Charlotte Property Management Weekly: Maybe You Shouldn’t Fix Up your Rental Home?

The “Golden Rule” was an excellent idea as soon as Jesus said it; our lives would be so much better if we followed it all the time. But it’s not such a smart philosophy to follow it with rental homes. Let me explain.




There are many well-intentioned investors who believe that the “Golden Rule” should apply to their rental properties. “Do unto others as you would have them do unto you.” Through the years, I’ve heard:



1. “I like granite countertops. I imagine that tenants would also like to have them in my $75K townhouse that rents for $550 monthly.

2. “Once the tenant moves out, get started on the new paint and carpet please. I would want everything spotless and new.”

3. “Should we include all utilities in the rental price?”



Americans don’t want average homes for themselves; they want distinguished trophy homes without any flaws. Unfortunately, trophy rental homes with bells and whistles don’t make money; average homes do. So the key is to keep your rental home average and undifferentiated? That doesn’t sound like good marketing, does it?



Don’t get me wrong, these would be very nice improvements that would make the rental move faster. My issue lies with 2 things:

1. The ROI

2. The way to effectively market the increased value in the internet age



The question should not be “Would the tenant like these improvements?” Of course they would! Who wouldn’t?



Rather, the questions should be:

“Will the tenant pay for these improvements with increased rent?

“Will the market allow us to raise rents to cover and profit from these expenses?

“Can we effectively communicate this increased value in our marketing?”



The first problem is the ROI. In short, if you pay $2K to install granite countertops, how much extra rent can you charge? The answer is between slim and none. And slim just left the building. The reason? If your home is priced out of the market, no one will go look at it. And if they don’t go look at it, they can’t see how awesome your improvements are. Pictures only go so far.



The second reason is that it is too hard to effectively communicate extra value in rental homes; attention spans are too short. People look for rental homes on the internet and are clicking between hundreds of them. The main things people are looking at are price, number of bedrooms and bathrooms, and the areas in which the homes are located in.



So as potential renters are clicking expediently through homes, they notice your home is listed at $1,500 and another similar rental is listed at $1,350. Guess which one they click on? Yes, the cheaper one.



"But I have electricity, lawn care and cable included! They would save money ultimately by taking my property instead of the one for $1,350!"  Yeah, that’s probably true. But to learn that, they need to read the house remarks thoroughly and be a math major (and also know the typical bills that utilities in your area run). That’s way too hard.



The “Golden Rule” worked because it was simple to figure out. To move your rental profitably, keep your rental pricing and improvements simple as well!

Charlotte Property Management Weekly: Better to Rent or List Your Home for Sale? 3 Question Litmus Test

This seems to be a FAQ these days. As a property manager in Charlotte, we get many calls from people asking themselves this question.




I didn’t think there was a one-size-fits-all answer to this, but I was corrected. It just seems to come down to who you ask. If you ask:



1. Realtors: “You should definitely put your house on the market! Interest rates are at all-time lows!”

2. Property Managers: “Nothing is selling in this market. You can either eat your mortgage every month as it sits or have a respectful renter pay it for you.”



So which is the right answer?



It really depends on your answers to these 3 questions:



1. If you wanted to live in the area your home is located, would you buy your home at the price it would be listed at? Take an honest look at comparable homes for sale in our area. If “yes”, list. If “no”, rent.

2. Does your house have a differentiator that would make it more appealing than cheaper, comparable houses (aka foreclosures and short sales)? If “yes”, list. If “no”, rent.

3. Can you stomach a possible rogue renter and locking into a negative cash flow for a year or two? If “yes”, rent. If “no”, list.



These questions make it easy and really boil down to a simple question:



Is your home among the best of the best?



If not, it’s like trying to sell your clothes retail when everyone else is having a 50% off sale. If your home is special and you can communicate this effectively in your marketing, then list your home for sale and be confident it will sell. If it is not, then you must rent until banks starting lending to the masses again.



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: Importance of Getting Paid from Rentals in the Next 5 Years

“Go to where the money is.” (Business Axiom)




According to an article in Barron’s this month, the future of the real estate market is in rentals for the next five years. Most real estate agents are hoping this news is akin to the Bush White House claiming the existence of Iraqi weapons of mass destruction (WMD); hopefully, it is just another example of faulty American intelligence.



