What Homeowners Don’t Know About Becoming a Landlord

becoming a landlord Reluctant landlords, accidental landlords or temporary landlords…call it whatever sounds best, but becoming a “landlord” is a designation that better be understood. The labels are often applied to sellers that decide renting a home that doesn’t sell for their price is a better strategy than selling it. It’s almost always a bad decision for the many reasons covered in that article. But as the late night informercials implore…”wait, there’s more”! The landlord experience brings things to the table that most never see coming; many landlords still want to sell their “rental” homes and fail to consider how that home (which didn’t sell pre-rental) will be received in its new status.

Showing a Rented Home for Sale

How anxious and receptive will a tenant be to allow prospective buyers access to the home? Instead of owners that want to sell, agents have to coordinate through tenants – and they are not anxious for change. They are also less likely to be flexible and accommodating; buyers wnat to see homes on their schedule, not the tenants. What? 24-48 hours notice is required? The tenant needs to be there? The listing agent needs to be there? Make buyers wait, let them lose the enthusiasm and they’ll disappear. Rented homes show like…rented homes. While there is always the exception, it’s accurate to say that rented homes do not show as well as owner occupied or even vacant homes. Access is a challenge and most tenants have even less interest in getting the home show ready. Keeping the home show ready, clean and picked up, cleaning the yard and things owners usually take for granted. What kind of impression is made after access delays and unkempt homes?

Leases, Inspections, Appraisals and Closing Dates

Homes with tenants not only have access problems; showings, contracts and the transaction process often hit potholes. Many rentals are listed with “tenant to remain in place until…” which can easily cause issues for buyers. If a home goes into a year rental in August, what sense does it make to list in April with months left on the lease? A tenant has certain rights once a lease is signed; selling a homes where the tenant remains after closing can be very challenging and requires a particular buyer and non conventional lender.

Accidental landlords often lack a full understanding of how a tenant influences the showing and sales process. Access, upkeep, cooperation during the transaction and even closing times can be challenges. Less than friendly relationship? Bet on it. Tenants understand the leverage they have.

Is there love between tenant and landlord or is it a contentious relationship? How will the appraisal and inspection go? Does the tenant stay there? Does the tenant talk about issues in the home that the seller failed to mention? Is the home clean and picked up for these visits?  How do the interior pictures in the appraisal look (already noted as tenant occupied) to the lender’s underwriter? If the home is on the edge of hitting price, are the appraiser and underwriter going to sign off or will they be concerned about upkeep? Landlords are surprised at how difficult an irate tenant can make life.

You Violated the Tenant’s Rights….and the IRS Called

The legal and accounting side of being a landlord are perhaps where most reluctant landlords come off the rails. It starts once the decision is made; failing to understand how to properly create an “entity” to protect personal assets is frequently the first landmine stepped on. The potential for lawsuits, insurance requirements (specific rental policies are required), tenants’ rights, negotiating rents, banking and accounting laws, tax filing requirements, writing contracts that cover the gamete of potential concerns and day to day management  requirements often blindside owners. Time to relist the home with a tenant in place? What are the legal aspects of taking MLS photos of their property? What happens if something is stolen or that accusation is made during the listing?

HGTV and the “get rich with real estate” scams are not the real world. Problems are not solved in 22 minutes of scripted TV or a 10 minute video. Being a landlord brings potential problems that cannot be anticipated.

Consider Fair Housing laws, laws surrounding tenant background checks, how to write legal and effective rental ads, the interview process, and of course, the eviction process. Tenants have rights; many more and much stronger than owners understand. Eviction? Piling their belongings on the curb? Better understand the law. Use a rental management firm? Excellent idea as long as their 10%-18% monthly fee is accounted for; and they simply pass on the costs (inflated of course) of repair and replacement items to owners. Self managed? Okay…

Accidental Landlords are NOT Investors

So does it make sense to rent a home that fails to sell? The data is pretty clear that the answer is no. The costs of becoming a landlord, the costs of refreshing the home (even just paint and carpet) and the potential costs of trying to sell while rented are unlikely to be recaptured. Add to this the variables present in every local real estate market combined with the national and the global economic uncertainty. Investors are pros; home owners that swim in these shark infested waters are bait.

Every home eventually sells; but the three variables of EXPOSURE / APPEAL / PRICE must be aligned. Sellers ultimately control this entire process. Select and work with only professional agents. Ensure that the home shows well and is presented in the best manner possible. Price the home accurately and listen to the market. Buyers are out there but buyers are smarter and better educated than ever before; new and better resources are always being added. If a home fails to sell, ultimately the blame lies with the seller. If you list, commit to doing it right and sell the home.

Questions? Maybe we should talk.

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