at hand is the "lock out". It's illegal in almost every state to lock or freeze out a tenant, no matter whether they've complied with the terms of the lease or not. For example, if a tenant stops paying you rent, you are not allowed to change the locks to prevent the tenant from entering the property (Texas law actually allows you to change the locks, but the landlord must make a set of keys available to the tenants at any time, regardless of whether rent is paid).

Similarly, a landlord cannot cut off utilities (like heat, for example) to make the property essentially uninhabitable. I would assume that cutting off services such as cable TV or internet would be allowed by the court, though I do not know of any precedence. But electricity, water and gas are certainly protected.

These laws vary by state, but most are quite similar. For example Virginia's law § 55-248.26 states:

If the landlord unlawfully removes or excludes the tenant from the premises or willfully diminishes services to the tenant by interrupting or causing the interruption of gas, water or other essential service to the tenant, the tenant may recover possession or terminate the rental agreement and, in either case, recover the actual damages sustained by him and a reasonable attorney's fee.

The question raised by the commenter is, what happens if the tenant locks themselves out of the property? Are you required by law to provide a new key for entry? Is that essentially a loophole around the law?

To be perfectly honest, I haven't found any decisive evidence on this situation. I've seen it repeatedly mentioned that in the case of an illegal lockout, a tenant is advised to alert the police and then break into the property, causing minimal damage. In addition, if I were arguing the tenant's case, I would argue that not providing copies of the keys constitutes "unlawfully excluding the tenant from the premises".

I think the bottom line is that if a tenant is paying rent on time and the landlord refuses to replace a lost key, that tenant would certainly have grounds to sue. After all, they have no access to the property that they are paying for. And the law makes it relatively clear that non-paying tenants have the same rights as paying tenants (at least in Virginia) until the point of eviction.

So my conclusion is that the eviction process is the only way to proceed in that situation. But I can't provide any conclusive evidence.

Indicator of Success #3

I enjoy gambling. It's a bit of a confession, because I know that it's not a financially sound position. Even in the most player-friendly games, the house always wins. As a matter of fact, I think that I've only lost money at a casino once in my life, but I know that more a matter of luck than any measure of skill.

But let's look a Hypothetical Bill. Hypothetical Bill has figured out a secret formula to win at roulette. Normally the house has a 51.4% advantage, but Hypo Bill has figured out a method of betting that gives him a 51% chance of winning. In other words, our of every 100 games, he can expect to win 51, which is more than half. Technically this is called statistical arbitrage, a system where you are guaranteed to win over the long term, despite potential losses in the short term.

Hypo Bill walks into the casino with $1,000. He bets $200 on the first and wins $200. Emboldened by his success he bets $500 on the next hand and loses. Trying to make his money back, he bets another $500 and loses again. He's down to only $200. He bets it all and loses once more. Poor Hypo Bill is now broke.

What happened? He was a sure thing to make money when he walked into the casino, so why is he begging for cab fare outside?

He got greedy. The 4th indicator of success is the absence of a get-rich-quick mentality. There was nothing wrong with Bill's system, and he should have been making lots of money. But even when the odds are in your favor, it's still possible to lose. A winning strategy not only has to win more than it loses, but it has to survive those losses as well. If Bill had been betting $1 a hand he could have survived a very long losing streak. Of course it would have taken much longer to build a sweet bankroll.

What's the equivalent of Bill's betting strategy in the real estate world? Well a lot of people make money in real estate, it's not exactly rocket science. But compare Biff and I, with our two properties (each with at least 10% equity), to a beginning investor who has just bought 5 houses with No Money Down.

Let's say that the market stalls a bit and renters and buyers are hard to come by. Biff and I will feel the pain, as we have to dig into our pockets to cover our mortgages. The beginning investor, however, will be digging a hole so deep that he may never recover. Of course, the reverse is true and if the market is soaring then Biff and I won't make nearly as much profit as the newbie. But that's what makes the newbie a gambler and Biff and I investors. We're able to survive both the ups and the downs of the market, the newbie goes to bed every night praying that the market will climb.

