Sunday, September 5, 2010

Can't Sell - Then Become a Landlord

As we come to the end of the summer selling season, there are many people who are about to become an unexpected landlord.  This is a tough decision for many, in most cases becoming a landlord was not part of the plan when a house was purchased.  Fortunately for me, my father taught me to value a house in a different way than most.  Not only did I look at a house I am buying as a place to live, but I also looked at the exit strategy, I analyze how easy it would be to sell and if I cannot sell, how would this house work as a rental home.

Not many people do this analysis at the beginning, so when a house doesn't sell they are not ready from an analysis of pro's and con's on their available options.  Also, many people wait until after a home has been on the market an extended period of time before they explore the option of becoming a landlord, so when they do they are highly stressed about their initial plan going awry.

Here is what happens when a house doesn't sell and a homeowner brings up the option of it becoming an income property.  First they ask their Realtor who has been trying to sell the house for them.  Most often this is the wrong person to ask, because a Sales Agent does not have the expertise to provide proper guidance and/or they have conflicting motivations.  If the Realtor honors their ethics and their fiduciary to their client this is the answer the Realtor should give, they should say, "Being a Landlord, leasing a home or being a Landlord's representative is a specialized area of Real Estate, I would be happy to refer you to a specialist in that area so you can get the most current information on the risks and benefits of being a Landlord".

There are some Realtors who have the proper experience to provide expert guidance, but the fact is the the vast majority do not.  You can count on one hand the total firms in the US with the experience and expertise you will find at ONEprop.  Local knowledge is very important in all Real Estate, so I will be the first to say you need to be working with a local expert, while our expertise is vast, it is of utmost value in the markets where we operate.  I will discuss later in this note what to do if you have a need in a market where ONEprop does not yet operate.

What most Realtors actual say diverges from what they should say.  I will not go into great detail about what I have heard, but if you are interested at all in understanding the risks and advantages of being a Landlord you should go to an expert.  A Realtor who specializes in selling homes has access to even more horror stories of people who were hurt by being a landlord, but they generally do not have the perspective or balance which comes from providing the service of management day in and day out.  This may provide a potential Landlord with a distorted view of reality.  The Realtor may also be concerned they have invested and absorbed costs for a sale which is going nowhere.  Your listing agent may offer to find a tenant, for a fee, but not have the experience or guidance to properly advise on what to do with a tenant once the tenant moves in.

The recognized experts in the field of single family leasing and management are members of the trade organization National Association of Residential Property Managers (NARPM).  Even within this organization you will find varying levels of expertise.  Some members specialize in a specific part of town or a specific type of house.  Some focus on small (4-12 units) or large multi-family residential and some remain exclusively managers of single family homes.  Some NARPM members focus on homes with a certain price point and others have the expertise and staff which allow a broader spectrum of support.

If you are interested in becoming a Landlord, then you should call a couple of NARPM members who operate in the town where your prospective rental is.  You should interview them as you would a prospective employee.  Your focus should be on the value you will receive based on your needs.  Most NARPM members will be glad to discuss the advantages of doing it yourself versus hiring a professional.  Once you find a NARPM member that you want to work with you need to coordinate a working relationship between them and your listing agent and a transition once a tenant is found.  Every NARPM member I know has a process for transitioning the relationship back to your sales agent when you are ready to sell in the future, so your agent can be more comfortable that their investment in your relationship is protected.  At ONEprop it is not unusual for us to have a "dual listing", where your sales agent tries to find a buyer at the same time as we try to find you a tenant.

There are a couple of myth's which need to be debunked.  One is that "you are throwing your money away on rent" if you don't buy a home.  This is easier to debunk now that the potential downsides of home ownership has hit so many people and hit them hard.  In many of our markets we actually have more renters than buyers, which is driving up rent and driving down costs.  It is very hard to do this next thing, you need to do your analysis about being a Landlord based on what you would pay for the home if you were to buy it right now.  The other thing to think about, if you were able to sell and get cash out of the house, where would you invest it right now and at what return?  The numbers may work out that the best thing you could do is transform your residence into a rental.

If you actually do the math, unless you have certain specific needs, you are often better off financially if you were to rent a home for your personal use and invest money into a rental property.  This is because the US tax law allows landlords to deduct a greater portion of the expenses of home ownership because tax law treats threats an investment property more like a piece of equipment in a factory and provides advantages (deductions) for those willing to invest in something which produces income.

Another myth is that "tenants will destroy your house".  There is empirical data which supports that tenants are harder on a home than an individual owner, meaning more wear and tear, but the total impact is actually fairly minor.  The bigger factor on the wear and tear is tenant turnover.  Every time someone moves in and out they use the house differently and this causes visible wear.  If you have a single tenant over a ten year period you are unlikely to see much more wear and tear then if a person of similar habits actually owned the house.

ONEprop manages over 3,000 single family homes so we are in the unique position of having enough feedback to validate or debunk this myth of tenants destroying a house.  There is a risk that a tenant can do damage beyond what they provide on a security deposit.  That being said, when a tenant fulfills the term of their lease less than 1 in 10 tenants have damages which exceed their security deposit and 90% of this is less than $1,000.  The number one expense is not for damages, but for lost rent on a broken lease.  The second biggest expense is to repair a lawn which was not properly maintained and the third is for excessive wear on paint or improper touch up.  None of these things fall anywhere in the territory of scary stories people will use as a reason to not be a Landlord.  Make no mistake, there is a risk, but you are probably more likely (in Texas) to suffer the same financial damage by getting hit by an uninsured driver.

The number one thing our clients do to minimize risk is to hire us.  Our processes and procedures at every step of the way are designed to use all of our experience to minimize risk.  This starts with how a house is listed and at what price, background checking on prospective tenants and tenant management once they move into the home.  Our collection procedures are superlative and in the event a tenant does not pay rent we are the best in the business at finding a replacement tenant at the least cost to the Landlord.  As a Landlord you have a right to a tenant who pays rent on time and follows the rules, we help make this happen for you.

If you are a prospective Landlord with questions on being a Landlord, is being a Landlord right for you, if you should do it yourself or hire out, please contact me or any other NARPM member.  I must admit that I have had clients where I explained in great detail why they should not be a Landlord, either because of the house or their own emotional make up.  Not every house should be a rental and not every person should be a Landlord.  If I don't believe that being a Landlord is  right for you I will definitely tell you as I do not want to work with an unhappy client.  Also, if you are a Realtor reading this blog and want more education on how to provide better advice and guidance to your clients I am happy to speak to you individually, or at your office.

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