Gonna Save Money By Renting, Eh?
I find myself working the Scottsdale rental market more often these days than in years past. With a large percentage of the populace having been converted from homeowner to renter after selling a home short or losing it to foreclosure (thus, effectively eliminating themselves from the buyer pool for the foreseeable future due to credit damage and/or home ownership malaise), and would-be sellers opting to lease their current homes out rather than taking a huge equity bath if circumstances force a move, it’s an arena in which Realtors are currently in high demand. So it was that I was researching rental home availability for a couple of clients this afternoon in the McCormick Ranch area.
While I’ve been aware of a diminished number of available rental properties coinciding with rising rents for some time now, I was shocked by the dearth of options I turned up in ordinarily easy to fit parameters.
For instance, there are exactly ZERO active unfurnished, single-family home listings in the 85258 zip code (McCormick Ranch, Scottsdale Ranch, Gainey Ranch, etc) for lease under $2000 a month at present. None, zilch, nada. This in a zip code that has fetched an average price per square foot of $164.89 for single family homes in the past six months (Aug 16, 2010 – Feb 16, 2011) .
Extrapolating the sales price of a 3 bedroom, 1800 square foot house based on that per foot average, current resale market value would be approximately $296,892 without adjusting for +/- factors.
Intrigued, I was drawn to crunch the affordability numbers on such a property.
Given that many buyers today are trying to get a foot in the door for the least amount of up front expense as possible, let’s pre-suppose a 3.5% down payment for a 30 year, fixed FHA loan. Assuming an interest rate in the 5.25% range, and tacking on the additional .5% for monthly PMI, the principal and interest payments on a loan balance of $286,501 at 5.75% is $1671.94. Add in property tax and insurance estimates of approximately $170 and $70 respectively for a total monthly PITI payment of $1911.94. Throw in the $15/month McCormick Ranch POA dues, and you are sitting on an approximate monthly outlay of $1926.94.
It should go without saying that figure decreases with a larger down payment.
A twenty percent down conventional borrower, for example, avoids the monthly mortgage insurance, thereby getting a significantly better annual percentage rate (credit and all other factors being equal) to coincide with the lower principal balance.
Now to rent this same property, back to the MLS we go.
If you were in the market to lease an unfurnished, single-family home in 85258 today, you would have exactly six choices: the cheapest of which is a 1900 square footer currently listed for $2195/month in McCormick Ranch. It bears repeating that the CHEAPEST available rental property in the category today costs almost $300 more per month (less potential maintenance costs of home ownership, but also ignoring potential tax benefits) than it would to purchase the same house with the lowest down payment available to most borrowers.
That is staggering.
Thinking the paltry number of available rentals might be an anomaly confined to a sought after zip code, I delved into the cheaper, neighboring zips of 85250 and 85251 in South Scottsdale. Going back just six months ago, a prospective tenant had his/her choice of remodeled 1950s-1960s ranch homes in the $800-1500 / month range. After all, these are zip codes in which a single-family, 3 bedroom, 1500 square foot home can be had in the 150-175k range these days.
The current rental inventory?
- There are 2 single-family homes for lease under $1500/month in 85250.
- There are 5 single-family homes for lease under $1500 / month in 85251.
Want to do you're own sleuthing?
Make your own comparisons by searching the current inventory.
Scottsdale Rental Homes | Scottsdale Homes for Sale
There is no moral of the story other than the context given to recent reports that tout home ownership in Scottsdale as having surpassed renting in affordability. I treat all such reports with healthy skepticism, as one must always question the source as well as the metrics used, but this is some news that actually jives with what I am seeing in the trenches. Much as it reads like more hot air designed to spur consumer confidence, there is merit to the attention given the growing disconnect between housing values and rental rates.
It’s a good time to be a landlord.
If nothing else, it will be interesting to see what effect, if any, this trend has on strategic defaults and short sales. Homeowners who are confident that ample affordable rental options await them may have to think a bit longer and harder before walking away from an underwater mortgage if the monthly payment is still manageable (homeowners who walk more from the distaste for lost value than ability to pay, in other words). On top of the higher rents, the reduced competition allows a landlord to be pickier with the choice of tenant. Recent credit / financial woes are only overlooked to the extent of one’s prospects. When there are 10 houses to every renter, it’s easy to find a forgiving landlord. But when there are 10 renters to every home … not so much.
Long essay short, a homeowner may want to do some additional research before opting to become a former homeowner. There is danger of jumping out of the frying pan and into the fire if precautions haven’t been taken to ensure that a markedly better living situation awaits.
While it has become an Olympic sport to predict the direction of the market with downward pressure on pricing here, and upward pressure on rates there, I’ll leave the prognosticating to the eggheads in the ivory tower. I will go on record saying this, however:
Prices are falling and rents are rising. Do the math.
Buy. Scottsdale. Real Estate. Now.
