property management Tag

You Want the Truth in a Hot Real Estate Market?

“It depends on what the meaning of the word ‘is’, is.”

Former President Bill Clinton

“What is truth?” 

Pontius Pilate

I was talking to a client the other day when he mentioned buying a house to live in.  He was currently renting and wanted to find a place he could settle and begin to grow roots with his growing family.  He had owned houses before and was ready to get into the real estate ownership game again.

However, we discussed that buying a house in Charlotte (and probably across the country) is difficult now.  If a home for sale is priced competitively, it usually has multiple offers as soon as it goes on the market.  In addition, home prices have escalated.  Even with low interest rates that would keep his payment down, he didn’t want to overpay as he was afraid it would take a long time to see any capital appreciation.  It was a conundrum- Continue renting or buy?

There was another option he wanted to talk about.  He had found a nice house that was in a great area that he thought was priced right.  It had been languishing on the market for months and the only reason he could see that it hadn’t been snapped up was that it had a shared driveway.  So his question was, “Do people really hate shared driveways that much?”

I didn’t know.  At first take, sharing was good.  Sharing is caring.  How much time do we really spend in the driveway anyway?  Surely not enough to be priced $75K below the other nearby houses and not be under contract, right?  I never thought that much about sharing a driveway.  It would be a nice opportunity to know the neighbor better; maybe share cars occasionally if his was parked in front of mine (especially if his was nicer!).

So what’s the true value of an independent driveway versus a shared one?  I told him I didn’t think it should matter that much.

But… at the end of the day, it didn’t matter what I thought the truth was.  The truth was the market.  The truth was that in the midst of an extremely hot real estate market, this home with a shared driveway was not sold.  And I wasn’t sure why this fact would change in a colder real estate market.  Bell bottoms may come back into fashion, but I’m not sure about communal driveways on higher end homes.

One thing that I have to come to realize in real estate (and other goods) is that the market is rarely wrong.  It happens sometimes and the people who bank on it can make a killing (see multi-billionaire hedge fund manager, David Tepper, the owner of the Carolina Panthers).  But usually, the market is the economic truth- it’s efficient and self-corrects quickly.

I had read something a broker wrote (if I remembered where I’d read it, I’d give him the shout-out) about pricing homes that are $500K or less in this hot market.  He said something to the effect that if the home was still on the market two weeks after it was listed for sale, the price needed to be reduced.  I’d largely extend this to the rental market as well.

A rental home may look like it is worth $2,000/month, but if it is marketed properly and there are no showings or takers, it’s not worth $2,000/month.  And let’s be clear, I’m not saying that, the market is.

It’s hard to tell what the truth is sometimes.  But in real estate, the market is one of the biggest truth-tellers out there.

Happy Landlording!

Predicting Presidents & Charlotte Real Estate Prices

There are people who are very interested in politics, especially in the US presidential election every four years.  “It’s the most important election of our lifetime!  Think of the children!”  I don’t fall into this camp.  However, I do like to try to predict who will win.

That doesn’t mean I’m any good at it, unfortunately.

I try to use “common sense” on who will win- ha, ha!  Below are the actual winners from the past few elections and my rationale at the time for why there was no way they could win:

2008: Barack Obama.  I was wrong.  I didn’t see how a community organizer with no experience running anything could win.  Plus, he shared his middle name with a top, evil dictator.

2012: Barack Obama.  I was wrong again.  The economy was in shambles and the “Great Recession” was on his watch.  I wasn’t sure that President Obama could effectively keep blaming former President GW Bush for the poor economy his entire term.

2016: Donald Trump: Wrong on this one too.  Where do I start on how I didn’t think his election was possible?  I mean he didn’t even think he was going to win.

2020: ???  Pollsters say Joe Biden is close to a shoo-in.

Now let’s shift to Charlotte real estate.  When COVID-19 began to affect our lives in March 2020, people were understandably afraid.  Corporations began rapidly shedding jobs, the stock market tanked, and there was little optimism in the world.

We had just put up a home for sale for a client that month (who really needed to sell) and we were concerned that COVID-19 would adversely affect the market.  We lowered the price and worked quickly to get it under contract before things got worse.

However, the adverse effect on Charlotte housing prices never really happened; in fact, prices actually climbed and continue to climb.  We probably should have raised the price!

So why am I bringing up my poor predictive skills?

