Inheriting Tenants: To Boot or Not to Boot

I am working on a transaction right now for a family member who is purchasing a rental property.  I have agreed to manage the rental of the property while the owner continues to live out of state.

One of the caveats of property management is know what to do with tenants that you inherit from the previous owners of a property.  Unlike utilities, you cannot just stop service on a tenant that has a lease on the property.  The new owner is obligated to honor the existing lease, whatever that is, with the existing tenant.

In this particular case, the tenant is a relative of the seller.  There is also no written lease agreement.   We call this kind of circustance a Tenant At Will situation.  The law stipulates that the tenant is, in the absence of paperwork to demonstrate the contrary, on a month-to-month lease.  That is good because when we initiated the contract on the property, the listing agent gave notice to the tenant that they would need to vacate.  However, the tenant asked if we would be interested in renting to him moving forward.

There are a couple benefits to keeping an existing tenant:

1.  Any existing deferred maintenance (i.e. fresh paint, upgrades, ect.) and cleaning can be deferred to the end of the tenants desire/ability to rent the property.

2.  Rent revenues begin immediately.

This would seem on the surface like a win-win situation.  The tenant wants to stay and the owner would like to defer any cash expenses he might incur working to get the place rented.   

However, when the tenant called to discuss the situation our conversation went something like this:

Tenant:  Hi, I would like to stay.  It would be a real problem for me to move right now.

Me:  Ok, are you working?  How much do you make?

Tenant: Yes, I make $1600 a month.

Me: Ok, what do you pay in rent now?

Tenant: Well I havn't paid in a while...

Me:  Hmm...our rents would be around $550-$600...

Tenant: Oh we can do that, that will work for us.

Me: Ok, do you have any felonies on your record?

Tenant: Well, I do but it was in 2001.

Me: Ok, that is fine.  I believe in redemption so as long as you have a plan and are making your life better we should be just fine.

We then discussed the plan for me to get an application to him.  About an hour later I get a phone call again.

Tenant: So I just got off the phone with my attorney and I want to be totally honest with you.

Me: Uh, Ok

Tenant: Last month, I was really hungry and my girlfriend and kid were hungry so I put a sandwich in my pocket and walked out of the store.  They caught me so now we are trying to plead down to a misdemeanor.

Me: Hmmm.....

After discussing the situation with the buyer we determined that this tenant was much too high of a risk to rent to.  If he was truly employed like he said he was, stealing from local stores would not be necessary.  Also, paying rent to the current owners would not be a problem either.  We notified the tenant and the listing agent that we would not be continuing the lease and the tenant was to vacate prior to closing.

This story is not always the norm but property owners need to be prepared for these kinds of situations as they acquire new property.  

Photo Of The Day: Improvised Lighting

Necessity is the mother of invention.  With some of my tenants, their ingenuity never ceases to amaze.  Here is an effort to provide lighting along the driveway below.

Why the mop is there too, I have no idea.  However, it is these kinds of improvisations that clue landlords into what improvements need to be made to their property. Proper driveway lighting is always a good idea.  I am sure that is one of the next improvements the owner will make.

If you have a rental property you would like managed, CONTACT ME, and let's see what we can do to make life a little easier for you.

Vacant Rental Sewer Problems

Vacant homes are always a challenge.  Homes were designed to be lived in and attended to.  When they are vacant for long periods, minor deferred maintenance can quickly balloon into serious problems.

Today, I got a call from a tenant who we had just moved in a couple days ago.  They were frantic.  The message: "There is sewage in our basement!!! Help!"

This particular home sat vacant for many months as it was renovated and then placed on the market for sale.  Since sales were slow, the owner decided to rent the home instead.  It was also built in the 1915 era with clay sewer pipes.  After calling Drain Tech to scour out the line, they determined that the pine tree in the front yard had grown roots into the line.  Also, since the home had been vacant for so long, any paper or other solids that sat in the line at the time had dried up.  When the new tenants arrived, the sudden rush of water expanded the waste again and it was impeded by the root ball that had grown in the meantime.

