Is Signing Zion Williamson a Worthy Tenant Placement Strategy?
“Therefore everyone who hears these words of mine and puts them into practice is like a wise man who built his house on the rock. 25 The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock. 26 But everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand. 27 The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash.”
(Jesus Christ in Matthew 7:24-27)
“…(Zion) Williamson and the team quickly agreed on a five-year rookie max extension worth at least $193 million. The new deal will kick in at the start of the 2023-24 season, and the figure could rise to $231 million if Williamson makes an All-NBA team or wins a major award next season. The No. 1 overall pick in 2019, Williamson’s career has been plagued by injuries and concerns about his conditioning. He missed nearly his entire rookie season after undergoing knee surgery, was shut down early in his second season with a broken finger and did not play at all last season due to a broken foot that required surgery and did not heal as quickly as expected.
When he has been on the floor, he’s been spectacular. In his second season, when he played 61 games, he averaged 27 points, 7.2 rebounds and 3.7 assists per game while shooting 61.1 percent from the field, and was named an All-Star. All of which is why, despite his injury history, the Pelicans were eager to extend him as soon as possible. At the same time, giving $193 million to a player who has been on the court just 85 times is a risky proposition.”
(Jack Maloney in CBSSports.com 7/29/22)
As stated above by Mr. Maloney, when Zion Williamson is healthy, he is a spectacular basketball player loaded with potential. With experience, he could even be much better!
If Zion was a healthy tenant, he’d be the dream of any landlord. He’d be paying above market rent, he’d keep the place spotless, the rent would come in early each month, and there would never be any outside complaints about him. He’d maintain the property flawlessly and even take care of minor repairs on his own (and on his own dime!). His uncle would be a world-class handyman who loved to stop in and help his nephew out with some free repairs and upgrades from time-to-time. He’d kick some courtside tickets to his favorite Charlotte property manager when the Pelicans came in to play the Hornets. And, to boot, Zion would love the house and want to rent it forever.
Cash flow heaven!
But what if, as his application suggested could happen, he got hurt and lost his job? Things could start going downhill quickly for Mr. Williamson (and his landlord):
Rent? Late and not paid in full. Eviction is probably required (NBA tickets now nixed)
Repairs/Maintenance? Not up to it
Outside Complaints? The lawn guy who is not getting paid stops the service. Air filters are too expensive now. The HOA and City are up in arms and threatening fines.
His Beloved Uncle? Now that Zion is hurt again, he doesn’t seem to come around…
But Zion? He still wants to stay in the house forever!
As a property manager in Charlotte, we get rental applications from people similar to Zion. They have a lot of potential and are willing to pay top rent, but their rental screenings show that they are susceptible to bad stretches of luck (which made some of their past tenancies bad landlord experiences…). The question is: are they just isolated events in their lives or a pattern? Is Zion Williamson going to continue to miss seasons with injuries or will he turn the corner? It’s impossible to predict. The New Orleans Pelicans apparently believe he will be healthy as evidenced by them handing him a $193M guaranteed contract.
So is the high risk, high reward strategy a good or bad one? I believe it depends who the landlords are and whether they can financially handle the downside.
Example: The institutional investors who have bought up thousands of houses in Charlotte seemed to have embraced the high-risk strategy. They list their rental homes for above market rent and then accept risky tenants who are willing to pay. Does it pan out? Well, I had read something that said one of the institutional investors had a 25% eviction rate; that’s super high (bad!). It also means that 75% of their tenants were able to pay the above market rent to them monthly (good!). So spread over enough houses, the excess rent may be able to pay for the evicted houses that face no incoming rent, court costs, and needed repairs. The math could work, even in their favor(!), when factoring in that they probably have faster tenant placement times due to less stringent tenant screening.
However, we work mostly with smaller investor-landlords (the “Mom-and-Pops”), where this strategy wouldn’t work well. One bad tenant could destroy their profit for the year, let alone two of them. We need “build on the rock” tenants, not “sand” tenants, because our property management clients need them to hold up in storms. So that has been the strategy that we have used. It requires more stringent tenant screening and sometimes a longer placement time. But we will feel it is the wise strategy for our particular client base.
Zion is a great, generational basketball talent and all basketball fans want him to get healthy so they can enjoy watching him play. But not all landlords can afford to risk $193M to find out if he’ll even be on the court. Pick your tenant placement strategy accordingly!
Happy Landlording!
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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!
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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!
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