How can you identify if you have the get-rich-quick mentality from simply wanting to maximize your investment and get good returns? Stop for a second and think about your past. One aspect of get-rich-quick is a desire to jump on board any idea that sounds lucrative. Not to jump on Casey Serin any more, but as the poster child of the "I deserve to be a millionaire without actually providing any value" generation, here's a subset of the "investments" he has looked into:
-single family homes
-penny stocks
-private equity (at supposedly a 5% return per month)
-cold fusion
-apartment ownership
-brokering large investments (sports teams and casinos)
-sure-fire roulette strategy (yes seriously. He probably meant the Martingale system, which doesn't work and is impossible to implement in modern casinos anyways.)

What's been his return on all of these investments? He's lost around $300k on single family homes, about $3k on penny stocks, and hasn't actually seen any gain from his other ideas.

Compare that to Biff and I, who've focused solely on single family homes (with some 401k's in funds as well) and have made around $30k-$35k each over 26 months, at an ROI of about 147% (about 70% annually). $30k over 26 months isn't going to help us quit our day jobs, but consider our ROI. We've crushed the stock market over this period, and accomplished that without putting our futures at risk. If we had bought 10 times as many properties, we may have made 10 times as much, or we might have gone broke and shattered our credit along the way. As it is, Biff and I are in a solid position to float any of our properties that might struggle, while still being in a good position to slowly expand our holdings.

So take a long look at yourself. If you aren't the type of person who is already maxing out their 401k, and putting money aside every month to invest for the future, then your motivations for pursuing riches in real estate are probably suspect.

Few people become instant millionaires in real estate, and most of those who do, find themselves in deep trouble shortly down the road.

Higher Education

There are many dangers in today's society. Take fire, for example. We are ready to deal with fire, we have a fine fire fighting force that can put one out quickly. But in today's new world we must be prepared for a new danger. The Rich Dad righteous.

Now you may believe that the best way to deal with a follower of Kiyosaki is simply to duck and cover. But the best defense is knowledge.

You can identify a fervent follower of that infamous dispenser of hurrah by their spiffy, though often pithy, catchphrases, such as:
- "I don't want to work for money, I want money to work for me."
- "If you invest OPM (other people's money) you can't lose!"
- "Colleges teach you to be a good employee."

Listen to that last one again. John T. Reed says that one common claim made by B.S. gurus is that they will tell you that education is worthless. It makes sense to them, because traditional education is their competition. They'd much rather you spend you $40k on two weeks of their seminars than 2 years of a good university.

Astute readers may know that I ranted about education a while back. But to be sure, let me emphasize that my beef was that I felt that our educations in the US are incomplete. We teach a lot of useful, and even necessary, skills. But we omit many skills that are crucial to living a good life (personal finance being one of those topics). So why am I discussing education again? Simply because I'm currently seriously considering going back for a Masters degree.

Kiyosaki has it all wrong. Colleges teach you skills. And while most people use those skills to become good employees, do you think that entrepreneurs don't need them at all? If you are serious about making real estate investing your career, consider that Virginia Tech (both Biff and I's alma mater) offers a major in Residential Property Management, which covers topics such as:

- Real Estate Law
- Real Estate Appraisal
- Maintenance for Property Managers
- Managing Real Estate as an Investment
- Marketing Real Estate
- Consumer Rights
- Real Estate Finance

That's by no means a comprehensive list of the courses included in this major. For a resident of Virginia, you can major in Residential Property Management at a cost of $2,886 per semester (plus fees for insurance and the like), or $23,088 for four years of top-grade education. Compare four years at a university to our old friends at Nouveau Riche, who want to charge you as much as $16,000 for 20 days of instruction.

