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Update #3 – Property Reappraisal Challenges

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This is the third installment of my posts regarding challenging the property reappraisal process by the Shelby County, TN Property Appraiser.  You can see the first two posts here and here.

I have finally received all of my new property assessments.  And in the greatest recession since the Great Depression, my properties have increased in value by about 17%.  Obviously I will be challenging some of these new assessments.

The first step in the challenge process is to go to the assessor’s office and ask to see the comps (or comparable property sales) that were used to determine my properties’ values.  The staff at out local assessor’s office is generally quite helpful and will be glad to do this for you.

The second step would be to then analyze those comps and compare them with your properties to determine if they are a true comp.  Does the comp property mach the characteristics of your property?  Does it have the same number of beds and baths for example?  Does it have the same heating and air systems?  Are the comps in the same general area?  Are you being comped with a much pricier locale?  Location can really make a difference in my location as one block can be a huge change from one right next door.

Third, start looking for your own comps.  This is when it is really helpful to be or know a realtor, as they have access to one of the best databases for this kind of information.  But there are plenty of other sources out there, including the assessor’s database itself.

In looking over the comps for my properties I have several questions regarding how the assessor used those comps.  I have e-mailed the assessor with those questions and I am awaiting a response.  When I get that response, I will blog about it and this continuing process again in the near future.

What Happens Without Positive Cash Flow?

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Positive cash flow is king.  If a property does not produce positive cash flow, then don’t even think about it.  Without positive cash flow, you are doomed to failure.  Eventually, the bills and the expenses will mount up and you will be writing a check every month just to keep the property afloat.  A lot of people cannot do that.  They have or will run out of money.

What happens then?

Repairs stop being made.  At first it is little things.  Apartments are not repainted.  The property begins to look worn out.  Soon it turns in to major problems.  Roof leaks continue to leak, air conditioning fails to cool, the dead refrigerator is not replaced.

Next, good paying tenants start to leave.  How long would you put up with a leaky roof?   No AC in the summer? I am out of here!  Bills continue to mount and now less cash is coming in.

Perhaps then the owner begins to take in a lesser quality tenant.  They may or may not pay.  They definitely will be dirty if not trash the place.  They will drive any remaining good tenants away.  They will likely leave in the middle of the night and stiff you on rent.

At this point it is unlikely that the owner can even get tenants in the property.  It sits vacant or nearly vacant.  It is not long before vandals take notice.  Copper starts to disappear.  First it disappears from the HVAC units then from the plumbing.  Now the property is truly uninhabitable.  The only people living in it are perhaps squatters.

With no money coming in foreclosure is not too far away.  The property has become a distressed property.  Smart investors have been watching this property for a while.  They noticed when the current owner paid too much.  They have watched the property slowly deteriorate.  They know that a potential deal is now available because someone bought without positive cash flow.

Think the above does not happen?  It is how I have bought many of my properties.  Stay tuned in the future as I write about what to watch and look for and how to pick up some of these properties yourself.

The Key to the Deal is Motivation

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There are generally two types of investment properties out there on the market to buyers like me.  These are:

  1. Investment properties that are owned by other investors.
  2. Investment properties that are owned by banks.

I have bought from both of these owners over the course of my investing career.  Both present their own unique circumstances.  But no matter who the owner is, they have to be motivated.  Without motivation, there is generally no deal to be made.

Investor owned properties that are on the market are generally going to be listed with a real estate broker.  Many times the broker will list the property with an “exceptional” price.  In these circumstances, you have no idea why the owner is selling the property.  The owner may be retiring, he may be sick of dealing with tenants, he may have an illness or he may be trying to gauge the market.  He may just be trying to see if there is someone out there who will “pay his price” so to speak.

In other words you have no idea if the seller is truly motivated or not.  You can ask the broker why the owner is selling, but most likely you will just receive a vague answer.  If you want the property, all you can do is view it, run your numbers and make your offer based on those numbers.  If the seller comes back with a counter offer, you can begin to gauge the motivation.   If not, move on, he is not motivated.

