The Easy Lies

It is not uncommon for rental prospects to lie.  This is especially true for the ones that really have something to lie about!  It is exactly these prospects that we as property managers are particularly interested in weeding out.pinnochio

The easy lies are, well, easy to ferret out.  It is the good liars that are trickier.  We usually still get them through some tried-and-true methods we won’t go into here.  But right now we wanted to share some of the more common lies we hear all the time.

Caveat: The prospects you are dealing with will be sure to point out that while the lie may be true for all of the other prospects, it isn’t true for them.  We’ll let you decide that one!

Lie #1 – “It was my roommate’s eviction.”

We hear ths one allll the time: “I was living with a roommate and I had to move and he/she promised to pay the rent but never did and now they are coming after me.”  This can sometimes be qualified with “And now I am paying back every cent to the property manager.”

This lie usually comes with an apartment.  But we’ve also heard it for houses.  We are still waiting to meet one – just one – of those roommates!  To this day no one has come through our doors and said “Yep, it was me!  My roommate moved out on me and I couldn’t afford the place so I just stopped paying the rent.”

But the other issue we have with this lie is this: Does the prospect not understand his/her obligation under the lease?  Because if they did then they would have found a roommate to take over their part of the lease or otherwise negotiated something else.

More than likely, though, something happened with one or both of them and they failed to honor their obligation.  For us, it is guilty by association.

Lie #2 – “My dog/cat is house trained and never makes a mess.”

Again, we have never had a prospect show up to a showing and say “My dog/cat pees all over the place and is uncontrollable.”  Occasionally they will proffer that their dog does like to bark, but that is the extent of it. 

The only way through this lie is previous landlords.  And that is a whole different lie that needs to be checked.  (We blogged previously about this.)  You have to make sure there is no application fraud going on in the form of the prospect putting their best friend down as a fake landlord.

Lie #3 – “I want to be perfectly honest with you.  My credit is not all that good.”

This isn’t a total lie.  They ARE being perfectly honest with you (usually).  Where this becomes deceptive is the attempt to build trust with the words “I want to be perfectly honest with you.”  Really?  How else were you planning to be with me?  Dishonest?

But really, they know as well as you that they don’t really have an option other than being “perfectly honest” because if you do your background check like you are supposed to then you are going to uncover all the dirt on them anyhow!

Usually when we hear these words (and the other lies) our antenna go up and we are put on alert that this prospect or prospects may not be the type of renter we are looking for.

 

For more information on screening tenants, visit blog.fullservicepm.com.  Peter Nelson is President of Full Service Property Management of Seattle, WA – a leading property management company of homes, apartments, townhomes, and condos..  He has been leasing residential property for over 28 years.  Their website is www.fullservicepm.com.

The long-term advantages of investing in real estate

Investment property, or rental real estate, is considered by most investment brokers to be a cornerstone to a diversified investment strategy.  But it typically is not a “get rich quick” type of investment.  Sure, there are the stories out there of “flippers” buying foreclosures at the auction and turning them around and selling them a few months later for tens or even hundreds of thousands of dollars.tenant-screening-process1

But those stories are in the minority, and most Americans’ real estate investment adds up to the equity they have in their home or previous home.  Since the 2008 real estate crash, that equity has shrunk.  Nevertheless, the soundness of real estate investing remains the same.  A quick peruse of Forbes Top 100 reveals that these thoughts are shared by most of the world’s richest people.

Here is a simple example that illustrates the point.  It’s called “other people’s money”.

Assume you purchase a home for $200,000.  Say you put down 20%, or $40,000, and get a loan for the other $160,000.  A year goes by and real estate in your area has appreciated 10%.  At the end of one year your chunk of ground on Baltic Ave. or Boardwalk is now worth $220,000.  Right?

Suppose for the sake of this example that after one year you decide to sell.  Further suppose, for simplicity sake, that there are no real estate commissions or closing costs.  So you sell the property for $220,000 and pay off your $160,000 loan.  That leaves you with $60,000 gross profit on a $40,000 investment.

That, my friends, is called a 50% return on investment (ROI)!  Even Wall Street can’t come close to matching those numbers.  Not legally anyway!  🙂  For those of you doing the math at home, you can arrive at the ROI by multiplying the leverage factor ($40K out of $200K is a 5:1 leverage) by the market appreciation (10% in our example).

