Tag Archives: advice

Quality Control Week #2: Recognizing Low Quality

Hey all! Sorry about the silence last week. Between business and the recent floods in my neighborhood it was absolutely frantic. As always, my clients come first.

So when we left off we were talking about the factors that make for a high quality home. Today we’re going to talk about how to spot symptoms of poor construction and quality when you’re in a showing. After all, a home with even medium quality construction will suffice for many of you, especially for renters who are only going to be living there for a short while. Poor construction and materials, however, can be dangerous and costly. You would not want to purchase a cheaply-made home without budgeting time and cash for major capital improvements to occur before you move in.

Sometimes it's easy to spot a cheap knockoff. Here's how to spot them when you're looking for real estate.

Sometimes it’s easy to spot a cheap knockoff. Here’s how to spot them when you’re looking for real estate.

Preparations

You’ll want to do a little research before you get started.

Learn the names of the current specialty appliance lines.

I recently worked with a buyer who rejected all homes with American appliances. If the kitchen had Maytag, GE, Whirlpool or Frigidaire appliances it was immediately off the list. He was only interested in imported labels like Bosch, LG and Samsung. In truth, every manufacturer has different lines of appliances with varying levels of quality and warranty. For example, GE currently has it’s basic line, as well as the Cafe, Profile and Monogram lines. Whirlpool Corporation owns the Amana, Maytag and Whirlpool labels, each label having multiple lines of appliances. There’s a big difference between a regular GE fridge and a GE Monogram fridge – a difference of several thousand dollars and several years of longevity.

The seller of a kitchen full of Amana (budget line) and no-name appliances will expect you to replace them when you move in. They’re basically placeholders. However, a seller who’s sunk a lot of money into top of the line gear will expect you to recognize their taste and pay more for it.

The same goes for IKEA. Yes, they’re known for cheap furniture, but some of their lines are well-respected for durability.

Take a trip to Home Depot

Home Depot is not known for their contractor-grade supplies. If you see a home that’s been outfitted with nothing but Home Depot fixtures, you can be pretty sure that the owner has been skimping on quality. It’s worth taking a look around to see what the cheaper stuff looks like, especially the lighting fixtures, bathroom fixtures and kitchen cabinets.

Oh, and if you watch a lot of HGTV, remember that their main purpose is to drive business to their advertising sponsors. They can make crappy cabinets look nice, but a TV show won’t show their durability over time.

Your Testing Kit

Appliances and cabinets are easy to test, but testing the structural quality of a home is the toughest thing to do. Here’s some things you should bring with you that won’t draw a lot of attention.

A scarf

You’ll want to make sure that door frames and walls are straight and not sloping or bowed. A slightly heavy winter scarf will do as well as a plumb-line to accomplish this test. Hold it up to the wall or door and make sure it stays flush all the way down.

A marble

Uneven floors can indicate foundation problems. You don’t need a level to tell you if the place is sitting pretty, though – a simple marble is enough. Lay it on the floor and see if it stays put.

A ballpoint pen

Any basic ballpoint of normal barrel size will do. That’s about the minimum size hole that a mouse could fit through. You want to make sure that baseboards and floorboards meet with no gaps larger than the tip of your pen. You’ll also want to make sure that any gaps around pipes are smaller than your pen. Pay particular attention to the areas under sinks and in the mechanical room.

You can also use your pen for listening tests. Tap it against things to get an idea of their interior composition. If you’re tapping against something solid and well-insulated, you shouldn’t hear anything at all. If you’re tapping something cheap or hollow, it will sound much louder. (Don’t forget to try it on the floors, too.)

Things to Look For

As many of my physician friends like to warn me, symptoms don’t always indicate the same disease. However, if you spot a large number of these problems in the same property it’s probably best that you move along.

Air

When it comes to the components that make up your home, you want as little air as possible. Window frames and doors are the main places where a seller, landlord or developer can get cheap on the materials by installing lots of air. Hollow-core doors and hollow-frame windows are simply not as durable. You want windows and doors to serve as insulators as well as security features, and air just isn’t as good at either as something solid.

A well-built window frame will be chambered and filled, not hollow. (Image from wikipedia.)

A well-built window frame will have many chambers, like this one, and be filled with insulation. (Image from wikipedia.)

