Oregon’s statewide rent control law, which passed early in 2019, is now impacting tenants and landlords in Eugene, Lane County, and throughout the state. This law favors tenants and is affecting how investors have to prepare when they want to sell their properties. Learn the four carve-outs that accompany the new law and how to enforce tenant rules.
What You Will Learn in Episode 2:
- The four carve outs that allow landlords to legally issue written notice ending a tenancy:
1. If the property is going to be demolished or torn down
2. If an immediate family member is going to move in
3. If you are doing renovations that will make the property uninhabitable
4. If you’re going to sell the property to someone who’s going to buy it and own or occupy it
- The timing for notices to end tenancy
- The differences in the rent control laws in Portland and Bend versus Eugene
- Predictions of what’s to come in 2020
- The differences in the rent control laws in Portland and Bend versus Eugene
The statewide rent control law passed in Oregon in 2019 is disrupting the multifamily market in Lane County and throughout the state. The law is affecting landlords and causing them to consider whether selling might be the right option. As a multifamily investor, it’s important to be educated about the law and avoid getting on the wrong side of things. Know the circumstances under which you can issue a notice to terminate a tenancy.Read the Full Transcript
New Laws Favor Tenants in Oregon
Barry MacGuire: Welcome to the Disruptions in Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard earned real estate investments working for you.
Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.
René Nelson: Hi Barry. Thanks for bringing me on. Today we’re going to talk about rent control and Senate Bill 608 and I appreciate you being here and let’s talk about this and ask me some questions.
Barry MacGuire: Real quickly. I guess the first question is, let’s review Senate Bill 608. What is it?
René Nelson: Okay, so in the Bill 608 it was designed to offer tenants protection against termination of tenancy and drastic rent increases. So that was the first thing. And they also require now longer notification periods for termination and it requires that a landlord has to have a reason to terminate a tenancy of more than one year.
Barry MacGuire: And you’ve recently had a case where a client wants to sell their property. Correct? Tell us about that.
René Nelson: Yeah. I had a client, and I’ve also had a lot of residential brokers call me because they know that I’ve really studied the rent control primarily because I sell apartment complexes. So if we’re selling a 20 unit apartment complex, most of the tenants just stay and we just sell those.
But when you’re looking at a duplex or even a single family resident, a lot of times the sellers say, “I want that tenant out before you put it into the multiple listing service,” as an example. Maybe the tenant is a hoarder or they’ve got a car jacked up on blocks in the driveway and it’s just not going to create good curb appeal.
So I’ve had a lot of residential brokers call me and say, “René, I’m about ready to put this great property on the market, but I need to get the tenant out. What do I do?” And I always tell them, “Okay, tread lightly because if you make a mistake, it’s very, very expensive.” And there’s some rules.
So the way that this works is with Senate Bill 608 it now protects the tenants so that you can’t just give them notice like you could in the past and tell them, “Hey, you need to move. We’re going to sell the property.”
Barry MacGuire: Even if they are hoarders? If they do have those vehicles up on blocks, you can’t do it?
René Nelson: Yeah, you can’t do it. So we’re going to talk a little bit about how to enforce your tenant rules because they still have to follow your rules and your guidelines. But you can’t just come in and say, “Hey, you’re out.” You have to start documenting that and you have to notify the tenant.
So here’s how it works. The Senate Bill was written so that it protects the tenant against just drastic rent increases and early termination or just a termination out of the blue. And it requires that the landlord, if you are going to terminate their tendency, you have to give them written cause and you have to give them why you’re doing it. And it actually takes three written violations in a 12 month period in order to terminate them.
Barry MacGuire: You say you have to give good cause. Is selling the property, is that a good reason right there?
René Nelson: It is not.
Barry MacGuire: It’s not.
René Nelson: It is not. So here’s how that works. If you’re going to sell a property that has a tenant in it, there’s four carve outs that go with the new rent control laws. And the first carve out is if the landlord is going to convert that into something different.
So let’s say they’re going to take a property and they’re going to either make it into condos or they’re going to turn it into commercial real estate or they’re going to demolish it. Then you can give the tenant notice. It has to be 90 days and you have to say, “This is what I’m going to do with the property.
So I’m basically going to demolish it or I’m going to convert it into a non residential use. And here’s your 90 day written notice that your tendency will be terminated.” So that’s the first carve out that’s allowed.
Barry MacGuire: Can the landlord use it as their own residence?
René Nelson: Yes. They can also move into it. So that’s the second one. You can move into it or you can move in an immediate family member. So you can move in a child, an adult child, you could move in a grandparent, you could move in a step child, but you don’t want to say grandma’s moving in, wink, wink, and never move grandma in. Because if the tenant finds out that you have done that, they have the right to come back and sue you for damages and they have up to a year to come back and sue you.
