Realty Insider Blog

For some, that is the extent of their tenant qualification - tenant seemed nice and had a prefilled lease ready for me, said they would help fix the place up, gave me a personal check at move-in for two months rent and the current landlord gave glowing reviews. Excellent - no problems - being a landlord is great!

For the people that snicker, you know where I am going with this and probably won't need to read this article. For those that see nothing wrong with the above, please please please read on.

So, it is great that you managed to find a tenant. I would suggest calling the person a prospect for the time being though. There are lots of different people renting from Craig's list, so it is imperative that you check out the prospective tenant thoroughly. If you are renting out your place yourself, you are really putting yourself up as a target - problem tenants will seek out first time landlords that are lax in their tenant verification and qualification.

To weed out the riff-raff, try adding something like the following to your craigslist ad. You won't get as many responses, but those that do contact you know that you mean business:

"Sufficient credit, income, employment & rental references are required and will be verified. All adults living in the property will have to be on the rental application. $32 application fee per adult."

Make sure all prospective tenants fill out an application form and that they submit a copy of their drivers license or other valid id as well as paystubs etc. Some rental applications:

http://www.independent-pm.com/Blank%20Rental%20Listing%20_%20Rental%20Application%20(14)%20-%2008-01.pdf

http://mrlandlord.com/rentalapplication/app1.pdf

For Qualification and Verification Purposes, I suggest landlords make sure they do at least the following:

a)      Run credit on the tenants (have them order it online themselves and email you the login and password - i.e. on creditreport.com ) Print it out for your records and compare with copy of drivers license. Make sure they don't have outstanding judgments, late payments, bankruptcies etc.

b)      Be clear on who and how many will be staying in the apartment, pets etc. All adults should apply and have their references and rental history checked.

c)       Be sure to get at least 1 month's rent and one month security deposit up front (in certified funds if you don't have at least 2 weeks before you hand them the keys). DO NOT accept people that cannot afford to pay you the whole amount up front.

d)      Verify their employment (call supervisor/HR) + get copies of recent W-2's

e)      Get copies of their drivers license so you know they are who they say they are and the same person as on the lease.

f)       Make sure they understand they have to pay utilities. move-in fees, trash fees or whatever else is required.

g)      If they have dogs/cats, make sure they understand the building rules and that they pay you for example a $500 move-in deposit.

h)      Call the last 2 landlords. If they are problem tenants, the current landlord will probably lie just to get rid of them.

i) Don't make friends with your tenants. You should be courteous and friendly, but if you are looking to keep your rentals an investment, don't mix business and pleasure.

j) Don't let your tenants paint or make improvements. They may not finish, may feel you are indebted to them and ask for slack when they are late or may just do a bad job.

k) Verify all information - income, employment, name on credit report/social security number etc.

l) Use a great lease.

m) If you don't want to go through the trouble of qualifying your tenants, use a realtor and a property manager. It will save you money and lots of grief. 

Plenty of leases online you can look at:
http://www.besthomeagent.com/forms/deed_of_lease_tenant.pdf

http://www.legal.sga.vt.edu/LEASE_VRLTA_2006.doc

http://www.arlingtonva.us/Departments/CPHD/housing/housing_info/page57910.pdf

http://www.rainespropertymanagement.com/pdf/Sample%20_%20Residential%20Lease%20(11)%20-%2008-04.pdf

http://astorpropertiesllc.com/forms/sample_lease.pdf

Among additional things, make sure you provide the renter with the led based disclosure/disclaimer form as well as the led based paint pamphlet(info and download from http://mrlandlord.com/lead/.) Their may be other forms necessary from your homeowner association, local jurisdiction and state.

You will want to get a book on how to become a landlord - plenty of good ones at Barnes and Noble to help you learn how to qualify tenants and managing them for maximum profit! Also, you should have an attorney review your lease and paperwork to make sure you comply if rules and regulations.

The above may seem like overkill to some, but it takes only one bad tenant to give you unlimited hours of wasted time, destruction and lost income. So, please make sure you take the time to read up online and in books on how to find and manage good tenants.

So, what was wrong with the prospect at the beginning of the story? Well, tenants that prefill in a lease and bring to the showing is generally trying to run the show having the owner skip some of their usual due-dilligence. Never take personal checks when giving the keys - they may bounce and after you have given the keys your legal standing is diminished. The glowing reference from the current landlord? If you had a nightmare tenant that wasn't paying - and a new landlord called you for a reference - how far would you go to get rid of that tenant? (not saying you should lie - just saying that some/many would)  Then, the fixing up part - yet again sometimes a ply to make the landlord be entustiastic about a less than ideal tenant - woow, he/she will fix up my place for free! 

Ok, hope the above helps some of you get started.

Joe Investor calls me up on a wonderful Monday morning and says that he has $50,000 sitting in the bank. He wants to get rich one day so he is looking to invest the money. He is currently renting and is fine with that - he really just wants to put the money into an investment account and forget about it. He figures he can get a 10% longtime average (he is very sharp.) He has received my mailers talking about what a great investment real estate is, so he is curious as to what return I can get him.