For this reason, landlords and investors should be careful and inspect sewer lines prior to taking ownership.  I recently replaced a sewer line at a property.  It was inconvenient but necessary to continue renting the building.  Had I known when I bought the property what I know now, I would have done the sewer inspection and perhaps acquired the property at better terms.

So, the moral of the story is be diligent and be prosperous.  A little due diligence goes a long way.

Multi-Unit Market Update

One of the market segments that got hit the worst during the collapse of the real estate bubble was income property.  Financing dried up and prices and sales collapsed.  It has been over a years since I updated my charts.  Here are the findings:

Our first chart show sales volume.  It is pretty obvious where the peak and the trough are.  We seem to be plodding sideways.  Some of this may be attributed to the fact that banks are still requiring sizable down payments (around 25%) on multi-unit property.

This next chart is telling because it dissects the market to tell us how transactions are occuring.  Notice the surge in seller financing and cash transactions just as conventional financing plumetted.  Today we see the opposite with conventional returning and seller finance ebbing.  Interestingly, cash still has a significant yet slightly shrinking presence.  This indicates to me that the market is still mending.  However, a couple more years of this trend and cash purchases should decline significantly.  

If you are in the market or an income property, CONTACT ME and let's find one that meets your needs.

  

Deadline Drama: When Moments Count

I have been working on selling a difficult investment property to some buyers.  I placed the home under contract with my first buyer and after we determined half the floor joists were ruined, he excused himself from the transaction.  I placed the home under contract again a second time with another buyer.  This buyer obtained further bids on repairs and was uncomfortable with a settling crack in the foundation.   He excused himself from the transaction.

Undaunted, I presented the property to a third buyer.  I reviewed the property's known deficiencies with him and we proceed forward.  Our due diligence deadline was three weeks from our contract date.  We gave ourselves an extra week due to the Thanksgiving holiday.

We began getting repair bids for plumbing, HVAC, roofing, structural repairs, and landscaping.  One issue was that the gas was not turned on to the property.  We couldn't check out the furnace.  I contacted the property manager two weeks prior to our deadline and told him that we needed the furnace turned on so the pipes didn't freeze.  He concurred.

Well, it appears that conversation was forgotten because four days prior to our due diligence deadline the gas was still off...with the water still turned on to the property...in December.  Fortunately, our mild winter prevented any damage.  However, we still hadn't had the furnace checked.  All our other bids checked out and finally with three hours before our deadline left, our HVAC tech tells us that the furnace is at the end of its life and needs to be replaced.  That was unexpected.  My buyer asked for a $2k a price concession even though we had already negotiated the "rock bottom" price that the seller was willing to go.

We quickly submitted our request.  The listing agent said she would get back to me quickly.  An hour passed. Since my client's earnest money was on the line, I forwarded him a Contract Cancellation that we planned to submit 15 minutes prior to the contract due diligence deadline if we had not heard back from the seller.  At 15 minutes to our deadline I called the agent.  She still didn't have word.  I notified her of our intent to cancel if we didn't get a response.  With 10 minutes to our deadline I called her again, she said the seller agreed to the concession and would have the addendum signed and to us in a half hour.

My fear at this point was that with our backs up against the wall the seller would reconsider after our deadline had passed.  In our business we live and die by our paperwork.  So,  I suggested to her that a 30 minutes wasn't good enough.  I asked her to have it to me in five.  Three minutes later we had our signed addendum.

This experience was a good lesson in the importance of contract deadlines and the importance of paperwork.  Earnest money keeps the parties interested in the contract and acting in good faith to move the contract forward.  I am glad we were able work out the final wrinkles in our transaction and move forward...even if by the hair on our chin.  Now on to closing...

     

JUST SOLD! Historic Arts and Crafts Style Duplex

I just sold this listing at 2370 Madison Ave.

We listed this property at the end of April for $109,900.  There was immediate interest in the market but it took about four weeks to receive an offer.  In June, we received an offer for $105,000 with the buyer asking for 2% of the purchase price in closing cost concessions. 