And I’ve had people say, “Oh, well I’m just going to move my mother in, but she really lives in Florida, so I’m really not going to move her in.” And I’m always like, “Oh, don’t do that. You are liable to be sued.”
Barry MacGuire: Well, like they say, honesty is definitely the best policy. We’re talking about the four carve outs right now. Let’s continue on.
René Nelson: To recap. The first carve out is if they’re going to demolish it or tear it down. The second carve out is if they’re going to move in an immediate family member.
Barry MacGuire: Okay there we go. Yes.
René Nelson: The third carve out is if they’re going to do renovations. So that means that the property would have to be uninhabitable. You couldn’t live in it. That doesn’t just mean paint and carpet where the tenant could move all their furniture to the middle of the room and you could paint around them or they could move everything into the garage and you could put carpet down. It has to have no kitchen, no bathroom, no heat source.
Barry MacGuire: Roof work?
René Nelson: Roof work is questionable.
Barry MacGuire: Really?
René Nelson: Yeah, because here’s the deal, roofers put roofs on all day long, all year long with tenants in it, while people are still in it. But if there’s a hole in the roof and it’s leaking, I mean a substantial hole in the roof and you’ve got issues with the tenant there, then potentially the roof could be an issue, but you really want to make sure that you do a gut check, check your integrity level.
Barry MacGuire: Is the landlord obligated to give that tenant a first right of refusal to come back into that property once the work is done though?
René Nelson: That’s a great question and the answer is no, and I’ve heard that from several real estate attorneys. And the reason is when you notify the tenant that that property is about ready to become uninhabitable, no kitchen, no bathroom, no heat source, something major is going to change in that property and you’re going to do a major remodel. You were ending the tenancy there. You’re ending the relationship.
So if you own more than four properties, you have to pay them one month worth of rent because that allows the tenant, that gives the tenant the cash that they need to go forward and put a deposit down on a property to move to. So if you own more than four properties, you have to give them 90 day written notice and you have to pay him one month of rent at the time that you deliver that notice to them.
Now I’m going to segue here on the side. I’ve had lots of property owners say, “Oh, well I’m going to put all my different properties into different LLCs and then that will exclude me from having to pay that one month of rent. I own property outside of Oregon. I only own one property in Oregon. So that excludes me.” You better check with your attorney because that is not accurate. So if you own more than four properties, including out of state in different LLCs, then you are qualified as a landlord and you do need to pay that 30 days worth of rent to the tenant.
Barry MacGuire: Oh, really? Okay.
René Nelson: I know a lot of people grumble and say that’s unfair, but folks, it’s reality. It’s already past. It’s the law. And if you violate that, the tenant has the ability to sue you for damages, including their attorney fees.
So think about it. They really don’t have much to risk or lose. They’re going to go to legal aid, get an attorney and they’re going to see you in court and you’re probably going to lose. So think logical, pick up the phone and call your favorite real estate attorney and run it by him if you have any questions or any doubts.
Barry MacGuire: What’s the fourth carve out?
René Nelson: Okay, so the fourth carve out is if you’re going to sell it to someone who’s going to buy it and own or occupy it. So let’s pick a single family residence. You’ve owned that for a number of years. Maybe you lived in it originally and then you moved into a bigger house and you rented that property out and you’ve had tenants in there for a number of years. Now you want to sell that single family property.
When you put it on the market for sale with your favorite real estate broker and they put it into multiple listing, you can notify your tenant that you’re going to put it on the market, which I think is the fair thing to do because you’re probably going to have a sign in the yard and it’s going to be a multiple end Zillow. And if you don’t tell them somebody that works with them-
Barry MacGuire: Communication is important. Yes.
René Nelson: Yeah, somebody is going to tell them, “Hey, your property that you live in is up for sale.” If someone makes an offer on that property and they’re going to live in it as their primary residence, then you have to notify the tenant in writing that someone is going to buy that property and they’re going to live in it as their primary residence and you have to give them a copy of the earnest money agreement to approve it. Does that make sense?
Barry MacGuire: It does. It does. Yes. Okay. So that’s the fourth carve out?
René Nelson: That is the fourth carve out. And you cannot give notice to the tenants until you have an offer in hand. So you can’t just list the property for sale and notify the tenants, “The property is listed for sale and the owner occupying is probably going to buy it. So you need to move out.” You can’t do that because that’s an assumption that may not happen.
Barry MacGuire: Now typically closings take more than 30 days and that’s what you have to give the tenants, right? 30 days?
René Nelson: You have to give the tenant 90 days notice. So it’s really kind of tricky because most conventional loans require that you move into the property within 60 days of when you close your transaction.
