Be it job trouble, an exotic mortgage that is done playing nice or any number of other financial ghoulies that have hitchhiked this recession, you need to get away from that house payment before it devours you. You’d sell the damn thing if you weren’t further underwater than Atlantis. Unwilling to crash your credit, or unable to qualify for a short sale, finding someone to pay the mortgage for you while you seek safe haven in cheaper digs is the most attractive play. Maybe you plan to move back in once things settle down a little bit.

Or perhaps you want to take advantage of the ridiculously low prices and even ridiculously lower interest rates to buy twice the house for half the payment.

Whether motivated by housing avarice or financial self-defense, the rental option is one being heavily leveraged by homeowners facing similar dilemmas. Before planting the “For Lease” sign and squeezing into the four hundred dollar a month studio apartment, however, there are a few precautions you must take.

For starters, you must screen rental applicants from a position of strength. Despite your desperation to fill your vacancy as expeditiously as possible, you can’t simply accept the first warm body that walks through the door. The only thing deadlier to a landlord’s bottom line than a vacancy is a deadbeat tenant. In addition to nonpayment of rent, there is also the concern over property damage, outstanding utility bills and the hassle/expense of eviction. Half-hearted screening of applicants is a shortcut you cannot afford to take.

To that point, however, I offer a caveat as my next piece of advice. The rental market is actually quite vibrant at present and full of demand. From where is all of this demand coming? From people who have walked away from or short sold their homes. People with recent bankruptcies due to job loss. As such, many of the old rules for defining the acceptability of a tenant no longer apply. If you hold out for only those with 750 credit and 100k salaried income, you are in for a long wait. Those people are still out there, but they’re called “buyers.”
You certainly don’t want to rent to someone as hard up as yourself, lest you would just be trading troubles, but you must be wiling to consider those with a few bumps in the credit road.

Differentiating between keepers and flakes often comes down to the overall credit history, not just the current score. Give me the guy whose credit is 550 due to a recent short sale, for example, provided that his previous history is spotless. That’s a quality individual who just had the misfortune of buying a house in 2005. Even someone with a recent bankruptcy is often worth a gamble if the credit damage is limited to the immediate year. In fact, that recent BK means he will have little residual debt and can’t seek protection from you for non-payment for another eight years (assumes a Chapter 7, differs for other forms of BK). Now the guy with a five year history of late pays, judgments, etc? Don’t fall for the story about the ex-wife who didn’t pay the credit card bills. Send him packing.

Next, I highly recommend taking out a home warranty policy. While you will swallow hard on the several hundred dollar (that you don’t have) policy, it is an absolute must for those who would ordinarily be far too cash-strapped to take on the role of landlord. If you negotiate for the tenant to be responsible for the first sixty dollars or so of repairs, and the landlord for any amount over and above that, you can offset the service call deductible. Anything within the scope of the policy (you MUST read coverage information closely prior to purchase of the policy) will be covered over and above that tenant paid expense.

Going into a rental agreement naked (no policy) is potential suicide given your financial hardship. Don’t let an exploding hot water heater send you into bankruptcy or cost you your house.

You will also want to strongly consider offering prospective tenants landscaping and pool service. Again, this runs counter to the cost saving instinct, but consider it insurance. If there is one rule I have learned in Real Estate, it is that tenants can’t/won’t adequately care for your pool and lawn. The trees won’t get the deep water soaking. The pool will turn green and plead for new plaster. Not only does a tenant want to save on utility costs wherever he can, but he just doesn’t care about your property all that much. Lacking the pride of ownership, even the good ones are apt suffer the occasional forgetfulness that can necessitate thousands of dollars worth of repairs.

Lastly, bite the bullet and hire an agent to get the thing rented. Property management service might be an extravagance that you cannot afford, but the one time cost of leasing a property through a REALTOR is generally less than a month’s worth of rent. Get the thing on the MLS and lease it quickly, and you will end up saving money in the vacancy department. You’ll likely command a higher lease rate as well. Moreover, you will enlist someone to help walk you through all of the facets previously referenced.

It’s not ideal, and it’s not what you had in mind when you bought the house back in the high times, but it’s survival. Take the right steps and leasing your Scottsdale home can give you the reprieve you need to get your house back in order. So to speak.

With this surge in demand and a subsequent decrease in supply, rental values have not only held firm, but have noticeably increased in the markets I work.  From a purely anecdotal standpoint, I have been shocked by the level of competition for not only the properties I have had listed for lease recently, but for the tenants I have worked with to secure rental properties as well.  Mind you, I am not simply referring to the low end pricing (sub $1000/month) where heightened competition is always to be expected, but in more expensive price ranges to boot.  In particular, I am seeing a LOT of interest in properties that are renting in the $1400-1800 per month range.

