Home Inspections

Six Reasons To Always Do A Home Inspection

Today's market is driven by foreclosure and short sales.

Most buyers believe they're getting a good deal because they're buying "below market" and most sellers, in particular the lender or receiver if the home is bank owned, insist on selling the home "as is".

Because of this "good deal" perception a lot of home rental investors are tempted to skip doing a home property inspection, thinking that since the price is low enough, there will be enough money left over to do what ever repairs are necessary.

Not doing a home inspection on any real estate investment home is one of the more foolish decisions an investor can make.

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Just because a seller says the property is "as is" and just because you may think you're getting a good deal on the price, and focusing more on how to lease your home, please, please, please do a home inspection so that - at the very least - you know what you're getting into.

When you’re buying a property it’s easy to get caught up in the excitement of soon-to-be ownership and skip dong a home inspection.

 

No doubt there are great marketing ideas in the works, leasing & management plans, and some ideas for increasing cash flow that you’ve been dying to try out.

It’s all too easy to forget about some of the boring nuts-and-bolts documents that will help your property management and leasing go much smoother once you own the property.

Let’s look at some of the recent issues we faced with property under management:

• A parking lot driveway shared with the property next door using a hand-shake access agreement
• A winter-time water leak from old copper line run on top of a roof that nobody knew existed, with the leak first attributed to melting ice
• Roof tiles falling from a two-story building during mild wind and rain
• Decorative artwork on a three-year-old building popping off and falling to the sidewalk
• Assuming that a “grand fathered” or non-confirming use of a space by the former owner would be allowed for a new owner
• A new owner believing that it’s superior property management skills would be able to bring past due tenants current on their rents

All of these above examples – and we could list many more – share one thing in common.

That is, the new owner’s failure to do a home inspection and gather all due diligence documents before closing the deal.

 

When a new owner believes it is getting a good deal on a property, that belief often manifests itself with the owner thinking that he’s a good negotiator and that all problems can be solved with that skill.

So, the details of the deal get over looked.

A home inspection that covers electrical, plumbing, lighting, ventilation, and landscaping – verification of existing zoning & uses with the governing municipality, architectural blueprints, certificates of occupancy, construction permits, original leases & the tenant background checks to back them up - are some of the documents that should be gathered prior to closing the deal.

In all of the above cases, having these documents would help to allow a property sell faster, reduce the monthly water bill, determine whether a construction defect was at fault, save a tenant’s business, and help to determine a fair price for the property being purchased.

Always do a Home Inspection

 

Many savvy investors in homes for rent have actually told me in conversation that they thought that because a lender was selling the home and that it was sold "as is", that they didn't have the right to do a home inspection.

Granted, a seller doesn't have to agree to do any needed repairs.  But normally a buyer of rental homes, or any other type of real estate investment, has the right to walk away from the deal at this point, if that's the path they choose.

No party involved in the transaction wants to see a deal fall apart, but that's not a reason not to do a home inspection.  Even if you decide to proceed with the closing, at a minimum you've been advised of any issues the investment home may have.

Jeffrey Roark
Property Management Training
How To Rent My House Newsletter

How To Better Manage Rental Property by Making Daily Rent Deposits

A residential property owner knows what it takes to manage rental property

Managing rental property can be the easiest thing in the world - if you do it right.

One of the common mistakes I see property managers and real estate owners make is to make things more complicated than they need to be.  

With an easy-to-follow check list system, listing daily, weekly, and monthly activities for each property under management, property management becomes a breeze and the odds of something slipping through the cracks is greatly reduced.

What's the single most important item needed to manage rental property?

From my personal experience the top two challenges are managing the tenants, and managing the cash flow and finances of the rental property. 

Today we'll focus on how to manage rental property from the financial side.

I personally know a pretty savvy investor who receives monthly rent payments from about 30 tenants, and obviously not all come in on the due date, so running to the bank every day to make a deposit could become a bit of a hassle.

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While it's tempting to make batch deposits every few days this landlord refuses to do so and sticks with a daily visit to the bank.