Sometimes it is more effective to forget the short-term noise of what is going on and stick to market fundamentals.  The market fundamentals for Charlotte are that 66 people on average are moving here every day and that number will probably increase as people flee big cities for more space.

There is also a housing shortage in Charlotte.  This has been exacerbated as people are “sheltering-in-place” and not putting their homes on the market.  The fundamental “supply vs. demand” rule takes effect and prices rise with scarcity.

Things can change quickly, but fundamentals and long term trends tend to move glacially or not at all.

And political incumbent candidates usually win…

Happy Landlording!

COVID-19 Rent Collections: OK to Say “I Don’t Know”?

“Dewey Defeats Truman”

Chicago Daily Tribune headline on 11/3/48

“Even fools are thought wise if they keep silent, and discerning if they hold their tongues.”

Proverbs 17:28

My 6-year old son is tasked with completing school assessment tests this week on the computer.  It’s a stressful time for him!  Not only does he have to deal with new questions about numbers and words, he has to figure out how to use a mouse for the first time.  It’s a lot for a new, aspirant student.

My wife thinks some of the questions may be out of the scope of a Kindergarten-educated child.  “Three-digit subtraction questions?  Scandalous!  How could he know such things at this point?”

So he’s tackling an assessment question like:

Q.  What is 100 – 80?

1. 35
2. 20
3. I don’t know!
4. I really don’t know!  (Can I watch TV now?)

The truthful answers for him are clearly 3 or 4 (with a hard lean on 4).  But for us educated folk who have been taking tests all our lives, we know at minimum we need to answer 1 or 2.  Nobody gets any points for offering “I don’t know” on a test!  We only get points for knowing (or acting like we know and guessing correctly).  But we really should know stuff, right?

Or maybe that’s the limitation with tests when we implement this methodology in real life.  With tests, there’s always one right answer that is evident if the data is studied and understood.  But reality can be very different.

For example, take this COVID-19 situation for property managers.  We’re asked questions from clients like, “Do you expect tenants to pay rent next month?”  Or, more directly, “Will my tenants pay rent next month?”  As someone in the property management field for the past 16 years, I should be able to answer that question, right?

Well, I read the same articles that everyone else did with statistics from large apartment provider associations saying 33% of tenants didn’t expect to be able to make their rental payments this summer.  Wow!  1 in 3, that’s bad.  Then I received calls from a few of our tenants telling me about their job losses and wondering if any of our owner-clients would be offering “Free Rent” until things were back to normal.  Data was not promising, both empirically and anecdotally.

All of this must have meant that we were going to experience some rough times with the rental properties we manage in the Charlotte-Metro area, right?  So I jotted off letters every month this summer to our owner-clients telling them to expect some rental disruption.  I thought I knew what was going to happen and then I relayed this to our clients.

So what happened?  Everyone this entire summer paid (with the exception of literally 1 tenant who is moving out).  And the number of late paying tenants was half of what we usually have.

What do I know?

What is 100 – 80?  Fortunately, I can help with that one.  But are tenants going to continue paying on time and in full next month?  I really don’t know.  (But I hope so!)

Happy Landlording!

Lost in Translation: Landlords Are Not “Pants”

“OK… but do we rock?”

(Opus from “Bloom County” after reading his band’s confusing review in Rolling Stone)

I remember back when I was in college and I had the opportunity to be a student-athlete abroad in Merrie Olde England.  I thought the new scenery shouldn’t be that hard to figure out being they spoke English over there.  But I didn’t account for some of their slang that as a “Yankee” I wasn’t privy to.

I was on the American football team and we had a pretty mediocre record.  In our defense, we only had about 20 guys, so most of us were playing offense, defense, and special teams.  We had some good players so we were able to keep the score close for most games (and win some of them), but exhaustion would set in during the fourth quarter due to our lack of depth; this would sometimes doom us.

Very few fans (aka only our friends) showed up for these fake “football” games (aka not soccer).  So I really didn’t know if anyone cared or thought we were any good.  However, someone pointed out that an article had been written about the team, so I was anxious to read it (was I mentioned in it???).  I was in the computer lab later that day and found it.

Now, I’m not sure if the writer was trying to appear impartial, but I had a hard time figuring out what his take on us was.  And then I wasn’t sure if he even understood what he was watching, as he used some soccer references to describe the action.  He listed some good things about us and then list some bad things, and then vice-versa.  Finally, at the end of the article, he gave his summation.  “All in all, the Staffordshire Stallions are pants.”

