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!

“No Showings in My (Rental) House!” Really?

No one comes into my house!

It’s a privacy issue.

It’s a security issue.

I won’t allow it!

No... No…  No, no, no!

That’s not legal!  Is it?

 

So goes a few of the responses from tenants when we begin showings for prospective renters of the house while they are still living there (typically between 30-45 days prior to their lease expiration).  And guess what?  We’ve never met a tenant who likes it.  Not one.  Nada.

 

So why do it?  There are a lot of reasons, mostly to the effect of decreasing the amount of time that the home is vacant.  Because time is money, right?

 

Is it legal?  Most certainly, yes, if any type of decent lease is being used.  It’s item #10 in ours.

 

I get it, though.  I wouldn’t want strangers walking around my house and essentially kicking me out of it when showings are scheduled.  It would be annoying.  It would be disruptive to me and my family’s life.  I wouldn’t like it!

 

But, unfortunately, tenants do not own the houses.  If owners want to show their rental properties while tenants live there, tenants should comply with their lease.  Nicely.  Because there are other parts of the lease that owners might not like complying with either.

 

I’m not paying for that.

That repair is more than my mortgage!

That doesn’t work in the house I live in and I need to pay to fix it in theirs???

My mortgage company doesn’t let me be late on my payment without serious consequences; they pay a small late fee.  Do they know this?

Why do I need to pay property taxes and HOA fees when I don’t even use the things there?

 

And so goes some of responses I’ve heard from our property management clients over the years when they see all the lease requirements of being a landlord.  When owners get a call saying the air conditioning unit at their rental property is shot and they need to pony up $6K pronto to get it fixed, they don’t like it at all.  I’ve been there.  We both want to say:

 

No... No…  No, no, no!

 

But in a lease, both parties have unpleasant responsibilities.  Like part of the above example, the lease says the landlord is responsible for making sure the major systems of the house are operable and remain operable (item #6 on our lease).

 

So for the lack of privacy/security/inconvenience for 30-45 days of prospective tenant showings (usually much less if the property looks nice for showings and times are made available when Realtors want to show it), there is a comfort in just picking up the phone when the refrigerator stops cooling and not having to pay anything or even find the vendor to use.

 

Do tenants want to trade lease responsibilities now with the owners?  Would tenants trade 30- 45 days of showings for making any needed repairs during the tenancy?  Probably not. 

 

But landlords would say: Yes… Yes… Yes, yes, yes!

 

So there are pros and cons on both sides of the rental game.   Accepting them makes a make much smoother tenancy for both parties.

 

Happy Landlording!

Eviction Court is Not Cool (No Matter How Much You Like Legal TV)

“Settle matters quickly with your adversary who is taking you to court.  Do it while you are still together on the way, or your adversary may hand you over to the judge, and the judge may hand you over to the officer, and you may be thrown in prison.”

Jesus Christ (Matthew 5:25)

 

My wife and I have been watching the old legal TV show, The Practice, lately.  What an exciting show!  Bobby Donnell thundering at witnesses in court, Jimmy “The Grunt” Berlutti bumbling through cases, and Eugene Young intimidating opposing counsel makes for some entertaining television.  It almost makes being in court a “cool” experience where justice can be cajoled and won- a battle of righteous gladiators!

 

But in reality, going to court for an eviction is not that cool.  It’s a last resort.  Most of the time, it is a result of poor tenant screening, poor management of expectations, and poor management of life circumstances.  It’s a property management failure.  It’s costly, time and energy consuming, and an overall negative experience.  It’s a game of losers, played by losers; no one is a “winner” (besides the attorneys).

 

How can it be avoided? 

 

Let me preface this by saying that players in the rental game will have to evict a tenant and go to court at some point.  No matter how well the items below are managed, there will be some life event (job loss / illness / etc.), some expectation not met (“the air coming out of the AC is giving me headaches- replace it!”), or some sudden personality change that will necessitate it.  But I believe it can be avoided most of the time.

 

Here are four quick tips on avoiding tenant-related court visits:

 

1. Good tenant screening: I’d especially focus on the tenant’s ability to afford the rental by drilling down on their income (monthly cash flow) and the credit report (especially debt level and other current commitments).  We all want to fill properties quickly, but cutting corners on the money part puts everyone in a bad position when the numbers have little possibility of netting out.  Don’t be set out for failure at the beginning.