We counter offered the buyer at a price point of $107,000 and they quickly accepted.  We placed the property under contract.  Then began our long odyssey to closing.  The appraisal went well, and the inspections went well.  However, the underwriting for the buyer was severe.  Apparently, the lenders were doing blood typing, genealogical research, and cavity searches on the buyer.

Our contract extended an additional 24 days in order to close.  That was quite surprising but we were ultimately satisfied in the end when the transaction concluded.  The best part was that were able to keep the tenants satisfied during the process so my client did not experience any vacancy or loss of rent due to the sale.  

If you are considering selling your rental property, contact me, and lets discuss some options that will help you liquidate your investment with the least disruption to your tenants and cashflow. 

FOR SALE: Duplex Investment Property

I just listed this property located at 391 Downs St. in Ogden.

This building was constructed in 1998.  Each unit is two two levels and arranged side by side.  One unit has 3 beds, 2 baths, and a 2 car garage while the other is a 2 bed, 1 bath configuration with a 1 car garage.  The property is located just a few dozen yards from Heritage Elementary School.  It is also situated very  close to the Business Depot. 

Rents are currently $750 and $675 but could be raised.  One tenant has been in the property for eight years.  The owner has kept rents at their current levels since he purchased the property several years ago. 

This property would make an excellent tax shelter while preserving wealth and providing a positive return on investment.  If you are interested in learning more about this property contact me for details.  Please do not disturb the tenants as they are unaware the property is for sale. 

JUST SOLD! Turn-Key Triplex Investment

I just closed on a listing for a client:

We listed this property back in May.  Shortly after putting it on the market for $149,900 we began receiving inquiries.  Several weeks later we received an offer. 

The buyers made their initial volley to us at $135,000.  That was quite a bit lower than our list price but one of our conditions was that the offer be written subject to inspection after acceptance of an offer.  We didn't want buyers disturbing the peace of the tenants during the marketing period.  Since the buyer's didn't know what the interior looked like, they aimed low.  I assured the buyer's agent of the condition of the interior and we counter offered them $145,000.  They accepted our counter.

The contract on this property went exceptionally smooth.  The buyers were well qualified and the appraisal came back with no problems.  The buyers were also satisfied once they did their interior inspection that the condition was what we had represented to them.  

Congratulations to my sellers on quickly liquidating their property!

If you are thinking of selling your rental property, contact me and we can put a plan together that is right for you.

JUST SOLD! North Ogden Condo Investment Package - Owner Financing

I recently sold four listings in North Ogden.

The Sunbrook Condos in North Ogden were built in 1998.  My client had purchased and been renting them out since their construction.  Due to changes in life circumstances, my client felt that it was time to liquidate them.  We listed these 2 Bed 2 Bath units for sale originally in July 2010 for $89,900.

After several summer listings passed, we put them on the market again in February of this year to give it another go.  My client had hoped that another investor would come along and snap up the bundle in one transaction.  Unfortunately, the investment financing climate for condos has been adverse.  When someone accounted for the multiple loans that were required, the transaction costs added up and reduced the return on investment.  The large down payments required by lenders also reduced the overall return on investment.  

So, to work around these issues, we put together an owner financed transaction for four condo units in one building.  The closing costs were greatly reduced.  Also, since the condos were owned free-and-clear, that allowed us to do a traditional note and deed of trust without worrying about "wrapping" an existing mortgage.  You can read more details on how owner financing (aka seller financing) works HERE.

In this case, the four units sold for a combined price of $328,000 with 14.6% down and an interest rate of 5%.  The buyer agreed to a balloon payment in 10 years.  Congrats to my client on converting their rental income into passive note income while avoiding capital gains taxes in the process.

If you or anyone you know is having trouble selling a property and is interested in learning more about how owner financing works, CONTACT ME and I can explain all the benefits and advantages and help determine if it is right for you.

How To Screen Tenants: Criteria and The Sweet Spot

Screening tenants is as much art as it is science.  There are a wide variety of risk variables to consider and no two situations are exactly the same.

Nevertheless, as a professional property manager, I make it a point to have clearly defined criteria for qualifying tenants to rent.