Not enough for you? What could the successfully real estate investor want to go back to grad school for? How about an MBA? Most MBA programs teach similar material, though the quality of instruction will vary. But take a look at the skills taught at the creme de la creme, Harvard Business School:

- Finance I
- Finance II
- Financial Reporting and Controls
- Leadership and Organizational Behavior
- Marketing
- Strategy
- The Entrepreneurial Manager
- Negotiation

What real estate investor wouldn't benefit from that education? In fact, what entrepreneur wouldn't benefit?

I'm not saying that you have to get an MBA from Harvard to succeed in real estate investing. But it's important to remember that as an investor you are going to face a lot of very tough situations. Which house to buy, understanding true cash flow and how to measure risk, how taxes work and how to maximize your return, how to keep correct books. To be honest, all of these topics are capable of being self-taught, thanks to the wonders of the wiki pages.

But learning such complicated subjects takes time. That's one of the reasons that I strongly advocate moving slow in real estate, buying only when you've saved up a good down-payment, and making each property cash-flow positive before moving on to the next. The small mistake you make along the way won't be enough to sink you, and as you become more adept, you'll be able to handle more houses.

If real estate is just a hobby for you, or a side-investment, than this approach will work fine. But if you feel that you want to enter the industry full-time, you need a jump-start on these subjects, and that's something that a 20-day boot camp isn't going to give you.

Now it's confession time. I'm not going back to school to get an MBA or to study real estate. Landlording is, and always has been, a side-investment. I'm actually going to apply to the London School of Economics and Political Science to pursue a Masters in Finance. Right now I feel the best investment for me is in my W-2. And there's no shame in that.

It started as a link to another article...

This article started as a simple link to another article. I just wanted to reflect on someone else's wisdom. But one tiny fallacious comment got under my skin, like a grain of sand in an oyster. And like our friend molluscs, that grain ate and ate at me until I was driven to dig deep into the background of the comment, building a coat of nacre to grant me much needed comfort.

It all began when I was reading an interesting article on MSN on the 10 biggest mistakes that novice real estate investors make. Most of the advice is good (and you can probably guess that it was 99% common sense then) with mistakes like "not doing enough research" or "thinking you'll get rich quickly".

As a quick aside, what is this pre-occupation with leading a "team"? Just because you pay a CPA to do your taxes doesn't make him a member of your team, you're paying for a service! It's like taking a taxi to a meeting and considering the taxi driver part of your team... I guess people obsess about it since it feeds the ego ("I have a team of more than 20 professionals!")

As I was reading the resevoir of useful, though commonly known, data one comment stuck in my mind and became nigh impossible to dislodge from my brain.

"If you're working on one deal at a time, Crowe says, you're doing transactions, not running a business. You need a steady pipeline of prospective deals; sufficient volume will weed out the marginal deals and let the good ones rise to the top."

This sounds awfully like guru-speak. John Reed argues that one of the signs of a guru is their need to offer new definitions to old terms (rule #32). Stop and think carefully about what he said. "...doing transactions, not running a business". Isn't every business built upon doing transactions? For example, when a mechanic fixes your car, isn't that a transaction? You give him money, and he gives you expertise? Is the mechanic not running a business?

Maybe he means that, by his new-fangled definitions, the mechanic isn't running a business, but if the shop is owned by someone else then that someone is. So by that definition we've determined that running a business means paying someone else to do your transactions for you... Confused yet? Because right now it sounds like Mr. Crowe thinks you ought to hire a bunch of real estate investors to handle the investing for you, otherwise you aren't running a business... (Mr. Reed's rule #7 for spotting a guru is "Claims to do lots of deals")

Who is Mr. Crowe anyway? Looking back earlier in the article we find that, according to the author, "Doug Crowe, a Chicago real-estate investor and speaker...[is] the managing director of Springboard Academy, the nation's only real-estate academy for investors." So he IS a guru, which explains a lot. Unfortunately the author's claim of his school being the only real-estate academy rings a bit false. After all, didn't our friends at Nouveau Riche claim similar things? Looking at Springboard's website, we see that their claim is to be the only "semester-based" academy.

