The Accidental Landlord

January 13, 2011

by christiborden

In today’s tumultuous lending environment, so many would-be buyers are being forced into leasing. And this has created an upset to the supply/demand balance … forcing unsuccessful would-be home sellers into making their homes available for lease due to the lack of ready, willing and able buyers. Thus, what I call The Accidental Landord is born!

In many instances, this is a wise maneuver because it allows the seller to maintain a stream of income to cover most if not all expenses (maybe even make a profit), while allowing the seller to sell at a future time when the market is more favorable.

That said, there are so many factors that you, as a future landlord, should take into consideration before making this move. First and foremost, in the State of Texas, you have a wonderful resource available from The Real Estate Center of Texas A&M. Click on the title to view the Landlords and Tenants Guide,  available in PDF format that you can download and read at your convenience. Be sure to grab a comfy chair because it is over 115 pages long and filled with pages and pages of legalese detailing your responsibilities and that of your tenant. I make sure all of my clients have access to this guidebook prior to the execution of a lease contract because it is so very important to understand the rules from the beginning.

Another thing to consider is whether it makes financial sense to lease. Ask your Realtor to run a market analysis of leases for properties similar to yours in the last year. This will give you an idea of where to price your lease. If you are in an area with few leases available or if you have something special to offer (pool, extra bedrooms, extra garage spaces, modern upgrades, close proximity to schools, shopping, transportation, etc.) then you may be safe to list above the average. On the other end of the spectrum, if you are in an area with an abundance of lease inventory and your property is very similar to the competition, you may need to consider pricing at or below market rates to attract a tenant. Another thing you need to consider is you are responsible for your mortgage payment, property taxes, landlord insurance and in most cases, any homeowner’s association or amenities fees. You may negotiate any costs for lawn or pool maintenance and repair items in the lease itself. Do the math! If your expenses add up to more than you think you can lease it for… you may be better off selling.

Big questions to ask yourself: should I allow pets or smoking? As a Realtor who may have to sell a lease home later or try to find another tenant years down the road, these are very tricky.

First, let’s chat about pets. We Texans love our pets and the majority of tenants seeking placement will have a pet or pets in tow. Realizing that pets can and do cause tremendous damage to properties, you may wish to decline to allow pets or to offer consideration on what we call a “case by case” basis. By declining pets outright, you limit the pool of tenants who will see and make applications to lease your property. By allowing case by case basis for pets, you get the pet owner traffic but can turn down any tenant with pets that you feel might be harmful to your property. If allowing a pet, you can ask for a sizeable pet deposit (either refundable or non-refundable) to help defray future repair costs to carpets, wood trim and landscaping – items usually damaged by pets.

Second, let’s chat about smoking. Now, I am not trying to start a dialog about the health issues or social issues behind smoking… I am only speaking from a property owner standpoint and I can tell you that the damage caused by repeated smoking indoors is extensive. Properties will retain the smoke odor (which permeates flooring, walls, all fabric surfaces, etc and also tends to discolor paint on cabinetry and trim) long after the smoker has left. In fact, many times these surfaces must be treated and/or replaced to eliminate the smoke odor – which could be very costly, indeed. This is a personal choice and smokers are not legally considered a “protected class” so you are perfectly in your right to only lease to non-smokers. That said, not everyone is truthful about this issue so some due diligence may be required.

And while we are on the subject of “Protected Classes”, you as a Landlord are required to know and comply with the Fair Housing Laws. Click here to view these requirements as they apply to everyone, not  just Realtors. And remember, ignorance is no defense where fair housing laws are concerned. One look at the penalties and you will certainly want to comply.

One last thought: I have been told by more than one successful real estate investor that a smart landlord is one with an outside property manager. It keeps everything on a non-personal, professional level and helps make sure your tenant is well cared for while living in your property. A happy tenant makes for a happy landlord.

So if you find yourself in the shoes of The Accidental Landlord, a little homework and due diligence will help keep your shoes on the right path.

