Putting Your Vacant Rental Home on the Market? 3 Steps To Be Prepared
The news has been all positive for home sellers. And some of you have been ready to sell some of your rental homes for the last 5 years!
The thought equation about selling your rental home looks like this:
Desire to Sell + Rapidly Improving Market + Now Vacant Rental Home = Time To Go To Market?
That is the big question. If the answer is “I think so!”, here are the next steps.
Talk to your property manager and have them run some comparables on your property. If it is determined that you have the room (difference between your rental home’s value and loan balance) to walk away from a sale with a profit (or an acceptable loss), you may decide you want to make a go at it.
If this is your situation, how do you prepare? Here are 3 easy steps:
1. Make sure you have the needed liquidity (cash) – Part 1: You’ll need to fix up your home to market standards. This may include a new paint job, new carpet, professional cleaning, and any other needed repairs.
2. Liquidity- Part 2: You should have a minimum of 4 to 6+ months of mortgage, HOA dues, lawn care, and utility payments at your disposal so everyone still gets paid during this time of vacancy. Unfortunately, you won’t have a tenant making the payments for you while it’s vacant on the market.
3. Decide what your boundaries are:
A. What is the lowest price you are willing to sell for (your property manager can help you factor in what your selling costs are)?
B. How long are you willing to wait to sell it before going back to the rental market?
Once these 3 criteria are considered and you are comfortable with them, it is time to go to market and trust the marketing prowess of your property manager. Then a new equation emerges:
Fixed-up home + Competitive Price + Funds Necessary to Execute the Sales Strategy = Sales Success!
Selling a rental home is a process that takes time and money. Successful execution depends on having the necessary resources and patience to see it through. Good luck!
Brett Furniss is President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords, managing single-family homes, Uptown condos, and town homes in the Charlotte-Metro Area. BDF Realty’s services include property management, home fix-ups, and home sales, including Rent-To-Sell (“When You Need a New Solution to Sell Your Home”). His newest book is A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!) which is available on-line now.
Learn MoreSelling Your Rental Home With 24’s Villain, Habib Marwan
I was watching an old episode of 24 last night (Season 4 for fellow aficionados) and was intrigued by the moves of Habib Marwan, the terrorist leader. In order to distract Jack Bauer and the Counter Terrorist Unit (CTU), he proposes to trade captured CTU agent, Jack Bauer, for the teenage son (Behrooz) of known terrorists, Dina and Navi Araz.
Marwan actually has no use for Bayroos, but CTU doesn’t know that. The trade’s main purpose is to distract and slow down CTU from figuring out the next stage of his nefarious plan (stealing a stealth bomber and blowing up of Air Force One with President Keeler). He wants them to waste their time and resources going after the wrong lead trail with the Behrooz-Bauer exchange. The purposeful misdirection almost works…
I see this misdirection, though unintended, in home sales sometimes. As a home seller, you don’t want to distract and slow down potential buyers for your rental home! Like Marwan, you must decide who your real target is and focus. Marwan never wavered on his priority on taking down Air Force One. He used misdirection to achieve his main goal.
However, don’t use misdirection when selling your rental home! To avoid this, the decision must be made on whether to target owner occupants or investors; going after both (especially when the facts on your home won’t support a good selling proposition to one of the parties) is a waste of time and resources. CTU didn’t have time to track leads to find Marwan AND conduct the exchange for Jack Bauer. This misaligned strategy cost President Keeler his life and was a major intelligence failure.
How do you know whether you want to target an investor or an owner occupant as a buyer for your rental home? The correct strategy to utilize hinges on the answer.
Here are a few questions to ask to determine the appropriate strategy to use:
1. What is the ratio of the monthly rent versus the asking price? In Charlotte, investors ask for anywhere from .008 and up. To get this number, divide the rent by the home price. Ex: On a home for sale for $100K and a rent of $995/month, the ratio is .00995. A ratio near .01 is excellent. A ration closer to .005 – .006 will make it tough to sell to a cash-flow investor. For homes, subtract the monthly HOA dues (or annual dues pro-rated per month) from the monthly rental amount; this usually significantly lowers the ratio and is why many investors shy away from townhomes and condos.
2. What type of discount can be offered on the home? If it needs to sell for full retail, the owner occupant buyer is the way to go. If there is room to discount the home off of retail price, it may be a good candidate for an investor.