Too much air in the walls – in other words, insufficient insulation – is also a problem. On a sunny day, head to the side of the house closest to the sun and hold your hand up to the inside of the walls. (Or on a snowy day, hold your hand up against the inside of any exterior wall.) If you feel too much of the outside temperature through the wall, you could be dealing with an insulation problem.

Stopgap measures and concealers

This one only works if the home is still occupied, but it’s definitely worth considering. Don’t get me wrong – I love duct tape and WD-40 as much as any other geek, but they’re still stopgap measures. A truly “fixed” item will not use either one. Pest control items scattered throughout the house are also a temporary fix that should really be remedied through more thorough means.

A lesser known fact is that the Chicago city inspector will fine a landlord who’s got visible damage to the sills and lintels that hold windows in place on the outside of a building. However, if the damaged sills and lintels are covered so the inspector can’t see them, they will escape the fine without solving the problem. Those sills and lintels are what keep water OUT and heat IN – you really want them to be intact, not just covered up to hide a deeper problem.

Systems with single Points of failure

When it comes to major fixtures in the home, you really don’t want any system to have a single point of failure. For example, the recent flood in Albany Park demonstrated the problem with sump pumps – many of them were hooked to the electrical grid without battery backup. During the flood, power was cut to many homes, rendering their sump pumps useless.

Of course, when your street looks like this even a sump pump can't help you much.

Of course, when your street looks like this even a sump pump can’t help you much. (Albany Park 2013, photo by me, unfortunately.)

Similarly, a furnace should have a manual cut off switch attached in case the thermostat fails, and outlets close to sources of water should have breakers built in.

Lack of Detail

While a simple aesthetic is certainly valid, complexity can in some cases be equated with quality. As we discussed last week, moving parts add to the usefulness and the expense of something like a kitchen cabinet. High levels of detail in trim indicate custom builds and considerably more care invested in the installation. Basic cabinets and plain walls will look frumpy by comparison. It isn’t just the visual impact that matters, either. While you certainly want your home to make your guests say “wow,” you also want it to last for a good, long time. Lack of detail can imply lack of quality – plain cabinets can be nice and sturdy, but you’ll definitely want to take a closer look at them than ones with lots of crown molding and heavy detail.

You should also pay attention to items that seem out of place. If you spot a contractor-grade ceiling fan in a home otherwise furnished with custom-grade decor, it may be a sign that the wiring behind the fan is faulty, resulting in multiple replacements over time.

Lastly, it’s worth considering how the moving parts, well, move. Do drawers and doors slam shut or do they quietly glide closed? Do faucets and drains open and shut fully and smoothly?

We Need to Go Deeper.

These tests are all quite superficial, and failing any one of them alone is not reason to walk away from a house. If you decide to put in an offer on a home, your inspector will be able to more thoroughly test everything so that you’re aware of major problems. Unless you’re planning on gutting the place, you definitely need to probe deeper than this before you get all the way to the closing table. However, basic awareness of quality and some quick on-the-go tests can save you from getting under contract on a clunker.

I’ll be back Friday (I promise!) with a special take on quality for folks who are looking for rentals. See you then.

Quality Control Week #1: What Affects Building Quality?

You probably know that there are different grades of quality when it comes to food. The USDA has three different grades for poultry, eight for red meat, and hundreds for fruits and vegetables. Similarly, building materials come in four different official grades: building, quality, custom and ultra custom. I would add “commercial grade” to those standard four. As the quality goes up, so does the cost; in some cases it increases exponentially. Homeowners must always walk a fine line between material quality and cost, but many are unaware of the differences and how they affect the bottom line.

Condo boards also face tough decisions when it comes to major capital improvement projects. Expensive materials will last longer – in fact, they may well outlast the current residents’ tenure in the community. Convincing condo residents to take on large special assessments for maintenance that they won’t be around to use is a difficult task. (more…)

The First 10 Things You Should Do After Closing

So you’re about to close on your first house. Congratulations! You’ve come a long way and it’s probably been a big hassle to get here. Saving money, filling out paperwork, viewing house after house… now that it’s over, what’s next?

There’s bound to be a lot of silliness that comes with getting your first house. You can dance around in your new empty living room and call up all your friends for a housewarming party, but there’s a few very important things you’ll want to take care of before you pop the cork on that champagne.

