Market Conditions
Understanding market conditions and having that “6th sense” of what
is going on, allows the successful investor to stay out in front and operate
where there is no competition. Just like the book “Who Moved The Cheese?”,
screening tenants for your rentals is critical now more than ever. We have
seen many small market indicators creep up on us over the last few years.
Although each condition by itself is not too bad, when combined all at the
same time, results in a major impact on our rental market including single
family homes.
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These factors include the nightly news regular update of our bad economy, high
unemployment, more jobs leaving the USA, and homeownership at all time highs.
The nonstop new home construction. The new home construction rate far exceeds
the growth of our local household census over the past few years. New
apartment construction, availability of FREE money to first time homebuyers
(including our own long term tenants), continued all time low interest rates,
access to easy money from lenders, stock market jumpers who “see the light”
realizing real estate is the place to be and jump into the real estate
investing arena, have all contributed to putting us in a simple but very
challenging market of SUPPLY AND DEMAND. Too many houses and not enough
quality Tenants!
While surfing the net last month, I found a website (www.badlandlords.info)
devoted exclusively to educating tenants on how to negotiate better terms with
landlords and the inside scoop on how to beat up and cause grief to your
landlord. They even sell T-Shirts “Kill the Landlord” promoting the same. This
website harps on market conditions of an abundance of available rental
properties and encourages tenants to go after 2-3 months FREE Rent. Locally,
we have apartment communities whose profitability is projected at a maximum 5%
vacancy rate and are now experiencing an average of 25% vacancy rate. We have
an apartment community locally with a 40% vacancy. These apartment communities
are offering blow out specials and low and FREE rent prices to fill vacancies.
Last month my brother purchased a home I would rent to a tenant for $800.00.
His total piti (principal, interest, taxes, and insurance) payment is $543.00.
Be aware of how this can affect YOU! Mortgage brokers and lenders are
targeting our sometimes overlooked, but valued long time tenant and they are
pitching this exact same situation. They pound our tenant with “Why are you
paying $800 month rent making your landlord rich when you can buy a home just
like yours or bigger and better for $250.00 month less?” The sad reality is we
learn about this too late. We receive our tenant’s notice of their intent to
move because they are becoming a homeowner. (Perhaps you would have sold your
tenant the home they are renting from you)
Congratulations to tenants who become homeowners. Almost anyone who can
breathe can buy a home.. (think about who is left…an ugly, ugly thought)
Although they are excited about homeownership, we have seen many get zapped
with outrageous fees resulting in the tenant paying well over 100% for their
home. In addition to this mess, the tenant does not receive any financial
education on how to “run their household financially.” When the roof, furnace,
water heater, etc. breaks or needs replacing, the tenant, now homeowner, will
have to dig into their empty pocket to make repairs – previously, a phone call
to the Landlord resolved their problem. Now we are in the beginning and
perhaps the middle of a cycle eventually giving us great rewards.
Unfortunately, many will eventually go belly up and lose their home and return
to being a tenant. In the meantime, we are short a boatload of quality tenants
right now.
Some new investors have added to the current problems for investors. Poor
financial decisions from the recent bygone days of EZ Cash Out Re-Finances
have allowed some new investors to have the “good life” on borrowed money.
These types have now run out of cash and their rent income barely pays
mortgages, let alone repairs or lost rent from vacancies. These people are
going belly up by the dozens locally and lenders have shut all doors on loans
involving non-owner occupied property, including the seasoned veteran cash
heavy investor. The pendulum has swung the other way.
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The investor with CASH is KING! If you do not have cash, you must have
resources to cash in order to stay active. The gravy train days of pay cash,
make it right, refinance and cash out, getting your money back on 30 year
fixed, to go do it again are almost gone. Focus and polish your education on
seller financing, negotiations, and develop your own network of private
lenders. Cash in on private lenders whose certificates of deposit are paying
two percent. Make it attractive to the private lender and you will always have
cash resources at your fingertips. Private lenders with cash network with
people with cash.
Tenant Screening
Managing Tenants effectively builds our wealth and begins with Screening
Tenants properly when they submit an application. I assume you use an
application and have them fill it out for a fee. My objective here is to give
you a smorgasbord of screening tips allowing you to select items of your
choice to work into your system.
Application: first of all, make sure your application is proper and legal and
does not violate any fair housing laws or local laws. On the back, include a
section with a few lines allowing the applicant a place to write comments.
