Rental Homes: You Break It, You Bought It?

 

   

“The “Pottery Barn Rule” is an American expression alluding to the policy of “you break it, you bought it” or “you break it, you remake it”, by which a retail store holds a customer responsible for damage done to merchandise on display.  It generally ‘encourages customers to be more careful when handling property that’s not theirs.’”

Wikipedia definition of the “Pottery Barn rule”

 

I think every parent has there own story on this concept.  My version comes in “Hobby Lobby” when my young son smashed a glass Christmas vase while “admiring” it.  I was within a 50-yard radius (which apparently puts me in the “bad” or “absentee parent” category); I heard the crash and prayed no Furniss was involved.  I wasn’t so fortunate.

 

The next step was to ‘fess up to a cashier or store manager.  As I searched the available employees up front, I was left with the strategic decision of who to approach:

 

1. The 17-year old (does he look apathetic or one that would stick me with store policy?)
2. The middle-aged woman (does it look like she might sympathize/empathize?  Or is she the type that makes an example of a parent who prioritizes reading “Calvin & Hobbes” ornaments over watching his kids on the other side of the store?)

 

The downside of either was $17.99 + tax and a stern look.  The upside was getting off with a warning.  I approached the front gingerly and dutifully offered to pay.

 

“Don’t worry about it!  It happens all the time!”, the middle-aged woman cheerfully chirped.  “Chip!  Go clean up aisle 5.”  The 17-year old gave me a look and grabbed a broom.  Mercy won out.

 

One of the hardest things of being a property manager is the security deposit dispensation after a tenant moves out.  Homes are rarely left in perfect shape which leaves the owner paying a bill to get the rental home back in market shape.  The question that is left is how much of the bill should the tenant shoulder and how much falls under “normal wear and tear”, which is legally permitted. 

 

The problem is that nothing in a house costs $17.99!  Things are expensive.  Steam cleaning a carpet costs a few hundred dollars; if the carpet needs to be replaced, it’s now in the realm of thousands of dollars.  The costs are similar for painting- touch-up can be much less versus a full paint job, but it’s still in the several hundred dollar range. 

 

Very few tenants ‘fess up and offer to replace the carpet or paint the house after they vacate.  In fact, most say that the “place was like that when they moved in” and not getting their full security deposit back is nothing short of an injustice.  Property managers tend to utilize pictures/videos and tenant-filled out “move-in inspection reports” to document what the home looked like prior to home occupation.  These are helpful to ascertain the truth.

 

Regardless, costs can be high if a home is not taken care of.  And if not, there can be a large degree of sticker shock when a tenant receives a bill for repairs that runs in excess of their security deposit.  How could this happen?

 

The components of homes are expensive.  And someone needs to fit the bill.  The assumption can’t be made that the landlord pays for everything short of a wall being knocked down.  “Normal wear and tear” cuts both ways.  Abnormal wear and tear is costly and the tenant is legally responsible for it.

 

It is a win-win when a landlord can return a non-docked security deposit to a tenant- trust me!  Then no one needs to shell out funds to repair folks and a house can be turned over for another family to move into; this is the most desirable and profitable outcome for all involved.

 

But, with rental homes, if you break it, you bought it.  It may “happen all the time!”, but someone has to pay the piper and most home issues are not cheap to fix.  Smashing a $17.99 Christmas vase is one thing, but see what the “Hobby Lobby” cashier says if your kids clip the branches of their $2K “Super-Deluxe” Christmas tree.

 

Happy Landlording!

Comfort of Old Cars & Non-Perfect Rental Homes: Does Anyone Care?

 

 

“Champagne tastes with beer budgets.”

Common real estate agent lament

 

I drive an old car.  And it has lots of miles (almost 300K!).  I’m reminded of this from time to time:

 

“Dude, seriously?  You’re driving that?  Don’t you want to step things up a little?”

An old friend

 

“You thinking about buying a new car soon?  I only ask because I’m looking to buy a car for my teenager and thought you might be interested in selling… How does it run?”

Pastor at my church when I saw him in the parking lot

 

I get it.  Nothing looks like success more than a new, nice car.  If you want people to think that you’re the “property manager to the stars”, you shouldn’t be driving a beater.  Realtors especially lock into this mindset.  A nice car means lots of closed sales.  “You look good, you feel good, you sell good” as the old salesperson mantra goes.

 

But there are positives to driving a beater.  First there’s an overall peace of mind (if it doesn’t breakdown).  For example, when I take things out of my car, I don’t particularly care if it scratches the paint or rips the seat.  When I walk out of the supermarket and someone has dinged my door, I’m OK.  When my young kids spill something in the backseat, I’m not reading them the riot act.  I’m cool.  No worries.

