There’s been a IMPORTANT RULING in federal court that’s big for owners of rental properties… and this one is all about MANDATORY GOVERNMENT INSPECTIONS of rental houses. If you’re a prospective owner of rental property, pay close attention to this one. I’m Bryan Ellis. This is episode 152.
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Hello, SDI Nation! Welcome to the podcast of record for savvy self-directed investors like you!
If you’re a rental property owner with property located in a jurisdiction that has mandatory rental property inspections – particularly in the jurisdictions that FORCE the inspection and DEMAND that you pay for it, too – you know how much of a problem those inspections can be, with very substantial, very detailed, and sometimes very ARBITRARY standards which can cost property owners thousands of dollars, even for very well maintained properties.
Many locales even include CRIMINAL penalties for landlords who fail to comply with the inspection requirement. That’s right… I said CRIMINAL penalties. It’s a big deal.
But there’s a problem… a problem for jurisdictions that do this sort of thing.
You see, there’s this little thing called the Fourth Amendment to the United States Constitution. That’s the one that guarantees the rights of citizens against unreasonable search and seizure of their persons, their papers, their effects and YES… their HOUSES without probable cause as evidenced by a warrant.
Now, I realize that some of the more bleeding heart types out there will immediately think that it’s a good thing for the government to be able to force their way into a home, without being asked or welcomed, and to inspect that property for whatever purpose deemed suitable by the government. But I, my friends, am not a bleeding heart. I think – and the law agrees with me – that you have rights as a property owner, and when a government forces its way into your property – particularly under the threat of criminal prosecution, and under the demand that YOU PAY for that forced inspection – well, then your rights against unreasonable search and seizure have been trampled for both landlord AND tenant.
Thankfully, a federal court judge for the Southern District of Ohio recently came to the same conclusion.
The case was called Baker vs City of Portsmouth, which was handled by the 185 Center For Constitutional Law on behalf of four rental property owners and one tenant.
The bottom line of this case is that, surprisingly but happily, the court did it’s primary job: To protect citizens – in this case, individual investors like you and me – from unreasonable government encroachment.
Ahhh yes… you think this is a genuine public safety issue, don’t you? It’s not, folks. Here’s the deal: The honest observer will see that these forced inspections have two purposes: First, to generate revenue for the government – both directly by charging inspection fees, and indirectly by driving spending for repairs which is then subject to local sales tax – and second, to directly and substantially influence the “type of people” who live in an area. Yes, that’s right… it’s incredibly easy to see where an inspector can harshly apply an arbitrary standard while inspecting the property of an “undesirable” resident, thus effectively forcing that tenant to reconsider where to live and/or own property.
Surely the government wouldn’t do that to you, an honest, decent individual investor… would they?
Well, now they definitely won’t in the city of Portsmouth in Ohio. And frankly, it’s quite reasonable to see how this legal rationale could spread to other parts of the country as well… there’s just not a lot of gray area in this.
It was so cut-and-dry, in fact, that the judge in this case not only ended the unreasonable searches being performed by the city of Portsmouth, but he also allowed a related lawsuit to continue, in which landlords are suing the city for reimbursement of the inspection fees they’ve been forced to pay over the years… fees which were, as you’ll recall, enforced under threat of CRIMINAL prosecution.
But folks, don’t get too excited about this just yet if you live in an area with forced inspections or other encroachments against property owners. The reality is that this case has absolutely no bearing on anyone other than the parties to the case. Only if it reached the appellate court level with the same result would this ruling apply to the entire 6th circuit. The only way to make it national would be for it to go to the U.S. supreme court with the same ruling.
Folks, this is why one of the standards I look at when choosing a local market for buy-and-hold real estate is the REGULATORY ENVIRONMENT. Look, none of us like to think about statutes, regulations or law enforcement… but you’ve got to consider it. Look at it like this: What if you had the choice to invest in two basically similar properties… similar cost, similar yields, similar expectations… but one of them was located in a place like Portsmouth, where the local government is overtly overbearing and uses law as a WEAPON against its citizens?
Well, it’s obvious… you’d choose not to invest there. You’d go with other options. That’s why a KEY COMPONENT of choosing a good locale for your investing is to evaluate the regulatory environment. The fundamental question is this:
Does the locale you’re considering view investors and business people as ALLIES or as ADVERSARIES. Thumbtack – a cool service for connecting consumers with specific service providers in their areas – provide an annual survey that ranks relative “friendliness” of states and cities to small businesses. The results?
LEAST friendly states are California, Illinois, Connecticut and Rhode Island, followed closely by New York, Massachusetts and Pennsylvania.
So, I have a question for you: When you perform due diligence on a property, do you include an analysis of the regulatory environment of the target market? If so, what factors do you consider? This is episode 152, so go over to SDIRadio.com/152 to share your comments about this topic. We’d love to hear from you!
My friends, invest wisely today, and live well forever!
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