Enclosed with this newsletter is one of my rental applications for your
review. Also include a small section of text briefly detailing your qualifying
standards and permission for the landlord to check all sources in evaluating
their application for tenancy. Also include a phrase stating an “incomplete
application” is a reason to be disqualified or not approved. Their signature
line is below this small bit of text.
The first section on the application asks for their full real name, date of
birth, social security number, and phone numbers to contact the applicant. Ask
for several phone numbers – home, work, cell, pager, etc. After attending a
class put on by an Enforcement Officer of the Equal Housing Commission, I
learned to my surprise it was permissible to ask for “date of birth” for
identification purposes; although you can not ask the applicant their age;
baffling, but true. You will see this kind of stuff in several situations.
Rental History: The next section deals with Rental History for the last
five years, including addresses, owner / manager contact information, and
dates of residency along with reason(s) for moving.
Income: This next section demonstrates the applicant’s ability to afford and
pay the rent. Information about their employer, wages, and other source(s) of
income are entered here.
Incidental but powerful information section falls below the income section. It
includes “What kind of animals do you have?” Do NOT ask “Do you have pets?”.
This phrase almost automatically implies the landlord does not accept animals
and your applicant will almost always answer this question with a “No”. The
first question implies it is okay to have animals.
“What is the name of your attorney?” Having this question on your application
is powerful. Many leave it blank (which is great). Those who fill it in
quickly might ring a bell with you. It might be one of those attorneys on TV
advertising “Help me find somebody to sue”.
How many evictions have been filed on You? It seems like the applicant has
trouble reading the question properly. Even when confronted with false
information on the application, the Applicant who answered this question ZERO
or None will respond “I have never been evicted!”. Unfortunately, that is not
the question. Read the question again, if you need to. Again, this question
puts another bullet in your gun to protect you. Load up on some ammo.
Household composition is the next section. You can not use the word “family”
or “children”. Think of those words as lighting fuses to cause you trouble. If
you are doing it, STOP IT NOW. Substitute the phrase “How many people are in
your household?” If they answer and respond about children and spouses, you
are in good shape. They volunteered and offered the information. You did not
ask it. Yes, it does seem a play on words; however, the mystery housing
shoppers looking for landlords who violate the federal laws can call and
record your phone conversation. Be aware.
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EMERGENCY CONTACTS: this section includes the phrase “including
non-payment of rent”. This is an emergency. I also include this phrase right
above the emergency contact information section in our rental agreement. This
is powerful and allows you to contact these folks if they get behind on their
rent. Yes, your tenant might throw a fit the first time you contact their
relative, but you remind them they instructed you to do so on both their
application and rental agreement. After perhaps some embarrassment, I have
found this to be a powerful tenant training tool. They will make sure rent is
paid on time to prevent their emergency contacts from being notified. I recall
one tenant in particular where the mother would go off and attack and slap her
son over his irresponsible actions. We need more Moms like her.
TURNING IN THE APPLICATION: this is a very critical part of the
process. Remember, you handed them an application and instructed them in a
calm voice to fill out the application completely. If you have an office, make
a copy of their valid photo ID. If you are doing this at the house, use a
digital camera and photograph the applicant and their valid photo ID. Many
people are victims of identity theft and you do not want to get a trash bag
posing as a responsible person
When the application is handed back to you, quickly review the top section to
make sure you can read their name, date of birth, social security number, and
the phone numbers to contact them.
SKIP EVERYTHING, FLIP IT OVER,
MAKE SURE THEY SIGNED THE APPLICATION.
Before parting ways with the applicant, we have encouraged a new aggressive
approach to prevent the loss good applicants. In the past, we heard the phrase
“beware of the applicant waiving cash, odds are, the cash they are waving
under your nose belongs to their current landlord.” All landlords have worked
up applications, called the applicant to let them know they are approved and
do the paperwork only to discover they have already rented another home. OUCH!
Back to ground zero.
Now, when an application is turned in, we ask them to put a DEPOSIT TO HOLD on
the unit. It must be close or exceed the normal security deposit. The language
on this form states the applicant puts up X dollars to hold this property
pending the approval of their application. If they are approved, these funds
will be used to start their tenancy. If they are not approved, the funds will
be returned to them within 30 days. If they wish to receive their money
sooner, we charge an $85.00 processing fee. If the applicant is approved and
refuses to rent the unit, they will forfeit the entire deposit to hold. The
objective here is to prevent a good tenant from continuing their search for a
rental unit while at the same time providing stiff consequences to the dirt
bag trying to get one over on us by wasting our time.