Read Springboard's website. They claim to be a legitimate educational facility, but notice that their website reads far more like Carleton Sheets site than that of a honorable education institution. I invite you to follow their advice and "review [their] course curriculum". Note the following things:

1) They don't give a price.

Their website specifically says "Tuition is discussed during the interview process." How many business models don't offer you a price until you sit through a sales pitch? Here's a hint, only the ones that use high pressure sales tactics (like timeshares). Think carefully about this, let's say that I'm comfortable spending $1,000 on a course, but their cost is $15,000. If I "interview" with them, I'm just wasting their time and money, a waste that could have been avoided if I had simply known ahead of time what they charge. The only reason to withhold a price is because they think that they price will turn people away, but if they can talk to you they can pressure you to pay it anyways.

But maybe their program is worth it? After all, some private schools charge that much for a semester's tuition. What are their classes like?

2) They don't include a course curriculum.

You know, like they promised? Their curriculum has absolutely no worthwhile data in it, just a bunch of feel-good crap.

If you were beginning a honest school for real-estate and had to write a section called "How it works", what would it look like? Would you list out the various course offerings you had? Would you describe how first you educate a student on financial topics, including cash flow and projections, then lead that into a segment on legal documents (including leases), maybe take that into some landlord/tenant case law? Maybe you would describe how you have a basic curriculum that teaches you everything from basic accounting to being a good landlord, but then you offered specializations in bankruptcy law, construction or repairs or maybe even a specialization in specific state laws?

One thing you would not do is write some tripe about how curiosity leads to frustration, which leads to action. I want to be an investor, not a jedi. Much bullcrap in him, I sense.

"Springboard is the nation's only organization that combines all THREE of the necessary ingredients for your success. It doesn't matter where you are in the process, because it is a PROCESS and not a destination."

Yes, because if you go to a traditional college where you can earn a degree, they most certainly do not serve the ingredients necessary:

Education - They do not teach you new things
Confidence - They don't make you more confident
Action - They don't assist you in any practical application of what you've learned

I wish I had learned these three pillars of education before I payed thousands of dollars for a real university to provide me with the tools I needed to succeed...

Are you convinced yet? That this is utter bullcrap? If not, consider this last bit of advice that he gave to Bankrate:

"The number is the number, and you don't go above that, he says. The best way to solve the problem is to have lots of activity and make offers on multiple properties. Then you don't care which one you get — as long as the numbers work out in your favor."

We've been here before. Anyone who tells you to throw out offers like Eli Manning throws interceptions is probably just trying to tell you want you want to hear. And that's just because he's eyeing your wallet.

Scammers, not gurus...

There is a relatively new scam going around (as in just the past couple of years) concerning cashiers checks. Essentially the scam is that someone will offer to pay you (for an item on eBay, or many other things) with a cashiers check, then they will send you a check that is much too large and ask you to send money to someone else (a shipper or something). The check is a fraud, however it's a good enough one that the banks won't catch it right away and will deposit the balance in your account. You then send the item and wire the money back to whoever the guy asked. A week or so later when the check is determined to have been a fraud, the bank will take the money back out of your account (with a penalty for "their troubles"), but your item and your wired cash are already gone for good.

Biff and I were targets of this just about a year ago (several months before I began this blog). I thought it might be fun to walk you through the path of the scam, including the warning signs that made us cautious, even before we had heard of such a scam.

It began when we posted a vacancy on a renting website. A few days later we received an inquiry from a gentleman who claimed to be a Dutch importer. He asked for some pictures (which is relatively normal) explaining that he would be moving to the United States for a couple of years on business.

WARNING #1: Biff and I have a very well documented application process that includes a credit check. Since this guy was from overseas a credit check would be nearly impossible, and I told Biff as much.

We didn't want to discount the possibility of renting to him though, since we were having some trouble generating interest in the property. The vacancy was to begin in Janurary, which is a relatively slow period.