A landlord wants to find the best person to live in and pay rent for his property.  As such, landlord is concerned about three things:

1.  Preservation of the property condition
2.  Timely and consistent rent payments
3.  Tenants minding their own business and being neighborly

As long as all three of these conditions are met, landlords are typically  ill-advised to interject themselves into the lives of their tenants or micromanage the way they live.  

To make sure these three conditions are met, I follow a rigorous screening process that looks heavily at risk factors.  Here are the qualities of tenants who I typically approve applications for:

1.  Good rental history
2.  No pets
3.  No smoke
4.  Income is 3 times rent
5.  No felonies

Of course, we never discriminate based on protected classes.  You shouldn't either.  We are interested rather in the economic viability of a tenant.

Notice that "Good Credit" is not one of my key criteria.  Tenants are tenants for a reason and I understand many life circumstances can destroy credit.  Such experiences include bankruptcy, divorce, a medical wipe out, and/or identity theft. I consider credit when reviewing the application but I am often looking for key red flags.  A good rental history will often but not always override concerns about bad credit. 

To illustrate who I look for in a tenant, I have put together this chart:

Many of the pools of people overlap each other but the the number of folks that fit in every category is pretty small.  Hence, it may take a little longer to rent a property following this criteria.  However, the rewards for screening are well worth it.

My experience has also taught me that there is a caliber of tenant that will almost certainly result in the destruction of a property or significantly degrade its condition to a point that future tenant quality is impaired unless expensive renovations occur.  This tenant falls into the center of these three categories:

The objective of a landlord is to get the best tenant possible for his property given its current condition.  As carpet wears, paint fades, and neighborhoods change, rent prices will fluctuate.  Tenant quality in turn will also change relative to rent price.  A tenant that is allowed to have a big dog in their unit may make significant changes to the condition of that property.  This change may result in the unit being "pet friendly" until the owner can afford to stain block floors, repaint, and replace carpets.  Pets are an expensive proposition.

Yet, despite all these risk factors, there are things can can be done to compensate if a tenant does not fit perfectly in the ideal tenant category.  Adjusting the deposit, or asking for a co-signor are an excellent way to work around some of the problems that can come up.  This also reduces risk for the landlord and provides more assurance that the tenant will perform on their obligations.

Being a landlord requires some careful thought and risk management skills.  If applied properly and equitably, screening criteria can make being a landlord a rewarding and worthwhile experience.

In the meantime, if you are looking for a professional property manager, contact me and I will show you how our services make owning investment real estate hassle free for you.  

FOR SALE: Historic Arts and Crafts Style Duplex

This grand home located at 2370 Madison Ave. was built in 1909.  It boasts over 3200 SQFT, 2 original fireplaces, original woodwork, brick construction, and all the Arts & Crafts ornamentation characteristic of the era.

The home is currently arranged as a duplex with tenants upstairs and and on the main level.  The basement is large and used currently for storage.  The home has a 2 car garage/carriage house in the back with a private yard.

The property would make a good investment or could be converted back to a single family home for elegant living.  Here is the video tour of the property:



If you are interested in this property and want details on financing terms, rents, and other specifics, please contact me.

FOR SALE: Turn-Key Triplex Investment Property

For those of you shopping for an investment property, I present 835 E. 27th Street in Ogden for your consideration.

Built as a true triplex in 1949, the home is in excellent repair.  The building is three units with a 3 bed, 2 bed, and 1 bed unit.  Utilities are all separate metered and paid for by the tenants.  The property has newer appliances and the grounds we well kept.

Here is a video montage of the property:

The property currently yields a return on investment of 12% annually.  Please contact me for current pricing, rent, and operating expenses.  This will make a perfect investment for someone's portfolio.

Marketing Rentals: The Yard Factor

As the lawn growing season approaches, it is important for landlords to consider their curb appeal.   I always find examples in the real world a valuable teaching tool.

For today's lesson, I will use two properties on my block, one across the street from the other.