Checking the latest statistics to see if what I have noticed is playing out on a larger scale, I see active Scottsdale rental listings are down to roughly 1800 units (as of ARMLS’s May figures).  This marks a steady decline from an inventory that reached a high point of 2568 in November of 2008 and did not dip under the 2000 unit threshold until January 2010.  The 5.19 months of rental housing supply (as determined by the current rate of absorption) is at its lowest point in years.  Interestingly, the overall average rental rate has not shown a noticeable jump, despite my recent personal observations.  Given the decrease in total inventory and increase in absorption (units leasing per month), however, I fully anticipate next month’s numbers to reflect a higher baseline average.

This shift in the rental market tells me two things:

1)  Before deciding to walk away from a house that appears irretrievably underwater in terms of negative equity, homeowners (and potential future renters) really need to study their options carefully.  If I had a nickel for every misguided homeowner who erroneously believed there was an unmitigated plethora of housing options, at bargain basement prices, waiting for them once they pulled the plug on the Bank of Extortion … er, I mean “America” … I could comfortably retire to my literary tinkerings.  The assumption that lower selling prices go arm in arm with lower rental rates is patently false.  Further, with all of the newfound competition for rental housing, your chewed up credit report will be scrutinized a bit more by potential landlords than most would expect.  Sure, a human landlord may be more understanding of the recent economic woes than some faceless underwriter, but as in any free market, it always comes back to options.  If there are renters out there with fewer credit issues and deeper pockets, you are going to get aced out.  Please consider where your escape pod is heading before abandoning ship and scuttling that home turned financial Death Star.  If there is no soft landing, how have you benefitted?

2.  Our market may have reached (or is close to reaching) that sweet spot in which it makes sense for the homeowner with designs on a move-up purchase to revisit the rental potential of his/her existing home.  While the notion of renting an existing house out (to offset the mortgage) to free oneself up to take advantage of the market conditions and purchase a considerably larger home for a fraction of its prior value is nothing new, the increasing strength in the rental market makes the strategy more feasible at present.  The biggest hurdle to this play, other than deciding whether one is really cut out to become a landlord, remains  the qualification process.  Unless you are one of the fortunate few who maintain at least 25% equity in your home, you will essentially have to qualify to carry both loans (the existing house as well as the new one you would purchase).  Even if you secure a tenant whose rent will cover the payment, you will be qualified for the new loan as if you were qualifying for both properties.  If you have the means to do so, the time could be right to finally leverage the conditions that seemingly everybody and their brother’s mail carrier have already managed to exploit.

Whatever your goals for the Scottsdale Real Estate market, drop us an email or give us a call with your specific needs / questions.  You might not be as trapped as you think.

(480) 220-2337 | paul@scottsdalepropertyshop.com

Part of the problem with the rental market is that the compensation is a prohibiting factor.  Realtors are hired guns.  As independent contractors, we are always performing risk/reward analysis.  For many, the potential reward of a rental transaction is not nearly lucrative enough to justify the risk of the effort not successfully culminating in a paycheck.  To operate on straight commission, productivity must be maxed and the upside ridiculously high, otherwise, we would all opt for the safety of a salaried position.  With compensation for rental properties drifting downwards in recent years, the opportunity cost has simply become too great for many in our ranks.  Why shuttle around some schlub for two days in hopes of collecting a $150 paycheck when they might put a $500,000 buyer in the car instead?  Of course, you also have a segment of agents who might simply find such menial work beneath their inflated sense of self, but you get those types in every field.

I can’t rightly attest to the motives of those who brush off rental prospects, but I can tell you why I do not.  Any agent worth his or her salt looks not only at the present business horizon, but the future skyline as well.  In my estimation, today’s tenant is tomorrow’s buyer.  Whenever the financial and personal wherewithal comes to make that transition, I want to be the agent they remember that helped them when the others gave them the brush off.  If my competitors want to slam the door on these apparently inconsequential house hunters, I will gladly use the opportunity to get my own foot in that very same door.

Anyone can sell someone a house.  It takes diligence, empathy and yes, a little luck (hard to compete with Aunt Margaret when she gets bored and gets a Real Estate license) to sell a person every home he or she will ever own.  I aspire to the latter.  Performing a service that can be tantamount to pro bono work in some cases is one means of achieving that aim.  It never ceases to amaze me how many advertising dollars some agents will spend to attract new clients while completely neglecting the opportunities that don’t cost a nickel (a little gas notwithstanding).  For the chance to gain the trust of consumers while they are at either the infancy or nadir of their journey towards home ownership, I happily pick up that slack.  Working rentals over the years whenever the opportunity has arisen, I have procured some of my very favorite and most loyal clients.  They tend to stick with you on the way up when you were there for them at the bottom.

To all of my esteemed colleagues who neglect the rental market, I thank you.

To the frustrated renters out there who can’t get an agent to return a phone call, email or smoke signal, give me a buzz.  I will gladly help you find temporary housing in the Scottsdale, NE Phoenix and Paradise Valley area.

And when you’re ready to buy … I wouldn’t be adverse to taking that call, too