3. How much money can you afford to put towards fixing the home up? If it is a lot, then you have the option of fixing up the home nicely and asking for full retail price. If the funds are not available, investors are flexible on repairs if the deal on the home is enticing in terms of cash flow ratio (#1) and discounted off of retail price (#2).
4. Is there a tenant currently in the home? If so, this is a good candidate to sell to an investor and save the holding costs of vacancy. It costs nothing to have a home on the market while a tenant is in it, though there are some logistical issues for showings.
So, the ideal selling conditions per buyer type…
Investor: good cash flow ratio, home discounted, limited repairs done, tenant in property
Owner-occupant: poor cash flow ratio, full retail price, fix-up completed, empty house
Once it is determined who the ideal buyer is for your rental home, the marketing should flow from this decision. So…
Investors: offering your home at local investment clubs, ad verbiage including “signed lease and expenses log provided” in the listing as well as other pertinent investment factoids, posting on real estate investment websites, informing property managers and Realtors who know investors looking to acquire rentals that your home is available and a good deal
Owner-occupants: MLS and other marketing a typical Realtor would provide
Having an aligned strategy to your target market will save money and in Marwan’s case, take American lives! Fortunately for US citizens, Jack Bauer is good at focusing on his target (Marwan) as well…
Brett Furniss is President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords, managing single-family homes, Uptown condos, and town homes in the Charlotte-Metro Area. BDF Realty’s services include property management, home fix-ups, and home sales, including Rent-To-Sell (“When You Need a New Solution to Sell Your Home”). His newest book is A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!) which is available on-line now.
Learn More3 Reasons Why LeBron James Is Like A Superstar Tenant
“LeBron James Picks Heat; Cavs Owner Erupts”
(ESPN headline on 7/9/10 after “The Decision”)
When LeBron James, the best player in the NBA, chose to leave the Cleveland Cavaliers and sign with the Miami Heat in the off season before the 2010 season, it had big consequences for the rest of the league. No one knew this more than Dan Gilbert, the owner of the Cavaliers. His team, which had been one of the best teams in the league with James, was now left decimated and would wind up becoming one of the worst.
Gilbert was so upset that James left he couldn’t hide his disgust, disappointment, and anger in his letter to Cavalier fans. “This was announced with a several day, narcissistic, self-promotional build-up culminating with a national TV special of his ‘decision’ unlike anything ever ‘witnessed’ in the history of sports and probably the history of entertainment. Clearly, this is bitterly disappointing to all of us. The good news is that the ownership team and the rest of the hard-working, loyal, and driven staff over here at your hometown Cavaliers have not betrayed you nor NEVER will betray you.”
Gilbert’s reaction after losing his team’s superstar was raw, genuine, and understandable.
Good tenants are property managers’ superstars. To be a successful property management company, superstar tenants need to stay put!
LeBron James is like a superstar tenant because he:
1. Makes (property) management look good. (Pays on time, takes care of repairs on their own, and get along with people in their community- no headaches)
2. Brings more fans to the game to make the team more money. (Happy owners bring referrals to the property manager)
3. Makes winning look easy. (“There never seems to be any issues and we’ve used this company for years!”)
4. BONUS +1: Needs to be retained!
I can feel for Dan Gilbert. As a property manager, I feel uneasy and disappointed when a good tenant leaves us to rent with another property management company too. We are only as strong as the tenants on our team. I want to make sure they know they are appreciated and that we want to keep them forever.
For organizations to be strong, they need superstars (like LeBron), be it in the NBA or a property management company in Charlotte, NC. We should “erupt” too if someone poaches one of ours!
Brett Furniss is President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords, managing single-family homes, Uptown condos, and town homes in the Charlotte-Metro Area. BDF Realty’s services include property management, home fix-ups, and home sales, including Rent-To-Sell (“When You Need a New Solution to Sell Your Home”). His newest book is A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!) which is available on-line now.
Learn More“Will You Buy My Rental Homes Now?” Big Buyers Say, “Yes, But…”
The media is abuzz with news of springtime in the housing market! Headlines trumpet:
Sales And Average Home Prices Are On The Rise Again!
Bidding Wars Are Back!
