Charlotte Property Management Weekly: When Will Rental Rates Rise?

Every property owner I’ve ever met (including yours truly) wants to charge the highest rent possible. Every tenant wants to pay as little rent as possible.




Sorry, there is no huge revelation here. This is pretty much the way any market works. The girl who sells cans of peas wants you to buy them for $100/can, and you want to buy 3 cans for a dollar.



This is what a free market is all about. What are buyers and sellers willing to accept price-wise?



Then supply and demand are thrown into the mix. If the girl is selling the peas for $100, and five other people are selling them for a dollar, the $100 price is not going to fly. But let’s say the pea market heats up (it becomes the rage in Europe) and the $100 girl is the only one who has peas to sell now. You come home and your wife tells you she is dead set on serving her famous pea soup with a side of pea pilaf for your anniversary dinner. Now, $100 may seem like a great deal!



The same is true of the rental market. When the economy is great (and especially when properties are in a hot geographic area), rental prices are able to rise because homes are snapped up as soon as they go on the market. The supply of homes is low and demand is strong.



Conversely, when the economy and real estate market are slow, the rental market suffers. The people who can’t sell their homes put them on the rental market, which join the many homes that are already on the rental market. This creates a glut of homes (increased supply).



With many rental houses to choose from (low demand), much like the many sellers of peas example, the prices must be lower. This has happened for the past few years. To be competitive and fill their properties, sellers have had to drop their rental prices.



Which leads to the question we really care about: When can we raise the rents to my properties? In short, soon. Why is that?



Many investors and home owners are sick of losing money every month on their rental properties. Some can no longer afford to be in the real estate investment game. As national sales numbers have shown, short sales and foreclosures continue to dominate the market. Many home owners are letting their houses go and this activity is a growing national trend.



As banks continue to take growing losses on bad loans, they will loan out even less. A recovery is not imminent; defaults will continue to abound.



However, in terms of the rental market, short sales and foreclosures will accomplish 2 things:

1. Removing rental homes from the market as owners let their investments go back to the bank (lower supply)

2. Adding foreclosed homeowners to the tenant-pool who now need to rent (increased demand)



The rental market will recover much sooner than the housing market (which is years away). I believe early 2011 will bring rental price increases, after years of holding the line or being reduced. The market is shaping up to reward the investors who hang on during this difficult period with higher rents and lower vacancies.



So, hang in there! Rentals will be back in 2011 and, in the meantime, “pea mania” has not hit the States and are still available on the cheap.



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. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: The Only Property Management Question You Need

Wow! Only one?




As a Charlotte property manager, we have potential customers contacting us everyday about managing their rental homes. Their questions typically boil down to two:



1. How much can my house rent for?

2. How fast will it take to fill with a tenant?



These two questions are not mutually exclusive.



This leads the property manager to ask the true follow-up question:



How fast do you want the property to be filled?



Duh, today or tomorrow would work! What type of question is that?



It’s the only question.



Here’s the logic: if you put the average Charlotte house up for rent for $100, we could have someone locked up today to rent it. Conversely, if you put your house up for rent for $10K today, it would take us years to fill with a tenant (if ever).



The equation is:

$100 Rent = Tenant move-in today

$10K Rent = Tenant move-in in 5 years

Today ($100) < How Fast you Want a Tenant to Move-in ($X.XX rent) < 5 Years ($10K)



If you want a tenant to move-in within 3 months, a good property manager should be able to tell you what price you should list your home for rent for ($X.XX). Chances are, you won’t be willing to accept the monthly rental price that would have your home filled within two weeks (nor would it be wise). But at least you would have the information to make the choice you want based on your needs.



With all other things being close to equal (marketing of the property, etc.) in an efficient rental market, rental price should determine how fast a tenant moves into your property. Speed is a function of price.



The only real question is, “How long do you want to wait for a tenant?”



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. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: Solving the High-End Home Sales Stagnation with Rentals and Rent-To-Own

Realtors everywhere are breathing a sigh of relief with the upswing in home sales in April and May. Things seem to be picking up a little, they have some money in their pockets, and there appears to be a light at the end of (what has been) a very dark and long tunnel of diminished sales activity.



Though, with the end of the tax credit, it looks like the roadrunner might have just lathered some white paint on the wall ahead as pending home sales are dropping fast.


Owners of higher end homes in Charlotte, defined here as over the FHA maximum of $304K, never really saw this light. They have beautiful homes that are priced relatively low (much too low they would say- and I would agree!). Their houses are still are not selling and the monthly nut on them is just sucking the life out of them. Unfortunately, banks are now requiring so much more (700 credit scores and 10% down minimum) from potential buyers of these homes that there can’t be a fluid market.


