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Weekly UpdatesHOME FORECLOSURE FILINGS CONTINUE TO INCREASE AT UNPRECEDENTED RATES--AS OF SEPTEMBER 2008, ONE IN EVERY 475 HOUSING UNITS RECEIVED A FORECLOSURE FILING, ACCORDING TO REALTYTRAC. WITH THE MORTGAGE AND CREDIT CRISIS MAKING HEADLINES EVERY DAY, real estate managers in the residential rental sector cannot afford to ignore changing market conditions and must recognize the impact foreclosures have on this part of the real estate industry.
As worrisome as this trend is, foreclosures in today's volatile market offer unique opportunities and possibilities for real estate management professionals, specifically those managing rental properties.
"In the big picture, homeownership rates are dropping, which means there is more need for rentals--and that's a good thing for property management," said Robert Machado, CPM[R], MPM, president of HomePointe Property Management in Sacramento, Calif. "Property management usually runs counter to the market conditions. When times are tough in sales and real estate, it is pretty solid for property management."
However, increased rental demand does not immediately translate into reliable renters. Often, this new pool of prospective residents has poor credit due to the foreclosures. Property managers must learn how to serve an influx of new renters with tarnished credit while still securing reliable, high-quality residents. To face these complex challenges, many management firms are revising their standards, offering more flexibility and allowing leniency for prospective renters with foreclosures. With no hard and fast rules for renting to these new prospects, managers who operate on a case-by-case, property-by-property basis have had the most success.
A BIGGER POOL
While foreclosures and the mortgage and credit crisis have significantly slowed real estate sales, the property management business is booming. Eric Luneborg, owner/broker, of CAL Property Management in Dallas notes increased traffic unlike anything he has ever seen in his 15 years of experience.
"There is more choice out there and a lot of people who are losing jobs or changing jobs, so there is a lot of volatility," said Luneborg. "When you have a lot of movement like that, people will make changes in how they live and where they live."
Specifically, Luneborg notes a dramatic increase in renters, in both the low-end and high-end rental markets. With lower-end markets less able to absorb a slow economy, these residents have increasingly been looking to move into more affordable housing. Meanwhile, the higher-end rental market is also experiencing an increase in prospective residents because renters who would qualify for $1,000-$2,000 per month in rent would formerly have been home buyers.
"We're seeing a higher quality renter hitting the market," said Luneborg. "For those people, it is harder to get home financing, so individuals and families who would have qualified for a loan a year-and-a-half ago are making great renters today. We're able to capitalize on an incredible pool of new renters that we didn't have a year ago."
However, an increase in prospective residents does not necessarily translate into well-qualified residents. Many property managers are facing prospective residents with bankruptcies and foreclosures on their records and damaged credit scores. In the past, many of these applicants may have been deemed high risk and ultimately denied. But, today there are simply too many to ignore.
When HomePointe Property Management's processing department began receiving a dramatic increase in applicants with foreclosures, the company realized that business as usual had to change.
"Before, if you saw a foreclosure, you didn't like it and you walked away from it," said Machado. "Now, there are a lot of people coming in with those situations and we feel like we're not going to keep our vacancy rates at an acceptable level [if we don't work with them]. You might have a long, long vacancy if you don't consider some of these people because they are starting to represent a higher percentage of prospective residents."
Similarly, Chris Yates, president of CM Yates in Denver, noted that he has twice the number of prospective residents this year than he did one year ago, yet a large percentage of these new prospects also have bankruptcies and foreclosures on their records. Nevertheless, he sees plenty of potential.
"A lot of our residents come in saying they have bad credit. So we say, 'Do you have a job? How long have you worked there? Can we talk to your boss?'" said Yates. "Instead of having a $500 security deposit and the first month's rent, I have them give me the first and last month's rents and a security deposit that is equal to a month's rent, which is usually twice if not more than I would have asked for before. I'm willing to overlook deficiencies in their credit if people can prove they are financially stable."
LOOSENING UP
As any property manager knows, a property is only as successful as the resident occupying the space. Thus, blindly filling vacancies should never be an option. Working with prospective residents who have foreclosures on their records requires savvy screening and thoughtful leniency.
"We're in the business of helping people with housing," said Cammie Allie, CPM, ARM [R], district property manager for GSL Properties in Portland, Ore. "We don't want to stomp on people when they're down. If a foreclosure is the only thing [on their record], that has to be something we consider. You have to consider each case on an individual basis."
CAL Property Management, for instance, has selective screening criteria based on portfolio. While some portfolios have stricter policies, others have more room for leniency, making them ideal properties for residents with foreclosures. The company protects itself by doing a pro forma on every rental property to determine the benchmark it needs to be profitable. With that benchmark set from the beginning, the company can be flexible in filling these spaces.
Clearly, flexibility does not mean throwing traditional standards out window. While some companies may deviate from certain screening criteria during these difficult market conditions, setting standards makes navigating new terrain more manageable. For instance, when HomePointe Property Management decided to work with individuals who had foreclosures, the company mapped out how it would deal with different applicants based on three different financial situations.
In the first situation, Machado said that if applicants show they have kept everything else intact, but they have bad credit because their mortgage readjusted and they couldn't afford it any longer, HomePointe will consider them solid people to rent to, assuming they have acceptable job references.
The second situation that HomePointe is willing to consider includes any individuals whose credit report shows that for 16-17 months everything was going along fine, but just in the last five months their finances show slippage in payments.
"That is an indication to us that their mortgage up-ticked and they got in over their heads," said Machado. "We'll look at those people a little harder because they let all their credit go. But if their story makes sense and everything looks good on their current income side to qualify for rental, we'll potentially do that deal."
Finally, HomePointe insists on maintaining strict standards when it comes to flat-out bad credit.
"We try to avoid people who have a foreclosure, bad credit throughout their entire credit history and those who have never been able to get a handle on things," said Machado. "There is just a different mentality with those people."
Like HomePointe, Southern Management in Vienna, Va., has seen an influx of people in the last year facing foreclosures looking to become renters in some of its pocket markets. To meet this demand, future residents with foreclosures must still meet the company's standard rental criteria that look at the credit history, income, rental history and so on, but the company may be more lenient in some instances.
"We've found that a lot of those individuals would have been our residents that left our communities to buy homes," said Pamela Martin, director of community relations. "They are usually qualified and they are very low risk. They may have been renters in the past or they had qualified to purchase a home, so they are qualified to meet our rental criteria. But, with the current market conditions, they may have just run into a snag with a foreclosure."
DEALING WITH DEVASTATED CREDIT
Not all property managers shy away from prospective residents with both foreclosures and poor credit. In these situations it is crucial to protect the property while being candid and upfront with the prospective residents.
"It is rare that I see someone with a foreclosure, yet all their credit cards and car payments are paid on time," said Yates. "It is usually a landslide; if one thing goes, it all goes. But the biggest thing for me is how recent it was. Do they still have six months past due on all their payments across the board? What is their explanation for that? Is it because they are doing a pending bankruptcy? Or, is it because they just don't like paying people and they are going to try to screw me over?"
To protect his properties while still working with individuals who have poor credit, Yates implements strict criteria.
"If they have some reason and I don't like it, I'll tell them that I'll rent them the house, but they're going to have to pay me three months of rent in advance and a security deposit before they get the keys," said Yates. "I basically am putting them in a situation where I am being very candid and friendly and saying, 'look, you are a high risk to me, but I'd like to help you out. So, you need to come to the table to lessen my risk.'"
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