She told me she learned how to manage rental property by learning from her mistakes:

• Most tenants, residential or commercial, will look at the float time between when a rent payment is made and when the check clears their account.  The longer it takes for the payment to clear the more tempted the tenant will be to write a check for funds not actually in their account.  By taking several days to make a deposit you're training the tenant to expect this and it will become a little more difficult to manage the rental property and the cash flow.
• If you're dealing with a new tenant or have to manage rental property with existing tenants, making daily deposits sets the right expectations with the tenant right out of the box.
• If the rent payment is going to bounce, the sooner you know this the better.  We've seen banks take as long as a week, sometimes more, before returning a check as NSF.  Unless you monitor your bank account online daily, by the time you get the NSF notice from the bank you could be two weeks into the month.
• Many municipalities are tenant friendly when it comes to residential rentals.  The longer it takes to start the eviction process, the more free rent a tenant gets and the greater the odds that the property will be damaged when they finally do move out.  We've seen some markets where over the Christmas season the sheriff will publicly state they no evictions will be done.  If you manage rental property like this, then watch out!

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Another benefit of going to the same bank frequently is that the bank employees get to know you.  This was actually advice that I received from my accountant years ago.

Why should you care if the people at the bank know you?

When I manage rental property I've personally benefited by going to the same bank branch in these ways:

• When I'm recognized I often will get faster service from the teller.
• Large deposit amounts are not questioned or put on hold because the bank knows who I am.
• My company maintains several property management trust accounts in addition to our business accounts.  Whenever I have a question on one of them I'm not asked to prove who I am each time.
• It's nice to be recognized, especially knowing that a bank branch deals with potentially hundreds of people each day.  A little egotistical, but true!

Exceptions to the Rule

While writing this post I received a call from one of the tenants in a property that we manage, apologizing for paying her rent late.  I'd actually planned on giving her a call after the weekend to see where her rent was, because normally her business is good and she pays the rent on time.

She was very apologetic, and her excuse was that she'd forgotten to include our complete address on the envelope that the rent check was mailed in.

I didn't say this, but 'highly unlikely' was my first reaction.  Instead I mentioned that I'd planned on giving her a call since she usually pays her rent on time.

This is true, but this also lets the tenant know that when we manage rental property we keep a close eye on cash receipts and tenant performance.

If tenants know what to expect, and what they can't get away with, then you've set the right expectations and hopefully won't have the same problems with any given tenant going forward.

I hope you've found this article on how to manage rental property useful.  

Jeffrey Roark
Property Management Training
How To Rent My House

Commercial Lease Tenants and How to Qualify Them

Tips on Qualifying Tenants in a Commercial Lease

When investors buy a property, they almost always will do a property inspection, review the title report, examine the comparable sales, survey the lot and building, and take a good look at the competition.

But for some reason most will overlook reviewing the quality of the existing tenants.  True, you usually can't change the tenant, but it makes sense to at least know what you're getting into so that potential problems or other issues can be predicted and budgeted for.

One of the due diligence items we see buyers of homes for rent and commercial investment property overlook is the qualifying of the tenants currently in the property, regardless if it's a commercial lease or a residential lease.

Several years ago when the market was strong, if a tenant ended up 'going bad' a new replacement tenant could be found relatively quickly and a new commercial lease would be written without a reduction in rent.

The Realities of Today's Market Place

In today's market, if a sales transaction is being done at all, often it is a bank owned property or short sale property and the seller expects the buyer to accept the commercial lease as-is, in exchange for what it supposed to be a discounted sales price.

Investors become excited about buying a property 'below replacement cost' and fail to consider the importance of the commercial lease and how the property cash flow will be affected if one or two tenants are lost and the length of time it might take to find replacements at the same, or more likely, a reduced rental rate.

[The Basic Property Management eBook has several good pointers on analyzing a property before you buy it, how to thoroughly review a commercial lease, and on how to use your maintenance staff to gather tenant intelligence.  Check out the Property Management Training eBook here.]

 

A Real-Life Example with a Commercial Lease

Recently we began managing a multi-tenant commercial property for an owner who had purchased the retail shopping center as a short sale.  It quickly became apparent that the buyer had been focused solely on the price per square foot and on buying a building at a 'below market rate' with only a quick glance at the commercial lease that each tenant had signed.

Within 30 days of closing escrow the investor faced these situations with current tenants:

• An anchor tenant was on a month-to-month commercial lease and began negotiating for a lower rent
• Trying to collect rent that was 60 days past due from three of the tenants

Amazingly the buyer was aware of the above tenant situations but believed that through new ownership and good property management the tenants would voluntarily catch-up on their back rent and also re-sign each commercial lease even though they had above market rates.