Good times appear to be back in real estate land and you will soon see your local Realtors rolling around in the hottest and newest automobiles again (we don’t use the lowly term “cars”- that’s recession terminology). Real estate school enrollment is up and the housing market is sizzling.
And you’ve been holding on to your rental properties tightly, making the repairs, paying down the loan, and living the ups and downs of your tenants’ employment statuses for the past 6 years. It’s been tough, but now it is time to get rewarded, right? Based on news reports, it is time to sell your rental homes and make some dough.
Or is it? As always, that depends.
The homes that are in bidding wars where buyers are making above asking price offers are typically in high-price, highly desirable areas, which are not where most rental homes are (it’s OK- those homes are tough to get to cash-flow on a long-term basis anyway). But what about the average rental homes that we hold in our portfolios? Can we sell them now?
One type of buyer that is very active in the market now says, “Yes, but not for the price you want. But not so off the mark that you won’t consider our offer.”
This type of buyer is the big institutional investors (Big Buyers) who are invading the local real estate markets armed with tons of cash. They employ some real estate agencies to find affordable homes for sale, send lowball offers (typical haircut of 30% from what I’ve seen), and snap up the ones that accept.
I view this positively. Besides the obvious disadvantage of below asking price offers, they bring a lot of advantages. They pay all cash (it’s so nice when financing snags doesn’t crush deals in the last minute), close quickly, don’t ask for closing costs, and don’t ask a lot of questions. They are really easy to work with; the deals happen rapidly and easily. The only real question is if the price is acceptable to both parties.
So how does this work in practice? Here are 3 examples on 2 houses we listed for sale (some details have been changed slightly):
House #1: On market for $89K
First big buyer (BB #1) offers $55K
We counter at $94K
BB #1 doesn’t dignify our counter offer with a response
BB #2 offer on house #1: $70K
The same day we receive word we have another offer coming in
We inform the BB #2 of the other offer and ask if they would like to submit their best and final offer
BB #2 responds that $70K is their final and best offer
We let them know the other offer was accepted and theirs was declined
House #2: On market for $105K
BB #3 offers $85K
We counter at $104K
BB#3 comes up to $90K
We counter at $100K
They come in at $95K final offer
Offer accepted at $95K
The BB’s are looking to accumulate properties and are not looking to nit-pick on repairs. Sure, if something is majorly flawed, they will ask you to fix it and/or cancel their offer. But the small repair requests that are typically negotiated by owner-occupants aren’t asked for; the BB’s just fix it up themselves. As stated previously, when the price is agreed upon upfront, the deals typically fall into place easily.
To sell or not to sell? That is the question. But, for average rental homes, be thankful it is now an option!
Brett Furniss is President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords, managing single-family homes, condos, and town homes in the Charlotte-Metro Area. BDF Realty’s services include property management, home fix-ups, and home sales, including Rent-To-Sell (“When You Need a New Solution to Sell Your Home”). His newest book is A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!) which is available on-line now.
Learn MoreCharlotte Property Management Monthly: Investment Confessions of a Property Manager- 4 Takeaways
Many property managers first get into the property management business because they own investment properties and are already managing them. “Why not add a few more? The infrastructure is already in place!” This rationale brought me into this exciting world of property management.
Becoming proficient at investments is an ever-evolving process. It takes a lot of easy education (reading the investments guru rags) and hard education (making costly mistakes with leveraged property investments).
This current economy has really put investment decisions I’ve made in the past 8 years under the microscope. In a hot real estate market, investment decisions have a lot of leeway to succeed. The converse is also true in a bad economy and leads me to ask questions like: Did the properties I bought maintain value (relatively speaking) or did I misread the area? Do renters want to live in these homes when much more choice became available? Can I sell any of these investment homes in a flat or declining real estate market?
Tough questions. And, unfortunately, some tough answers.
When I look at my investment decisions, I’ve come away with these 4 takeaways:
1. Cash (flow) is always king. Properties always cost more in terms of vacancy, repairs, and fix up than expected. I remember an investment guru telling me, “If you need to pull out a calculator when analyzing a real estate deal, the deal isn’t good enough to buy.” Amen to that. When declining rents hit, I was hit hard as well.
