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A landlord gets absolutely crushed by vacancy. If they accept the higher price suggested by the software, they risk being vacant for longer. A month of vacancy

by tevon 2y ago

A landlord gets absolutely crushed by vacancy. If they accept the higher price suggested by the software, they risk being vacant for longer. A month of vacancy is generally not worth 100 extra dollars a month. So if the price is too high, the landlord has a strong incentive to drop it. The price suggestion isn't the issue, the lack of stock absolutely is.

mint2 2y ago
My understanding is that with the way commercial loans work, the landlords are actually incentivized to keep things vacate rather than lower rents. Is that wrong?
- acchow 2y ago
  This is/was a real loophole which I believe was created by low interest rates. The abundance of cheap money encourage lenders to tell their clients to make up approximate rental values. But with tightening credit, I can’t imagine this practice can last
- lotsofpulp 2y ago
  Correct, that is wrong. Lenders aren’t stupid, they want to see cash flow. Commercial mortgages will come with terms requiring a minimum debt service coverage ratio (DSCR) to avoid default: https://www.investopedia.com/terms/d/dscr.asp https://www.investopedia.com/terms/d/dscr.asp If a landlord leaves units empty, their income drops, so their DSCR drops, and the lender can consider the property in default. That does not mean a lender will foreclose or otherwise take control of the property, they also might not want to get involved. But it does give them negotiating power, and is something borrowers want to avoid.
  - mint2 2y ago
    But the DSRC doesn’t contract my understanding, it just shows there’s a floor to the number of unrented units. Actually considering the DSRC it seems a large landlord would be more unlikely to lower rents unless desperate. Otherwise as people renew or lease at the lower rate, they’ll have less and less buffer
    - lotsofpulp 2y ago
      You claimed landlords are incentivized to keep spaces empty. Empty means zero income. DSCR with zero income is less than DSCR with some income.

by tevon 2y ago

mint2 2y ago

My understanding is that with the way commercial loans work, the landlords are actually incentivized to keep things vacate rather than lower rents. Is that wrong?

acchow 2y ago
This is/was a real loophole which I believe was created by low interest rates. The abundance of cheap money encourage lenders to tell their clients to make up approximate rental values. But with tightening credit, I can’t imagine this practice can last
lotsofpulp 2y ago
Correct, that is wrong. Lenders aren’t stupid, they want to see cash flow. Commercial mortgages will come with terms requiring a minimum debt service coverage ratio (DSCR) to avoid default: https://www.investopedia.com/terms/d/dscr.asp https://www.investopedia.com/terms/d/dscr.asp If a landlord leaves units empty, their income drops, so their DSCR drops, and the lender can consider the property in default. That does not mean a lender will foreclose or otherwise take control of the property, they also might not want to get involved. But it does give them negotiating power, and is something borrowers want to avoid.
- mint2 2y ago
  But the DSRC doesn’t contract my understanding, it just shows there’s a floor to the number of unrented units. Actually considering the DSRC it seems a large landlord would be more unlikely to lower rents unless desperate. Otherwise as people renew or lease at the lower rate, they’ll have less and less buffer
  - lotsofpulp 2y ago
    You claimed landlords are incentivized to keep spaces empty. Empty means zero income. DSCR with zero income is less than DSCR with some income.