“Pants”??  What the heck does that mean?  I was at a loss.  Do we rock?  That’s what I wanted to know.

So I nudged the guy beside me and asked him what “pants” meant.  He looked at me for a second, noticed my American baseball cap, and had pity.  He said, ‘It means rubbish, complete rubbish.”  Ouch.

For us to have a .500 record and beat some much bigger schools with 60+ players on their sidelines, I wasn’t sure how fair his assessment was.  Some of our 20 guys hadn’t really even played before and were pressed into action.  The article really could have been about how well we were doing despite the odds being stacked against us every game (and then how some “American saviors” were making their mark…).

I bring up this story because it reminds me of negative press landlords are taking for being against the eviction moratorium (not legally being allowed to file for eviction for non-payment) imposed now during COVID-19.  The plight of affected tenants has been well-documented and no one wants this economic devastation.  But to make landlords the villains is ridiculous.

I “know a friend” who manages a property where the tenant has not made a rental payment in 2020.  My friend’s client still needs to make a mortgage payment, insurance, and property taxes every month without any offsetting revenue coming in.  He provides a service where an agreement was made to pay him for it, and he is not getting it.  And he has nowhere to go for help.

I’m not sure if any of our property management clients are multi-millionaires who are immune if no rent comes in on their rental houses.  I get calls and e-mails from concerned owners when a tenant is late in paying or a repair seems on the high side.  Most need the rents to keep their real estate investments afloat.  I don’t know of any that are sitting on their yacht in the Mediterranean who rarely need to check a bank account!

Some of the criticism probably comes from people who just don’t understand the real estate investment game.  On the other hand, I also understand (during tough times especially) that eviction is dirty word and can appear heartless.

But this is a situation that has been lost in translation.  Landlords are not “pants” for wanting to receive their rental payments for providing houses for people to live in and making repairs to keep them functional.  It makes sense for them to have the option of legal recourse to go to if things are not working out.  They rock for trying to keep their obligations up-to-date during tough times.

In summation, the COVID-19 economic situation is “pants”, not landlords (or the 1998-1999 Staffordshire Stallions, for that matter).

Happy Landlording!

Virtual Life With Virtual Rental Home Showings?

“Ain’t Nothing Like The Real Thing, (Baby)”

Marvin Gaye & Tammi Terrell

I don’t think I’ve ever written on the same topic four months in a row, but COVID-19 has affected every facet of life so abruptly; it’s tough to avoid.

Everything in life has changed when you can’t be with other people and are scared (or not allowed) to go places.  Some things have been enhanced (more time with your family in your home & no commute) and others have been limited or discontinued.

In the limited and discontinued space, compromises were made to replicate virtually what was lost physically:

“If we can’t meet in person, we’ll have an awesome Zoom.com meeting.”

“Let’s do drive-in church where we watch our pastor on a big screen from the church parking lot in our cars and honk when we like what he says.”

“Let’s watch world-renown artists sing in their homes instead of going to watch them live in a stadium.”

“With no live sports, let’s re-watch Game 7 of the 2016 NBA Finals or NASCAR’s iRacing where their drivers are essentially playing a video game from their homes.  That’s awesome!”

 “There’s no need to hold the new grandson when you can just FaceTime him and wave!  It’s virtually the same thing.”

These compromises, though necessary, are certainly not the same thing; I’d say they are not even close.  It’s like seeing a shadow of a person instead of the person.  Or it’s like seeing a picture of the New York City as opposed to standing in the middle of Times Square.  These compromises are largely ineffective, counterfeit replacements.

I remember in my early sales career when I tried to avoid the time and energy of meeting customers, my boss would always say, “You can’t fax a handshake.”  (Note: in retrospect, I need to never give that example again as both of those things seem to be relics of the past and will make me sound really dated…)  Nevertheless, the point is that there is immense value in seeing people, places, and things in person.

A Realtor friend of mine called me the other day and was talking about how “virtual” house buying (aka seeing a video of a house and making an offer sight unseen) was gaining enormous traction.  And really, I have no problems from that from the sales-side.

Why?  In NC, we are a caveat emptor (“let the buyer beware”) state; this essentially means that after you close on a property, there are no “take-backs”.  Once the house is bought, it’s yours- it’s over even if after you move-in you decide you don’t like it for some reason.