He sent back this email:

===== Original Message From =====
Pls could you get back to me with your phone number,i would like to give you a call to explain things.There are some things in the application that i dont feel to comfortable about giving out, except in person.Thanks and looking forward to hearing from you

WARNING #2 - Our application was pretty standard stuff. Addresses, identification info, references, etc. We haven't had anyone balk at our applications yet, he was the first.

This itself was odd to us, since our application was relatively standard. But since the gentleman claimed to be from overseas, Biff agreed to the call. The call was routed through Canada (or so it indicated on Biff's caller ID), and the connection was horrible. Now for those of you who've never had the pleasure of calling overseas, a real phone line is hard to mess up. I've called my family from China and from England so far, and both of those connections were both quick and clear. So when Morgens call was so staticy that Biff could barely understand him.

WARNING #3 - Anyone who claims to do international business but can't make a clear phone call to the US has some serious issues.

The one thing we got from the call though was that Morgens intended to make payment via a certified check. This seemed legit to us at the time because we weren't aware of the fraud. However, he was insisting on sending it to us right away, despite the fact that he hadn't completed an application yet and we hadn't agreed on accpeting him as a tenant.

WARNING #4 - He tried to essentially bypass the application process, tempting us with a big check.

Biff, while cautious because a few red flags were flying, was willing to continue the application process. After all, we certainly didn't want to discriminate against someone because they weren't American. However we needed to assert extra caution before making any agreements. If he insisted upon sending the check, we'd just run the credit check after it arrived. We had never turned someone down because of a bad credit check (our rents tend to be in the higher range, discouraging those types of renters), so we had no reason to assume that he would be any different.

Biff sent him back a reply:


Excellent talking with you. As requested, here is my mailing address to send the certified check: I know our phone connection was not all that good, but I'd like to make sure that we agree on what we discussed.

a) You will send a certified check to my home address in the amount of $1990. This will cover your $800 security deposit (refundable at the end of your lease) and your first month's rent of $1190. You may prepay additional months if you like.

b) You will e-mail me the electronic application I sent to you, filled with the information you feel comfortable providing

c) You will send me via mail the missing information in the application (driver's license info, or whatever information you feel is necessary to verify your identity and credit history) along with your certified check.

Once this process is complete, if we accept your application, I will send you the lease agreement, which will include the term of your lease, your rights, your responsibilities, etc. I think we can certainly come to an agreement and can resolve these issues, despite the present difficulties of communicating overseas. Thank you for your patience and understanding.

Best Regards,

Our intent was to accept the check (but not cash it) and then do whatever research we could on this guy. At the very least we could have contacted his references in his home country and done some research on how to run a credit check in the Netherlands. I'm still not certain if you are capable of doing this, but since US credit checks are so easy to run from anywhere in the world, I had assumed that Europe would be equally easy.

Now is this a little excessive to be trying to dig up stuff on a guy who isn't even in the country just to fill a vacancy? Probably. But Biff and I are both young and to be honest, it was still kind of a game to us. Half of the fun was in figuring out new things and we were embracing every challenge. The other reason we were pursuing this was that we had no other bites on that vacancy yet. Honestly, if someone local had filled out an application, we'd simply have sent our apologies to Morgens and dealt with the local. But at this point there were no other bites at all.

Now Morgens think he has us hooked. He writes us back this e-mail:

>===== Original Message From =====
Thanks for your reply and also for assisting me. I have sent you a certified bank check in your name and to your address. I'll be paying for 2 months($1990) but will be sending a check worth $6490. You'll kindly cash the check and deduct your funds for the house and you will send the excess funds to my shipper . He is to ship my belongings down to the US and i have kept him on hold for too long. I am doing this so as to secure the house first before he transfers my belongings to the location,this is the only assistance i will be needing from you and will be most grateful.Pls if there is anything you don't understand pls get back at me as soon as possible. Thanks and hope to see you soon.
Morgens Smith

There's the trap. He intends to send us a very large check and then send the "excess" funds over to his "shipper". So the goal of the game is revealed and Biff and I start to figure out that something is definitely wrong with this guy. He's asking us to handle over $4000 of his money? Still unaware of the cashiers check fraud, we started to wonder about money laundering schemes.

