Should I Sell My Rental Home?
From the mail bag… (aka a question I may have made up to write about)
Q: I have a few occupied rental homes and wonder if I should sell one of them now that the market seems to be improving. What are your thoughts?
- Oh, this is a surprising question from left field! And a great one! Kudos to you, mighty thinker!
It is a tough decision on whether to unload a rental property. If you decide it may be time to do so, the first thing is to establish whether you can by asking 4 questions:
- What is the realistic value of my property? Have your trusted real estate advisor run sales comparables and put your home’s value at the low end of the range for estimating purposes.
- How much will it cost to get my property in sales shape? In my opinion, there is a difference between getting a home in rental shape and sales shape. With a rental, you may get away with steam cleaning the carpet and touching-up the paint; with sales, there is a lower threshold for cosmetic issues which may mean replacing the carpet and repainting the house.
- Do I have the money to cover the mortgage and utilities while the rental home potentially sits vacant for months? Generally-speaking, showing a home effectively with tenants in it is tough.
- Do you have the money to pay the selling costs (Realtor fees, closing costs, less than full market offer, etc.)?
So, the math looks like:
Answer #1 – Answers #2, 3, and 4 = $$ (hopefully a BIG, positive number)
Then the question is: Is $$ above worth selling the property for?
If so, do it. If not, continue to hold the rental until the market and your mortgage balance improves further.
However, there is a scenario that skews the math and lets you skip cost items #2 (home cosmetic fix-up) and #3 (home vacancy costs), and eliminate or reduce #4 (selling costs in terms of Realtor fees)…
- OK, I’ll bite. What is the scenario?
- When the tenants in your rental home want to buy it for themselves.
This is the #1 question to ask if you think you may want to sell your rental homes. ALWAYS ask the tenants first. If they do want to buy it, get them in touch with a mortgage broker and see if they qualify.
If they qualify, this is a win-win exit strategy. The tenants get to start building equity in a home that they already love. And you, the owner, get to avoid much of the costs and uncertainty of selling your rental home.
And what if the tenants proactively ask you if you are willing to sell your rental home to them when you’re not quite sure you are ready? You want to think REALLY long and hard about it. These opportunities don’t come up that often and you need to make sure that it is something you really don’t want to do.
Cash is king and the purpose of investments is to make money. Two well-worn adages come to mind:
A bird in the hand is worth two in the bush.
AND
Buy low, sell high!
Happy investing!
Brett Furniss is the President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords & Home of $100 Flat Fee Property Management. BDF Realty utilizes their innovative Pod System for exceptional customer service in residential property management, home repairs, and home sales for single-family homes, condos, and town homes in the Charlotte-Metro Area. Contact Us Today!
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 MoreSection 8 Offers “Free Rent”? 5 Reasons Many Landlords Still Choose Not To Participate
I saw an ad for a Section 8 speaker touting their government-sponsored rental assistance program as “Free Rent” for landlords. I had to laugh. As we’ve been told our whole lives, nothing worthwhile is free. And the Section 8 program is not an exception to the rule.
For the uninitiated, the Section 8 housing program allows people who earn under a certain income to receive a housing voucher to partially subsidize or pay for their rent in full. This seems like a boon for landlords.
The process looks like this: For the tenants, they need to scour rental home ads and find landlords who are willing to accept Section 8 vouchers. For the landlords, they need to willingly accept them. The problem is that many landlords choose not to accept them, which seems strange. The landlords do not want government-guaranteed “free rent”?? Well, maybe free isn’t always so free…
A big misconception is that the tenants are the reason landlords hesitate to accept Section 8 vouchers. To me, this is patently false. Some of our nicest and best tenants use Section 8. Really, on our rental applications for Section 8 tenants, we run them the way we typically do, but deemphasize income and credit score requirements as Section 8 has them partially backstopped.
So, if the tenants are good, why not accept Section 8? The 5 main reasons many landlords choose not to accept Section 8 vouchers:
1. Too much paperwork. It’s not easy for landlords, especially non-real estate professionals, to navigate the process.
2. The governmental standards for housing are really high and your house will fail the inspection. Slum lords (ex: the type of people who ask if tenants really need clean, running water) are not the only people that fail; almost everyone fails the inspections. I can speak from personal experience, anecdotal evidence, and conversations with the inspectors. I asked one inspector what percentage of homes passed their first time and he laughed. “Seriously? Zero percent. I’m not kidding.” He went on to say that his own house wouldn’t pass a Section 8 inspection. Our latest fail report had paint splatter on a strike plate and a loose electrical outlet as reasons it failed. When there are hundreds of items that the inspectors are looking for, you are behind the eight ball.
3. Customer service is typically unresponsive. I don’t really blame the employees. The workload that is saddled on them is immense. I asked an inspector the other day a question about a failed item on the inspection report and she exhaustedly told me she couldn’t remember- she conducts 15 different home inspections every day! So, bottom line, getting anything accomplished with them takes a lot of time, energy, and follow-up.
4. Waiting is the hardest part. We had a house that took 5 weeks to get an initial inspection. So, for 5 weeks, we ate the rent and utilities as the house stood vacant. There was no “free rent” or sympathy. After the home inevitably failed, there was another 2 week wait for a reinspection. The combined 7 weeks of non-recoupable utility and mortgage payments hurt. So did the vandalism that occurred as the house sat empty.
5. Re-inspection failures and rent abatement really hurt. So, let’s say you pass the initial inspection and the tenant moves in. At the ten-month mark of the tenancy, there is a reinspection where the Section 8 inspectors look for housing violations. We used to occasionally pass these, but that hasn’t happened in the past few years due to stricter regulations. The inspectors will find new things that happened during the tenancy; sometimes they find things they missed on the first inspection. Our latest fail was partially for a loose banister.
The problem with failing reinspections is that you are given one chance to fix the items. They provide a punch list so it should be as simple as giving it to a handyman to fix, right? Well, the descriptions detailing what is wrong are nebulous and getting the inspectors on the phone to ask them to remember your home and a specific issue is not likely. The handyman does the best he can, but when it fails, you enter into the unfriendly world of rent abatement.
Rent abatement is how property managers get fired and cash flow becomes difficult. It starts with the failed second inspection. This letter comes a week after the inspection letting you know what items you failed. You are instructed to fix the outstanding items and then schedule a final reinspection. During this time, not only is rent deducted for the abated period while waiting for the final inspection (your bank account is debited the following month on the 1st when payments are made), there is no rent paid for the coming month. For example:
Your rent due is $900/month and your abated 2-week period costs you ($450).
On the first of the month after abatement, not only do you not receive the $900 due (and the tenant is still living in your rental home and the bank wants your mortgage payment), you are clawed back $450 (payable immediately). This essentially puts you in the hole $1,350 (not counting the funds for the repairs on the home). Cash flow becomes a big issue. This is when “free rent” becomes “free rent” for the government. You’re a great citizen to do this, but you don’t feel so great when this happens.
If you pass on your final reinspection, you will get the $900 back the following month (the $450 is gone forever). If you fail, your contract with Section 8 is terminated and the tenant is free to leave. This presents a much bigger problem as the tenant usually doesn’t have money to pay rent, Section 8 is not paying you, and the tenant needs to enter the arduous, time-consuming process of finding a new Section 8-eligible home (while living rent-free in yours).
In closing, Section 8 can be a good program if you know it well and have repair people very familiar with their changing requirements. However, “free rent” for landlords is a gigantic misnomer and is about as far away from the truth as you can get. It can be intelligently argued that Section 8 vouchers are much more risky than working with non-subsidized tenants. “Nothing is free” is the true mantra!
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 More