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!

COVID-19 Landlords: 7 Positive Developments

“The grass is always greener on the other side.”

Ovid

 “Every cloud has a silver lining.”

John Milton

When I was growing up, I liked to complain.  And now that I’m older, I wish I didn’t complain, but sadly it still happens a lot (mostly in my head as I’m usually bright enough to keep it to myself).  Old habits die hard, or don’t die at all.  Thankfulness is not a natural response for me.

When I was a kid complaining about doing yard work, my older brother asked me what I’d prefer to be doing instead.  “Anything!  Riding my bike, playing basketball, watching TV…”  He looked at me, smiled, and walked away.

Later, after I had finished the yard work, I started to complain that there was nothing to do.  “I’m so bored!” I wailed.  My brother was in earshot and asked me about all the things I would have been doing if it wasn’t for the yard work.  “Oh yeah… I forgot about those.”

I try to keep that story in mind with the current COVID-19 situation.  When I was (sniff, sniff) “sooo busy” and wishing I could be doing “something else” prior to it, “something else” time came abruptly and is largely here for the foreseeable future.  But now I can’t seem to recall most of what else I wanted to do.  Now I just think of the things I’d prefer to be doing if things were back to normal: meet with people, go to public places, take “non-essential” travel, etc.

If I was smart, I’d begin to write a list of all the things I wanted to do after this pandemic is stamped out; then I’d have a list of awesome activities waiting for me.  Ironically (and sadly), when things went back to normal, I could work on my list of things to do when the next pandemic rolled around and I had a lot more isolated, free time. 

In truth, every situation has pros and cons.  So I thought I would focus on the positive developments in property management during this COVID-19 period and give thanks for the following 7 things:

1. The government is giving money out to everyone. Money pays rent.

2. The lease renewal rate is way up.  This keeps cash flowing for landlords and gives tenants stability amidst uncertainty.

3. Tenant repair requests seem to be low, which is a bit surprising to me.  I thought with people being home more often, they’d find the time to point out more things that are broken.  However, local ordinances would only allow us to repair major system issues, so many requests would be denied anyway as a matter of law.  Tenants have told me they are fixing some things on their own which saves landlords money.

4. Mutual understanding seems to be up.  Owners understand some tenants are in tough spots (and vice-versa) and are showing patience.  And tenants seem to understand that it’s tough for owners to pay for repairs (and their mortgage) if they aren’t taking in any rent from them.

5. The Charlotte market has finally slowed a bit.  It’s been 6-7 years of almost non-stop growth and activity.  Though no one will admit ever wanting it, but a breather isn’t always a bad thing.

6. Existing tenants who are moving out of their rental houses are happy not to have prospective tenants visiting as the new local ordinance outlaws showing occupied homes.  Landlords are saved from having to begin unwanted showings and the (sometimes) tough conversations that go along with them.

7. There is (much) more time to spend with family.  The peer and societal pressure to be involved with outside things has almost completely dissipated.  I’m not sure when we will have this type of relative freedom ever again.

In the most negative situations where there are ample items to complain about, there are always positive developments as well.  Be thankful for what you can– there’s more than you think.

Happy Landlording!  And Stay Safe!

Property Managing the Coronavirus: Business as Usual?

“…There is nothing new under the sun.”

King Solomon in Ecclesiastes 1:9

Well, I’ve been doing this property management thing for a while now and this coronavirus is new.  The sick game of infection tag (where you actually don’t have to even touch but be in a 6-foot radius) is baffling and scary. 

But the underlying trend of “social distancing” has been growing rapidly in property management.  That’s not new at all.  Technology has made distancing all the rage in the name of cost and efficiency.   Marketing houses on-line, self-showings, on-line requirements and applications, on-line payments, and e-signing leases make meeting almost obsolete.  Right?

I mean, who wants to meet with the public?  And from the public’s perspective, who wants to meet with the property managers?  Both parties would probably be happiest just transacting impersonally.  It’s faster and both parties get what they want.

When this crisis first started, it led to going through our processes to see where we had physical contact with customers or were the cause of other people (Realtors, vendors, etc.) having contact with our customers at our direction or with our permission.

We changed the following business practices this week:

1. No in-person home showings by us of vacant properties
2. No showings of tenant-occupied properties by us or other Realtors
3. No in-person lease signings
4. Suspended in-home quarterly inspections
5. No in-home repairs on non-major systems

We want everyone to be safe and support the government’s efforts on tamping down and eliminating this threat.

Technology allows us to still operate the property management business and serve our customers under these conditions.  So I’m thankful for that.  However, it was eye-opening to me on how little of an adjustment it was to batten the hatches.  And I wonder if this is just the excuse property managers are looking for to make these changes permanent.

