In neighborhoods just off East campus, groups of undergraduates live in houses whose bedroom doors have rotted off, whose stairs have fallen through and whose cracks birth cockroaches. But for the students living in these houses, it isn’t the conditions that bother them as much as the prices. Many pay between $600 and $900 per person per month, excluding utilities, to lease large, older homes within walking distance to campus and owned by local rental agency Bob Schmitz Properties.
“These are probably the worst living conditions I’ll ever live in,” said one senior, Mitch. “It’s one of those things where we’ve had the house in our fraternity for so long that we’ve got to keep it. But now, it’s almost like the house is unlivable and they should just tear it down.” Mitch’s name and the names of all other students in this story have been changed to protect their identities.
A deeper examination of off-campus housing trends and preferences reveals that this imperfect market outcome—where price and quality don’t necessarily match up—is supported by a rather perfect storm of factors that push real estate business into the hands of one company invested in the type of real estate that undergraduates find most desirable.
Bob Schmitz got his start in the real estate profession through faith in a single book: “How You Can Become Financially Independent by Investing in Real Estate,” which he patted gently as he spoke to TOWERVIEW, peeling open the pages to reveal careful pencil notes along the margins. “I literally did what this book says,” Schmitz said, noting that he has no training in real estate, finance or contracting.
A physician by trade, he first tried to make money in 1985 by buying beat-up furniture, fixing it up, and re-selling it. Unable to turn a profit that way, he chose to apply the same strategy to Durham houses, patrolling the city for rental properties that looked so run down as to be unlivable. He’d page through the city housing records, contact the owners and maybe he’d purchase the property, sending in a maintenance crew to bring the conditions up to par so that he could lease it to tenants.
Now, Schmitz owns more than 270 properties in Durham, approximately 10 percent of which are rented by undergraduates, exclusively in the older neighborhoods just off East campus. Since he started buying properties, he said his business strategy hasn’t changed much.
“I still always say the same thing: ‘Hi, I’m Bob Schmitz. I own some rental property, and I’m looking for some more to buy. I wonder if you’d ever thought about selling this house,’” Schmitz recites. “I do it that way still, but now people call me.”
In his office, predictably located just blocks from East campus, he opened a thick photo album that turned out to be a scrapbook of the work he had done on the properties he has acquired over the years. A house on West Markham Street, one currently leased by undergraduates, appeared in photos from 20 years ago, its ceilings decayed, its walls damaged by creeping dark water stains, cabinetry fallen from the shelves.
“I wanted to take X, add Y to it and end up with something that was more than X plus Y and where the rents supported a debt service of X plus Y,” Schmitz said, explaining his rationale for purchasing homes in this state and attempting to refurbish and rent them.
No doubt Schmitz has made substantial improvements in many of his properties. But his undergraduate tenants argue that rent costs are unreasonable, given the fundamental quality of the house.
“Our house is ridiculously overpriced,” said one senior, Elliott, who pays $700 per month excluding utilities payments. “When we first moved in, it looked nice, but we realized that everything was actually falling down. There were roaches here when we moved in…. I haven’t said anything yet to them about the hole in the ceiling.”
Duke Community Housing Director Linda Moiseenko, who has spent nine years in that office, said rental properties leased through Bob Schmitz generally ride above market value. Moiseenko added that it’s usually the date of construction that drives real estate value in Durham—not so much proximity to campus—meaning that these old construction houses should be bargain-priced. “The market price is less than what Bob Schmitz is charging, and students may or may not know that, but they still go ahead and rent,” Moiseenko says. “Ultimately, the choice is the students’ choice in whether they’re willing to pay that amount to live in that house or not.”
Moiseenko’s only hypothesis to explain the above-market price of many Bob Schmitz properties, was that if the company could charge above-market, it probably would.
“If you can get the price, charge the price, right?” Moiseenko told me. “It’s not like somebody in the fraternity is saying, ‘Why are we paying this?’ They’re actually saying, ‘We want this house,’ so I think that’s part of it. It’s only when somebody vacates where all of a sudden something’s available and the company has to say, ‘Can we lower this price, or do we think we could get another group of students living here?’”
I asked Schmitz how he sets the rental price for each of his units, imagining it to be some rough calculus based on the varied characteristics of the property. “I don’t determine the prices,” Schmitz said. “The market does. I just try to find out where it is, and we obviously want to set the rents as high as we can.” He then raised this point: If the prices of his rental properties are too high, why do tenants continue to pay it?
Bob Schmitz Properties is currently at 100 percent occupancy, Schmitz said, suggesting that his prices may in fact be too low, given the demand for the product. But Schmitz’s application of supply and demand theory is based on the assumption that the market for the kind of housing he invests in is free and competitive. Rather, Schmitz has something of a monopoly with the type of house undergraduates—particularly seniors in fraternities—are seeking.