But honestly, because Oregon and now California are passing rent control, Fannie Mae is not really enforcing that rule because if you think about it, you can’t move in for at least 90 days because the tenant has to move out.
Barry MacGuire: This is complicated. That’s why you’re here doing what you do. We really appreciate that. Thank you. There is just so many moving parts to this.
René Nelson: There really are. Unfortunately, if you make a mistake it can be really costly. There’s really great smart people out there, primarily some really good real estate attorneys that to buy an hour of their time and run “what if”s by them is so smart.
A lot of people self-manage if it’s one to four family units or smaller. A lot of people self-manage and so they don’t have a good reliable property manager to bounce this stuff off of or ask questions.
I’m certainly not qualified to give them that information. I study it because I’m so intrigued with how the rent control has changed the multifamily market and that’s one reason that I wrote the book Disruptions in Oregon Real estate because when this first passed, a lot of people were just crazed with what am I going to do? I think I want out.
Well, if you’re going to sell your real estate, you have to kind of figure out where you’re headed because you’re either going to need to do a forward exchange at 1031 exchange or you’re going to pay tax if that has been a rental property.
So I wrote that guide as a way to help people understand rent control is not really as bad as it sounds. Yes, it has changed the game for landlords and property owners, but if you understand the rules, you can still work within the rules. And like I said on the past podcast, most landlords do not raise their rents as high as 10% annually.
What this rent control has really put into place is calming down the market so landlords can’t just show up on your doorstep for a tenant and give them a notice and say, “Hey, you’re out in 30 days.” Because it made so many people homeless or not homeless, but they had to find new housing that especially in the Portland market, it was hard to find a housing in 30 days.
Barry MacGuire: You mentioned rules. Those rules are different from community to community. The rules in Portland and Bend are different from the rules new Eugene, aren’t they?
René Nelson: They are. I know it’s hard to believe, but the rules in Portland are actually stiffer because there’s new rules that have passed that are coming out and we’ll talk about them in the next show in regards to screening and how the screening laws are now changing in Portland and how that applies to tenants and more importantly how it impacts landlords. And I predict that in 2020 those screening laws are going to pass statewide, so I think a lot of the listeners really need to pay attention.
Unfortunately, 2020 is a short legislation year, so there’s not going to be many changes. I don’t think we’re going to see changes to the tenant landlord law until 2021 so everybody needs to be really educated on what’s changing in 2020 how it’s going to impact them because one thing that we’re going to talk about on the next podcast is in relation to credit score. In Portland, you now have to take a 500 credit score.
Barry MacGuire: 500?
René Nelson: 500.
Barry MacGuire: Yeah, I don’t have great credit, but I’m not that low. That’s way down there.
René Nelson: It really is. Experian and some of the national credit reporting agencies indicate that the average consumer across the board in America, the average credit score is about 695 and that’s kind of for fair to medium credit.
There’s 800 and the higher scores for the perfect platinum credit, but for the average tenant who’s struggling to pay rent, maybe they’ve got some student loan debt, sometimes it’s hard to balance all that and you have a late payment or two. The average consumer has a credit score of about 695.
So when you’re in the 500 range, I always kind of equate that you’ve almost stopped trying at that point. It’s hit and miss whether you really want to pay your bills at that point. And unfortunately you now have to take that in Portland as one of the criteria. You can’t screen against a low credit score.
Barry MacGuire: Stay tuned more on that in the next podcast. Real quickly. For landlords and owners, it seems like it used to be a lot easier for them to get rid of their property if they wanted to. It’s just gotten really, really tough for them now, hasn’t it?
René Nelson: It really has. There’s still some opportunity.
Barry MacGuire: There’s carve outs.
René Nelson: Yeah, carve outs as an example. I don’t want to be all gloom and doom because I still have investors that say, “I love the market. I’m heavily invested, I love multifamily. Bring me every opportunity that comes across your radar.”
So it’s not all gloom and doom, but for the average mom and pop and when I say mom and pop, that’s someone that owns a couple of pieces of property. They self-manage and they’ve done a great job in the past. They’ve rolled up their shirtsleeves, they’ve fixed the properties, they’ve screened the tenants. They’ve provided great places for their tenants to live. But now because of rent control it’s really starting to change the game and it’s almost painting a target on their back where if they do one wrong step, they’re liable to be sued by their tenant for damages in addition to three months worth of rent for violating the law.
Barry MacGuire: One of the things that I’ve read in your book is you have a landlord that’s had a great tenant for a long time and hasn’t raised their rent that much over the years, but eventually that landlord is going to have to raise the rent to market value.