The second type of seller is generally always motivated.  Banks do not want to be landlords.  They may have unrealistic prices in their heads, but they are generally motivated.  Again these properties will also be listed with a broker and what I have found is that banks often need to be educated on the true value of the asset they are holding.  Sure, the asset may be worth the price they are asking if it was fully rented, generating top of the market rents and lacking repairs of any sort.  But that is rarely the case with bank owned properties.  It can take a little time to educate the sellers and work these deals.

I like working with either type of seller, but for the deal to work for me, they always have to be motivated to sell.  If the motivation is not there, the gap between ask and bid is just too wide to bridge.  So determine the level of motivation as best you can early on.  If you find it lacking, move on to the next deal.

5 Traits of an Effective Landlord

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What makes an effective landlord?  Here are my top five traits.

  1. Effective Landlords are Sagacious.  Yeah I know, sagacious is a rarely used word but I think it really works here.   It means that effective landlords have a keen mental discernment and good judgment.  In other words, we have good BS detectors. This trait is important because being a landlord means that you have to shift through a lot of BS to get things done or get to the truth.  Being sagacious means we can see which real estate deals are truly deals, we know which gurus are full of it and can tell when our tenants or potential tenants are not being wholly truthful.
  2. Effective Landlords are Reliable.   To be effective in the landlording business you have to be reliable and be perceived as being  reliable.  You have to be a person of your word and do what you say you will do.
  3. Effective Landlords are Persistent.  Someone is always going to be throwing up some sort of obstacle to attempt to derail you or trying to get further into your pocket.  It could be family naysayers.  It could be the local utility company or city, it maybe your tenants or your insurance company.  Whoever it is, you have to be focused on your goals of being an effective landlord and keep fighting to achieve your goals.
  4. Effective Landlords are Confident.  To be effective you have to be confident in yourself and your ability to do the job.  That confidence comes from training and on the job experience.  Get yourself educated on landlording basics by joining a local reia group, reading this blog or finding a mentor.  Make that first step and acquire your first property.  Yes you will make a mistake or two, but nothing breeds confidence like a little success.
  5. Effective landlords are Creative.  To be effective you are going to have to find ways to get things done.  You will need to find properties to buy and hold.  You may need to renovate those properties.  You will need to find tenants before your competition.  You will want to retain the good tenants.  You will want to set up effective business practices.  You will want to do all of this while the forces in number 3 above are working against you.

These are in my opinion the essential qualities that differentiate effective and non-effective landlords.  I am sure there are others and I am sure others will have different opinions.  But if you are sagacious, persistent, reliable, confident and creative, I believe you will be successful.  The good part is, all of these qualities can be acquired.  Education and experience will make you a better BS detector, and give you confidence.  Reliability and persistence can easily be acquired.  Just start now!  Creativity will come as you learn and experience more and more about landlording.

 

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Update – Property Reappraisal Challenges

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This is an update to my previous post, I Thought Real Estate Was In the Dumps.  It is a property reappraisal year where I live and despite the down real estate market the county property assessor seems to think we are in the boom times.  Follow along with me as I go through the process of challenging these appraisals.

I have received more property reappraisal notices over the past week.  So far I am looking at an even greater supposed substantial increase in property value for 2013.

The first step in challenging these appraisals is to find out what basis the property assessor used to determine these values.  The basis is generally comparable sales or “comps.”  I went to the property assessors office and asked to see the comps for my various properties.  This information is generally public record and all you need to do is ask for it.

So now I am armed with the info that the assessor used to value my properties.  I will be analyzing it over the coming weeks and will let you know what I find.

I will also note here that the staff in the assessor’s office were very helpful and I could not have been treated better.  I was in and out of the office in about 15 minutes.  It is always refreshing to get good service.

 

I Thought Real Estate Was In the Dumps?

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I thought real estate was in the dumps.  After all, all we have heard for the last few years is about foreclosures, underwater mortgages, short sales, falling prices, declining values and so on.  I guess my local property assessor has been listening to some other news source.