The savvy investor will immediately counter with: 1) no one holds real estate for just one year; 2) there is no guarantee of a 10% rise in real estate, and; 3) everybody knows that closing costs can be a significant part of any real estate transaction.  And he would be perfectly correct on all three accounts.  But let’s delve into each of these arguments a little further because they warrant further consideration.

1. Liquidity.  You should not go into real estate with the idea of holding for one year and then selling.  We’re not talking stocks here.  Real estate is an illiquid investment and anyone who tells you otherwise is either lying or a foreclosure flipper.  Real estate as an investment strategy is a long-term, “buy-and-hold” deal.   We used one year in our example to prove a point.  The reality is, just like most other investment, the gains compound over the years.  The gains in subsequent years add on top of the gain this first year.

2. Guarantee.  We can’t argue this one.  There is no guarantee to this investment, or to life.   A lot of people who bought in 2007 and 2008 at the height of the recent market found that lesson our the hard way.  Markets go up and down.  But if you are in it for the long haul then you have history on your side.  Just as the Dow Jones Industrial has had recessions and depressions, over the long haul it has continued to go up.  So if you stick with the buy-and-hold strategy then you’ll recover from a short-term loss.

3. Closing Costs.  The effect of closing costs on a transaction decrease over time.  In our example above after just one year a 6% real estate commission would reduce that $40,000 by $13,200.  (Still not a bad profit!).  But in 5 years if that property rises to, say, $250,000 then the $90,000 profit ($250K – $160K) is only reduced by $15,000.   A bigger number to be sure, but a smaller percentage of the gross profit.  And would anyone be crying over a $75,000 profit in 5 years?!!

This example is a very simplified example.  The reality gets more complicated.  For instance, we did not take into account the tax benefits that might accrue from depreciating real property.  Nor did we account for the return on principal that occurs every month as a little bit of the principal of the mortgage is paid down.  These secondary effects only add to the equation.

Peter Nelson is President of Full Service Property Management in Seattle, WA — a full service property management and real estate brokerage firm providing a fresh, rewarding approach to real property management.  Their website has a wealth of information.

This rental does NOT come with a guarantee!

Check this out!  We just had this situation come up today.

The tenant sent in a maintenance request last Friday (the Friday before the Veteran’s Day long weekend).  We responded that day saying we would send out a maintenance tech on Wednesday afternoon of the following week to look at (and probably replace) the refrigerator.

A few appointment perturbations later we replace the refrigerator a little earlier than expected — on Wednesday morning.  Job done, right?  We can go back feeling good because we helped a tenant get a new fridge.  Makes the job all worthwhile, doesn’t it?

On Thursday we get an email from the tenant thanking us for the new fridge.  She then goes on to recite chapter and verse the Residential Code of Washington (RCW – commonly known as the Landlord-Tenant Law).   She says she lost $100 worth of food and then tacks on another $246 in ‘per diem charges’, and asks for a total of $346.

Now there is gratitude for ya – wrapped up in a nice brown box and shoved somewhere where the sun won’t shine!

Chapter 59.18.070 of the RCW states that the landlord has 72 hours to ‘commence remedial action’.  So after consulting with our attorney I wrote the tenant back explaining that we commenced remedial action within one hour of her sending the request!   I also expressed my condolences over the lost food and inconvenience.  End of story…or at least I hop so.

But here is the kicker.  How did we get to this double standard where everything in a rental is guaranteed?  When our refrigerator goes out and we lose food, is someone going to kick in the for the lost food?  I understand that as owners we have more control over when the fridge gets replaced than the tenant.

But that doesn’t automatically extend a right to guarantee!  Maybe I am missing something, but as far as I am concerned we warned the tenant it could be a few days and gave her ample warning to make other accommodations.

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Peter Nelson is President of Full Service Property Management, a Seattle-based property management firm serving homes, multi-plexes, condos, townhouses, and apartments.  He has been a landlord for over 28 years.  He can be found at www.fullservicepm.com.

This stuff drives me wild!  Americans!  There is no guarantee!  Stuff happens.  Learn to live with it (rather than running to your lawyer)!!  It’ll make living life a LOT easier on all of us.

10-step Tenant Screening Process

Tenant screening is one of the most important tasks a good property manager undertakes.  It is incumbent for a good property manager to find a tenant that best suits the property, that will take care of and respect the property, and is a good fit for the unit.  tenant-screening-process

A good fit is important to ensure long-term tenancy.  At Full Service Property Management, we strive to make each lease a win-win situation.  We want the Owner to be happy with the care being given to his/her unit and we want the Tenant happy with the home we are providing them.  If a rental is too expensive for the prospect then they will sooner or later run into financial hardship.

