Editor’s note: In part one of a three-part series on "accidental landlords," Inman News explores how real estate agents and brokers can generate fees and listings by getting into property management. Experts say property owners, however, should think twice about pulling a property off the market in order to rent it, and may be better off managing it themselves.
If 2 million or more homeowners will end up in foreclosure during the housing downturn, as some have estimated, still others will find themselves in something more like purgatory.
They are the owners of homes and condominiums who are still able to make their mortgage payments, but who would sell in a heartbeat — if only they could get what they see as a fair price for their home.
Some are retirees who have downsized, while others are starting new families and have moved into larger homes. There are job seekers who have moved to other cities and couples looking to sell vacation homes they don’t have time to enjoy.
And, of course, there are investors and speculators who bought a home or condo at the height of the boom, hoping to flip it for a quick buck. Instead, they now find themselves staring at a loss if forced to sell today.
In the meantime, real estate investors who were busy converting apartment buildings into condos during the boom are now doing the opposite. In cities across the U.S., developments originally conceived as condominiums are instead being marketed as apartments.
For those who can afford to, it’s tempting to wait for the market to turn around. But with many forecasters predicting stagnant sales and prices in some regions until 2009 or beyond, the ability to outlast the downturn could depend on whether an unoccupied property sits vacant or is generating income as a rental.
But it’s perhaps inevitable that the ranks of accidental, reluctant or inadvertent landlords will grow, as more would-be sellers decide to hold out for better prices.
When it hit the bookstands last year, "House Flipping for Dummies" was already suggesting leasing a home or condo bought as a speculative investment as "plan B," should housing prices go south.
According to the latest Census Bureau estimates, the inventory of vacant for-sale properties nationwide hit 2.1 million in the third quarter, up 7.2 percent from a year ago. The total inventory of vacant housing — including rental units, vacation homes and property not for sale or rent — reached 17.9 million units at the end of September, up 7.8 percent from a year ago.
For real estate agents and brokers, the accidental landlord may present an opportunity. Managing a client’s rental properties is a way to get listings when they decide to sell.
"A lot of time Realtors start managing properties as a favor to clients they buy and sell properties for," said Douglas Pope, a co-founder of HotPads.com, the free, map-based rental listings site. "One of their clients has a property they just can’t get rid of, and asks their Realtor to help them."
Real estate brokerages that don’t want to get into that line of work are forging ties with property management companies, with the understanding that the clients they refer will be sent back to them when a rental goes back on the for-sale market.
But Realtors or property owners who decide to take on the challenge of managing properties may quickly find themselves bogged down in landlord-tenant laws, fair-housing requirements and local rent-board decisions — all before they even get around to the laborious task of marketing rentals, vetting tenants and managing records.
Fortunately, there’s a wealth of resources, both online and off, the accidental landlord can avail himself or herself of.
The emergence of the Internet as the go-to choice for renters seeking housing can simplify the process of marketing a rental, and there are many property management applications available, including a growing number of Web-based tools (see Part 3).
But the first decision to make before deciding to become a landlord or manage a property for a client is whether it really makes sense to turn the property in question into a rental.
You can always rent it
"There are some misconceptions out there that if you can’t sell it, you can always rent it," said Robert Massey, a veteran property manager and founder of the rentals listing site RentalHouses.com. "You can rent it, but not always under circumstances that make it worthwhile."
When managing properties was Massey’s full-time job, he’d often tell prospective clients who wanted to rent a property they couldn’t sell to first take a hard look at everything they’d been doing to market it.
"Many times, I’d tell them, ‘Lower your price and keep it on the market — you don’t want to get into this,’ " Massey said of becoming a landlord. Homeowners who are forced into renting often have unrealistic expectations and are hard to work with, Massey said.
"I can’t tell you how many times I met with homeowners who would list all their expenses and say, ‘This is what I want,’ " for rent, Massey said. "It’s laughable. Renters don’t care how much your mortgage, property taxes, subdivision fees, homeowner association dues and property management fees are. The market is going to drive the rent, not expenses."
The decision whether to rent a property should be based on a comparison of the difference between actual expenses and a realistic estimate of market rent, Massey said (see Part 2). Property owners with no experience renting often forget to factor in expenses like unexpected vacancies, maintenance and the cost of preparing a house for rental.
"In a situation where you’re putting your house on the market for the first time, you have to understand that any appliance or function in the house that is not working needs to be made to work," Massey said. "A lot of people don’t understand that. They think if they went without the disposal or the dishwasher for three years, that’s fine for the renter. I’m sorry, but if you want to attract the best renter, you can’t do that."
Much of the work and expense that goes into preparing a house to rent must be done again between tenants or when the house is ready to go up for sale. Carpets wear out, and paint needs to be refreshed.
"You don’t need to do everything every time, but it has to look like you did," Massey said. "It pays off 10 times over in the long run."
Once a more realistic estimate of expenses has been determined, it should not come as a great surprise if it exceeds what the property can realistically generate in rent. Then it’s time to decide "if it’s worth it to pull the property off the market, or cut the price and move it now," Massey said.
A rental with total expenses exceeding rent by $500 a month would produce a roughly $12,000 loss over two years. Would a $12,000 price cut provide enough incentive to turn a stale listing into a sale?
The losses could be greater, on paper at least, if the property’s value also falls during that time. According to an analysis by PMI Mortgage Insurance Co., there are 11 major U.S. markets where there is a greater than 50 percent chance that prices will fall in the next two years (see Inman News story).
Do it yourself or hire a pro?
Once a decision has been made to rent out a property, the next question is whether to manage it yourself or hire a property management firm. Eliminating property management fees may reduce expenses enough to make renting a property a more attractive proposition.