However, the supporting information for a rental uptrend (as well as brokerage to be on a continued, extended downtrend) is pretty compelling; if this is what is going to happen, then anyone in the field of residential real estate needs to start thinking about how they are going to operate in this type of future. And then think about how they are going to operate in a rental-dominated market.



And let me clarify. When I say “how to operate”, I mean “how to make money” and “how to stay employed in the real estate industry.”



With rentals, this means creating:

1. Quantifiable value

2. Your fee structure

3. A narrative to explain why you should earn your fee



So what does this look like? What is the quantifiable value of a rental tenant? What is my fee? What story (narrative) am I telling to back up my fee? An example:



If I bring a tenant paying $2K/month and they sign a 2-year lease, I just created $48K (24 months X $2K/month in rent) in future cash flows for you, Mr. Owner (this is the quantifying the value). What is this worth? 10%. Why? How about because that is what the commercial agents charge for leasing fees (the narrative)? If so, that’s a $4,800 commission to you.



A tried and true business model in any industry is to take a percentage of the money you bring in. It works for hedge funds (they take 20% of the money they earn for their client off the top), real estate firms, and any other commissioned salespeople.



So, to recap:



1. How much money are you bringing in to your client? (total quantified value)

2. What percentage of it is your fee? (your value)

3. Why? (the narrative)



Those that adapt will survive!



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: 700+ Credit Score Tenants Not the Best Option for your Rental Home?

I was talking to a prospective Charlotte property management client the other day and he had only one criteria he really cared about. He wanted to make sure that we placed a rental tenant into his home that had 700+ credit scores. That was it.


I told him I didn’t think that was a good idea; it would reject a lot of better suited applicants. He told me I was crazy (in so many words).



Well, let’s do the whole Benjamin Franklin pro’s and con’s thing. Then we can make an educated decision.



First, the overall goal must be established. As a Charlotte property manager, we want to make sure that we maximize our client’s investments. Generally speaking, we define this as providing the most net cash flow to our owner clients. Most clients agree that we should be measured by how much money we put into their pockets.



Now for the pros of a 700+ credit score client. They will almost always:

1. Pay their rent in full and on-time

2. Leave the home in great shape when they move out

These are the two biggest concerns of our clients, so these are very good attributes.



Let’s now look at the cons. I could nitpick, but tenants with 700+ credit scores are pretty good to have. So, I just want to focus on one con:

1. They typically vacate after their initial lease expires



This one con crushes a client’s overall cash flow and ROI.



Most people who have 700+ credit scores buy homes immediately. The ones that don’t usually have a reason like they:

1. Are a mobile professional who will move with their company in 1-2 years

2. Are waiting for the right deal on the house they want (Guess what? The deals are here now!)

3. Just moved to town and will buy once they get to know the area



So a full year’s rent is secure, but then there will usually be a few months of vacancy and holding costs that have to be factored in after the 700+ tenant vacates.



The ROI might be better with a tenant with sub-620 scores (who can’t buy) and a solid landlord history? I’m thinking there is certainly a case to be made.



Tenants who stay for years are almost always a better investment than those that are one year and done. In conclusion, it may be time to rethink the “700+ credit tenant or no deal” strategy.



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: Wouldn’t You Want the Market to Know Your Rental is For Sale?

As a Charlotte property manager, we work with many clients who are looking to rent-to-own a home. As the banks continue their non-lending ways, this group of clients continues to grow.




To find homes for them, we look through many sources. Homes listed for rent-to-own (aka lease option or lease purchase), homes for sale, and rental homes. We approach the agents of these homes and ask if their client (the seller) would be open to a lease option arrangement; some of them are and some of them aren’t. Lately, obviously, sellers are more open to this arrangement.



Asking agents of rental homes and homes for sale whether their clients are interested in rent-to-own can be a timely process. The manual effort of calling and leaving messages, and then waiting for responses when the rent-to-own client wants to see the home now, makes it a very arduous process. Then the discussion of actual terms makes this go on forever.



However, in an increasingly illiquid market, most wanna-be sellers are turning to the rental market to decrease the short-term pain of monthly payments on their vacant homes. What they really want to do is sell (and not of the short variety).



