Scratched-Up Rentals: Possible Win-Win for Tenants & Landlords?

 

A few years back, my wife and I were fortunate enough to take a trip to Barbados.  Due to the many things we wanted to see on the island, it made sense to get a rental car.  When I Googled how American tourists fared driving there, the information that spit out was that driving was fine with two caveats: they drove on the left side of the road which made things trickier, and if we went off the highways, the local roads were narrow and could be challenging.  We didn’t plan on going to any remote places, so I didn’t think much of the second issue.

 

However, when we got to the rental car agency and they went through the costs associated with bringing back a damaged car, I got a little nervous.  I started moving past the shiny, newer convertibles and went to the shabby, scratched-up section of the lot.  My eyes landed on a weathered, small model that had taken some rough driving in its day.  I picked it out and we drove off.

 

On the next to last day of our trip, we took the car up to some tourist spot on the top of the island.  While driving there, the sky began to darken and the winds started to pick up.  When we got there, the tourist spot was closing due to the weather and we were thirty minutes away from our hotel.  It turns out a hurricane was forming and power wound up going out across the whole island.  Everyone was being let go from work and the roads quickly filled up with bumper-to-bumper traffic.  This was not good for a tourist driver!

 

Google Maps was working and it started to give us off-the-beaten path directions to avoid the traffic.  I dutifully followed them and we were now on the local narrow roads where locals were speeding home.  My comfort level was now really low.  Cars were speeding by us on the right side of the road and our clearance from them could be measured in inches.  To create more space, I was hugging the left side of the road.  Unfortunately, I got too close to a curb and resulting in some tire and wheel well damage.  I was praying that we could just get back in the vicinity of the hotel and not be left in the middle of nowhere in a full-blown hurricane.  Fortunately, the car was able to continue on.  My prayer was answered and we were able to leave the car on the side of the road near the hotel. 

 

When I called the rental car agency the next day, they were pretty busy and said they would pick the car up at some point.  I was wondering what my deductible was and how much of this car I was going to wind up buying.  But when I finally heard back from them, they said there was no issue- “No problemo!  Things are good.”

 

I didn’t ask any questions, but I have to assume the car’s condition at pick-up left me a lot of room for damage. 

 

I bring up this story because as Charlotte property managers we are tasked at fixing up homes prior to new tenants moving in.  If tenants are asked if they want new carpet and painting prior to taking possession, probably most would immediately answer “Yes!  Definitely!”  But is that really what they should want?  Sometimes it’s worth a discussion based on their future security deposit return.

 

New carpet and painting will undoubtedly look great!  But it starts a new cycle on their useful life (we generally use a 7-year wear schedule).  If a tenant moves out after one year, there is an expectation that the new paint and carpet would have incurred one year of normal wear and tear and be useable for another six years.  Any wear and tear fix-up expenses outside of one year (a small amount of damage) would be deducted from the security deposit (or billed back if the wear and tear costs exceeded the security deposit).  And costs for these items have really shot up in the last five years!

 

Recently, we had a rental home with a very worn wood floor that we hadn’t refinished for over a decade.  It was scratched-up heavily in a few places.  I asked the incoming tenants if they preferred that we refinish the floor or if they wanted the peace of mind that we would not be charging them for any new scratches on it.  If we finished the floor (a costly repair) prior to them moving in, they would need to be very careful with it.  They opted for peace of mind and some well-placed rugs.

 

Rental homes that are scratched-up can be used to create win-win scenarios for tenants and landlords alike.  Not coming home to a hefty rental car repair bill saved having a shadow cast on a really nice vacation! 

 

Happy Landlording!

5-Star Review Skepticism: Old-Fashioned Way Best to Find Good People?

 

My skepticism of customer reviews has been growing for some time.  I think customer reviews started out well and became very useful to find good people, but have been spiraling down for years for a variety of reasons.

 

I believe the first reason lies in the sheer ubiquity of customer review requests.  If I talk to any person on the phone, I’m getting some combination of e-mail, text, and personal plea for a 5-star review.  And it is not just once in a while; it is becoming part of most business interactions.  It’s a job put on me by companies and they make me feel guilty if I don’t comply, and comply positively.  The volume of reviews has watered-down legitimate performance feedback.

 

Another reason is how the on-line review system has been gamed.  Corporations hire “review help” companies to improve their on-line reviews.  They send out surveys to every person that does business with the corporation and then turns the positive, 5-star reviews into “official”, posted reviews.  The less positive reviews get scrapped.  This has made reviews less and less reliable.