 

There’s also the financial piece.  There are no car payments.  The taxes are low.  Occasional repair bills are taken in stride as they are lower then having a new car.  Insurance is lower with a “liability-only” policy.  I’m not worried about additional miles detracting from the value of the car.

 

Most people don’t subscribe to my “peace of mind” thinking.  They want to look cool.  I’m OK with that, to a point.

 

I see a similar thought process play out in rental homes.  As rental rates continue to rise significantly annually (in the Charlotte-metro area, newly offered rents increased 16.7% from September 2020 to now per CoStar), the tenant income levels needed to support the higher rents also need to rise significantly.  But people’s incomes are not going up 15%-20%.  This is where all the press about the lack of affordable housing comes from.  Renters are becoming “severely cost-burdened” where over 50%+ of their incomes are going to housing costs.  That’s a huge percentage (which many experts call a crisis).

 

What has contributed to this crisis?  One factor is the decision a landlord is generally left with after their tenant moves out and they are preparing the house for the next tenant.  Do they spend a lot of money to make the rental house look great (full paint jobs, new carpet, new appliances, etc.) or do they try to “let it ride” (minimal to no touch-up paint, steam clean carpets, entry level appliances, etc.)?  I think with all the HGTV housing television shows, many owners decide to fully refurbish their rental homes.  By employing this strategy, they are looking to get top rent when it goes back on the market.

 

This only works when tenants play along.  Tenants need to be willing to sacrifice a higher percentage of their incomes for a nicer, updated home.

 

And they are!  Even when they clearly can’t afford it.

 

When some of our clients “let it ride”, we accordingly price the house lower.  The owner chooses to accept below-market rents to avoid a pricey fix-up bill.  They play the long game; every year that goes by, they use the rents to lower their mortgage payment until it goes away (that’s when the landlord game gets a lot more fun!).  And as a bonus for the tenants, they keep more of their money.  They also get a lot more leniency on their security deposit deductions as the house is already worn, so any mishaps they inflict on the house aren’t so noticeable or costly when they move out.

 

But many tenants choose not to make this trade-off.  “The carpet is stained!  The walls have some scratches!  The refrigerator is old!”  Um, that’s why it is priced lower.

 

Most tenants don’t seem to care.  Frankly, it’s shocking to me.  I’ve expected more tenants to happily make the trade-off for the peace of mind it offers.

 

Old cars may not look cool, but they may allow for a cooler, more peaceful life.  But if this line of thinking has little appeal, I suppose landlords need to give people the housing they want.

 

Happy Landlording!

Charlotte Property Management Weekly: 3 Approaches to Fixing Up a Rental Home

We sometimes take over management of homes that have been treated in, diplomatically-speaking, less than desired regard. It’s frustrating for the owners (and the property management company), especially in difficult economic times when cash is scarce.




The purpose of this article is not to talk about the root cause of this destruction (usually poor tenant screening), but rather the options available when faced with a rental home in bad shape.



It comes down to 3 potential approaches:



1. Total Fix-Up: This is when everything is fixed so the home is in tip-top shape. New carpet, new paint, new everything! The upside to this approach is that the home will command top rent and a top tenant, while the downside is that it will demand top dollar to be spent by the owner. ROI on a 1-year rental with this approach is debatable.



2. Partial Fix-Up: This is when the most pressing demands of the house are met. The house is cleaned well, the walls are touched up with paint, and the carpet is steam-cleaned. The goal is to make the house look like a good rental, not a show home. The upside to this approach is that it is much less expensive and will entice a good renter, while the downside is that it will not command top rent and the tenant will usually not be a neat-freak (we love neat freaks!!).



3. No Fix-Up: This is when the home goes to market “as is.” Little to nothing is done to fix the home aesthetically and the tenant is asked to “have an open mind” and the property is listed as a “handyman’s special.” The upside to this approach is that repair costs are low and the home can be put on the market immediately. The downside is tough. Rents have to be lowered considerably, the quality of tenant suffers, and the house will be in even worse shape (think catastrophic) when the tenant moves out (evicted or otherwise).



So which is the best approach? The answer is the universal response in business school to any question- “it depends.” At different times and situations, each approach is appropriate. Many times this answer is dictated by finances. I mean, if you have no extra money, you are forced to use approach #3, right? And if your rental home has gotten to the point that it is absolutely disgusting, you probably have to opt for approach #1 at some point.



Generally-speaking, I’m a fan of approach #2. I try to stretch #2 as long as possible before I’m faced with the decision that the house has to go to approach #1 (or #3). Once I’m at that point, my preference is approach #1 (if finances allow).



The approach chosen for home fix-ups is a huge component on their ROI. One size does not fit all (as some are wont to do). Choose carefully (and profitably!)!



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)