If this is true, doesn’t it make sense to have a discussion about this prior to listing the property? The conversation would start with, “Hey, we’ll put your home on the rental market even though I know you really want to sell. Taking this into consideration, we should also communicate to the market your willingness to sell it through a tenant-buyer purchase (aka rent-to-own, lease purchase, or lease option). To do this, we need to sort out three things upfront:



1. Monthly rental price- OK, we got this already

2. Option money required upfront for lease option- 1-3% of the home price is good

3. Rent-to-own sales price- 3-5% appreciation a year probably works



By including this in the listing copy, the market now knows how serious your client is about selling (aka rent-to-selling) the home. This now turns into a potential win-win-win scenario.



Win- Seller sells their home

Win- Tenant-buyer locks into the home they want and are building up a down payment (upfront option fee) and closing costs (monthly rent credit) to purchase in 1 to 2 years

Win- Agents get paid on rental and sale



Note: Your pricing upfront for rent-to-own can also signal to the market how uninterested your client is in selling. If your client asks for a $300 rent premium per month on the rental, 20% upfront option fee, and 15% annual home sale price appreciation, it is clear that they have no interest in rent-to-selling. Actually, this would be good for other agents to know as well!



Ask and you shall receive. Don’t ask and the logic still works!



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: 52 Consecutive Weeks of Writing- Some Random Thoughts on the Real Estate Industry

Writing a blog every week is hard! My hats are off to the people who write multiple times a week, and especially to those that do it every day- kudos!




My thoughts haven’t changed in the past year on the near future of short-term residential real estate (next 1-2 years). Rent-to-own and rent-to-sell (as well as short sales and working with serious investors) seem to be what the main growth areas will be.



As foreclosures continue to rise, banks will not even pretend to relax lending guidelines.



As the US economy sputters, FHA loans will not become more affordable or easier to get. It will actually be the opposite. Fannie and Freddie have lost and continue to lose a lot of money!



People, in general, have less money. For people disbursing it (banks, government, property managers), the pressure of delivering it is on much more than usual.



More real estate offices will close as technology and business realities (aka less revenue and customers) continue to hit. Office virtualization will continue to grow.



I don’t like the thought of owning a business in a downtrend industry. There, I said it. Being involved in high growth industries is much more exciting (and profitable). Property management is a good growth industry with steady income, but the margins are not close to those of brokerage. You live off of property management and vacation from the brokerage business.



The biggest market for rent-to-own and rent-to-sell prospects will continue to be $250K+ homes. These owners (especially those over the FHA maximum loan amount) need solutions for their homes!



Rental (and especially rent-to-own) tenants are plentiful in this market!



Other people are still the best source of blog material!



Is social media going to continue to trumpet it’s ROI in anecdotal format? Has anyone made any money on Twitter on a consistent basis? Let’s see the numbers, not hear stories!



On that token, one of my favorite quotes on social media is, “Conversation is king. Content is just something to talk about.” Twitter is a bit one-sided (aka no conversation), no?



Here’s to another 52 weeks…



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: Rent-To-Own- Just like Burger King for Buyers and Sellers

A lot of banks don’t like Burger King. Why do I say that? It’s simply because they don’t want you to “Have it Your Way.”




I’m obviously a fan of rent-to-own. It’s sort of a nice change from the rigid rules that mortgage underwriters make clients go through. For example, banks have rules like:



1. Must have 3.5% down and it must be meticulously sourced

2. Credit is now run the day of closing. Anything on that report that the underwriters don’t like will cause the loan to get kicked.



This has caused much client consternation. Some have been left in moving trucks in front of what they thought were going to be their homes; then the homes don’t close and they have to go back to their the old homes. I’ve heard that this isn’t a fun experience.



But, rent-to-own on the other hand, is really flexible. There are no rules that wouldn’t allow a tenant to move in. For example:



1. As long as they have the money, who cares where it comes from?

2. If the house is vacant, they could move in the next day (after a tenant screening)

3. If they need additional time to get qualified for a loan, the lease can be extended indefinitely

4. There is no reason for the seller to wait to make financial moves. As long as there is a signed lease, they can submit this to the bank and do what they want.



Rent-To-Own is like Burger King, for both the buyers and sellers. Both can “have it their way” when they negotiate the rent-to-own transaction.



So have fun and put together rent-to-own deals that benefit both parties. And, while you’re on a Burger King kick, get the French toast sticks while you’re there; they are really good!



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.