The entire process is all about filtering and efficiency.  By the time the prospect views the property, there should be a 95% probability that this is the unit they have been looking for, and that they qualify for.  It rarely works that way!  But that is at least the goal.

1. Written criteria.  We are required by law (and common respect) to treat everyone equally.  We have established tenant screening criteria we follow that is posted on our website.  We strictly follow this criteria.

We use a “3-strikes and you’re out” approach.  We’ll forgive one exception to our criteria with a 25% boost in the security deposit.  A second exception will result in a 50% bump.  A third violation results in either a 100% bump in security deposit, or denial.  Some things – like sex offenses and violent crimes – are thrown out immediately.

2. Write long, detailed ad with lots of pictures.  The best way to filter prospects is to tell them exactly what we have for rent.  Each of our ads is a narrative tour of the property.  We combine that with tons of pictures so the prospect has a 99% idea of what they are considering for a new home.  While we obviously cast the property in its best possible light, we are not afraid to mention in the ad limitations to the property.  In such instances we try to turn any objection into a positive attribute.

3. Receive telephone & email inquiries.  As soon as we receive a phone or email inquiry our screening process begins.  The conversation that ensues helps us to qualify the tenant so we aren’t wasting each other’s time.

4. Show property.  This is actually one of two areas that we put heavy emphasis on in our entire process.  While the prospect is checking out the property our leasing agent is checking them out!  We engage the prospect in conversation to ascertain motivation and background.  We assess not only the content of the dialogue, but also context.  This personal interview is critical to our screening process and cannot be emphasized enough.

5. Sign Holding Deposit Agreement  When we find a prospect that will be a good fit for the property then we encourage them to put down a $500 holding fee.  This fee saves the property for the prospect.   We remove our advertising and quit showing the property.

When the applicant is approved then the fee gets converted to a deposit and credited towards their security deposit.  If the applicant backs out then we keep the fee and give part of it to the Owner.

6. Receive application   Our application is completed online.  Once we receive it, with the application fee for all adults paid in full, then we can run a civil, criminal, and credit check.  It isn’t perfect – it won’t catch everything.  Which is why we do not rely heavily on it (like some of our competitors).

7. Receive signed Tenant Release & Consent form.  We have the prospect give us authorization to run their screen on the application.  But in addition to that we also have them sign a Tenant Release and Authorization form that we can then send to present and past landlords and employers to get additional information.

8. Screen application.  But the screen does provide some very valuable information.  So we review each of the elements carefully and consider any irregularities in the context of the rest of the application.  For us, it isn’t necessarily about one item – we try to put the whole picture together to give us a good idea of what we are looking at for a future tenant.

9. Call rental verifications.  With the aforementioned signed Tenant Release & Consent Form, we are now prepared to verify current and past rentals.  We prefer past landlords because current landlords may have a vested interest in giving a false report to get rid of a problem tenant.

Like the personal interview, the Verification of Rent (VOR) is the second critical part to our screening process.  We want answers to two primary questions: 1) did they pay their rent on time,a nd; 2) did they leave the unit clean.  A third question – did they give proper notice to vacate – is of interest, but we place less importance on it.

We do not verbally verify employment unless it is a new job for the applicant.  We do require them to produce paystubs to show proof of sufficient income.  We are looking for three times the rent in verifiable, gross income.tenant-screening-process1

10. Acceptance/Notice of Adverse Action.  When we are done with our screening we send the prospect one of three emails: 1) application accepted; 2) application accepted with conditions, or; 3) application denied.  The first instance is pretty easy to understand and we move immediately into the lease signing phase.

The second and third situations require us by law to send a Notice of Adverse Action.  If we are going to accept the applicant with conditions (usually a bump in the security deposit as described above) then the notice will explain to the applicant how much the bump is and why.  Similarly, if we deny an application then the notice explains to the applicant why.

The most important thing is to do your due diligence.  Do NOT overlook this important step in the excitement to get the unit leased up and the cash flowing.  A vacant unit costs a lot less in the lnng run than a unit rented to the wrong tenants.

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Peter Nelson is President and CEO of Full Service Property Management, a Seattle-based property management specializing in managing homes, condos, townhomes, multi-plexes, small apartment communities, and HOAs.  For more information, Full Service Property Management can be found at www.fullservicepm.com.