 

Many reviews border on fantasyland.  The 1,000 positive reviews with one company with only a handful of negative reviews?  How is that even possible?  People tend to be negative!  Everyone is so overwhelmingly overjoyed with an overwhelming number of companies?  People don’t generally seem that effusively happy to me…

 

Or how about companies that arbitrate between two parties with competing interests?  It would be like reviewing a judge (or a property manager with their landlord and tenant clients!).  If a guilty verdict was given, the prosecutor would be giving the judge 5-stars and the defense would be giving the judge 1-star.  That makes sense.  Now is it possible that both parties think justice was done and might positively review the judge?  Sure, it’s possible.  But 1,000 times?  No one is that good!

 

If there is one scoop of ice cream left and my oldest son and daughter both want it, how would I always get a great review from both of them?  One is going to love me and the other is going to be upset.  I figure to get 5 stars from my daughter and 1 star from my son (or vice-versa).  Doesn’t that make sense?

 

So… if on-line reviews are trending to be less and less reliable, where do Charlotte landlords find good people to work on their homes?  We are all in need of them!

 

In the old days, people in need of a service would ask a friend.  “Who mows your lawn?  Are you happy with them?”  There are certain friends everyone has that they know are up-to-date on certain things.  They tend to give out the 5-star referrals!

 

In property management, the same goes for finding excellent vendors and tenants.  I’ve always had success when asking our favorite vendors if they could recommend good people in other industries.  And when great tenants recommend their friends who are moving into town, I’m almost positive they will be good tenants too before even running their applications.  Good, reliable people tend to congregate with people like themselves.

 

Are on-line reviews useless now?  No, but I think they are getting there.  I’d argue they need to be taken as a piece of information and handled with a healthy degree of skepticism.  I think it is better to focus more on the comments than the star count.

 

Smart landlords realize that while newer search methods for good people can be moderately useful, old-fashioned methods can be more dependably 5-star worthy.

 

Happy Landlording!

Purpose of Upside-Down Nametags and Fewer Rental Home Photos

 

Early in my business career, I attended a networking event at a local restaurant.  I went to the sign-in table and was enthusiastically greeted by Susie.  “Welcome!  What’s your name?”

 

As Susie found my name on the sign-in sheet, she dutifully checked a box and pointed me to a nearby table with white sticker nametags and black Sharpie markers on top.  “Write your name, your business name, and go meet some great people!”  Then she quickly repeated the same spiel to the fellow behind me. 

 

I did what I was told and uncomfortably started to mill around the room while simultaneously straining to read the other attendees’ nametags around me. 

 

Me: “Hi, Jim.  I’m Brett.  What do you do for Hillman’s Autobody?”

Jim: “I fix cars.  What does ‘BDF’ stand for?  Oh, that’s really interesting…”

 

It was painful for me, as it was for Jim.  As I moved on in the room, I saw a slightly overweight, middle-aged man standing by himself against a far wall with his nametag on upside-down.  I went over to him and then unwittingly stepped into his trap.

 

“Excuse me… Joel?”  I tried to awkwardly read his name by crooking my neck.  “Your nametag is on upside-down.  I just wanted you to know.”

 

“Oh, thanks!  What a klutz I am, Brett!”, he appreciatingly said while reading my nametag.  He then unstuck his nametag and put it on correctly.

 

“But do you know what else is klutzy?  Not having life insurance, Brett!  Let me tell you about it.”

 

And that was the opening that of his 10-minute monologue.  He was very concerned that my grief-stricken family members would potentially being stuck paying for my funeral costs (thousands of dollars!) and what a stain that would be for my deceased self’s legacy.

 

When the conversation came to its merciful conclusion, I politely excused myself and headed to the exit.  When I got to my car, I realized I had forgotten my coat and backtracked back to the restaurant.  I retrieved my coat from its hook and was on my way out when I saw Joel standing by himself again… with his nametag on upside-down. 

 

Wait a minute…

 

So I fell for Joel’s little ruse.  I definitely felt duped.  But, to Joel’s credit, he knew why he was there and what he was trying to do.  Sales is a numbers game.  His purpose was to talk to enough people and expect that one would be in the market for life insurance.  The right conversation with the right person would lead to a sale.

 

In the rental home game, landlords are trying to find qualified tenants to apply for and rent their homes as quickly as possible.  So, they set the bait in the form of on-line rental ads.

 

Prospective renters visit these on-line rental home websites with the purpose of finding the best home for their needs.  To do so, they add some filters to the search criteria (cost, # of bedrooms, size, area, etc.), look through these narrowed down rental home listings, and then click through the details of specific homes to find a few finalists.  Then they schedule times to see these top choices in person before applying for them.