The closing table is no place for incompetence. The crescendo to a Real Estate transaction, the signing of loan documents and the final settlement statement is representative of a successful navigation of the escrow obstacle course. If it were a cinematic experience, an empowering musical score would soar over the montage of conquered struggles that it took to get to this point. While a few credits have to roll before the buyer can officially call the property home, namely lender funding of the loan and recordation of the deed, smiles and handshakes accompany the last executed signature in the two inch stack of paperwork, nonetheless. In years past, agents and consumers alike have been spoiled by the well-oiled machine that was the title and escrow field. Catastrophes arose, catastrophes abated and we lost our minds if a closing was delayed twenty four hours by unavoidable eventualities.
These days, I consider myself lucky if a closing isn’t delayed two weeks and my clients draw anyone other than Sparky, the one brain-celled signing agent.
With new disclosure regulations, a completely different settlement statement and a host of new concerns with the transfer of clear title due to the pervasiveness of foreclosure and short sale properties in our midst, an accomplished escrow officer has never been more vital to the process of a home sale. Unfortunately, many of the good ones were forced out of the industry when the market hit the skids in 2007. When sales finally began to rebound, the major title/escrow companies restocked their ghost offices. As the predominance of these properties were distressed, however, it was the REO (bank foreclosures) and short sale divisions that welcomed new staff. The resale divisions remain largely undermanned.
The REO division of a title company is an entirely different universe. Like that of a REALTOR who specializes in listing bank property, transactional volume is ludicrously high. Too many files on too few desks. You can imagine how this translates to the urgency with which your file gets treated. Another component that is not necessarily to the buyer’s benefit is the relationship between the bank and the title company they have procured. Supposedly a neutral third party whose purpose is to convey the property from the current owner to the buyer, the myth of its transactional Switzerland is a tale taller than the Alps. If the sheer dollars involved in a title company’s relationship with a bank (or the bank’s asset management affiliate) does not dictate outright obedience to the demands/whims of one party over the other, it sure does influence behavior. I have been nonplussed during the course of bank property transactions (the buyer MUST use the bank-selected title company if his/her offer is to be accepted) in which the title company is the one contacting me with seller demands, essentially performing the role of the listing agent by proxy.
It is expected that one will have to tolerate a third party that is subservient to its master in a bank property sale (and not overly concerned with getting the file closed in a timely fashion to boot), but problems are now creeping into “normal” resale transactions between living, breathing human buyers and sellers. For starters, with many resale divisions depleted of adequate staff, it is not an unlikely scenario to get stuck with an escrow officer who primarily handles REO accounts. Flip a coin between whether said officer is overworked or under-experienced, but too often lately a less than exemplary job is being done. Documents are not being requested/delivered on time, assistants are left to answer questions they are not ready to field, communication between the officer and the buyer’s lender is nonexistent … I’ve even encountered “signing agents” at closing who are neither the selected escrow officer, nor capable of explaining the documents upon which they want your signatures. One clown literally tossed the paperwork in my lap and told me to explain it all to my clients. Had I not been rendered utterly speechless, I would have ordered the hall monitor to escort the fresh lad to detention.
Mind you, these are not mom & pop style title companies, but reputable names that do a very high volume (perhaps too high?) of business.
The moral of the story? Unless you are purchasing a bank property, and thereby resigned to the amusement of escrow fate, you have a choice in the matter. As the buyer, you get first crack at naming the title company in your initial offer. Sellers (upon direction from their chosen representatives most often) may list their own preferred company amongst the terms that are countered, but don’t cave. Unless your agent can point to specific, positive dealings with said officer/company in the past, I urge you to stick to your guns. Going back four or five years, a title company was largely a disposable part of the negotiation. As long as you got your price, you let the other party get the perceived “win” of naming the company. The recent changes to the escrow landscape make such a laissez faire approach to the title work fraught with peril. Make this term non-negotiable. More often than not, the other party will buckle rather than lose a sale over what many still consider a minor point.
When selecting a company, your chosen agent is the best source of advice. We have favorites for a reason, and it is not monetary. Through trial and error, we find excellence in all of our affiliates. When we find a diligent service provider, we are loyal. In this day and age, though, a little prevent defense is still warranted. Ask your agent who underwrites the title policies of his recommended escrow company (title and escrow are not necessarily synonymous) before satisfying yourself as to its viability.
I happen to use Jenny Werner with First Arizona Title. Her policies are underwritten by the big boys at First American. She chaperones her files quite adeptly to prevent avoidable delays and miscues, and is very responsive to consumer questions/concerns. Whether you employ me to assist you in the purchase of a home or not, I highly recommend you write Jenny’s services into the agreement. Your movers and peace of mind will thank you for it. Eventually, the other party will as well.
Jenny Werner, First Arizona Title
11333 N. Scottsdale Road
Scottsdale, AZ 85254
Phone: (480) 385-6500
Fax: (480) 385-6800