Sabtu, 31 Desember 2011

The Reality of US Property Management...Part 1

I am often approached by investors from all over, not just the US, that have invested in properties in Kansas City. The common problem that seems to concern them is property management. I would really like to say that it's just a misunderstanding or lack of communication that leads to these problems, but unfortunately in most cases this is just not what is happening.

I have been managing properties on an exclusive level for over 4 years, and usually only managed those properties that my company was involved with every step of the way. I found this to be the most productive way at maintaining a professional approach with my clients. I currently manage just over 80 properties and just don't have many problems with the tenants or the properties. I decided to do some undercover work to find out exactly what is going on with property managers and why they are unable to find qualified tenants in a market that is full of renters.

Please keep in mind, this research was conducted over a 2 year period and consisted of data found primarily in the Kansas City market only, though I did ask some of the same questions to clients that have properties in other locations, to see if this was being followed in other markets.
I am in no way, saying this is the rule for all markets, as I am confident that not every property management company operates with this amount of incompetence.

What I will post over the next few weeks is data that has been recovered over this 2 year investigation in to what is wrong with property management companies, and why they struggle to perform.

The first topic discussed is the placement of tenants.

What my research has made ever so obvious is that most PM see this business strictly as a numbers game, now this might sound like a statement of the obvious, until you read deeper. When you consider most PM's charge anywhere from 0-100% of the first month's rent to "place" a tenant, and then anywhere from 7-10% of the monthly collected rents after that, you can begin to see where the problem lies.

If your paying for office space, internet service, office supplies, insurance, gas, marketing and of course employees and your "net" gain on an average rent of $700 monthly is around $60, you can clearly see the need for ALOT of properties to pay these expenses. Since its more profitable to "place" the tenants than it is to collect the monthly rents, the background checks ran on most tenants are just non existent, due to the cost. The end result of this of course, is more often than not you are getting a very questionable tenant and most likely will result in an eviction within the first 3 months or so, obviously not the goal.

I found thru investigations, that most, if not all KC property managers were either NOT running a background check of any kind, or only focusing their search at a LOCAL level. This is just not a good idea, tenants move from one city to another with no regards to financial intelligence. They usually have family or friends in that town, thus you could run a local search on a tenant and find absolutely nothing wrong. If you were to run them nationally, you would see a whole different picture. The problem here of course is it takes money to get a nationwide criminal check, where as most states now have their court system online and are either free of charge or cost very little. I can run a search for all of Missouri for free, where as if I run for the State of Kansas it costs me a dollar per report. The problem here is of course, if they have never been to court in Missouri or Kansas, then its not going to tell you all you need to know.

Insist on a nationwide criminal check!
Just as shocking as electing to ONLY run a local criminal check, is the fact most didn't even pull a credit report. This one stunned me, as there is information on the credit report that is very valuable in the decision to rent to a tenant or not. The credit score is one thing, but more importantly is what is on there to bring that score. If your renting to someone that has judgements from the utility companies, guess what this means for you, either you will pay the bill sooner than later, or your going to get a call from your PM saying that the tenants never got the heat turned on and now you have a swimming pool in your basement or living room(if no basement), and you will need to wire 10K for repairs. The other issue is if your renting to someone with a judgement for child support, their freedom could be over anytime. It's likely they have a warrant for their arrest if they are not paying their child support, and that means an eviction if they get caught and hauled off to jail. These are not that rare at all, especially the utility judgements, I see them quite often.

The last topic for now will be the decision to place, and well you will see is the shortest explanation as found in the investigation.
This probably shocked me more than anything. My research found that most companies make a decision to rent to a tenant based on 3 factors. 1. No evictions ( Thats good) 2. Verifiable Income ( Keep in mind, no mention of the source of this income, I will explain in a bit) 3. Verification of Employment and Rental Reference. What could be wrong with that? Let me explain if you will.

If you are basing your decisions on nothing more than those topics, here is where you will run into trouble.

1. No evictions --- well that's great, but what else is there if anything. Have they been arrested for drugs, inappropriate relations with a child or any other serious crime. Again if you are only running local searches this information might not be available, but you better know it or you could end up in a legal struggle for your property if ceased for drug use, law suits for moving in an offender, or thousands in repairs for someone "running" with the wrong crowd.

2. Verifiable Income - Great! But what is the source? If its unemployment, you better not accept it, it WILL expire and usually its 27 weeks, don't bank on it being renewed, as this is not a given. If it's SSI or some other government benefit, better confirm it's renewable and just not a one time occurence for the year. Is there a ratio being applied to the rent vs income? You better be asking for a no less than 2x the rent, or you are in the "gray" zone with that tenant. It could come down to them making a decision to stay warm or pay the rent, most often they will pay your rent, get the gas turned off and freeze up your plumbing, then bail when the water lines break causing you thousands in repairs. Ideally you would want to see 2.5 times the rent in verifiable and reliable income.
The other NO-NO in income is personal day care, first off it's just a law suit waiting to happen in your home, the 2nd is if this tenant is moving more than 5 miles away, most of her current clients are not going to follow her, as they can find someone considerably closer, thus leaving your NEW tenant with no income. Just a bad idea all around.

3. Verification of Rental & Employment References - Again all good. But here is what I found, their rental reference usually only went back to their current landlord. Are you joking me? When questioned what they were asking, it usually came down to these few quesitons:
a. Are they leaving on their own terms?
b. Did they pay their rents on time?
c. Would you rent to them again?
Hardly a professional interview. And why only the most recent landlord? You need to go back at least 3 and preferably 5, to see if there is some pattern being exposed. Are they tidy tenants? Did they tear the house up? How often were they late? Any problems with the police visiting? Anything else I need to know?

Verifying employment is a pretty straight forward process, but most PM's were only going back 1 year, again WHY? If they are job jumpers, this almost always leads to an eviction (unless of course they are in school, then this is pretty common as their class schedules change like the weather). Why so many jobs? Do they have a career path laid out? What is their average time on any one job?

To summarize this posting.
1. Insist on nationwide criminal checks
2. Insist on credit reports ( not just 1, but all 3)
3. Place restrictions on the Income ratio, and actually perform professional interviews from landlords, and not just 1 or 2.

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