 

In my mind, the purpose of rental ads is to be one of the homes that is visited in person, not just a home clicked on thousands of times.  The more in person visits, the more chance that a home will be applied for and rented.  Most people do not want to keep visiting rental homes without picking one.  If a landlord can create intrigue with the promise of a renter finding their “diamond-in-the-rough” property, this intrigue can generate more visits. 

 

So how does a landlord create intrigue?  One way is to use fewer photos.  As the saying goes, “you don’t know what you don’t know”.  It may seem helpful to prospective renters to be able to narrow down properties by seeing 50 photos and a virtual tour, but landlords shouldn’t want their properties to be narrowed down and eliminated from consideration.  If only 8-10 great photos are posted, it can create a taste of a property that can only be sated by a home visit.  More photos can actually bring up more reasons to cross a rental home off a list, especially in light of hundreds of available homes to choose from. 

 

The purpose of Joel’s upside-down nametag was to start conversations to ultimately generate life insurance sales.  Smart landlords remember that the purpose of landlord rental ads is to generate home visits to induce rental applications.

 

Happy Landlording!

Trump Versus Institutional Homebuyers: Opportunity for “Landlords on Purpose”?

 

“Every adversity, every failure, every heartbreak, carries with it the seed of an equal or greater benefit.”

(Napolean Hill)

 

In recent news, President Trump is working on banning institutional homebuyers (firms owning 1,000 or more residential homes) from buying more homes.  These institutional buyers (IB’s), like Progress Residential, Invitation Homes, American Homes 4 Rent, and others, own about 3% of the homes in America. 

 

The Trump administration rationale is that IB’s with unlimited checkbooks are outbidding families for the same homes which makes achieving the American dream of homeownership harder for regular citizens.  IB’s are typically vultures in the market eagerly trying to buy affordable homes (around $200-400K in Charlotte), so there is truth in that.  After they buy them, they usually fix them up (laminate wood flooring, new paint, new stainless-steel appliances, etc.) and make them higher-priced rental homes.  Then instead of a family owning a home, the family is paying high rent to an IB. 

 

The picture painted above of an IB is not a glamorous one!  IB’s would tell the story a little differently than the Trump administration.  They would say that they provide liquidity for the home sales market as a motivated buyer; this helps American families move on to buy other houses or cash out on their real estate investments.  They would say they fix up houses that are in disrepair and introduce new, needed rental homes to the market for American families to live in.  They are an instrumental partner in keeping American housing stock current and from neighborhoods incurring decay from dilapidated and abandoned homes.

 

As someone who regularly sells homes in this price range, I like dealing with the IB’s.  They always pay cash, don’t quibble with repairs, and close on time.  They are in the business of accumulating homes that fit their investment profile and they are good at it.  The agents who work for them are cordial and non-emotional; they don’t hold a grudge when we reject their offer initially and they are still willing to make a deal months later if we call them out of the blue.  Their offers are not usually outlandishly low; some are actually above what we expected to get from a non-IB buyer.  They are a nice option for sellers to have!

 

In short, I think IB’s are both bad and good.  But I don’t make the rules!  I just try to work my best within them for our landlords, their rental homes, and the tenants. 

 

If IB’s are banned, there will be fewer rental homes available.  And in Charlotte at least, we need more rental homes for the influx of 157 people a day that are moving into our metro-area.  Where will they come from?  The Trump administration says they expect the void to be filled by Mom & Pop investors (aka you and me).

 

So here is the opportunity.  I saw a statistic the other day that said that 51.5% of all US mortgages are below 4%.  I also saw (and have experienced) that the home sales market has been relatively stagnant for the past 3 years.  Many people believe the past low mortgage rates are causing the slow market.  This has been labeled as the “lock-in effect” where sellers don’t want to lose their low interest rate to buy a house with a much higher interest rate.  Their great past interest rate is “locking” them into their existing house.  That makes sense to me.

 

Reviewing the information below:

 

IB’s being banned or curtailed would create fewer rental homes (less supply)

Strong rental home demand continues as experts say that not enough homes have been built and there is undersupply (strong demand)

Previously bought homes with sub-4% mortgages can cashflow better than buying investment homes now at higher interest rates (lower monthly cost)

Buying a new home in a buyer’s market is favorable (lower prices, more negotiation room, & less competition)

Real estate is considered a great investment that adds portfolio diversity while hedging against inflation

 

I would conclude (drumroll please), it might be a great time for smart investors to rent out their “locked-in” rate house and buy a new one to live in!  There are families ready to rent them.

 

As opposed to an “Accidental Landlord” who is forced to turn a non-selling home into a rental, a “Landlord on Purpose” could be a profitable way to ride today’s market trends.

 

Happy Landlording!