24 HOURS Notice to perform when approved. How many good tenants have you lost
because an applicant was approved, you made arrangements to do the rental
agreement on Friday and they become a no show along with the inability to
contact them by phone? Puzzled and frustrated, do you give them a couple of
days? Do you rent to your next qualified applicant only to have the original
approved applicant re-appear and challenge your process. You can prevent this
headache with a simple 24 hours to perform rule. Remember the small print on
the back side of your application stating that once approved, the landlord
will use the phone numbers listed on the application to contact the applicant
and inform them they are approved. This is the start of the 24 hour rule.
Period. If no answer or voice mail, you may keep calling, but I sure would
start working on my next application. Shoot straight with the new applicant.
Tell them this other person is in front of them and they have till 3pm today
to perform or your newest applicant can be in the driver seat.
Don't worry about seeing blanks in the application – THIS IS GOOD AND POWERFUL
FOR YOU! Before you start to “process” or work up their application,
immediately make a copy of their application. Mark the original application
“ORIGINAL” and do not mark on it anywhere. Stamp or mark “COPY” on your work
copy. Do nothing to the original and safeguard it as it may turn into evidence
to support your decision later. Staple it below your work copy.
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Work thru your application process using the work copy. You can write and fill
in the blanks on the fields of information they failed to fill. I get more
worried about the 100% completely filled out application vs. an application
with a bunch of blanks. You can telephone the applicant and fill in the blanks
on your WORK COPY, and not their original. (Remember, an incomplete
application is a reason to not be approved.) I have found there are two types
of applicants who leave blanks on their apps. The Professional Tenant who is
trying to get over on you, and the plain good old stupid person who doesn’t
know any better. I will go out of my way to help qualify a good old stupid
person. If you help the professional tenant fill in all the blanks on their
original application, you are just making it more difficult for yourself to
disqualify them; in fact, you are helping them to qualify.
NEVER DISQUALIFY an Applicant: Always present a challenge or hurdle to the
applicant that prevents you, the application processor, from moving forward.
Put the ball in their court. The applicant needs to take action to correct the
hurdle. You project an attitude of helping them by explaining to them how they
can work through this obstacle. Many tall orders requiring work on a dirt bag
applicant will cause them to tuck their tail and run away allowing you the
liability free position of not having “disqualified a person for housing”.
Avoid disqualifying an applicant over the phone or in person. My old program
to protect the privacy of the applicant, required the applicant to send a self
addressed stamped envelope to a PO Box to receive a written explanation of the
cause for not being approved. Today, we avoid disqualifying applicants.
For example, let’s say a Dirt Bag applicant has no chance – ZERO of renting a
unit from you for reasons 1,2,3. We will telephone the Applicant and explain
to them we need their help in working up their application. “While working up
your application, we discovered district court case number blah, blah, blah,
where Mountain View Apts filed an eviction on you on such and such date.” Your
applicant may respond “That is not me”. We will acknowledge we understand;
however, the court records show this item against them and offer to give them
the case number again to HELP THEM. Inform them as soon as they get it
straightened out at the courthouse, bring the court paper to us and we can
proceed with their application. Always present a challenging hurdle for them
to straighten out in order to proceed with their application. Present the
challenge as their problem THEY need to correct and You are HELPING them.
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Another example could be a bad landlord reference. Do not go into details, but
explain there is a problem with their rental history and they need a letter
explaining their tenancy from each of the three landlords listed.
Another frequent flyer tactic is trying to hide previous addresses. It is
surprising to see an applicant fill out an application listing their addresses
for the last five years. Also amusing is noting the top of the application
states “ONLY
CLEAN AND RESPONSIBLE PEOPLE WHO PAY RENT ON TIME MAY APPLY, with a valid
Photo ID.” AFTER submitting their
application, the Applicant is asked to produce a photo ID and amazingly
another address is listed on their ID. Do NOT confront the applicant at this
time. This is another bullet to put in your gun.