 

2. Set expectations upfront: Use a good lease and explain what the landlord is going to do and what is expected from the tenant, especially regarding the condition of the house and future repairs.

 

3. Manage life circumstances: Avoid setting eviction criteria in stone.  People have bad months.  Work with the tenant (within reason), but never go past 1 month due.  I’ve rarely seen tenants be able to get caught up being that behind.

 

4. Be nice: In my experience, no one wants to get kicked out of the house they are living in if it is not their idea; getting evicted is failure and life-altering.  However, if they want to exit, help them.  Someone else will want the house.  The first priority is getting the house back vacant; the money can be worked out at a later time.  Once the house is vacant, a new and better tenant can be found to get back to cash-flow positive.

 

Winning in court can feel “cool” in the moment, but cleaning up afterwards is definitely “not cool”.  Let the TV lawyers get the glory and try to stay out of court in real life.  Losing, especially at the hands of a sympathetic judge on some loophole, is even more “not cool”!

 

Happy Landlording!

“Big Apple’s” Effect on Charlotte Rental Prices: Anti-Trust or New Market Reality?

You are an apple farmer- a good one!  You know your soil, got the regular watering down, and are complimented often for how crisp and tasty your apples are.  You write a pretty good blog about them too.

 

On the business side, you price your apples the way your father did.  You factor in all your costs and then add your 50% mark-up; it usually comes out around $1.00/pound.  Your competitors are usually around that price as well.

 

But a new apple farmer, Big Apple, has come into town.  They have a lot of investment capital and are buying up apple fields everywhere.  They pay a good price for these fields; so many apple farmers have sold to them and looked for better pasture elsewhere.  Big Apple’s presence in the apple market hasn’t upset the cart because the public seems to have an insatiable appetite for apples.  And, truthfully, Big Apple can grow apples with the best of them- tasty stuff!

 

But they do things a bit differently on the business side.  They price their apples for $2.00/pound.  They can afford longer sales times and just wait for other apple farmers to run out of their apples.  They also extend credit to people who have not paid for apples in the past.  There is nothing shady going on; they don’t talk to other farmers about their pricing.  They just price at $2.00 and wait for an inevitable sale from a hungry public.

 

After some time goes on, you start to wonder why you can’t charge $2.00/pound for your apples too.  You’re not that brazen, so you start at $1.25/pound and then go up to $1.50/pound.  Other farmers independently follow suit.  Apple prices begin to go up and sales are impacted less and less (people like their apple fritters!).  It is now the “new normal” and it is understood that apples cost around $2.00/pound. 

 

That is true until Big Apple decides that $2.50/pound is the new price.  Other farmers like where this is headed.  Big Apple keeps buying up fields at higher prices knowing they can just sell their apples for more.  Their investors cheer.  Other farmers (quietly) cheer as well.

 

The public can’t understand why apple prices keep going up and grumble to the local government.  The public realistically can’t keep buying apples at higher and higher prices!  But they need to eat and don’t have much choice.  The government tries to find some impropriety to call Big Apple on, but their business practices seem to be completely legal; it is the free market system at work.

 

So the government looks at other venues to make apples more affordable, especially for families that can’t afford them anymore.  They ask for tax dollars in bond offerings, try to buy fields of their own to sell their own, and ask corporations to assist charitably as well.  Though their intentions are noble, their methods will probably produce two unwelcome, unintended consequences:

 

1. An unsustainable business model to buy higher and higher priced fields to produce $1.00/pound apples when Big Apple (and other farmers) are buying fields sustained at $3.00/pound revenue
2. Subsidizing Big Apple’s (and other farmer’s) business models of higher and higher apple prices

 

So what is the answer to combat high apple prices?

 

This fictitious apple example is happening right now in the Charlotte market with rental housing.  The rental houses are “apples”, “Big Apple” is the big investment groups that have been buying up Charlotte homes and turning them into rentals for almost a decade, and the “other farmers” are landlords (and property managers, like me) who set rental pricing.

 

There is no anti-trust gamut going on that I can see.  As a property manager in Charlotte, our job (and duty) is to charge as much rent from our client’s properties as we can while mitigating risk.  And we don’t need to talk to anyone else to see what other properties are renting for; we have access to this information through the market and the Multiple Listing Service (MLS).  When other properties are priced higher and are rented, it does set the market to a new high (sort of like for NBA or NFL players whose contracts always seem to climb higher every year).