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The reality is that if a tenant is not paying the old owner, they're not going to pay the new owner either.

Qualify Your Tenants

 

Here are 5 things you can do, before you invest in any real estate investment property, to qualify the existing tenants and to make sure that the terms of each commercial lease are at market:

1. Be a Secret Shopper.  Pretend to be a customer and visit the business - in person - and see what your first impression is.
2. Drive the Market Area.  Make a list of your prospective tenants and drive around to see how much competition they have.  Consider how they compare to the tenants you're buying.
   
3. Examine the Tenant File.  During your due diligence period when buying the property you've likely been given copies of the leases to review.  Make sure to ask the seller for copies of the tenant applications, credit reports, and business plans gathered when the space was first leased.  If the seller can't or won't provide these ask why, and give the property transaction extra scrutiny.
4. Examine the Actual Rent Deposits.  Again during your due diligence, the seller will likely give you profit & loss and aging reports showing rent payments received from each tenant.  Make sure to look at the actual dates the rent checks are deposited.  Seeing a report that shows a tenant paying every month is different from seeing that the tenant is paying late every month.
5. Look at Competitive Properties.  Talk to the tenants in neighboring properties and see what opinion they have of the building you're about to buy.

I always like to have my clients do as much of these tasks as possible.

It's not because I'm lazy.  It's because one of the toughest things to do in property management is to educate the property owner about the market.

And the easiest way to get educated is to go out in the field and play detective, instead of sitting behind a desk and doing research on the internet.

Or worst of all, thinking you're smarter than the current owner.  To be blunt, you're probably not.

After all, they're the ones that are getting you to accept each commercial lease as-is and to buy in a down market!

Jeffrey Roark
Property Management Training
How To Rent My House Newsletter

Does It Make More Sense to Rent or Buy Real Estate?

Choosing Between the Rent or Buy Scenario

Is it better to rent or buy is a question frequently asked by tenants, with market conditions the way they are, much more so by residential tenants instead of commercial tenants.  It's a good idea for real estate investors to ask whether renting or buying makes more sense also.

Here's why.

In my real estate investment business, I always suggest that the real estate investor I work with learn to think like a tenant.  Preferably before buying an investment property, and thinking about whether to rent or buy is a perfect example.

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There are always predictable hard and soft costs in any real estate investment.  A few are:

• Leasing fees & other acquisition costs
• Mortgage, if leveraged, versus the time the property is vacant, aka Negative Cash Flow
• Utilities and other property upkeep done at the landlord expense because there isn't a tenant

To keep these costs down a real estate investor needs to minimize tenant turnover .  Most investors assume that if they find a good, solid tenant and if they are great landlords, the tenant will have no reason to leave.

One of the things many investors overlook is how the tenant views the opportunity cost of renting versus buying.  Tenants will look at this rent or buy situation from an objective, financial viewpoint, but also very subjectively as well.

Cheaper to Rent in Most US Cities

A recent CNN Money article caught my eye and is a perfect illustration of this rent or buy point.
In summary, the story describes how in most major U.S. cities homes prices are so low due to oversupply and demand for rental units has increased so much, that in most cities it's cheaper to buy a 2-bed home than to rent one.

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Real estate investors need to consider whether or not this trend will continue, and what markets will be most and lease influenced.

Rent or Buy from an Investor Viewpoint

In addition to learning how to think like a tenant, real estate investors should also have a good feel for what direction real estate in their market is heading.  While I never try to time the top or bottom of a market - that's a fool's game - what I do try to do is look at both the macro and micro trends whenever possible and then conduct a 'reality check' to see if the trend makes common sense.

One of the most important trends, and also a question I'm often asked by the investors I work with, is, "What's happening to prices in the real estate market?".

In other words, are they going up or down.

Up until the year 2000 or 2001, there was a pretty good correlation between income levels and home prices.  This changed when money became easier and creative financing - think low or no-doc loans and interest-only mortgages - kicked in.

Common sense says that when you can finance something the price goes up, and the more you can leverage something the higher the price goes.

Jeffrey Roark
Property Management Training
How To Rent My House