Moving fast and breaking things (mostly) doesn’t work in real estate
As someone who attended Stanford University and who’s tech startup participated in Y Combinator, I developed a strong bias in my 20’s towards moving fast, making quick decisions, and asking for forgiveness rather than permission. This mindset, while helpful for those who err towards indecision, extreme caution, or even inaction, can actually be a very risky mindset in the capital intensive and highly regulated industry of real estate. This feels especially true in small town communities with a particularly strong conservative mindset. As such, my transition out of tech and into real estate was a bit bumpy.
After winding down my startup because I couldn’t make the cost of customer acquisition work, I felt burnt out and had a desire to create meaning outside of building a tech company. I had been interested in real estate as a kid but getting started in real estate in California, especially the Bay Area, was prohibitively expensive. South Dakota on the other hand, was much more approachable. I began my real estate process by researching what it took to invest in small multifamily properties and realized it was doable with the kind of money software engineering contractors can make in Silicon Valley. So I made the transition back to South Dakota, started performing contract work, and began the hunt for my first property.
After finding the perfect starter property, a triplex, I set up meetings with all five of the major banks in town to see if I could get pre-approved for a loan. After each meeting, I was turned down. Their reasoning was that I didn’t have any experience managing real estate… Yet, paradoxically to me, how was I going to get experience if I couldn’t acquire the property? So I did what anybody with a Silicon Valley mindset might do — I hustled harder and bought this triplex in an all cash deal for $45,000.
This property was by no means the Ritz-Carlton but it was a start. Two of the tenants were college kids and one was a single dad. My first order of business was to make some small fixes and improvements as requested by the tenants, a couple windows were old and leaked air in the winter, a door wasn’t properly hung in its doorframe, and two of the sinks leaked water when washing dishes. So I pulled up YouTube, watched several videos, and talked to family members who had DIY experience. I was able to fix all of these issues, make a good impression with the tenants, and begin my process of being the “good landlord”. It was also at this time that I took my first shortcut.
It was required by city mandate that garbage services be provided via city or private, permitted garbage collectors. As someone with a “hacker mentality” who drove past a free dump site going to and from my new apartment building, I realized I could save a couple dollars through a very small time investment by hauling out this garbage myself. I saved $50/month and was able to keep an eye on the property just in case something needed my attention. In one sense, this is an acceptable “hack” because no one was harmed and all garbage found its way to the dump.
My next shortcut occurred after I bought my second building. There was a college student in the top unit who decided he no longer wanted to pay rent. For the first week he was late with rent, I sent him a text asking for an update. He said that he was getting his paycheck in a couple days and would pay then. I followed up a couple days later asking for an update and he said he had been sick and couldn’t get it deposited. I again followed up a few days later and didn’t receive a response. I checked in the next day and again received no response. The day after that I sent a text saying I would begin eviction proceedings if he was unable to pay rent that day. He responded by falsely saying that the apartment was infested with cockroaches, bedbugs, and that he would be reporting me to the state and planned on moving out ASAP. The next day, I went with a Notice To Quit that summarized our exchange and that I would begin the eviction proceedings. I found that the door to the apartment was wide open and that there was a mess everywhere I could see. As this was the first time I experienced anything like this, I was at a bit of a loss for what to do next.
I immediately closed the door and texted the other tenants in the building. Had they seen the tenant from upstairs? Did they know anything? One tenant responded that they had seen him moving stuff out. I followed up with a text to the tenant in question saying I had stopped by to post the eviction notice, noticed his door was wide open, and asked if he had abandoned the apartment. The tenant responded and said yes. I now officially had my first abandoned apartment on my hands.
According to state law, landlords are required to store all of the tenant’s property for 30 days regardless of whether or not it has been abandoned. I did not know this at the time so instead of storing it, I hauled all of the (former) tenant’s stuff to the dump. I spent two days cleaning up the mess, fixing what they had broken in the process of moving out, and readying the apartment to be rented out again. It was A LOT of work. I was essentially moving someone’s stuff by myself and having to perform a deep clean for someone who had intentionally left a huge mess. However, that’s one of the lessons I learned as a landlord — it was my property and ultimately my responsibility. Luckily though, there were no cockroaches or bedbugs, nor did the other tenants report concerns of any pest infestation.
Fast forward a couple years and abandoned apartment units had simply become part of the job. I had developed a process whereby I would contact the tenant and ask if they had moved out. If they responded yes or didn’t respond for a couple days, it felt pretty safe to assume that the unit was abandoned. This was especially true if the power was turned off or if there was garbage and rotten food in the unit. If all signs indicated that the tenant had left, I knew what I had to do to clean up the mess and get the apartment rented again.
This was also the scenario that led to the most difficult experience I had as a landlord. Basically, one of my tenants was a couple months behind on rent. As was standard for me, I went through the eviction process with this tenant. In this particular instance though, several hours after removing the tenant’s possessions and storing them in another building I owned for 30 days as a precaution, I found out that the tenant had gone back to the apartment. Not surprisingly, the tenant was very upset to find that the apartment was empty and that his stuff was missing. I found this out because a cop called me asking me about an illegal eviction. I told the cop that I thought the unit was abandoned because the tenant had been unresponsive and the apartment had been left in a trashed state with the utilities turned off. The cop asked if I still had his stuff and I said that I did. I then said the tenant owed a couple months of back rent and had failed to communicate with me so I had assumed the apartment was abandoned. This is where things took a wild turn though as this particular tenant was part of a legal incident involving his brother, which meant his lawyer was the county prosecutor. As a result, the tenant got the prosecutor involved and within days I had five criminal charges filed against me that carried a maximum sentence of up to 40 years in prison and resulted in an article on the front page of the local paper. If this was what “move fast and break things” meant in real estate, I wanted no part in it.
It was at this point that I got a criminal defense lawyer and started the process of defending myself. While I knew the accusations were false, I needed external evidence to exonerate me. Thankfully, we were able to show that the tenant had lied under oath to a grand jury about my charges. As such, all of my charges were dropped and, to my chagrin, a minor byline was written in the local paper proclaiming my innocence. The damage however had been done, a salacious front page article in the local newspaper outlining the accusations against me had damaged my reputation and made doing business in town much harder.
What became clear to me was that while it’s fine to move fast and break things when the impact on others is relatively inconsequential, when the circumstance involves someone’s home and there are established laws protecting the safety of that home, it is imperative to follow the law by the book. I was fortunate in this situation but it also drove home the point that in the world of real estate, moving fast and breaking things can be a recipe for disaster.