Note also that while we're requested that he send us a copy of his driver's license and other forms of ID with the check, Morgens is just talking about the check. He has no intention of sending us that information, and his goal is for us to be so excited by the large sum on the check that we forget about all of our documentation. This is why having a system that you follow works, it helps override the emotion of getting a check for the vacancy that you desperately want to fill.

Right around this time we received a mass mailing from the website that we advertised on describing this scam in detail. We identified Morgens as a fraud immediately (we were very suspicious of him as it was), and pretty much discontinued contact with him. We did receive the certified check and informed the FBI, though don't expect anything to come from it. Most of these scammers work out of loosely regulated nations, such as Nigeria, where law enforcement can't track them down.

Right after this episode with Morgens, Biff received two more e-mails, on the same day:

Laurence Johnson has inquired about your property on Military By Owner.

# Comments: I am interested in this place for rent I have seen the photos and they are great!!! About Me My name is Laurence Johnson, a British Archaeologist. I am currently embarking on a research in US. I have completed all official processes. The research would take about a year and so I am looking for a year's lease. As I am already aware there needs to be an application process and income verification. I will not be able to provide some of the needed information due to my status as an independent Scientist with funding from Financiers. To this end, I will be willing to make payment for the 12 months period which I am going to occupy the place for rent. This payment would be coming from my financier. I hope this solves things. Please send me the lease agreement for my review. Talk to you soon. Thanks. Laurence.

This highly questionable request (again note the request for us to send him the lease for review, assuming that we'd take him. His goal is to send us a check as soon as possible, bypassing any paperwork or identification if possible) was followed almost immediately with this one:

My name is Jeff Newman, a British Archaeologist. I am currently embarking on a research in US. I have completed all official processes. The research would take about a year and so I am looking for a year's lease. As I am already aware there needs to be an application process and income verification. I will not be able to provide some of the needed information due to my status as an independent Scientist with funding from Financiers. To this end, I will be willing to make payment for the 12 months period which I am going to occupy the place for rent. This payment would be coming from my financier. I hope this solves things. Please send me the lease agreement for my review. Talk to you soon. Thanks.

At least the scammers aren't very organized. Score one for the good guys.

The importance of this article (besides making you aware of a common scam), is to emphasize the necessity of a good process. Biff and I carefully thought out our tenant selection process, which helps us avoid falling for traps like this, even when we have a vacant property that we were feeling pressured to rent out quickly. Because of that, we were very suspicious of our international friend well before we knew how his scam worked.

If you are looking to rent out property, make a very well-documented process. You have no idea how many landlords take in tenants that they otherwise wouldn't just because of some sob story or a financial pressure. Decisions made emotionally often make a situation worse, not better. Make your decisions now, document all the steps you will follow, so that you don't have to make them when you are under pressure.

If you want to read some more about this scam, read this one person's experience with Nigerian scammers when he tried to sell his SAAB.

Here are a few more links on the scam:

The US Government's warning's page on the Nigerian Cashier's Check scam

Indicator of Success #15

I'm sure that the vast majority of you have been following the epic saga of Casey Serin. Casey has demonstrated a genuine lack of business acumen, essentially failing every test of intellegence, resolve and leadership along the way.

For those of you unawares, he had been blogging about his mistakes in real estate investing (which lost him millions) against the wills of his wife and was planning to self-publish a book with the help of a partner. When his wife finally had enough, she forced Casey to shut down the blog. His publisher encouraged him to come back, leading to a climax where he left the country, giving his wife only an hour's notice. Finally it seems that sense has returned to him, and he's decided to quit his blogging and his get-rich-quick dreams, and settle down for his wife. Then he notes that after he had made the decision he sent the following letter to his publisher:

M**** , there is going to be no book and no blog. Sorry to do this. But if you are a good person (business aside) you will understand. If don’t stop now I WILL lose my wife. That is not a good trade off for me. This is final. Sorry I don’t want to talk on the phone at this time. Lets wait until tomorrow. This is a hard decision. Thanks for all your help but I am exiting. I DO NOT want the book to be published without me either. Again, I hope you understand. Also our agreement is calling me to do illegal things (putting my digital assets into entities while I am defaulting on all my lenders). I didn’t know it until I had a professional look at it. You probably didn’t know either. Either way, this whole thing is about to cost my my marriage and I must stop NOW. Sorry for the troubles.