One effective tool I’ve used is to liquidate some 15 and 30-year mortgages into interest-only. This has dramatically helped cash flow on my property portfolio. When the economy improves, interest rates will rise and I may need to pay the piper. But then I can look at refinancing or selling the investment homes in a rising real estate market, as opposed to selling in a buyer’s market.
2. Buying cheap isn’t always good. For a while, I loved telling the story about buying a home on my credit card. Not anymore. The problem is the home isn’t in a great area (making it tough to rent or sell) and has needed significant fix-up funds through the years. Sometimes there is a reason why homes can be bought on the cheap.
I like to defend this decision by saying, “At the time I bought it, it was a great deal in a transitional area on the rise.” I must have missed the newsflash at the time; in an overheated real estate market, almost every area is considered “on the rise”. This reminds me of two sports quotes that seem apropos:
a. “Having ‘potential’ means that you haven’t accomplished anything yet.” I never read any articles on Michael Jordan’s potential, but rather about his performance.
b. “Yeah, he has great talent. But there are a lot of talented people in prison.”
3. I like a well-rounded real estate investment strategy; it does the body good. We get many calls from prospective clients looking for options on what to do with their properties. I’m with you! Options are good! Good options are even better!
My idea of a well-rounded real estate portfolio consists of this:
A. Nice, expensive homes that will rise when the market comes back. Cash flow won’t be great, but will generate a nice chunk of cash when the market goes up. Then they need to be sold!
B. Cash flow properties that generate hundreds of dollars of positive cash flow a month. These will subsidize other properties that aren’t cash flowing. They probably won’t see any great amount of equity build-up (even in a rising market), but they will keep you solvent and smiling!
C. Long-term holds will be nice investment pieces for retirement. They are solid homes in solid neighborhoods that are really a mixture of the A & B properties above. They will give average cash flow and equity build-up, but should be easy to rent to good tenants for a long time.
4. The most important takeaway (by far) is to buy investment homes right (aka at a big of a discount as possible). This can cover up a whole lot of other mistakes. As another investment guru told me, “You make your money when you buy. Period.”
Best of luck with your real estate investing!
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Monthly: Incentives: Knowing Why the Chicken Crossed the Road & Why Fees are Good
Q. Why did the chicken cross the road?
A. There was bird feed there
B. A coyote was chasing him
C. He saw a hot “chick” on the median
D. To get to the other side
Answer D is the response that makes this a legendary “joke” (somehow…). Answer D is also very incomplete. Everything happens for a reason; no one does things without some type of incentive being involved. I mean, the chicken wouldn’t care about getting to the other side if he didn’t have a reason to do so. What was its motivation? What was the incentive the chicken was pursuing? A, B, or C answers make much more sense to me in answering the “why” question! They address the chicken’s needs:
A. Hunger
B. Safety
C. Love (or lust)
In business, incentives usually mean money. If 90%+ of businesses fail for lack of cash flow (lack of money incentives), then the ones that survive make sure they are getting enough cash incentives from their customers. Obviously, this isn’t a one way street; the businesses are offering enough value in return so these payments are a win-win deal.
So now that is established, what can incentives tell you about a company? Some charge for certain services, some don’t. Why not just take the free services when they’re offered? Cheaper, especially in tough economies, seems like the best way to go. Right?
Well, incentives can be telling; company pricing and their fees can tell you what they believe they do well and what they don’t. So, in terms of getting great results, paying fees can be very important! Fees motivate companies to do what you want them to do.
Reading into incentives (aka company pricing) is interesting and generally informative. Let’s look at examples of this from real estate and other businesses:
1. When a tech company sells pricy software and then offers free support with it, I’d expect the software to be good and the support to have long hold times. If support costs extra money monthly and can be cancelled at any time, the support will probably be pretty good.
2. If you ask a friend to pet sit Fluffy as a free favor to you, your friend will probably be late and leave early; unfortunately, most friends will do the minimum required! If you hire the most expensive pet sitter in town, chances are Fluffy will be treated like Benji on a movie set.
3. If property management companies don’t charge you to sell homes under management, they are probably not going to actively seek to sell your home to the tenant.
4. If you offer your real estate agent 7% commission, they will probably be incented to work harder to sell your home. Many people will try to get their agent down to 5%, which is a complete misread of how incentives work.
5. If a property management company charges a huge sign-up fee, but very little for procuring a tenant and managing the property, chances are they will be very motivated to sign you up. They may be less motivated to procure the tenant and manage the property.
