“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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