Which leads us to the latest indicator of success, the ability to build a consensus. Casey doesn't know why everyone gets mad at him, and then he sends out letter like these to people he considers "partners".

Let me recount a quick story. I had a good friend who was in a stable relationship who ran into a bit of a crisis of faith and no longer felt that he should be sleeping with his Significant Other (SO). He actually felt extremely sure about it and told me that he intended to tell his SO in a few days when they next saw each other. Here's what I wrote to him:

You are unilaterally making a desicion for the two of you. Yes, it's a decision that you are fully allowed to make, but you've already made up your mind on an issue that affects [your SO]. This will probably make him feel like you are dictating the terms of the relationship to [your SO].

This wasn't about whether he needed to change his relationship or not, I won't go into that can of worms. What made his decision so poor was that his SO is a partner in the relationship. And partners don't dictate terms, superiors do. Partners discuss terms. So by dictating some terms of the relationship to his SO, he was essentially asserting himself as superior.

Now that I've told that story, go back and read Casey's e-mail to his "partner" in publishing again. Doesn't it sound a little bit arrogant? He's simply saying "I've made a choice, and you have to abide by my wishes". Then he wraps it in an extra layer of guilt by saying "if you are a good person you'll understand". This isn't the first time that Casey has done this. He has repeatedly, in the past, dictated terms to people he wanted to have as "partners", even his wife. Which is part of the reason that nearly everyone he dealt with eventually turned against him.

What should Casey have done differently? When he realized that he had to kill the blog to save his marriage, his first phone call should have been to the only business partner that he currently has, the publisher. Since the publisher has invested time and effort into this project, he should have got him on the phone and said "M****, this project is destroying my marriage and that's something I can't allow. She wants to get out of the public eye, and I wanted to talk to you about this".

The goal of this conversation is to have M**** (yes, we all know it's Marty) come around to saying "I understand that you need to take the blog down, but since I have already vested time in this deal, let's discuss what we can do to walk away." At this point, Casey can offer a few things, from monetary compensation (although he has supposedly already paid Marty $5,000) to a new contract that promises him a cut of any future book project that tells his story.

But the difference between good leaders and bad leaders is that bad leaders give orders. They hand down directives. They dictate terms. Good leaders build a consensus, so everyone feels valuable, and no one feels like they had a fast one pulled on them.

Biff and I have an exit clause built into our partnership agreement. At an time Biff can come to me and say "I want out", and the clock starts ticking (I have 3 months to pay him for his share of the business as determined by independant appraisers unless we're liquidating, in which case he gets paid when I do). Yet I would never expect that of him. If he really wanted out he'd come to me, discuss it and we'd start thinking of ways to either keep him in and address his concerns, or we'd look into how we would go about his exit in the best way for both of us.

But that same principal applies to our tenants, and (thank God we haven't needed them yet) our contractors. Repeat after me:

"I don't want people to do what I tell them. I want people to do what we agreed together."

Flooding the Market

I don't have a lot of time today to write (still have guests in town and I'm actually quite exhausted), but I wanted to toss out a couple of related thoughts.

1) Foreclosures are rising to un-heard of rates. People are defaulting and banks are getting stuck with over-priced housing.

2) If the banks put the houses back on the market, they'll essentially flood the market with "desperate sellers". Sellers who are looking for the best quick price, not the best possible price.

