Some Houston apartment owners and operators say they are facing repeated blows as tenants defraud them, systems fail to protect them, and lenders turn a blind eye.
Bisnow/Maddy McCarty
RPM Living’s Christopher Cunningham, Lincoln Property Co.’s Aura Malpica, Partners Real Estate’s Scott Lunine, Better World Properties’ Terri Clifton and Blue Stream Fiber’s Kate Grutzmacher.
As elevated interest and flat rental growth make it hard for owners of older workforce housing properties to pay their mortgages, they are also seeing prevalent rental fraud that drives up bad debt, panelists said at the Houston Bisnow Multifamily Annual Conference on Tuesday.
More than 70% of multifamily landlords reported an increase in fraudulent rental applications at the end of 2023, and the Texas Real Estate Commission warned of a massive leasing fraud scheme last year. The issue is a lingering impact of pandemic-era eviction moratoriums, said Christopher Cunningham, senior vice president of operations for property management company RPM Living.
“The vast majority of them have evictions on their records,” Cunningham said onstage at the Hyatt Regency Houston West. “They have bad debt. They have cyclical, low credit. So unfortunately, they’ve now turned to crime syndicates.”
These enterprises create sham credit histories, Social Security numbers and other information to help applicants get approved for an apartment, he said.
Some of these documents meet Tier 5 qualifications, meaning they include embedded chip technology and are nearly impossible to distinguish from authentic documents. Artificial intelligence is making it easier to create high-quality forgeries.
“I have to spend more money on technology fighting those to keep them out,” Cunningham said.
Bisnow/Maddy McCarty
The Morgan Group’s Philip Morgan, Buckhead Investment Partners’ Kevin Kirton, Hines’ Ashley Prasse-Freeman, Greystar’s Ryan Terrell, Rockefeller Group’s Philip Croker and Legal 1031 Exchange Services’ Cindy Pham.
Sometimes fraud isn’t discovered until a resident fails to pay rent. Management then has to start the eviction process, and the federal CARES Act, passed in 2020, requires an extra 30-day notice before an eviction can be carried out.
“So now they’re collecting even higher debts against us, which then inverts my NOI,” Cunningham said. “Which makes my owners, who are already struggling with debt service and interest rates, to then take in less cash, which then puts us in a negative position.”
Most tenant protections available during the pandemic have expired, but judges continue to grant residents more time before finalizing evictions, Better World Properties Managing Partner Terri Clifton said. The property management company is working to educate lenders about the problem.
“Bad debt is growing, just based on our court systems,” Clifton said. “When we’re getting [underwritten] by the lender, it wouldn’t be as bad if we could educate them.”
The state of bad debt and residents’ financials is worse in Houston than in other markets RPM Living is present in, Cunningham said. Houston also has a high proportion of older workforce housing, the kind that is heavily distressed.
Greystar has tracked almost $500M worth of real estate that was foreclosed on in recent months, most of which were Class-B and C multifamily properties, Managing Director Ryan Terrell said.
Bisnow/Maddy McCarty
Wilson Cribbs & Goren’s Travis Huehlefeld, Z & Co.’s Ziad Kaakouch, JPI’s Miller Sylvan, Sudhoff’s Jacob Sudhoff and Disrupt Equity’s Ben Suttles.
Across multiple asset classes, the properties experiencing financial trouble were largely built prior to 1990, said Scott Lunine, a partner specializing in investment sales at Partners Real Estate.
Distress takes away from value-add and capital expenditures budgets, leaving properties in a state of disrepair. Houston officials say they’re working on addressing abandoned and neglected apartment complexes by holding owners accountable.
“That’s the biggest thing that we have to figure out in this city, is what we’re going to do with older product,” Lunine said.