Let me start at the beginning.  Every four years in Tennessee each county property assessor is required to reappraise all properties within their jurisdiction and adjust them to the “fair market value.”  2013 is a reappraisal year here in (Memphis) Shelby County, TN.  That means that all properties have to be reappraised since their last reappraisal four years ago in 2009.  What do you think has happened to values since 2009?

So far I have received reappraisal notices for about half of my properties and amazingly my values have gone up almost a quarter of a million dollars!

Now, I do consider myself pretty savvy when it comes to determining a property’s value, and I always look for the good deal, but damn I did not know I was that good! (Insert sarcasm here).

So it looks like I will be challenging several of my appraised values again this year.  It is not really difficult to do and I have done it several times before.  I will be blogging about my experience here.  So join the fun and follow along.  It should be interesting to learn how they developed their “fair market values.”

A Key (Box) For Saving Time and Aggravation

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Ever notice that tenants will lock themselves out at the worst possible times?  Mine have called while I’m on vacation or out of town even once during an anniversary dinner.

Repairs needing help from contractors were always fun too.  They would tell you when they would show up so you could meet them and let them in the property.  But, those contractors always took a little longer on the jobs before yours and that wait was always a little (a lot) longer than you thought.

I used to go to my properties to let locked out tenants in (yes, I did charge them) or to let in contractors.  As I got more properties however running here and there to unlock doors became quite the time consumer.  I am lucky, most of my properties are pretty close to my home, but I know other landlords who live much farther away, even in the next town.  So quickly running over to their property was not an option.

My solution to recapturing my time and reducing aggravation was to place key lockboxes at my properties, in which I put keys to every lock on the property.  Now, if a tenant calls while I am on vacation or simply out of town, I can provide them with the access code to get their key and open their apartment.  Now, when a trusted contractor needs to go to a property to make a repair, they have the access code to get the keys, make the repair and then lock it up upon leaving.

I use a lockbox from Master Locks.   This lockbox has space for several keys. It is sturdy and hangs easily.  Plus the combination code can be set and reset easily which I do from time to time or if a tenant has gained access.

These boxes have been a true time saver.  No more going to let a locked out tenant in.  No more waiting for contractors to show up.  Now I just text them the address, the problem and the lockbox code and they text me back when done.  Take some of your time back and get some of these lockboxes for your properties today.  To save money and time, I get mine from Amazon.com.  You can too by clicking this link.

Tenant Selection Criteria – What to Use?

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Use the right criteria to say no!

Tenant selection is perhaps the most important thing a landlord can do.  You have heard the saying “One bad apple spoils the bunch.”  Well one bad tenant spoils a landlord’s life.  Bad tenants will not pay you, will destroy your property and will generally be a thorn in your side and to your other tenants.

So you want to weed those bad tenants out before they get into your property.  But, you must be careful with your selection in order to avoid a potential discriminatory claim.  To do that you need to establish a set of criteria that you use to rank all applicants.  You want to find tenants who can pay, who will pay and who will take care of your property.

What are those criteria?  Let’s first discuss what they cannot be.  You cannot base your tenant selection on the eight federally protected classes.  These are: race, color, national origin, religion, sex, disability, familial status.  That means you cannot disqualify someone because they are black, or Jewish or female or because there is a child involved.  These criteria in no way affect anyone’s ability to be a potential renter, so do not even think of using these criteria.  It is just wrong and it will get you in some serious trouble.

So, back to the question, what criteria can you use to select your tenants?  Frankly, it could be almost anything except those criteria listed above.  But here are some of the more common items used:

  • Enough income to cover rent, utilities and living expenses.  Many will use a standard of a monthly income equal to three times the amount of rent.
  • A steady work history with good references.
  • Decent references from past landlords.
  • A decent credit score.
  • A history of prompt bill payment.
  • No recent bankruptcy or evictions (last 5 to 7 years).
  • Criminal or arrest history.