 

On the same token, I’ve been shocked to see formerly $700.00/month rental homes now going for $1,200.00/month.  I can understand why the public, whose wage growth has not been close to keeping pace with the rental increases (especially at the lower income levels), would be concerned.  I’m in the rental business; I communicate with tenants everyday.  It’s tough from their end and seems to be a new market reality that is going unabated.

 

I’d argue we are squarely in anti-trust territory without any illegal anti-trust activity (as presently defined).  It’s a great environment to sell apples in Charlotte, but not a great time to have to buy them.

 

Happy Landlording!

Where to Invest in Real Estate in Charlotte?

As a property manager in Charlotte with investor clients, we are often asked where the best places are to buy local investment properties.  

 

When I was a young real estate investor in 2004, I bought my first two investment properties on the same day from HUD.  Both were relatively cheap and I figured they’d be easy to cash flow.  I admittedly did not really know what I was doing.

 

One was a condo in a relatively contained area.  The other was a house in what could be labeled a “war zone”. 

 

I hated this house.  If I was smarter, I would have outsourced the property management.  One of the main issues is that it would just get broken into a lot.  So every time it was vacant, I was praying that I didn’t have to have the windows and doors repaired again.  The house was really old and somehow the utility bills were really high, which added to the vacancy pain.

 

One day I was stopping by the house and noticed a man with a shopping cart full of old window screens walking in the neighborhood.  I didn’t give it much thought (like I said, it wasn’t a great area) until I reached the house and noticed something a little off about the (formerly) screened-in porch.  I ran back to my car to find the guy with my screens.

 

He was still on the street.  I pulled up behind him in my car and he kept walking.  I got out and walked quickly to catch up to him.

 

“Excuse me, sir?  I think you may have something that belongs to me.”

 

No response.  He kept walking away at his measured pace.

 

“Yeah, I’m sure of it- those seem to be the window screens from my house up the block.  Mind if I take those back?”

 

He stopped, turned around, grunted, and then lunged at me with a knife.  Fortunately, he missed due to my cat-like reflexes (OK, not true) and the fact that he was drunk and slow (thank God!).  He then kept walking away.

 

I followed him in my car and called the police.  He smartly cut across a field and was never seen again. 

 

As I left the scene with my tail between my legs, there was nothing left to do but go back to the house and re-shoot the front porch pictures.  Then I logged into my computer and changed the rental ad copy from “Awesome House with Screened-In Porch!” to “Awesome House with Open-Air Porch!”.

 

Oh, how I hate(d) that house!

Fast forward approximately 13 years… the Charlotte press started fawning over this “new” area of Charlotte that was having all of this awesome new development.  Price values were skyrocketing; it was the next big thing.  As I clicked through to read further, the area they were referring to was very familiar…  No way… The smart money wanted to be in the vicinity of “that house”. 

 

A popular calculation is that 66 people are moving to Charlotte every day.  The Charlotte-Metro population is set to go up 50% in the next ten years.  And all of these newcomers need a place to live. 

 

As a real estate investor, the short-term prognosis on where to buy in Charlotte is a crapshoot; an efficient market should have already built this into the current prices.  However, due to population forecasts, the long-term prognosis of where to invest is much surer.  “That house” (or any house in the city of Charlotte) will probably be a good investment you’ll love if it’s held long enough.

 

Happy Landlording!

Too Big of a Jump to NBA Competition (& Rent)?

What do former NBA players Jack Sikma, Devean George, Vern Mikkelsen, and Terry Porter have in common?

 

I’m a big basketball fan, but had only heard of 3 out of the 4.  And I had no idea what they had in common.

 

Answer: They all came to the NBA after playing at a Division 3 college.  That’s pretty hard to do.  It’s so hard, in fact, that they are the ONLY players to ever make it to the NBA from Division 3 schools.

 

Why is that?  The best high school basketball players have either gone directly into the NBA (ex: LeBron James) or gone via a Division 1 college (ex: Kemba Walker from the University of Connecticut).  The competition in Division 1 is fierce and players train year-round to compete.  And 99%+ of Division 1 players are not good enough to play in the NBA.