René Nelson: Yes, you really do. I see that when clients call me and say, “Hey, I want to sell this property. I have a client right now who wants to sell a six Plex and she’s owned it for the last 20 years and she’s got really good tenants in it. She’s been really good to her tenants, has barely raised rents like maybe $35 once a year, but hit and miss. Like once every five years, she’ll raise rents a little bit.
She’s so far behind on the market. She’s about $250 per unit per month under the market. And so now she wants to sell it and I can only value it at about 400,000 even though if you looked at a comparable property where it was up to market rent that property would be closer to about 600,000.
Barry MacGuire: My goodness.
René Nelson: It was that drastic because she was so far behind on market rent. So now what’s going to happen is because rent control is in place now landlords are going to raise rent like clockwork. So every 12 months you can now raise rent by 10.3% or whatever the cap is, which is 7% plus CPI. Right now, CPI is 3.3. Next year it’ll be a little lower. So next year in 2020 the maximum rent is 9.9. So every year landlords are going to raise rent like clockwork. If they don’t, they’re foolish.
Barry MacGuire: Also, that affects the tenant though. That hurts the tenant.
René Nelson: It does. It does because that’s going to raise rent. For some people it’ll raise it 12, excuse me, 125 bucks a month because a lot of people are paying between 12 to $1,600 for an average three bedroom, two bath. So the rent is going to go up 125, 160 bucks a month.
Barry MacGuire: And one other way that tenants were hurt was before rent control to hold. You had a lot of landlords up there that saw this Senate Bill coming down the road and they decided, you know what, we’re going to jump the gun here. And they raised their rents drastically for their tenants.
René Nelson: Yes. Yeah. You bring up a good point. We watched a race to the deadline where landlords raised rents 300, 400, $500 a month on their tenants and a lot of tenants moved out. I have a client right now who just decided that she wanted to sell her whole entire real estate portfolio.
So she’s getting out of the multifamily market and she notified the tenant that she was going to drastically rehab gut this one property before she put it on the market. So she took out the whole entire kitchen. She took out the bathroom, so there was really no way the tenant could live in it.
This tenant had been there for two years, so she notified the tenant in writing, gave them the 30 days worth of rent because she owns multiple properties and the tenant then later met the landlord at the property so that she could get her deposit money back that she had paid originally when she moved in a couple of years ago. She was paying that landlord $850 a month for rent, and she told the landlord that she wound up having to pay double in rent.
Barry MacGuire: Double?
René Nelson: And that’s just recently, that was just in November that that happened. She went out to the best thing that she could find and she didn’t go out and rent something lavish. She just went out and rented something that was manageable for her and her partner and she paid double in rent.
Barry MacGuire: I’m sure a lot of stories like that are going on in the state of Oregon right now?
René Nelson: Yes.
Barry MacGuire: The joys of rent control, isn’t it?
René Nelson: Again, it’s not all bad because I do think it is making it a little fair for the tenants so that there are no surprises. Most tennis just want a great place to live and they want to be a great tenant, but we do have some people, you’ve got hoarders, you’ve got the tenants that play loud music, you’ve got those tenants that are problem children as I kind of call them, problem children.
And there’s ways to deal with those. You can just give them written notice, but you have to make sure that you’re keeping note of that because you may have to go to court to defend that. And remember it’s three strikes and you’re out. So you can’t give them three strikes all at once. You have to do it methodically, you have to document. But there are ways to rein in those tenants if they’re giving you grief as a landlord.
Barry MacGuire: Exactly. There’s a lot of great tenants out there, but unfortunately it looks like this Bill, it really protects a lot of the bad tenants.
René Nelson: It really does. That’s why I wrote the book because I was trying to educate people on here’s how it has changed the tenant landlord law and here’s what you need to know to prepare and protect yourself.
Barry MacGuire: Well, a lot to deal with and it sounds like you’ve got a passion for this. If people want to reach you, how can they do so?
René Nelson: Probably the easiest way is go to my website, which is stoprentcontrol.me. Log in, put in your name and your email address and you can download a free copy of my book. I’m not asking anybody to sign a petition. I just made an easy website so that people could remember it while they’re driving or cooking or walking their dog and they’re listening to this podcast. Just an easy way to remember, stoprentcontrol.me. So think, “Hey, I’m a landlord. I need to protect myself. I want to stop what could be coming down the path for me. Stoprentcontrol.me.”
Barry MacGuire: René, thank you so much.
René Nelson: You bet. Thank you.
Barry MacGuire: Once again. Go to stoprentcontrol.me to download a free copy of René’s new book Disruptions in Oregon Real Estate. She covers lots of good information in the book about rent control and how it’s impacting Oregon real estate, and you can get a free copy of it. Once again, go to stoprentcontrol.me.
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