So where does that leave them?


Most of the owners of these homes don’t want to go the foreclosure or short sale route. They also don’t like the fact that they know their homes have value that the market won’t recognize at present. Their sterling credit scores and reputation with their former neighbors mean something. They are just not willing to walk away when they can still afford the monthly payment, as unsettling as paying it every month is.


Many are realizing that they need a solution to get them past the next few years. They are starting to explore rental and rent-to-own options. They’ve heard the horror stories that people tell about renters, but they can also do basic math.


What do I mean by that?


Let’s take an $800K home, for example, and say the monthly cost is $4K. The current market value is $600K. They can rent it for $3K. We’ll assume a 2-year lease.


Not rented:

1. Loss of $4K+ (monthly payment, utilities, other holding costs)

2. Maybe sell it for $600K sometime during the time it is on the market vacant


The math: If not sold, they are looking at a loss of $100K+ in 2 years (24 months X $4K + holding costs) OR (if sold) a $200K potential “loss” on the sale


Rented:

1. $1K loss per month ($4K - $3K) on monthly rent versus their costs

2. Assume (medium-to-bad case of irresponsible renters): $15K of damages when the tenants leave (if they don’t buy)


The math: Loss of $39K ($1K X 24 months + $15K damages) if they don’t buy OR the realization of market value (around $800K depending on what the home appraises for at the time of sale) in a year or two if the tenant buys (through a rent-to-own scenario).

So, the results look like this:

Keeping their home vacant on the market: $100K - $200K loss
Renting or Rent-To-Selling their home: >$39K loss


Is it any wonder why the rental or rent-to-own option is gaining traction for higher-end homes in this economy?

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. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: The Top 3 Reasons Why Good Property Managers Matter More Now (Reason #3)

3. The skills needed for selling a home have (and will continue) to trend to more of a solution-based, “cash now, sell later” approach; outright sales are becoming scarcer as there are less qualified buyers available in the market


Consumers are having a more difficult time selling their homes. More people want to sell, but the weak market is not allowing them to at retail prices. 50% of all sales in 2010 have been either short sales or foreclosures. Now that the Obama tax-credit has gone away, first-time home buyers will become an even smaller percentage of buyers; the trend that will continue is discounted home sale prices.


So what does this mean to real estate brokerage? It means that the promise of “list, market, wait, and hope” (then repeat) formula will continue to be a less effective one. Consumers are going to want more. They are going to ask questions like:

1. Why will your listing strategy work?

2. The definition of “insanity” is to do the same things and expect different results. What are you going to do differently?

3. I don’t want to ruin my credit through a short sale and want to stop hemorrhaging cash from an empty home. What else have you got?


This is where having a good rent-to-own or creative financing plan is place is paramount. And this is where a good property manager becomes even more important. Banks have made it clear that they consider most consumers “too risky” to extend credit (and this is before upcoming extensive Congressional regulation!). As the FHA (the savior of the market for the past few years) keeps losing billions of dollars, they are going to tighten standards as well. Uh oh!


But people need to do something now! As the oft-repeated Wall Street mantra says, “The market can remain irrational longer than you can remain solvent.” Where can sellers go to find a solution to ensure cash-flow on their vacant properties with the hope of selling them?


Property managers have been executing solutions in the rental and rent-to-own arena for years! While some real estate agents have seen the trend and have educated themselves in this arena, a good property manager has been analyzing credit and creating solutions for homeowners since they’ve been in business. They know how to screen tenants and have the infrastructure in place to ensure cash flow to home owners during tough real estate markets; and this market, unfortunately, is not close to returning to good and “normal”.


In short, having experience in creating “cash now, sell later” solutions for cash-strapped homeowners is becoming more valuable. And this is why a good property manager is more important then ever!

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. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: The Top 3 Reasons Why Good Property Managers Matter More Now (Reason #2)

2. Tenant selection is getting harder

I remember when we first starting offering property management services, there was a large property management company in Charlotte that had very simple tenant screening criteria:


1. Their income must be 4X rent at minimum

2. They must have good landlord history

3. They have 600+ credit scores


I thought, “Wow! They must have some pretty good tenants if they keep those standards. If they can deliver a tenant within a reasonable time frame, it would definitely be worth using them!”


Now, flash-forward to today. If they are using these criteria to find tenants, good luck! People that pass these criteria are usually called “buyers”, not “renters”. There are certainly some renters of this caliber, but they are becoming a smaller percentage of the rental tenant pool by the day. I imagine this company had to lower their standards so the majority of their rental inventory didn’t sit vacant.