 

Division 3?  Though the players are very good if they are playing hoops in the park with you, most would probably have a hard time competing against a Division 1 player’s athleticism, size, and skill.  Those Division 1 guys are really good!  And multiply that by 100 for the guys who are good enough to play in the NBA.

 

So am I a Division 3 hater?  Not at all!  I can probably relate to them much more on the basketball court.  But when they have to try to play against NBA-caliber players, it’s just too much of a jump.  The NBA guys are stronger, faster, quicker, more accurate, have better basketball IQ, and jump a lot higher.  Most Division 3 players don’t stand a chance.  It’s like trying to compete against a perfect storm of genetics and work ethic.

 

I sometimes feel like I run into this situation with rental applications.

 

BDF Realty receives some applications from perfectly fine, average tenants.  They have decent credit scores, a few late payments from their prior landlord, and have some debt.  But we have to turn them down.  Why?

 

Because they are paying $900.00 in rent and want to rent a house that rents for $1,500.00.  With rising rents in Charlotte, this has become a more common situation.

 

We have to ask: if the tenant was late a few times at $900/month and apparently has consumer credit card debt that is being carried from month-to-month (aka living beyond their means), what is it going to look like when the rent jumps up to $1,500/month?  Where is that extra $600/month coming from?  It would require a lifestyle change that most people don’t want to and/or are unable to make.

 

It’s certainly not impossible.  But just like the aforementioned four Division 3 players being the only players to make the NBA, it is unlikely to work out.  The jump in rent is usually too great.

 

No one (tenant or landlord) wants a situation where it is a struggle to make ends meet.  Be cautious when accepting tenants who might not be equipped to make the big jump into the NBA.

 

Happy Landlording!

Fill Your Rental Home with Complainers?

As a property manager in Charlotte, we conduct a lot of rental house showings.  Typically afterwards, the tenant is either interested in the house and submits an application or is not interested and goes incommunicado with us.  Fair enough.

 

But sometimes we get an e-mail like below:

 

Hi BDF Realty,

 

I saw the rental house today and liked it.  However, I was wondering if the owner would be willing to address the following before I moved in (if I were to apply):

 

1. Clean the windows- interior & exterior
2. Replace the kitchen flooring (small rip in front of the stove)
3. Replace the light bulbs to LED
4. Replace 2 of the blinds that have cracks
5. Change the front lock because it sticks a bit
6. Paint the downstairs bedroom a neutral color (I prefer beige for my bedroom set)
7. Replace the vegetable drawer in the refrigerator (slight crack starting to form)

 

Etc., etc., etc… this list goes on for a page and a half filled with minor item after minor item.  It’s not exciting reading!  I don’t care to read anything that long unless it’s about one of my fantasy football players (7-3 this year so far- yeah!).

 

In my early, inexperienced years of being a property manager, I may have composed a letter back to them that would read something like this:

 

Dear Prospective Tenant,

 

Thank you for your (dis)interest in our rental property.  After a careful review of your requests, here is what we are willing to do in regards to each of them (answers correspond to the numbers in your email):

 

1. Nothing
2. Nothing
3. Nothing
4. Nothing
5. Nothing
6. Nothing
7. Nothing
8. – 93. Nothing

 

Thanks again for your (dis)interest!

 

Love-

BDF Realty

 

P.S. From my experience, courtship doesn’t work like this.  We have the property.  You don’t have the property and may want to live there.  You should be selling us on you, not asking us to do a lot of marginal stuff instead.  Just sayin’…

 

P.S.S. There’s this thing called “new construction” you may want to look into. 

 

However, this is almost always not the best tact to take.  Landlords actually should want these tenants.

 

What????  Repairs cost money!  Why spend it on non-operational stuff?

 

I’m not saying to offer to do everything.  But definitely offer to do some things.  Some people would call these prospective tenants “annoying” or “complainers”.  A different, nicer moniker would be to call them “meticulous”.

 

And in my experience, “meticulous” tenants keep and leave your place in great shape; dare I say in “meticulous” shape!  There are usually improvements made during their tenancy (that they pay for), rent is always on time (or early), and everything is in perfect order.  We really like these people after the first few months and then don’t want them to ever leave.

 

There is some pain on the front end.  However, once they get situated, the back end is awesome.  Bring those complainers on!

 

Happy Landlording!