So, in an optimistic voice I tell him that the average appreciation for real estate is 5% per year. The phone goes silent on the other end before he stutters that he can get double that by just putting it in an investment account! How can real estate be such a great investment?

The above makes sense at first glance. To see what is going on, let’s make a quick comparison between the two alternatives over, say 1, 5, 10 and 25 years.

First, let’s put the money in an investment account with an average yearly return of 10%.To keep things simple, let’s just do simple interest and add it to the principal every year.

Year 0:

$50,000

Year 1:

$55,000

Year 5:

$80,525.50

Year 10:

$129,687.12

Year 30:

$872,470.11

Pretty impressive! Over 30 years he made over $800,000! Dang, one could retire with that! Of course, there is such a thing as inflation, but we'll ignore that for this comparison.

So, to get the gain for the real estate investment (giving 5%) we'll just halve that to $400,000 then and declare the stock market superior to real estate. Case closed!

Not so simple - leverage is a homebuyer and real estate investors’ friend.

Leverage in this context means that we spend a little to get control of and the appreciation of a lot. Let me explain - by taking up a mortgage on a house and just putting in part of our own money, we get control and the appreciation of the full investment (as opposed to just the money we invested from our own pocket.)

So, if Joe Investor spent his $50,000 as a down payment on a house and paid for the rest with an 80% mortgage loan, he would in essence have the equivalent of a $250,000 investment (and a home to live in.)

He would in this case have a $200,000 mortgage that he would owe interest on - at 7% interest over 30 years. Mortgage payment would be $1,330 per month.

Year 1:

Initial Investment: $50,000

Home Value: $275,000

Paid in interest+principal: $16,320

Outstanding Loan: $197,968.38

Net value of investment: $60,712

Year 5:

Initial Investment: $50,000

Home Value: $402,627.50

Paid in Interest + Principal: $97,920

Outstanding Loan: $188,263.18

Net value of investment: $116,443.82

Year 10:

Initial Investment: $50,000

Home Value: $648,435.62

Paid in Interest + Principal: $179,520

Outstanding Loan: $171,624.77

Net value of investment: $297,186.08

Year 30:

Initial Investment: $50,000

Home Value: $4,362,350.57

Paid in Interest + Principal: $505,920

Outstanding Loan: $0

Net value of investment: $3,856,430.57

Yes, you read that right. The $50,000 initial investment grew into $3,856,430.57. Now that’s a retirement!!!

Of course, there are additional expenses to owning a home. But, on the flip-side, I have not included the tax benefits when owning and when selling (as opposed to stocks), the savings of not having to pay rent and so on. Also, few people put down 20% these days - 5% is far more common. So, even with few of the other benefits of owning accounted for, owning a home seems to beat putting the money into the stock market to smithereens!

Would the same hold through for an investment property? Absolutely - the numbers would be even better for the example above as you would get rent to offset the amount of principal and interest paid. Basically, over the long run the rent income should more than offset the $505,920 spent on principal and interest. There are tax implications with investment properties, but with the right planning the taxes can be greatly reduced.

So, it is easy to see why people love to own real estate - in the long term it is a fantastic investment! Give me a call and I’ll help you find a great home to invest in!

Time and time again I run into potential home buyers at open houses that insist that they will get a better deal buying on their own. Their logic usually boils down to some combination of the following:

a. Not using a Buyer’s Agent will get me a lower price as the seller will have to spend less on commission. A lower commission means they can agree to a lower price while still getting the same net.

b. Not using a Buyer’s Agent will get me a lower price as the Seller’s Agent will get all the commission and will be incentivized to work harder to get me a lower price.

c. Not using a Buyer’s Agent will get me a lower price as the Seller’s Agent will give me the commission they are saving by me not having an agent.

d. I hate agents. All they do is driving me around in their fancy car and letting me into homes with their fancy electronic key. I am going to teach  this Seller's Agent a lesson.

So, let me answer these seemingly logical arguments one by one:

Not using a Buyer’s Agent will get me a lower price as the seller will have to spend less on commission. A lower commission means they can agree to a lower price while still getting the same net.

Highly Unlikely. The vast majority of listing agreements (between the seller and a real estate brokerage) are for a fixed rate whether a buyer has a Buyer's Agent or not. So, a Listing Agreement states a total percent of the sales price due to the brokerage of the Seller's Agent (average 5% in this area) at settlement. There is then a separate clause in the agreement that states how much of those 5% the Seller Agent brokerage will offer to the Buyer Agent brokerage IF there is one. If there is no Buyer Agent brokerage, the full commission goes to the broker of the Seller Agent. So, the net to the seller will be the same whether you come with an agent or not.