Students interested in leasing houses off-campus have a defined and predictable set of preferences, sources said. Generally, they want to live within walking distance to East campus for accessibility and convenience, and they want to live with a group of friends, Moiseenko said. When Moiseenko applied those two criteria in a search for 4+ bedroom listings available through the Duke Community Housing web site, she yielded 10 results—seven of which were Bob Schmitz properties.
Conversations with tenants suggested Schmitz’s company as the only choice for undergraduates who prefer to live in a large group and within blocks of East campus.
“Bob Schmitz is the only company that owned houses around here that were big enough for us,” Elliott said. “We found a couple of sweet houses that were probably 10 minutes away that were about the same price and absolutely awesome-looking…But we didn’t want to be 10 minutes away from campus, because no one would come hang out.”
Two of the remaining three listings were other property management firms that might not be open to leasing to undergraduates, she said, introducing another element contributing to a lack of competition among the housing market for undergraduates.
Several off-campus real estate agencies will not allow undergraduate tenants, generally out of concern over their ability to pay and to maintain the properties, Moiseenko said. Until recently, many ads posted under the Duke Community Housing site openly stated, “No undergraduates.” Moiseenko decided to exclude this type of comment from the ads, concerned that it would send a discriminating message that is out of keeping with a community-oriented resource like the Duke Community Housing Web site.
Although equal-opportunity housing policy prohibits discrimination against groups as defined by gender, religion and sexual orientation, property managers may discriminate freely against groups as defined by educational status or age, Moiseenko said. “Undergraduates are not a protected class,” she said, noting that some off-campus apartment complexes have instituted minimum age requirements to exclude undergraduates.
But as far as his tenants—and to some extent the houses he purchases—go, Bob Schmitz is more indiscriminate than other real estate agencies, a factor that gives him an advantage among undergraduates who may be unable to find other agencies from which to rent. “We don’t have policies against undergraduates,” Schmitz said. “We don’t have policies against married couples, against children or against pets. The only animal we don’t allow is ferrets,” he continued, citing a bad experience.
Another housing policy that Schmitz could benefit from disregarding is the Durham city ordinance that prohibits more than three unrelated individuals from residing together. Schmitz has several properties with four or more bedrooms currently occupied by undergraduates, who are likely not related—posing the question of how such arrangements can exist legally, pursuant to the ordinance.
“We rent to three people,” Schmitz said. I told him I was aware of several houses where three tenants sign the lease, and as many as four additional tenants reside there unofficially. “We don’t knock down doors and make bed checks,” Schmitz said. “And I don’t think that laws should be based on people’s relationships to each other. They should be based on people’s behavior.”
Many students who are seeking off-campus houses—particularly those in fraternities— likely would need to lease from an agency that treated that ordinance with some degree of flexibility.
“I like the idea of us all being able to live together, and I think the reason people want to live together in a house is because it’s the closest thing this school has to actual frat houses, so students are willing to take a hit,” said another senior, Tripp.
For students living in properties long home to members of their fraternity, the house they rent is iconic among alumni, who pressure the students to remain there for tradition’s sake.
“The logic is that if you’re an alumni and you graduated six or seven years ago and don’t know anybody, you could still just show up at the house,” Tripp explained. “But then again, how often do alumni just show up at your door?” Still, this sentimental investment in the property can keep fraternity members less price-sensitive than the average tenant.
Looking at Schmitz’s competition by neighborhood, in the areas off of East campus, he has no rival. “I don’t know anybody who’s doing just what I do,” Schmitz said, explaining that Guy Solie, owner of Trinity Properties and formerly a direct competitor, had recently sold off many of his off-campus rental properties to the University. Although Moiseenko observed a few listings by other real estate agencies in these neighborhoods, she said it is apparent that Schmitz owns by far the most of any agency.
Yet even in a situation where Schmitz has a near-monopoly on the type of housing available to and preferred by undergraduates, no one is forcing these students to rent from his company. Christine Pesetski, assistant dean for Off-Campus and Mediation Services, said undergraduates’ housing decisions are often grounded solely in friends’ word-of-mouth.
“That’s the only name we know of,” one tenant, Adam, said of Schmitz.
“Do I wish they would use other resources? Absolutely,” Pesetski said, noting Duke Community Housing and Residence Life and Housing Services as organizations who are most amenable to undergraduates’ housing inquiries. This imperfect access of information, coupled with imperfect competition in the sector of the housing market that appeals to undergraduates, that yields a price-to-quality ratio some students have found barely tolerable.
“Whenever we have parties I wonder if the floor will fall through,” Adam said. “But as a guy, it’s a fraternity house—what more can you expect?”
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