I hope not.  I find one of the toughest things to decide on with all the technology offerings at our disposal is how much of the people element we want to wring out of the system in the name of “efficiency” (I’m not sure how much more efficient some of this actually makes us, but that’s for another blog…).  The personal stuff makes us a company, not just property management robots.  I feel there’s a ton of value there.

I like meeting our owners, tenants, and vendors in-person.  I can try to make some business case that it helps us get better service, improves retention, improves Google ratings, blah blah blah… But at the end of the day, I want to like being at work!   And that has a lot to do with personal relationships, the kinds that are formed best without “distancing”.

Business with coronavirus may be the culmination of where property management has been going since the birth of the internet.  But I think we’ll all be poorer if this ever becomes business as usual.

Happy Landlording!  And Stay Safe!

Tenant Management: Be Nice Until…

“A brother wronged is more unyielding than a fortified city; disputes are like the barred gates of a citadel.”

Proverbs 18:19

“I want you to be nice… Until it’s time not to be nice.”

Patrick Swayze to the other bouncers in Road House

There’s a danger of showing your age when quoting lines from the classic movie, Road House.  Younger people have no idea what you’re talking about.  It’s not as bad as making a “Rosebud” reference from Citizen Kane (1941), but it can make you feel like you’re in the same ballpark sometimes.

For the uninitiated, Road House is about a bouncer (Patrick Swayze) who is hired to go to a small, backwoods town in Missouri where some local ruffians are ruining a local bar by making it a warzone for fights.  His job is to restore peace by training the staff to deescalate the increasing violence. 

His first training session with the bouncers starts with him giving them the advice of “be nice”.  No matter what bar patrons say to them, they shouldn’t take it personally.  It’s a job.  He instructs them not to retaliate, but walk offenders out of the bar, nicely.  They should be nice, until it’s time not to be nice.

The inevitable question he gets after this speech is “how do we know when it’s time not to be nice?”  He answers succinctly, “You don’t.  I’ll let you know.”

As a Charlotte property manager, we often run into the same question.  This may come as news, but tenants don’t always follow the lease to the T.  They want to do what they want to do, regardless of what they signed their name to.  This can be frustrating.  And it can lead to the impulse to escalate situations quickly by invoking phrases like “throw you out on the street”, “it’s eviction time”, and “you’ll never live indoors again when your next potential landlords ask me for a reference”.

That’s not nice.  And it’s usually foolish.

In my experience, nicely asking tenants to do something differently is effective.  For example, if they are leaving the trash cans out for days which elicit HOA complaints, we may ask, “Would you mind trying to get the trash cans in a little earlier so we can be compliant with the HOA rules?  I wouldn’t want them to start sending fines.”  Or “can you try to make your rental payment a little earlier?  The owner needs to be able to pay his mortgage on time and it would also save you from donating late fees to us every month.  You’re usually only off by a few days.”

Most tenants are reasonable and respond well to landlords who ask for things nicely.  I feel as a property manager, one of our most important jobs is to establish a respectful relationship with the tenants who rent from us.  We both need things from each other and it’s much better for all involved when the relationship is cordial. 

However, when a landlord is repeatedly ignored or there are egregious violations, it may be time not to be nice.  This is when court action may be necessary, but it rarely leads to a happy ending.  Remember, the tenant and his/her family are losing the place where they live and sleep; in Charlotte, at least, it’s going to be difficult for them to find another house easily due to the lack of available housing and a recent eviction on their credit.  They are in a really bad situation that they will probably blame the landlord for.

At this point, the relationship in most cases is irrevocably broken.  The chances of receiving additional rent are low and the house is usually returned in horrible shape.  It’s a true “lose-lose” transaction.

It’s actually the same ending as in Road House.  When it was time for Swayze and his fellow bouncers not to be nice, it infuriated the bad guys and a civil war broke out in the town.  A lot of people got hurt (including Swayze’s best buddy, Sam Elliot, who was killed) and a lot of property was destroyed.  In the end, Swayze got his Pyrrhic victory which, outside of movie logic, would only be considered a complete disaster.

So, be nice and try to keep things nice as long as it depends on you!  It’s much better than having to turn to the alternative.

Happy Landlording!

Your Car & Tenant Strategy: Pay Now or Later?

Most people own a car.  Statistically, there are more registered cars in the United States than there are licensed drivers!  And people have different strategies on their ownership depending on that they want to pay.  Some people like expensive foreign cars, other people just want a “beater” to get them from point A to point B.  Some keep them a long time; others keep them less than a year.

For the sake of this example, I’ll separate car owners into 2 categories with the pro’s and cons of each:

1. The stereotypical Realtor car owners:  They want the latest and greatest car to flaunt and exhibit success.  They’ll buy or lease a new model of car and then trade it in every 6 months or year to upgrade to the newer model or newest taste. 