I've heard from friends in the industry that banks are sitting on houses that they don't want, because they fear that if they put all of their houses on the market right now, it'd completely destroy the housing industry. Entire towns could go through an extremely painful price correction (though no one mentions that those are the same towns that went through extreme price inflation to begin with).

As always, it's worth mentioning that paper profits are not profits until you cash them in.

Anyways, this currently leads me to two conclusions.

1) The housing price drops that we are seeing (of 1% or so) should be worse than they are, but the banks are trying to prevent al all-out panic. It could be a good long while before prices start to climb (bank inventory will continue to leak out in small doses for years).

2) The banks are going to take large hits for this. Holding houses costs them a lot of money, money that they can't use to generate other profits. Profits from investment banking will probably fall a bit over the next 5 years (unless there is another boom that they can reap "transaction fees" from, like the private equity boom).

The struggles of finding a tenant.

Biff and I have finally sorted out our tenant situation, but not with out pain or heart ache. Here's a quick timeline of what happened:

April 5th: Biff contacts our tenants is Property A, and asks if they would like to extend their current lease, which ends on June 1st. They agree verbally

May 30th: Tenants of Property A are supposed to return a written lease to us. Instead they contact Biff and inform him that they want to move out at the end of June. I write a blog post on our situation. Biff puts up an on-line ad for the property.

June 1st: Biff places "For Rent" signs in the front yard.

June 8th: We find our prospective tenant, who we'll call Fanny.

June 11th: We receive our new and shoddy credit check report on Fanny, and the results are promising. We decide to offer a lease to her.

June 14th: Fanny decides to accept the lease. Doing so will switch her children's school systems and so she struggles a bit with the decision, but decides to accept. Biff mails her a lease and removes the "For Rent" signs.

June 19th: Fanny tells Biff that she has signed the lease and will return it later in the week. She'll move in on July 1st.

June 23rd: Biff buys the gift basket for the new tenant. Whenever we have a new tenant arrive, we leave a gift basket for them, filled with chocolates and a list of important numbers (like the local pizza delivery places). It helps starts the relationship on the right foot, and we can deduct the costs anyways.

June 26th: Fanny tells Biff that she will not be able to accept the lease for several more months, citing personal reasons (Biff suspects divorce). Luckily Biff has saved the contact info of other people who had expressed interest before he took the ads down. Problematically, Biff will be visiting my wife and I in London in just over a week, so we're on a strict deadline.

June 28th: Biff meet with two more prospective tenants. both make good impressions on him and both have good credit. We decide that whoever agrees to the terms first will get the offer.

June 29th: One of the prospective tenants, we'll call her Beth, agrees to the terms and signs a one year lease, leaving Biff with a check for the security deposit of $800. Finally everything has settled down, and we think we're in good shape.

Lessons Learned

We made several mistakes this time, but here's a list of some of the biggest ones:

  1. I was visiting my in-laws at the time the Fanny deal broke down. Biff was unable to contact me for a couple of days. He remembered I was going out of town, but didn't have contact information for me. He finally got in touch with me by CC'ing my wife on an e-mail (she checks her mail far more frequently than I do).
    In the future, before either of us travels we need to be more explicit. We need to provide contact info, and be specific about dates of travel so if we can't get in touch with each other we know if we have to make a decision for the company by ourselves.
  2. We took down the ads before we had a signed lease in hand. Never again.
  3. We didn't require Fanny to make a Good Faith Deposit. Our original plan involved asking for a deposit of $100 that you'd forfeit if you were offered the place but didn't take it. We'd be lenient on the policy (if we offered and you said no immediately we'd give it back), but it was designed specifically to avoid a Fanny situation (procrastination for a week or so, before finally declining).
In the future there are a few simple rules that we need to remember when signing tenants:
  • Without a signed lease, we don't have a tenant. Period.
  • Without a deposit, the most well-meaning tenant can back out on a whim. Deposits makes people think about their actions.
  • A lease should be signed and returned no more than 48 hours after a tenant gets it. Including 24 hours for local mail each way, that means if a lease isn't returned in 4 days, start looking for a new tenant.