Make Copies of your Closing Documents. If you’re a first time buyer, the documents handed to you at closing are probably the most expensive pieces of paper that you have ever encountered in your life. The first stop you make after closing should be your local copy shop. While all the documents are still together and in order, take at least one copy of everything.

(more…)

10 Mistakes Made by First Time Landlords

Last year I did two articles about mistakes made by first time renters and first time buyers. Today we’re going to look at errors made by first time landlords.

1. Setting Arbitrary Rent Rates

The price a tenant will pay has little or no bearing on your monthly costs. They will compare what’s available and, if your price is reasonable, they will rent your unit. If your price is too high, they won’t even look at it. If it’s too low, they will wonder what’s wrong with it or take you to be a sucker.

Apple can get away with pricing higher than anything else. You cannot.

Apple can get away with pricing higher than anything else. You cannot.

(more…)

Rental Site Review: Zillow

A couple of months ago, I posted a review of SearchChicago.com, the Sun-Times online classifieds page. I concocted a scoring method to rate rental websites on a 40 point scale based on diversity of listings, listing freshness, listing legitimacy, and ease of use. SearchChicago scored 14 out of 40 – 35% of the maximum, a dismal failure. Today we’re going to use the same criteria to rate another, more well-known site: Zillow.

Zillow is best known as way to search for homes for sale. Their claim to fame since the beginning has been the “Zestimate,” or their estimated value of a home based on sale data from the area. For conventional homes, it can be reasonably accurate. For homes that deviate even slightly from your standard cookie-cutter architecture it is frequently wildly out of whack. Zillow recently expanded into listing apartments and homes for rent, and they brought the Zestimate along with them. It’s just as unreliable for rentals as it is for homes, but what about the rest of the site? Is it something your average Chicago apartment hunter should be using to find their next place?

Zillow scored 24 out of 40 possible points. Here’s why.

On the surface, it looks like Zillow has a ton of rentals in Chicago. And they do, but it isn’t as diverse as you’d think. In the 60640 zip code (Uptown), they list 910 rentals. The MLS has 79. In the 60625 zip code (Lincoln Square/Albany Park), they list 388 rentals while the MLS has 38. However, once you start picking apart the listings you realize that the surface data is misleading. Looking closely, over half of the listings are either duplicates or similar apartments in the same large buildings.

Even so, if you cut the total listings on Zillow in half, they still handily trounce the MLS. There’s all sizes and styles, from studios to five bedrooms and from houses to high rises. Rents range from $500 to five-figures and all different types of landlords are represented.

In terms of listing diversity, Zillow gets an 8 out of 10.

Zillow does not charge landlords or agents to post rental listings. This means that everyone and their brother can post an ad, regardless of whether or not they have the right to do so. Sites that do not charge advertisers are generally rife with questionable postings, and Zillow is no different on that front. A quick search this evening uncovered a fake copy of one of my own listings, which I reported using their handy “report” button. After reporting it, the listing disappeared from my search results, but I could still bring it up by typing in its direct address in my browser. I’m pursuing other routes to have the listing taken down.

In my search through the 60640 and 60625 zip codes, at least half to 3/4 of the listings used the ominous “undisclosed address.” Many used photos with watermarks from the apartment locator services, which are known for posting bait listings to free marketing sites. Others had no photos at all.

The apartments with actual addresses are more likely to be legit, but Zillow’s checking for unique addresses needs a little work. In the case of the scammer who copied my listing, he simply left off one digit from the apartment number to fool the system into thinking he was posting a different apartment.

Zillow gets 5 out of 10 possible points for listing legitimacy.

SearchChicago got a measly 2 out of 10 when it came to ease of use. Their slow, clunky site made for a totally dismal experience. By contrast Zillow comes out smelling like a rose. The site loads quickly, the back button works properly, and the mobile version takes me from a Google search result to an actual listing with only one annoying nag window about downloading their app.