Using the above criteria, you should be able to determine fairly well if an applicant can pay the rent, will pay the rent and if they will take care of your property.  Is it 100% effective?  No, nothing is when dealing with people but it does work pretty well.

Some will include other criteria based upon their own personal experiences.  I know of landlords who will not rent to lawyers.  Lawyers like to sue.  They are not a protected class and you can discriminate against lawyers as long as you are consistent.  I know another who will not rent to people with motorcycles.  Their experience has been that the motorcycle will end up in the living room dripping oil come winter.

You will most likely need to tailor your criteria to your particular circumstances.  Depending on your location, your tenant pool may not have decent credit scores, or bankruptcy may be very common.  Whatever criteria you do decide upon, be sure to write them down and be sure to evaluate everyone against those written criteria.  Keep a record of your evaluation process.  If someone ever does come back on your screaming discrimination, you will have records showing otherwise.

 

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What’s In Your Rental Application?

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The rental application is one of the most important documents that a landlord uses.  It is the tool that is used to verify everything that a potential tenant has told us.  The application should give you the authority to check an applicant’s credit, criminal, work and housing history.  A good application for should do three things:

  • Positively identify the applicant (yes, some do lie here.).
  • Determine if the applicant can afford the rental unit.
  • Provide enough information so you can rank the applicant according to your application standards.

You application form needs to be clear, easy to read, and easy to complete.  At a minimum it should ask for the following:

  • Legal Name
  • Current Address
  • Social Security Number
  • Phone and E-mail
  • Addresses for previous 5 years
  • Employment Information
  • Income Information
  • If the applicant has ever been evicted
  • If the applicant has ever been convicted of a crime
  • If the applicant has ever filed bankruptcy
  • If the applicant has pets
  • Who will be living with applicant (adults and children)
  • Where they bank
  • Credit references
  • Emergency Contacts
  • A space for comments and explanations
  • Authorization to check references, call employers and pull a credit report.
  • A place for their signature.

All of this information should be enough for you to determine if the prospective tenant can afford the property, meet your rental criteria and will be a decent tenant.

Keep it simple and straightforward.  Also be sure to keep your application form neutral in regards to the 8 federally protected classes, which are race, religion, color, national origin, age, sex, disability and familial status.  Determining your applicant’s ability based on any of these criteria is just plain wrong and will land you in hot water.

Next time I will take a look at some criteria you can use to rank your applicants.   Untill then, have a happy new year!

100% Occupied May Not Be What It Seems

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100% occupied.  Sounds great right?  That is just what we want to hear when we are looking to purchase a multi-family building to add to our portfolio.  However, not everything is always as it seems.

Trying to sell a building is easier if you can tell perspective buyers that the building is 100% occupied.  The buyer thinks that there will be less work involved in taking over the building when the sale closes.  They will not have to advertise, they will not have to do showings, they will not have to spend money rehabbing the apartment to make it rent ready.  There will be a smooth and easy transition.

But, as I said, not everything is as it seems.  Sure the building may be 100% occupied.  But, what if the current owner rented the last few apartments to anyone who could fog a mirror just so they could say the building was 100% occupied?  What if the people they placed in the building had been evicted from their previous residence just a few months before?

Don’t think the above happens?  It happened to me when I bought a four-plex several years ago.  Yes, I did my due diligence and reviewed all of the leases and the income and expense statements.  Everything looked fine.  But if I had bothered to check a simple and free database I would have noticed that one tenant had just been evicted and had a drug arrest as well.  No one in their right mind would have rented to this guy, unless you were trying to say 100% occupied.

So what happened?  You guessed it.  As soon as we closed, he stopped paying.  Four rent free months later, after going through the expensive and lengthy eviction process I had a dirty and damaged rental unit back in my possession.

On the bright side, I learned a valuable lesson.  Check out the current tenants as best you can before you close.  The court and criminal databases are free here as they are in many jurisdictions.  It is as simple as typing in a name.  If you do find something odd, go back to the seller and discuss and if you need to, renegotiate.  It would not have been so bad kicking the guy out if I had gotten a little bit better price.