With rental homes, it’s a different story.  Back when we first started offering property management in Charlotte, BDF Realty would allow “sight unseen” rentals.  Most of the time, it was fine.  But there were a small number of people who decided they hated the house after they actually saw it in-person; this created problems.  They had already signed a lease and had moved in their furniture when they decided they wanted to move.  The reason was a problem with the neighborhood, or the size if the rooms when they were actually in them, or a number of things that would have been avoided if they had seen the rental home in person.  But, unlike when a house is sold, there was someone they could complain to- the property manager.

Virtual rental home showings just can’t replicate what seeing a home in-person can.  Sometimes just driving a neighborhood or stepping into a home will immediately eliminate it from consideration.  We don’t want renters being forced to live in a home for a year if it is going to be a disaster from the get-go.  That’s not good for anyone- the renters, owners, or the management company.

Virtual life has its limits.  It’s wise to exercise caution on the rental home side with a virtual-only approach.  There ain’t nothing like the real thing, baby!

Happy Landlording!

Credit Reports (YAWN) & COVID Tenant Placement

“Everyone has a plan until they get punched in the mouth.”

“Iron” Mike Tyson

The “sleep industry” (from bedding, sound control, “sleep consultants”, prescription pills, etc.) is estimated to be a $30B-$40B annual business growing by 8% year.  That’s a lot of money going to something that should naturally be free; and, unfortunately, the inability to sleep seems to be an issue that keeps growing.

My father told me that a solution that always worked for him was to read textbooks.  It made sense, but most adults (thankfully!) don’t have many lying around.  However, if you’re in the property management arena, you do have a lot of credit reports you can read through that will have the same effect.

On a single rental application, it is possible to have 20+ pages per person.  Every open and closed line of credit they’ve ever had in their lives is listed.  It can be painful reading and sorting through them as the pages can begin to just run together…

Many property management companies outsource the application process.  I get it!  No one wants to read through the reports and try to put together how someone’s finances link to whether they’ll be a good tenant, especially when 10-20 applications are coming in per property.  It’s arduous.  That’s why it’s common for property management companies to have credit score minimums- for example, if you don’t have a minimum 600 credit score, your application will automatically denied.

There are a couple problems with that approach, in my opinion.  The first is that if every landlord did that, there would be a lot of people in the streets who weren’t eligible to rent a house.  That seems harsh, unfair, and inhumane.

The second is that a credit score alone is insufficient to gauge an applicant’s true financial strength.  I think the level of debt to how much available credit they have is a huge indicator.  A credit score rewards taking on debt to a certain extent as it measures whether debt payments are being made in a timely fashion; people with no debt (or utilized available credit) seem to have lower credit scores because there is less of a payment track record to go off of.  Should people be penalized for that?  I guess I have an “old-school” mindset where I think not having debt is preferable to the alternative.

Thirdly, I like to see cash flow and where it is going.  I’ve had 700+ credit score applicants who have so much debt to pay off that after their monthly debt obligations (aka credit cards, financed cars, etc.) there is little room to pay rent and other niceties of life (like food).

This is where COVID and tenant placement comes in.  How strong is the applicant?  Can they pay when times are good and bad?  Can applicants take a financial punch?  COVID is a huge punch to almost everyone.  But even putting COVID aside, a punch could be an unexpected job loss, big car repair, or some other major expense that life throws at everyone at some point.  Can it be weathered?

That’s where I find the credit report to be an invaluable tool and a “must-read”.  I always felt that the #1 responsibility of property managers is to keep the rents flowing to the owners.  And property managers are only as good as the bench of good-paying tenants they have in their properties.  How strong is the bench?  Can it handle adversity?

COVID has and will continue to put things to the test.  I think the practice of pouring that extra cup of coffee while poring over the credit reports will prove to be time well spent.

Happy Landlording!  And Stay Safe!

Where to Invest in Real Estate in Charlotte?

As a property manager in Charlotte with investor clients, we are often asked where the best places are to buy local investment properties.

When I was a young real estate investor in 2004, I bought my first two investment properties on the same day from HUD. Both were relatively cheap and I figured they’d be easy to cash flow. I admittedly did not really know what I was doing.

One was a condo in a relatively contained area. The other was a house in what could be labeled a “war zone”.

I hated this house. If I was smarter, I would have outsourced the property management. One of the main issues is that it would just get broken into a lot. So every time it was vacant, I was praying that I didn’t have to have the windows and doors repaired again. The house was really old and somehow the utility bills were really high, which added to the vacancy pain.