On occasion, it seems some professional tenants just seem to self-destruct. If
they have given you a bunch of BS on their previous addresses, you may ask
them again, based on the information from their original app… So you lived at
123 Main St. for the last 3 years? If they reply Yes, and you already have
discovered another address during the same time period, then you can ask them
about the newly discovered address. At this time, they will start back
peddling and see you are for real and serious about working up their
application. They will move on and search for a dumb landlord. You may choose
to slow walk the conversation on the telephone making a big deal of the first
issue asking for their help to get them qualified, then expose the 2nd
hurdle, the 3rd, and so on. Most of these folks then just
evaporate.
Phantom Owner / Manager: Have you received applications where you suspect
their current landlord is a relative or friend at work? If your gut feels
this, here is a good method to expose the dirt bag. Call the number listed and
ask “How much is the rent for the available unit?” If you don’t expose
yourself on Caller ID, this question will put the phantom off guard and they
will usually reply “ I do not rent houses or apartments!”… Ah, hah, now the
cat is out of the bag! This would be an excellent candidate for False
Information on an application.
BEST Screening tool for Landlords: After working up their application on paper
and on the phone – get out of the office! Ride by and see where they live. If
it is ugly, tall grass, cars in the yard, no need to stop. If it looks okay
from the street, then stop and knock on the door. You need to verify they
actually live in this pretty home. I explain my company sent me over and it is
one of the final steps in the application process. This almost final step is
“Our way of verifying you live here and to see how you take care of your
home.” If you feel safe enough to eat a bologna sandwich then it looks like
you might have found a good tenant. Many times I have stopped by and knocked
on the door only to discover the applicant does not live there but is a
relative or friend who asked for a favor.
PREVIOUS LANDLORD is a powerful reference. Do not overburden them with
26 or 32 questions. Tell them you have just four easy yes or no questions.
Remember, this tenant is gone! You are taking up their time.
Ask these 4 questions:
1.)
Did they pay their rent on
time?
2.)
Did you receive any
complaints?
3.)
Did they damage your
property?
4.)
WOULD YOU RENT TO THEM
AGAIN?
CURRENT LANDLORD – be careful here. Think about it for a moment. Have you ever
had a bad tenant and you received a phone call from maybe their new landlord?
What did you really tell them? Did you say they were average or okay, or they
were great and you hate to lose them.
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CREDIT REPORTS: it seems 90%+ of all applicants have no credit or bad credit.
How can we find good tenants. Remember, anybody who can breathe can buy a
house. Most good tenants have become homeowners. What remains is the ugliest
of the ugly. How can we make lemonade out of lemons. There is no need to stand
by and hope for A1 credit. You will have extended vacancies. You must make
adjustments.
Expect bad and poor credit. How can these people get qualified. The answer is
compensating factors. Here are some solutions.
1.)
Use the phrase, “there is a way to get you qualified. You can double
your deposit”.
2.)
Provide a good credit co-signer.
3.)
BUY DOWN their rent to qualify for their income. For example, a house
rents for $800 month. For $2,500 today, your applicant can buy down their rent
to $600 for 12 months.
4.)
Encourage an Option to Buy: get educated on it first in your state and
jurisdiction. Many landlords using options are jackpotting themselves.
5.)
Ask for a FULL YEAR RENT paid in advance. Just like an aggressive
investor, train yourself to ask this question… it costs you nothing, and some
applicants have resources to pull this off. We sometimes focus on income to
insure their ability to pay rent. I missed the boat and lost a good tenant to
one of my business friend and competitor because he asked this question. In
other words, we passed on this applicant because they did not have the income
and my competition asked this question and the applicant paid a full year of
rent in advance when they signed their lease. Who needs a job or income if
they can do this? It costs us nothing to ask the question, we just may feel
uncomfortable or feel it is useless. Again, it costs you nothing to ask the
question.
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PREVENT TENANT TURNOVERS
is your #1 method of preventing vacancies. Do something special and create
loyalty from your tenants. Financial incentives and benefits to your tenants
that costs you zero are home runs. Keeping good tenants in units sure would
eliminate all of the hoops and hurdles discussed earlier.
Special thanks to these
folks whose ideas have lit my fuse on this subject – John Schaub, Nick Sidoti,
Jeff Taylor, Chris McCarty, Rue McFarland, Jay Long, Dick Vreeland, Layne
Smith, “Fixer Jay” P. DeCima and many others.
