Wednesday, June 14, 2023

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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