Generally-speaking, incentives (pricing) are an effective measure of the value that will be received for different services. A $5 chocolate bar should be better than a $1 bar. If you offer to pay one friend $50 to mow your loan and ask another to do it for free, guess which one you will see firing up his push mower first in your front yard?
So fees are good for consumers! If you don’t make sure you are utilizing proper incentives for service providers, you’ll never know when (or if) the chicken will actually cross the road.
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Monthly: Rental Home E-Harmony: What Tenant Is Perfect For Your Rental?
Dating web sites, like E-Harmony and Match.com, have grown in popularity and are apparently very effective; one in five people getting married met on-line, their advertising claims. That’s pretty good!
It can be even better for real estate. Many polls conclude that 90%+ of home searches begin on-line! Real estate web sites have the potential to be much better matchmakers!
But the real test of effectiveness is how many leases are consummated (for lack of a better word) from this on-line home matchmaking. And whether the landlords and tenants are happy with the union after move-in. Much like the 4 out of 5 people who don’t get married from the dating sites, sometimes it doesn’t work out between the landlords and tenants. Why not?
Maybe this matchmaking could be much more effective if there was a lot more honesty going on from both sides of the deal?
For example, on-line ads for homes tend to look like this regardless of what the home actually looks like:
Immaculate & cozy, this 3 BR / 2 BA stunner can make even the most choosy renter’s heart melt. Beautiful home with too many upgrades to count. Voted safest and best run neighborhood in Elmwood for 2 of the last 3 years (as reported by the Elmwood HOA Newsletter)! Priced attractively at $1,200/month and is sure to go fast!
And if the renter had an ad? It would read something like this:
Ideal tenants seek quiet abode for a loving family. Our 8 dogs are trained in Vienna (on Vienna Drive in Lincroft, NJ, it turns out…) and have never soiled a single fiber of carpet. Our rent is always paid on time and the only time the police come to our home is when we make them hot chocolate after they are done caroling in our neighborhood. We love our landlords and they love us!
But what is the truth? No tenants or landlords are filling out a 300-question survey where algorithms are going to match the tenant and house together. Each of them is going to claim that what they offer is top of the line, no matter what the real truth is. The problem for the landlord is that the tenant can see the home and make a determination if the rental ad is true, while the landlord must run an application and make a partially subjective decision on information gathered during the application process.
So how can landlords get the type of tenant they want? It really goes beyond the rental application. Much like dating is about being the mate that you want to attract, rental homes are the same way. What???
Generally-speaking, it’s a simple truth and goes like this:
If the rental house is in a safe area, priced economically, and immaculate, the chances rise exponentially that tenant it attracts will not be a criminal, be economical (buys things valued properly), and value cleanliness.
On the other hand, if the house is in a crime-ridden area, overpriced, and dirty, the tenant it attracts will more likely be involved in more shady dealings, spend recklessly (re: which may lead them into situations where they struggle to pay rent), and not care about the cleanliness of the home.
So, in practical terms, should the spots in the carpet be cleaned out prior to going to market? Yes, if the landlord wants a tenant who rents the home to care about spots on the carpet. What about cleaning the appliances? Only if the landlord cares about attracting tenants who care about clean appliances. Should the highest rent possible be asked for? Only if the landlord wants a tenant who doesn’t conduct research on their biggest expenditures which may signal their overall financial shakiness.
Much like humans, homes attract suitable mates. Good-looking people marry other good-looking people. Clean people rent clean houses. Financially responsible people don’t lock into overpriced rental homes.
What type of renter will your rental home naturally attract? Or more importantly, turn off?
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Monthly: Should I Even Bother to Try to Sell My House in this Market?
This is a question that I was posed on a call last week. For property managers, this is a no-brainer, right? It’s like any buying question to a salesperson in any industry:
Question from prospective client:
Do I need a haircut?
Barber:
Absolutely.
Question from prospective client:
Do I need insurance coverage for (fill in the blank)?
Answer from insurance agent:
Absolutely. If your family’s (fill in the blank) is important, it would potentially be devastating to live without it.
Question from potential client:
Can my house sell in this market? It didn’t with the past 2 real estate agents I used.