Here is our first example:

This yard has missed the first and second mowing opportunities of the year.  Is anyone excited about renting this home?  Across the street we have this example which is also for rent:

Curb appeal makes a big difference in attracting quality tenants and lifting up a neighborhood.  There is something to be said about having dignity in being a landlord.

For my yard care I use Master Maintenance.  Call Jeremiah at 801-814-0183.  He is affordable and provides a good service.

Before and After: Parking As A Landlord Priority

One of the biggest impediments to getting good tenants at a property is providing adequate parking.  I recently took on a rental property for a client that has never had parking.  It shares a common driveway with a duplex and here is what the end of the driveway came to for this property:

After visiting with the owner, we determined that it would be a tremendous benefit to install the parking pad.  Here is the 13' X 18' result:

This rental property should see an increase in performance as an asset.  Tenants that have cars have jobs.  Tenants that have jobs pay the rent. 

If you are looking for a quality concrete contractor who is tremendously affordable, give Gary Cobia a call at 801-663-0321.  He does good work.

Seminar: Strategies for Growing Wealth 2012

Yesterday, I held a seminar at the Historic Ben Lomond Hotel for real estate investors.  We had a good turn out and I thought we all walked away from the event a little more enlightened after 90 minutes of conversation.  Here is the .pdf of the power point presentation I shared with the group.  I will be holding another meeting in June.  If you want notice of that event, be sure to contact me.
Strategies for Growing Wealth 2012

ILLEGAL: When Zoning Enforcement Bites

I recently placed this duplex under contract with a client looking for a great investment bargain.  The property has two separate 1 bedroom units in an up-and-down configuration.  The structure was build around 1950.  This was a bank owned property and our negotiations settled at a price of $57,000.

Once we got into our due diligence though, we had a major problem.  A phone call to Ogden City Zoning shows that this duplex does not have a non-conforming use certificate.  Although clearly a single family home that was subivided into a duplex decades ago, the previous owners did it without property application to the city.  Therefore, the property was not grandfathered the use.

Then, another client and I were shopping for a property and placed this triplex under contract:

This bank owend property had three mailboxes at the curb that are also decades old.  Yet, during our due diligence we discover that South Ogden City has only permitted the home for use as a duplex.  So where has city zoning enforcement been all these years?  Who knows.

The cities do appear to be in an enforcement mood however.  The glut of bank owned properties make it politically palatable to be so while not provoking the ire of owner occupants that would otherwise inhabit the property.  It's best to get the enforcement done while the property is vacant and the owner is a faceless corporation thousands of miles away.  

Workers You Can Trust: Jeremy's Preferred Vendors

As we come on the Summer season, repair and improvement work on homes tends to increase dramatically.  I have been busy already this last week ordering fix up on rentals.  For those of you looking for some good vendors, here is who I use:

Trusted Home Service Providers

If you have any question about who is the best fit for the job, contact me and I can let you know.  Happy rehabbing!

Lessons for Landlords: Aesop's Advice

I was reading through Aesop's Fables recently and fell upon this poignant story:

 The Farmer and the Snake 

ONE WINTER a Farmer found a Snake stiff and frozen with cold. He had compassion on it, and taking it up, placed it in his bosom. The Snake was quickly revived by the warmth, and resuming its natural instincts, bit its benefactor, inflicting on him a mortal wound. “Oh,” cried the Farmer with his last breath, “I am rightly served for pitying a scoundrel.” The greatest kindness will not bind the ungrateful.

 When screening tenants, I use objective criteria that I apply equally across all applicants.  I have found that this has prevented me from finding myself in the position of "pitying a scoundrel" and suffering the consequences of lost rents and damaged property as a result.  Truly, kindness does not bind the ungrateful.  As one of my investor friends once said, "No good deed goes unpunished."

So, as rental season kicks into high gear, make sure you stick to your established criteria.  Prospective tenants will feel they have been treated fairly and your business will be better off in the long run.