One day I was stopping by the house and noticed a man with a shopping cart full of old window screens walking in the neighborhood. I didn’t give it much thought (like I said, it wasn’t a great area) until I reached the house and noticed something a little off about the (formerly) screened-in porch. I ran back to my car to find the guy with my screens.

He was still on the street. I pulled up behind him in my car and he kept walking. I got out and walked quickly to catch up to him.

“Excuse me, sir? I think you may have something that belongs to me.”

No response. He kept walking away at his measured pace.

“Yeah, I’m sure of it- those seem to be the window screens from my house up the block. Mind if I take those back?”

He stopped, turned around, grunted, and then lunged at me with a knife. Fortunately, he missed due to my cat-like reflexes (OK, not true) and the fact that he was drunk and slow (thank God!). He then kept walking away.

I followed him in my car and called the police. He smartly cut across a field and was never seen again.

As I left the scene with my tail between my legs, there was nothing left to do but go back to the house and re-shoot the front porch pictures. Then I logged into my computer and changed the rental ad copy from “Awesome House with Screened-In Porch!” to “Awesome House with Open-Air Porch!”.

Oh, how I hate(d) that house!

Fast forward approximately 13 years… the Charlotte press started fawning over this “new” area of Charlotte that was having all of this awesome new development. Price values were skyrocketing; it was the next big thing. As I clicked through to read further, the area they were referring to was very familiar… No way… The smart money wanted to be in the vicinity of “that house”.

A popular calculation is that 66 people are moving to Charlotte every day. The Charlotte-Metro population is set to go up 50% in the next ten years. And all of these newcomers need a place to live.

As a real estate investor, the short-term prognosis on where to buy in Charlotte is a crapshoot; an efficient market should have already built this into the current prices. However, due to population forecasts, the long-term prognosis of where to invest is much surer. “That house” (or any house in the city of Charlotte) will probably be a good investment you’ll love if it’s held long enough.

Happy Landlording!

Too Big of a Jump to NBA Competition (& Rent)?

What do former NBA players Jack Sikma, Devean George, Vern Mikkelsen, and Terry Porter have in common?

I’m a big basketball fan, but had only heard of 3 out of the 4. And I had no idea what they had in common.

Answer: They all came to the NBA after playing at a Division 3 college. That’s pretty hard to do. It’s so hard, in fact, that they are the ONLY players to ever make it to the NBA from Division 3 schools.

Why is that? The best high school basketball players have either gone directly into the NBA (ex: LeBron James) or gone via a Division 1 college (ex: Kemba Walker from the University of Connecticut). The competition in Division 1 is fierce and players train year-round to compete. And 99%+ of Division 1 players are not good enough to play in the NBA.

Division 3? Though the players are very good if they are playing hoops in the park with you, most would probably have a hard time competing against a Division 1 player’s athleticism, size, and skill. Those Division 1 guys are really good! And multiply that by 100 for the guys who are good enough to play in the NBA.

So am I a Division 3 hater? Not at all! I can probably relate to them much more on the basketball court. But when they have to try to play against NBA-caliber players, it’s just too much of a jump. The NBA guys are stronger, faster, quicker, more accurate, have better basketball IQ, and jump a lot higher. Most Division 3 players don’t stand a chance. It’s like trying to compete against a perfect storm of genetics and work ethic.

I sometimes feel like I run into this situation with rental applications.

BDF Realty receives some applications from perfectly fine, average tenants. They have decent credit scores, a few late payments from their prior landlord, and have some debt. But we have to turn them down. Why?

Because they were only paying $900.00 in rent and want to rent a house that rents for $1,500.00. With rising rents in Charlotte, this has become a more common situation.

We have to ask: if the tenant was late a few times at $900/month and apparently has consumer credit card debt that is being carried from month-to-month (aka living beyond their means), what is it going to look like when the rent jumps up to $1,500/month? Where is that extra $600/month coming from? It would require a lifestyle change that most people don’t want to and/or are unable to make.

It’s certainly not impossible. But just like the aforementioned four Division 3 players being the only players to make the NBA, it is unlikely to work out. The jump in rent is usually too great.

No one (tenant or landlord) wants a situation where it is a struggle to make ends meet. Be cautious when accepting tenants who might not be equipped to make the big jump into the NBA.

Happy Landlording!