Answer from real estate agent (straight faced without blinking):
Absolutely! My team has a 10-point marketing plan that can sell any house in any market*!
* With a nominal 50% price reduction
So back to the original question:
Should someone even bother to try to sell their house in this market?
My answer:
It depends.
Depends on what?
You should try to sell your home if you:
1. Are living in the house and don’t have to move
2. Have a clean tenant who is amenable to showings
3. Have a unique house (be honest!) that is desirable in any market
4. Are able to afford to price the house competitively (aka on the low end)
5. Are willing to gamble and eat the rent every month and wait for a buyer who might or might not come
My answer to not bother putting the house on the market for sale is under the following conditions:
1. There are several foreclosures and short sales active in your home’s subdivision
2. You can’t afford to or don’t want to drastically discount your home price
3. The home is vacant and #3, #4, and/or #5 above don’t apply to you
4. Neighbors’ homes that are priced around the level you want to sell yours for are sitting
The simple truth is that the buy & sell real estate market is continuing on a sharp downtrend with no end in sight, while the rental market is on a sharp uptrend. Everyone still needs a place to live, but the banks are not willing to lend to less than perfect borrowers. This leads to a surplus of rental and rent-to-own tenants, and a dearth of buyers. So the question is if it is better to go fishing at the small pond stocked with thousands of fish or the big pond with 25?
Whether it still makes sense to list your home for sale really depends on your answers to the questions above. Truthfully, for most people, the best financial option is to stay put in their home. But going straight to the rental or rent-to-sell market is best for people who are:
1. In a time crunch
2. Need to move
3. Can’t or don’t want to afford 2 mortgage payments
Often, it just doesn’t make sense to put the home on the market for sale. It’s an exercise in futility and costs a good deal of money. It’s like asking out the head cheerleader to the prom when you know you are going to wind up going with Suzy next door anyway. You might as well cut to the chase and save yourself the time, expense, and effort.
That being said, one size never fits all. Determine what criteria above fit your situation and act accordingly!
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Monthly: Multiple Rental Offer Situations: Is Engagement The Same As Marriage?
So you’re walking down the street the day after successfully proposing marriage to your girlfriend, who now (you’ve been told) is to be referred as your “fiancée”. You’re happy and are convinced she was meant to be “The One”. But, wait; is that the beautiful Sasha Blue across the street? The girl of your dreams who always had those model boyfriends that put you permanently into the “friend” category? Is she looking at you? I think she is!
As you get closer, Miss Blue excitedly runs up to you. “Max, is that you? I was hoping to run into you! I finally got rid of that no-good Antonio! Wow… Is this the first time we are both single at the same time? How exciting! I’d love to catch up!”
As your heart races, your memory of getting down on one knee the night before is fading fast. Is it too late to run a reverse and go after Miss Blue? Engagement isn’t legally binding, is it? It’s a very interesting conundrum!
That is the same question that faces property management companies when multiple tenants apply for the same property at different times. At what engagement point prior to move-in is a tenant “locked” in and the property manager must forsake all other suitors?
Let’s look at a potential scenario: Tenant A applies for a property and is approved. They have not put a deposit down on the property yet. Tenant B sees the property the next day and loves it. They are a stronger applicant and are willing to pay more money per month. However, when talking with Tenant B, Tenant A puts down the deposit. Company policy is that whoever puts down the deposit first with an approved application gets the house. So, is Tenant B out of luck?
In most scenarios, yes. But there is a caveat. The property manager works for the owner. It is their job to get the best applicant that fits the home owner’s (aka their client’s) goals. Should the overall mandate to pursue what’s best for the owner trump company policy?
The easy answer is “of course!” The practical answer is yes and no- the solid, business school “it depends” response. On one hand, I don’t think it is reasonable to take a deposit from an approved tenant, keep the house on the market at a higher rate, and then renege on the agreement if another tenant appears that is willing to pay more. That could leave an applicant who dealt with the property management in good faith potentially homeless and dealing with the hassle of changing addresses, utilities, moving vans, and losing their piece of mind. This generates hate mail (rightfully so).
But, on the other hand, at what point is it reasonable to accept competing offers?
I believe that up until the tenant is told definitively that the home is theirs is a reasonable time to protect the owner’s interests. That may mean that if multiple applications come in (and even after deposits are put down), there is still time to review the applicants and decide which one is best for the owner. If the applicants are similar, then the first one who applied and put down a deposit should be given first dibs.