Pros: They look really good!  Their Instagram is cool and lots of their pictures seem to have the car in it somehow.  Though they may make others feel poor and unsatisfactory at times, people want to have a few of these car owners as friends so they can drive them places to make an entrance.  And they never have embarrassing car problems which leave them curbside and ruin road trips.

Cons: It costs a lot more money to roll like this.  Friends may feel poorer than them, but in actuality, their net worth might dwarf theirs.  There is more paperwork involved in constant car turnover, but the upside of filling it out in a new fully-loaded Tesla may make up for it.

2. The long term car owners:  They will literally drive the wheels off the car.  They seek a good, reliable vehicle that looks good at first, but will continue to drive it as it mechanically and cosmetically deteriorates.  A reactive repair policy will fix major operational issues so it will continue to run, but it will stop looking cool fairly early in the ownership game as it becomes a “Mom/Dad Car”.  As the average age of a car in the United States is 12 years old, most owners follow this strategy.

Pros: It’s much more economical and takes much less administrative energy. 

Cons: Their Instagram doesn’t feature their car and their kids groan when it’s their turn to drive the carpool.  There are ketchup stains on the car mats and a few rips in the seats.  Buffing out the scratches on the exterior is not in the budget.  The tires are starting to bald so it’s a little slippery at times in the rain.  The tape deck stopped working 2 years ago when it ate “Billy Joel’s Greatest Hits, Volume 1”.

Landlords are similar to car owners when replacing “new cars” with “new tenants”.  When tenants move out, it gives the landlord or property manager the opportunity to come into the property and perform deferred maintenance.  If tenants vacate after a 1-year lease, the rental home usually looks pretty good and there is not much to do.  Fix-up costs are minimal.

But what about when the tenants stay for a long time?

Pros: It’s great for cash flow.  Having a tenant pay month-in and month-out for 8-10 years is a dream.  There are minimal management costs and the loan is being paid down significantly as the property is appreciating (especially in Charlotte!).  The landlord’s net worth is climbing and the property is being maintained by the tenant.  Good stuff!

Cons: When the tenant eventually leaves, it’s time to pay the piper.  And this is where it hurts a lot at one time.  I notice I don’t see many late night real estate gurus touting “Millionaire Real Estate Dreams” covering this topic.  Unless a landlord is really lucky, the home will need to be painted.  The carpet will need to be replaced.  There will be miscellaneous broken things inside and outside the house that the tenant learned to live with that need to be addressed.  These things cost thousands and thousands of dollars.  Totally not cool!  And it burns even more when the incoming monthly rent flow stops at the same time.

Much like the old car where the repairs start becoming so extensive that it needs to be replaced (expensive), the homes with old tenants need to be revamped (also expensive!).  Paying these expenses as late as possible is economically more sound and costs less overall, but paying all the deferred maintenance at one time is painful.  Not everyone has $5-10K sitting around!

When adopting a long-term strategy for keeping a car or a tenant, it is wise to put aside funds for this fact- No car or tenant lasts forever and longer stays equal higher eventual costs.

Happy Landlording!

The Police & HOA’s: Only Good Until You Need Them?

“If you hire someone to dig up dirt, they’re going to dig up dirt.”

Bob Warner (Season 2 of the television show 24)

It’s hard to be part of the police force these days.  Most of what is reported about the profession is unfavorable.  And it can seem like they focus on lesser crimes while neglecting larger crimes that seem to go unabated.  Who hasn’t heard some variation of, “Why are they pulling me over for speeding 10 miles over the speed limit?  Aren’t there unsolved murders they could be working on instead?”  It’s a tough gig when you’re just trying to do the job the law tells you to do.

Home Owners Associations (HOA’s) get similar treatment.  They are the “police” of subdivisions.  Their job is to ensure that the neighborhood rules are being followed, even seemingly minor ones.

BDF Realty isn’t in the HOA business per se, but we do “work” with them occasionally when we field their complaints on rental homes we manage.  They’ll send us a letter (some affectionately coin these letters as “nastygrams”) like below:

To whomever this may concern,

We hope you are having a great day!

And it must be a great day for you because you get to sit inside munching on Cheetos and watching Netflix while your neighbors deal with the unsightly vision of your empty garbage can still sitting at the curb 3 days after collection!  As our property values plummet, we all collectively wish we could smash your face and wipe that snug, lazy smile from your cheesy lips.

Sir/Ma’am, you are worthless and weak.  If your garbage can is not rolled back to the house by 12/1, we will be forced to haul you in front of our next HOA meeting/tribune and publicly shame you for your selfishness (while fining you $100/day).  You are an unsightly blot on our fine subdivision.

If you have already moved your garbage can, please accept our half-apology.  It never should have come to this.

Have a wonderful week!

Love,

Your HOA

P.S. May God have mercy on your soul.