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Why has our Buyer Cancelled the Deal? Today’s Home Seller Dilemma…

July 7, 2010

by christiborden

While real estate certainly has its ups and downs (one of the reasons I love it), some of the hardest minutes are those right before I have to call my seller to tell them that their buyer has terminated their contract. Whether it be on the last day of their Option Period* or the day prior to our closing date, it is still a very hard pill to swallow. And for the sellers, it can be devastating.

In this very interesting (read, volatile) real estate and economic climate, this is occurring all too frequently. Why? First and foremost, buyer confidence has certainly been impacted by the economy, worries about tax increases, health care reform costs, job security (or lack thereof) and locally, the issue of the BP gusher in the Gulf. When you come to think of it, with all of those worries, it is a wonder buyers can get out of bed each day, much less commit to purchase the largest financial investment of their lives.

Second, we in the Katy, TX (and much of Houston) markets have to deal with the issue of abundant, reasonably priced inventory (much of it new construction). Buyers will commit to one property, write an offer, agree to a contract price, even go through inspections only to find that their dream home has now come onto the market and all bets are off. Goodbye, Buyer…

Third, I have seen recently quite a few buyers cancel a contract over inspection items that in the past would not have been of great concern. It seems like today’s buyers want a resale home to be perfect in every way – and frankly, even the new homes rarely pass inspection with flying colors. Most if not all inspection deficiencies can be repaired but there have been instances where seller agrees to repair everything and the buyer is still not satisfied. Why is that? I think in some cases it has to do with cultural misunderstandings of how our inspections work here and the grandfather clause for many changes in codes through the years. Another factor may be the lack of an experienced and professional Realtor representing the buyer (who should prepare their buyer for what to expect upon inspection and what may be reasonable or not reasonable to expect a seller to repair). I have actually seen agents send over an inspection list and say to the seller, “Buyer wants you to repair all items”. If the agent had done their work in counseling their client, they would have told them that inspectors are required to inspect with today’s code in mind but sellers are not mandated to bring their homes to today’s standards. This can go a long way in helping keep buyer’s expectations reasonable and could alleviate a lot of frustration on the part of all parties when and if repair items are requested.

So, how do we help our sellers understand that a contract is only as strong as the buyer behind it (or as strong as the buyer’s Realtor and Lender, but that is another story indeed). First, we must truly analyze the offer as to all terms, not just price. Even with multiple offers in hand, remember that the buyer you let go may be the one you wish for 2 weeks down the road.

All parties need to have a back-up plan if the transaction fails. One thing I tell my seller is DO NOT start packing until the inspection is completed and all repair negotiations, if any, are worked out to the satisfaction of all parties. In Texas we have a Termination Option* that allows the buyer a given amount of days after the execution of contract to terminate for any reason, whatsoever, and still retain his earnest money. This is usually the time period that inspections are completed and any repairs negotiated.

Once that period expires, then the buyer is contractually committed to close. Does that mean it is a sure thing? No way! There is also a time frame within which the final loan approval process must be complete and this allows the buyer to be released from the contract with his earnest money in tact if for some reason the loan cannot move forward – loss of job is a great example here.

So what is a seller to learn from this?

  • Please be aware that a contract is no guarantee of a closing.
  • Have a back-up plan so that you do not find yourself homeless if the deal falls out at the end.
  • Be informed: Stay in touch with your Realtor and make sure he/she is constantly in touch with all the parties involved: buyer’s agent, title escrow officer, buyer’s lender, etc.
  • Allow a flexible timeframe between your next purchase and the closing of your current home, even if it means asking for a temporary lease from your buyer or moving your family to a hotel and your household items to temporary storage to allow for closing delays – which unfortunately is more frequent that we would all like. I have seen transactions built on multiple back-to-back closings crumble like a deck of cards which could have been prevented if all parties had left wiggle room in between the closing dates.
  • And if by chance your buyer terminates, it is not the end of the world. Pick yourself back up, dust yourself off, repair needed items presented on inspection and proudly put yourself back out on the market … You will find that your next buyer was really the best buyer for you and everything eventually always works out for the best.

Good luck and happy selling!