Multi-Unit Market Update

It has been a while since I ran the numbers on the multi-unit market.  Here is a look at the numbers through the end of 2011:

First, lets look at sales volume.  Clearly we can see that a volume trough occurred in 2009.  That was the most pessimistic year of the multi-unit market.   In contrast, last year put sales volume nearly with par of sales in 2001.  It appears we are improving in sales.  However, to understand what is driving the market, lets take a look at sales according the the financing style of each transaction:

This chart is intriguing.  A whopping 44% of ALL transactions are done in cash.  That is up from 35% last year.  That speaks of a tremendous amount of distress still in the market in 2011.  Notably, seller finance and FHA/VA transactions were on the decline as a proportion of sales.  Also, conventional transactions seemed to be increasing though not significantly.

Overall, I believe 2012 will be a transition year.  Look for conventional financing to improve and the number of cash transactions to decrease from where they were in 2011.  If those two things occur, it will be the mark of an improving investment property market.  Nevertheless, those that are buying right now are making a killing in return-on-investment. 

If you want to explore purchasing a great bargain on multi-unit property, contact me and we can put a plan together that is right for you.

Real Estate Regulation and De-Regulation from The Hill

This year was an interesting and exciting Legislative season.  While working on my committee, I saw several real estate related bills come through for discussion and debate.  There were several more that were debated on the House Floor.  Here is a summary of some of the Real Estate related legislation that will become law this year:

Window Egress and Zoning Enforcement

HB383 - This was a bill that I ran which dovetailed with SB178 that I reported on last year.  My bill puts teeth into the law which prevents building officials from requiring owners of rental property to cut into the foundation of their properties in order to enlarge existing egress windows.  The State Fire Marshall wrote the language for the bill and testified in its behalf at committee.  This should bring an end to most of the egress window non-sense where owners have been forced to endanger their properties by cutting into old and fragile foundations.

Short Sales and Deficiency Collections

SB42 - This bill brings deficiency collection for short sales in line with those for foreclosure.  Before this law passed, lenders had 6 YEARS to file a deficiency judgement against the seller of a property.  Most lenders don't file these judgements because the financial status of the sellers makes the action pointless.  However, in some cases, the lenders do file.  If they do, they now have 3 MONTHS from the time of the short sale closing to do so.  This should increase the number of short sales being worked in the marketplace and help us churn through our distressed inventory faster.  That, in turn, should help us accelerate toward a full market recovery.  


Property Tax Reductions for Urban Farms

SB122 - This bill allows parcels of land of 2 acres or greater that are zoned for uses other than agriculture in urban areas to be taxed at an agricultural rate when they are dedicated to that purpose. The bill closely follows greenbelt statute and allows the property to have reduced taxes as long as the property is in use for agriculture production.  When the property is sold, the seller must pay up to 10 years of the difference between the taxes they paid and what they would have paid had it been taxed the full rate through that time.  This should do two things.  First, it should increase the number of viable agricultural operations in urban settings; second, it should create an incentive for the properties to stay in agricultural use over longer periods due to the lump tax due at time of sale.

Mortgage Fraud Prosecution

SB281 - This bill funds the Mortgage and Financial Fraud Unit of the State Attorney General's Office.  The unit has been in hibernation for several years due to budget constraints.  The funds were available this year to restart the unit and begin investigating bad actors in the market.  

Good Landlord Program Changes

SB216 - This bill makes some changes to Good Landlord programs across the state.  It creates reciprocity for certification between cities who have a GL program.  It also restricts the fees that cities can charge for a business license to be no more than the actual cost of providing the license.  Ogden landlords have nothing to worry about.  The city charges $83 for a non-GL and $13 for a GL license when the actual cost to the city is $108.  Ogden has been an excellent example of how to run a GL program. The bill also provides an appeal process in the even that a landlord is kicked off the program.

Zoning Enforcement

HB302 - This bill requires cities to issue notices to owners and property managers, if desired, when giving notice of zoning violations.  It also requires that a notice be issued for each instance of a violation.  This will likely affect owners in Ogden regarding mowing of yards.  The city policy prior to this bill has been to send a notice once in the year and then move strait to issuing fines if the violation occurs again later in the same calendar year.  This will require a notice for each instance of the violation.