If there’s a downside to investing in real estate, it’s dealing with nonpaying tenants. Many people prefer to put their money in the stock market because even with diligent screening, it’s inevitable that you’ll encounter tenants who fall behind on their rent. When that happens, your real estate becomes a massive headache. However, according to a recent article in the Wall Street Journal, rent problems could be well on their way out.
What Is Eviction Diversion?
The City of Brotherly Love, Philadelphia, is spreading love to landlords and tenants through eviction diversion. In short, it’s like real estate marriage counseling. Instead of heading straight for a divorce—i.e., an eviction—landlords must enroll in out-of-court negotiations with tenants before they can sue to remove them.
If that sounds like another headache for landlords before the inevitable eviction happens, the stats show otherwise. Philadelphia is known for low income and high eviction rates. However, since eviction diversion was enacted, court filings to remove tenants were down 41% in the 12 months ending in June, compared with the annual average between 2016 and 2019, according to the Eviction Lab, a research unit at Princeton University.
How It Works
With eviction diversion, tenant negotiations start before the court gets involved. A program-appointed counselor negotiates on behalf of the tenant with the landlords. It’s not Legal Aid in the traditional sense to delay evictions through loopholes and landlord oversights (though Legal Aid lawyers can be used as negotiators), but rather an intermediary whose focus is getting the tenant current with their rent—that means catching up with back rent while making on-time payments going forward.
How will they pay back rent that was missed in the first place, you ask? This is where the negotiator earns their keep (from the city, not the landlord) in finding creative ways to make up the shortfall. It can include apportioning tax refunds or some of their security deposit, using public rental assistance, and creating a payment plan to make additional payments toward the money owed.
Of course, if the tenant does not agree to these terms, an eviction can continue as normal. A mutual agreement to move out without an eviction is reached in some instances.
Why It Works
The eviction diversion program has proved so successful because the negotiators can access funds on behalf of tenants that most landlords and tenants would find difficult—namely, rental assistance.
Why It Doesn’t Work
In some cases, the eviction diversion is just delaying the inevitable. Out of desperation to stave off eviction, a tenant might agree to enter the program only to fall behind and face eviction again. After being in the program, the landlord can evict without delay.
Despite the drop in evictions, the Pennsylvania Apartment Association has voiced its dissatisfaction with the program as it currently stands. They would like to see the City Council modify eligibility criteria to include lease violations, such as nonpayment of rent. They also want to expedite the eviction process when tenants renege on their end of the deal.
The Elephant in the Room: Unaffordable Rents
No amount of negotiations will be able to solve the issue of a tenant simply not being able to afford their rent. In Philadelphia, 35% of renter households make enough to afford a median-priced apartment in the city, compared to 39% nationally. And in recent months, many big cities have seen explosive rent increases.
A recent article in CNN quoted Moody’s Analytics data that said renters in New York City, Miami, Fort Lauderdale, Los Angeles, and Northern New Jersey allocated more than 30% of their income toward rent in the second quarter. However, an increase in construction in Tampa, Denver, and Minneapolis has seen shelter costs decrease.
“It’s heartbreaking when I look at the data for New York,” said Lu Chen, senior economist at Moody’s Analytics, the lead author of the group’s report quoted by CNN. “There is just no way that many families, depending on the household structure, can afford to live in any unit without sharing.”
The Panacea for Landlords: Rental Assistance
Rental assistance became a common term for landlords and tenants during the COVID-19 pandemic. It is a pivotal tool in making eviction diversion work. A government website dedicated to eviction diversion details how rental assistance and other government programs enable the program to work.
Of particular interest to landlords is the sentence: “Treasury strongly encourages grantees to require landlords that receive funds under the ERA [Emergency Rental Assistance], as a condition of receiving the funds, not to evict tenants for nonpayment of rent for 30 to 90 days longer than the period covered by the rental assistance.”
Will Eviction Diversion Become Part of the Rental Landscape?
Courts in Alaska, Indiana, Texas, Michigan, and other states have utilized types of eviction diversion programs. New Jersey has introduced the Comprehensive Eviction Defense and Diversion (CEDD) program to each of the state’s 15 court districts, using funds from the American Rescue Plan Act, which was initially introduced to help with the effects of the pandemic but is now being used for the housing affordability crisis. The long-term use of eviction diversion procedures depends heavily on whether rental affordability continues to be an issue in American cities.
Final Thoughts
Although evictions are down dramatically in Philadelphia while nationally, they have surged back to pre-pandemic levels, statistically, eviction diversion is working. Had the program failed, evictions would have only stalled temporarily. The program is targeted specifically to help low-income tenants, which has always been the most problematic rental sector for landlords.
On paper, less expensive properties where lower-income tenants live are the most profitable due to potential cash flow. However, this is rarely achieved due to high repair costs, labor-intensive management, and evictions/nonpayment of rent. It would be wonderful if this weren’t the case, as it is usually the entry point to landlording for many investors and often proves so traumatic an experience that it puts them off investing for good. Until a better solution is found, eviction diversion is the best way tenants and landlords can cope.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