There is one exception, and that is a variable commission. Some brokerages (usually smaller ones) allow their agents to negotiate a variable commission rate. A variable commission rate could say something like “If a buyer comes without an agent, the total commission will be reduced by 1%” - this is rare and I have run across very few agents doing that. There is really no way for you, as an unrepresented buyer, to know if the commission is variable and what the terms are.

Not using a Buyer’s Agent will get me a lower price as the Seller's Agent will get all the commission and will be incentivized to work harder to get me a lower price.

Unlikely. With an unrepresented purchaser, the Seller's Agent will usually have a great advantage. Sure, the Seller’s Agent will love to get the full commission (not really true, the broker gets the commission and the agent gets a percentage) but will also enjoy getting the seller a great price in the process (win-win.) A seller would easily see through an agent trying to push through a weak offer to ensure the larger commission. I would argue that agents will work even harder to get the seller a high price to get rid of any appearance of ulterior motives in such cases.

Also, many agents prefer to work with Buyer's Agents as opposed to unrepresented buyers. The chance of the deal closing is probably better, the work required educating the buyer on the process is less and the chances of a lawsuit are probably less as well. Agents do not like lawsuits - a court may find that a “poor unrepresented buyer” was taken advantage of by a skilled (and aggressive) listing agent getting his or her seller client a fantastic price.

Not using a Buyer’s Agent will get me a lower price as the Seller’s Agent will give me the commission they are saving by me not having an agent.

Highly Unlikely. The agent is not allowed to pay you commission. You could end up with a credit towards closing cost on your settlement statement. Odds are that the money would be paid by the sellers, not the agent. You may think that the agent giving you back 1% at settlement of 5%(average) shouldn’t be a big deal. However, agents are not the ones receiving the commission - their brokerage is. And the brokerage does not go around giving back commissions when a listing agreement cleary states they are entitled to it. Working with unrepresented buyers is usually a lot more work - agents expect to be compensated for that.

I hate agents. All they do is drive me around in their fancy car and letting me into homes with their fancy electronic key.

Uhhhmm. Not much to do to help these people. Generally they have had a bad experience with an agent in the past – or they are uneducated as to what a skilled and experienced buyers agent does. Please come and make an offer on one of my listings!

So, are Seller Agents evil?
No. They are simply doing the job they were hired and are paid to do: represent the interests of the seller and get the highest possible price.

What most unrepresented buyers don’t realize is that everything material you tell the agent like “I love the house”, “My financing is a bit shaky”, “I will offer $400,000 but will go up to $450,000 is the seller doesn’t accept”, he or she is obligated to tell the seller. Furthermore, the agent and sellers will use all the information gathered to get the seller the highest possible price.

Sure, the listing agent will be your best friend and offer to do your laundry and wash your car - but do not believe the listing agent is looking out for your interests and will help you get the best deal.

Why I can’t just read “Homebuying for Dummies”?
You should read “Homebuying for Dummies” – it has great information that will help you find a great home. However, there is really no reason to not use a buyer’s agent.

In almost all cases will the agent be fully paid by the seller (so it will cost you nothing.) An experienced buyer’s agent will look out for your interests only and guide you through the process. The agent will help you find a home you can afford, will help you prepare an offer – and will help you purchase a property for the lowest possible price.

You will also get access to all the comparable sold data (a listing agent will not give you information that is not beneficial to the seller) and general market information. Not to mention the advice and help on everything from inspections to strategies to make your move easy.

So, get that agent now before it is too late. We here at Partners Real Estate will be happy to help!

News in the media today focused on the latest NAR report:<br><br>

"The group's closely watched report showed the annual pace of existing home sales fell 2.6 percent to 5.99 million in April, down from a revised 6.15 million pace in March. It's the first time the pace of sales fell below the 6 million level since June 2003. Economists surveyed by Briefing.com had forecast a little-changed sales rate of 6.13 million." (http://money.cnn.com/2007/05/25/news/economy/home_sales/index.htm?cnn=yes)<br><br>

No real surprise there - market is getting back to historical averages. In Fairfax County the year over year (YOY) numbers for April came out recently and the statistics show that the number of units  for sale is pretty much the same - but for single family homes the number of units sold is down 44% year over year.<br><br>

If you are seller, this means that you will have to price your home aggressively to be among the few actually selling your home in your neighborhood. More than ever, the initial asking price and condition of your home will determine if the home is shown or sits ont he market month after month.<br><br>

If you are a purchaser, there are great deals to be had. However, it is important to remember that many homes are priced correctly already. Also, the most attractive properties will still sell at their asking price. If you are flexible on what property you want you will still be able to get a property well below asking.

Believe it or not, it is possible. There are quite a few restrictions on how it has to be done and what you are allowed to do. But, if you are more comfortable with the real estate market than the stock market, this may be a way to go.

Please see the article here: http://www.bankrate.com/baw/news/ira/20070417_real_estate_self-directed_IRA_a1.asp

The main drawback that I can see is the limited control you have and some tax limitations/implications. The other biggie is that you can not deduct the depreciation. Depreciation is a great way to defer tax, so that one alone may be a deal killer.