"There are more and more regulations all the time, but I still feel people can do it themselves," said Robert Griswold, president of San Diego-based Griswold Real Estate Management and the author of another "Dummies" book — "Property Management for Dummies."
Although a professional who commands a generous salary might be better off hiring someone else to manage her properties, Griswold said, "It’s not rocket science. You just have to have the time and the willingness to train yourself."
Griswold’s book is one place novices can get an overview of what they need to know, while Griswold himself recommends books and articles published by Nolo Press for more nitty-gritty legal details.
Landlords must also be familiar with county and city requirements — particularly in areas with local rent boards — another reason to consider a professional property management firm that knows the rules in a property’s jurisdiction.
Ultimately, the decision whether to become a landlord may rest not only on economics or expertise, but whether you’ve got the time, temperament and stomach for it.
"You’ve got to like people and be able to give and take," Griswold said. Cut tenants too much slack, though, "and people will take you for a ride."
A glance at some of Griswold’s recent columns for Inman News provides a glimpse at the pitfalls property owners and managers deal with on a routine basis.
What do you do about a tenant who shuts himself up in his unit, chain smoking and rarely letting his dog out so it pees on the floor? You may have to wait until the lease runs out if the dog and the smoking aren’t prohibited in the lease.
Hiring a property manager doesn’t guarantee a trouble-free existence for the accidental landlord, either. In another recent Griswold column, a subletting tenant damaged a condo owner’s unit, and the property manager hired a contractor who never finished the work and stole a ceiling fan from the dining room.
It turned out the contractor was not only unlicensed, but had an outstanding arrest warrant. Property managers aren’t typically responsible when rental properties are damaged by contractors, Griswold advised the owner, so it’s a good idea to have property owner’s insurance.
Another investor recently wrote Griswold about a home he owned in distant Phoenix, Ariz. The property management company — which had been trying to rent the home for four months — was surprised when a prospective tenant called to say the kitchen cabinets and stove were missing. The home had been burglarized — and the property management company probably wasn’t liable, even though it was apparently oblivious to the situation, Griswold said.
"I strongly advise real estate investors to not invest in income properties that are more than one hour away by car, or unless the rental property is located where they have trusted family or friends or routinely visit on business," Griswold advised the owner.
Lisa Trosien, a Chicago-based property management consultant and trainer, said managing a property requires a serious commitment and a skill set that some people just don’t have.
"The thing (property owners) lack is the ability to service these clients," Trosien said. "If somebody gets locked out at 4 a.m., are they going to be able to let that person in? They need to make that decision, whether being a landlord is going to control their life."
While some property owners may choose to dabble in property management to save the expense of hiring a professional, individual Realtors should think twice about handling rentals on the side as a favor to clients, Massey said.
"Fair-housing and landlord-tenant laws can trip up a lot of people," Massey said. "Beyond that, there are fundamentals that are not difficult to learn, but if you don’t know them, it can set you up for bad tenancy situations."
Real estate agents who work for companies that don’t have dedicated property management divisions can always refer clients to a professional property manager, Massey said. Many property managers will agree to send those clients back to the listing agent when they are ready to sell.
Such agreements may be spelled out in a contract or letter, but Massey said he never needed to bother with either. Realtors knew his property management firm was good for its word, he said.
Many property managers will even pay Realtors a modest referral fee, Massey said, but the primary motive is the opportunity for the agent to get the client back as a listing.
"We worked with a number of Realtors, who knew they could bring their clients to us and we would not steal them for a sale," he said.
For real estate brokerages that are thinking about getting into property management, now is a good time to make the move, Massey said. But he advises companies that want to get into property management to "do it full bore — not with the idea of helping clients for the short term, and then dropping out" when sales pick up again.
Massey sold RentalHouse.com to Primedia Inc. in February, and now holds the title of vice president of industry development at sister Primedia company Rentals.com. Primedia claims to have generated more than 1 million leases for apartment managers in 2005 through Apartment Guide, a print publication, and ApartmentGuide.com.
Rentals.com will offer seminars next year to real estate brokerage firms that are interested in getting into property management, with insight from Massey, said Robert Turnbull, vice president of sales and business development. RentList.com, another site under the umbrella of Primedia and its subsidiary Consumer Source Inc., offers a directory of residential property mangers.
At a recent industry event in New York City, Turnbull said, chief executive officers from several real estate brokerages were fretting about the number of vacancies.
"For the first time in history in this country, we have 3.5 million houses that are just sitting. What do we do about it?" was a common complaint at the conference, Turnbull said. "We don’t have the solution, but a solution — diversify your company into property management."
"You have all these real estate brokers looking at just selling," Turnbull continued. "Our answer to them is to look at managing properties. At least you can generate revenue, a finder’s fee or monthly fee for managing, and if a renter is interested in buying, you’re already there."
From the property owner’s perspective, it’s worth considering having a Realtor manage a rental — especially if there are no fees involved, and the broker or agent has a proven track record of finding good tenants, said Trosien, a consultant who also provides training for multifamily property managers.
But for the most part, Trosien frowns on such arrangements, saying homeowners may end up feeling handcuffed if they delegate the job of renting out their property to a real estate agent or brokerage firm.
Trosien said brokers who refer clients to property managers are often looking for referral fees, short leases, and out clauses.
"It’s a stopgap measure — they want to wait until the market straightens out," Trosien said. "I’d look carefully at someone who says, ‘I want to get the sale on the back end.’ What if they give you a bad renter?"
Up next: Part two of a three-part series on "accidental landlords" looks at how the "ghost market" for homes and condos complicates the process of determining fair market rent, and part three provides an overview of software and Web sites for marketing and managing rental properties.
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