Should they have lowered their standards? What? Wouldn’t that make their eviction and non-payment rate skyrocket?


Not necessarily. Traditionally, this could be considered a “lowering” of standards; however, in today’s market, I would argue that it is understanding, collecting, and interpreting tenant data better. Tenant selection has become more of an art and less of a science.


And this makes it much harder! For example:

A. Does a bankruptcy, eviction or foreclosure mean an automatic application rejection?

B. What ratio of income to rent is appropriate? Does this change for each individual?

C. How much should job history be considered? Should we be looking at it on a company or industry basis?

D. If both tenants work for the same company (and both incomes are necessary for them to be eligible for the home), should the risk model change?


For the past few years (and continuing now), credit scores, housing, and employment have been on the rocks for many consumers. Does this make them all bad renters? How do you tell?


You hire a good property manager and let them worry about it! In today’s uncertain environment, they are much more important today than ever!


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. For a FREE look into his new 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!) go to www.RentToOwnAgentGuide.com.

Charlotte Property Management Weekly: The Top 3 Reasons Why Good Property Managers Matter More Now (Reason #1)

1. If this economy has taught us anything, it is cash is always king and real estate is an investment. The ONLY decision criteria for hiring a prospective property manager should be their ability to maximize the cash flow of your investments. Period.


A friend of mine works for a utility company. The were recently faced with a question on whether they should spend the money to increase their customer service grade from 74% to 77%; they had calculated almost exactly what it would cost to do so. His co-workers were fighting to spend the money. Isn’t great customer service what business is all about?


But, where was the ROI (Return on Investment)? His co-workers didn’t see that spending the money wouldn’t bring in any additional revenue (people didn’t have a choice but to use the utility company). The real question that should have been asked was:


How much will our cash flow improve if we drop our customer service level from 74% to 71%?


This is the type of property manager I want working on my properties. The answer isn’t always to:


A. Put perfect looking homes on the market (though it helps…)

B. Make costly repairs

C. Wait to get upper rental rates

D. Wait for perfect tenants

E. Evict late payers


The answer IS to make the most money on your investments. This is a result of 3 things:


A. Maximizing revenues

B. Reducing expenses (yes, this includes the holding time when properties are empty)

C. Sometimes taking on a manageable level of tenant-risk (letting some tenants be late, etc.)


Cookie-cutter approaches don’t cut it anymore (no pun intended). Just take a look at the drop in retirement portfolio values of the average American, and then look at the hedge fund manager who MADE $4B last year (yes, that’s “B”, as in billion). The stunning thing is that both were investing in the financial markets…


Good property managers maximize the amount of investment dollars paid to you. They use strategic approaches for each individual property (and, yes, the approaches are sometimes unconventional). But they never waver in having you spend less and make more. Period.


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. For a FREE look into his new 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!) go to www.RentToOwnAgentGuide.com. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: Top 6 Miscellaneous Tips for Rent-To-Own Deals

The following is an excerpt (3 of 3) from A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants by Brett Furniss (2010)


1. Option money (written in the contract as such and paid to the owner) should be used as down payment funds (remember to both source and document!). Monthly rent credits can be used to pay closing costs or reduce the purchase price of the home.


2. What about a security deposit? Typically, there isn’t one for several reasons. The first is that tenants only have so much money to put down (option fee, first month’s rent, moving expenses, etc.). The second is that the tenant should be treating the home well (and not destroying it), being that they entered into a contract to potentially buy it.


3. What about insurance? For the rent-to-own buyer, I always recommend renter’s insurance. It’s cheap (around $100 a year) and you’re really glad you have it when something goes wrong. For the seller, they just need to call their insurance provider and switch from a “homeowners” to a “landlord” policy. Typically, there is no price difference.


4. What about inspections? The blanket, conservative answer is to get them done prior to move-in and then the house sells “as-is” at closing. However, being that the tenant will be living in the home for a year or two and the owner is paying for any repairs above $500, you can look at this at a case-by-case basis. Broken things will be found out quickly while living there.


5. What about the much publicized “higher rental rates” you hear about that rent-to-own arrangements command? I don’t see evidence of this. Does this ever happen? Sure. Does it happen often in competitive markets? No. As an example, try to list your rental home for $200 above market rate as a “rent-to-own” and see what your response rate is. There are plenty of rent-to-own opportunities at market rate rent (or below).


6. What about paying for an appraisal prior to move-in? I think this is a waste of money. You can just use comps, negotiate the price, and then wait. When the tenant goes to buy the home, the bank will send an appraiser.

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. For a FREE look into his new 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!) go to www.RentToOwnAgentGuide.com. You can contact him directly at Brett@BDFRealty.com.