However, what about if the following applicant situations present themselves?
1. An applicant with a 600 credit score with average landlord history is approved and puts down a deposit before a 700 credit score applicant with great landlord history
2. 2 applicants are equal but one is willing to pay a higher monthly rent
3. 2 applicants are equal but one is willing to pay the year of rent upfront
4. One applicant is willing to move-in 3 weeks prior to the other
In these situations (if prior to giving “official” notice that the house is locked in for a certain tenant), then it is really imperative to choose the tenant that offers the best deal for the owner.
However, once official notice is given, I don’t believe it is ethical to offer the home to anyone else, regardless of the deal offered. The only way to supersede this is if the one tenant “buys out” the other in a separate negotiation. Money can make things happen!
So, if you asked to marry your fiancée, told her she was definitely “The One”, and gave her a ring, Miss Blue should be off limits. It may not be legally binding, but it’s the right thing to do.
Learn MoreCharlotte Property Management Weekly: The Cheap Rental Home Game: A Saga of Ups & Downs- 10 Tips for Survival
Cheap rental homes remind me of buying electronics off the street.
Street Urchin: “$50 Bucks! Flat screen television for $50! Why are you even thinking about it? This is a great deal- CHEEP!!”
My mind (definitely thinking about it): “Hmmm… I need a flat screen, but this thing is either stolen or a piece of garbage. But, if it’s not (and his uncle really died and bequeathed it to him), this is a great deal!”
My mouth: “OK, I’ll give you forty-five for it.”
This is the type of deal I see people making to buy homes for as little as $10K. It’s really a gamble, but can be a lucrative one if it works out. I mean, the ups can be great!
For example, a $20K house’s payments come to approximately $130/month (believe it or not, there are no HOA fees to worry about!). The home can rent for $400. That’s a positive cash flow of $270/month, which is not bad! With a $100K credit line, this could equal 5 homes. I like the math, $270 multiplied by five homes equals $1,350/month. That’s a monthly return of 13.5%. Oh yeah! So the flat screen works and works well! I’ve got a great television and an even better story of my tough negotiating tactics to match.
But then, there are the down times. The house is cheap and old, and things start breaking down. The tenants (savvy to the system) call the city’s code enforcement department, who find a lot more stuff that’s not at code. The landlord is required to fix them (or face fines) which eats into the return. Several of the tenants think that requests for rent are merely suggestions; they promise payment, but it never comes (even after thousands of dollars in repairs are done). Evicting them is a double-whammy as no rent is coming in and the attorney fees are going out. The house becomes vacant and vandals begin to smash windows; neighborhood kids start using the home as a party pad. After filing ineffective police report after police report, it’s clear that the police don’t want to be in the neighborhood unless absolutely necessary. Then again, neither does the landlord.
So now “you get what you pay for” begins to ring true. The flat screen has stopped working and has somehow completely shot the electric system of my condo. A detective from the police department has left a business card on my door. Unfortunately, I threw away my old television set (“Good riddance, 20th Century!” I said…) and am now forced to read a lot more.
So how do people make money off of cheap homes? Well, the margin is there so some savvy investors have figured it out. A guy I used to work with told me his system:
1. Thoroughly inspect to see what’s broken and on the verge of wearing out. Include this in the upfront cost of the home.
2. Leave the home broken up until someone moves in. Then repair it.
3. Never have carpet in the house; always use vinyl or a hard surface that cleans off well for flooring.
4. Get tenant referrals from good existing tenants
5. Find out when pay day is and show up in person on that day. Accept cash and carry a gun.
6. Find a handyman who lives in the community to take care of the needed maintenance/repairs.
7. Understand that evictions and losses are part of the game sometimes. There will rarely be months where something doesn’t happen. It’s not upsetting, it’s business.
8. The homes will probably never go up significantly in value and will be difficult to impossible to sell on the market. This is purely a cash flow play.
9. Buy these homes in bulk and spread the gains and losses across many homes.
10. Make enough cash flow to hire someone else to do the dangerous duties (aka visiting the properties).
Cheap homes are meant for the savvy investor with a system, not the guy looking for a deal on an inexpensive set on the street. A steel stomach doesn’t hurt either!
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
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