P.P.S.  Please join us for crackers and hot cider at the clubhouse on 12/8 for our “Holiday Meet & Greet” with a “Frosty the Snowman” theme.  Prizes will be awarded for the best snowman/snow-woman/snow gender-neutral costume.  Look forward to seeing you!!

(Author’s Note: the letter above might not be verbatim, nor closely resemble an actual HOA correspondence)

So why even have an HOA if it is a bother?  At the end of the day, they are being paid by YOU to police YOU.  They don’t have to exist; certainly not all neighborhoods have them.  HOA’s, as the police, are only around because members of a subdivision/society choose them into existence.

So what good do they do?  HOA’s are nice when you have a problem with a neighbor that you can’t call the police for.  They are painting their house pink.  They are building a shed bigger than their house.  They are putting on a chain link fence with barbed wire while everyone else has a white picket one.  Their garage has paint peeling off and is an eyesore.  They don’t pay their pool fees.  They never bring in their garbage and recycling cans…

HOA’s, like the police, can seem annoying when they get into your business.  But it is nice to have people to call when you need them.  So when you see your HOA management representatives at the “Holiday Meet & Greet”, compliment them on their well-rounded snow costumes and bring them a cup of hot cider.  They are there to help you!

Happy Landlording!

Charlotte’s “Cinderella Homes” Meet the Fairy Godmother

“There is a time for everything, and a season for every activity under heaven: a time to be born and a time to die, a time to plant and a time to uproot…”

(Ecclesiastes 3:1-2)

As a long time Charlotte property manager, the growth of the city and its real estate here has been amazing.  I guess when you’ve been doing something for so long, you wind up telling stories about how things “used to be” which makes you sound old.  And maybe I am old as younger guys on the basketball court say (“you guard ‘old head’ (me) over there”) and my younger self would also have said “if you are doing something for 15-20 years, you’re probably old”.

Well, I’ll own it, so as an old man I might as well tell an old story.  I remember when I started investing in real estate back in the early 2000’s, there were these smaller, antiquated homes that people were always trying to get the public to buy.  The prices and stories were great- $10-$20K homes which would rent for $500-$600/month, great cash flow, and the possibility of great capital appreciation if the area became gentrified.  You could buy one on your credit card. 

But they were Cinderella homes before she met her fairy Godmother.  Many houses like this had been perpetually on the market for 10 years.  No one was taking them to the ball to dance the night way.  They were small, in bad/dangerous areas, and in serious need of major repairs.  The windows were boarded up and the feeling that your life expectancy was about to take a major dip was on your mind when you went to do a walk-through.  A friend of mine (much tougher then me) told me his strategy on owning a bunch of them:

I show up at my renters’ doorsteps each Friday evening when I knew they had been paid earlier in the day.  They would hand me cash for the rent and then I’d go on to the next house.  One time, I got ripped off when someone pulled a gun and took a few thousand dollars of rent from me.  Since then, I’ve been packing and I haven’t had a problem since.

Well, I haven’t spoken to this friend in several years, so I’m not sure if he is still among us.  But he sounded like a real man; my “smarts” (or arguably, my lack of courage) never allowed me to get too involved in buying many houses in that price range.  But I did succumb to allure of buying a few which led to some challenging situations throughout the years. 

Fast forward to 2019…  I’m getting letters, robo-calls, and text messages from random investors saying they want to buy these old houses with all-cash (no loans needed) and “as-is” (no repairs asked for).  Cinderella homes now seem to be the rage.  And they sell in the $100K range with no repairs.

So what to do?  The no-brainer answer seems to be to take the money and run.  An opportunity to unload these rental homes easily at a profit seems to be a gift horse that shouldn’t be looked at directly in the mouth area.

But then, on the other hand, you have that FOMO (Fear of Missing Out).  Values and rents in Charlotte keep rising as 66 people on average move into the region every day and that only seems to be growing, not abating.  Holding costs for these types of houses are relatively minimal with smaller mortgages (if applicable), low property taxes and insurance, and usually no HOA fees.  And most of these houses are located near Uptown which might mean they are primed for further future price and rent appreciation.  In this economy and market, the outlook for these homes looks pretty rosy.

At the time, it was not so obvious that the Prince should have chosen and married Cinderella.  He could have bypassed Cinderella and her difficult stepfamily and had his pick of the other princesses with less baggage and/or simply enjoyed a few more years of his bachelorhood.  And who knew that a momentary infatuation would last forever?

I guess the decision depends on one’s investment outlook.  A bird in the hand is worth two in the bush or more risk equals more reward?  The Charlotte market can’t keep going up indefinitely, can it? 

Sometimes it’s not clear on how to get to what “happily ever after” looks like in the rental home game.  Cash out, hold, or double-down?

Happy Landlording!