Their mapping feature is decent, with nice neighborhood sectoring and the ability to draw your own boundaries. I’d have liked to see the ability to do a radius search in a circle around a specific point as well. Unfortunately, the map cannot be turned off unless you click through to a listing, and once you zoom in beyond a certain point you cannot switch from satellite to street view. On the map view, search results are displayed to the right in a list with basic data. However, the “basic” data on many of the listings is overly simplified, which leads to a lot of excessive clicking. Of course, Zillow being advertising-driven they want to be able to demonstrate that they’re generating lots and lots of clicks. Their approach seems to be to provide as little information as possible as a reward for each click.

A listing detail page dedicates about the top 1/4 of the page to the information obtained from the landlord or agent. The next 1/2 of the page is spent on Zillow’s useless “Zestimate” and price history tracking. Finally, the last 1/3 of the page is spent on school scores inlined from Greatschools, which is of marginal use to apartment hunters in Chicago who tend to be just barely out of school themselves.

The search feature is quick and dirty, but asks some strange questions. It’s obviously copied over from the home-for-sale search feature with little regard for the specific needs of renters. It allows the user to specify date of construction, lot size and square footage – most of which are omitted from rental listings altogether – but doesn’t allow the user to narrow their search by more important criteria like minimum lease length, security deposit, non-smoking buildings, or number of units in the building.

Overall in terms of ease of use, I’d give Zillow a 7 out of 10.

Finally, we’re down to the criterion that pretty much killed SearchChicago – listing freshness. If you recall, 72% of their listings had been off the market already for at least 3 months. Now, I’d like to say that Zillow did better. The MLS average market time for an active rental listing in 60625 and 60640 is between 40 and 56 days, so if Zillow comes in anywhere near that or better they’d be doing fine on the freshness factor.

Unfortunately, I just can’t tell how fresh the listings are.

See, if you look at the map page you can sort by “days on Zillow.” If you do so, you’ll see that the oldest listings are 34 days old. This makes Zillow look really good on the surface, until you start clicking through to the listing details. That’s where it all falls apart.

This is the teaser on the map page...

This is the teaser on the map page…

... and this is the detail page. Notice the difference in listing age?

… and this is the detail page. Notice the difference in listing age?

This means that short of clicking the detail pages for over 1000 listings, there’s no way for me to tell the actual age of the listings on Zillow. The oldest I found in a cursory search was 92 days – that’s a two month difference between the index page and the detail page!

Speaking as an agent who syndicates listings to Zillow, I can vouch that my listings take about 3 days to get picked up from the MLS. This is a very bad delay in a fast-paced market. I had a 3 day listing a few weeks back that didn’t even appear. However, they do tend to be very good about removing inactive listings promptly once they’re notified.

In terms of listing freshness, Zillow gets a 4 out of 10.

So, Zillow just barely passes with 60% of the maximum achievable score. If you’re comfortable with using maps, you can use it to search for Chicago apartments, but proceed with caution. Make sure to background check any landlord you find on Zillow. Also bear in mind that as the new kid on the block, most agents will post to multiple other sites before they think to post to Zillow, too.

What’s Your Sign? (How to Tell if YOUR Housing Market Has Recovered)

If you’ve been following the housing market at all, you’ve probably seen articles about how the housing market is recovering, mortgage rates are slated to rise, and prices are climbing again. However, as the inimitable Dennis Rodkin recently pointed out in Chicago Magazine, the Chicago housing recovery is happening in fits and starts.

Oh really? (Cover © Chicago Magazine)

Oh really? (Cover © Chicago Magazine)

As we’ve discussed before, even if you live in Chicago, when it comes to housing you don’t live in Chicago. You live in a district of Chicago with its own boundaries, attractions and demographics. Those districts in turn contain many different types of housing, not all of which are truly comparable to your current home or the one you want to buy. Statistics that may be useful on a national or citywide scale are useless when it comes to determining the right time for you to buy or sell.

Today we’ll be looking at how you can determine what section of the market you should be watching and how to figure out whether or not the market has recovered.

What’s Your Market?

Much like your personality can theoretically be affected by the motions of the stars, planets and other cosmic bodies, there are also many factors that contribute to a home’s real estate horoscope.

Local Attractions & Neighborhood

The name recognition of a neighborhood will do a lot to dictate when your market recovers. Trendy neighborhoods that everyone recognizes will come back faster than the ones nobody knows about. Areas closer to the El trains and Metra stations will come back faster than those that require a car. Give some thought to which type of neighborhood you’re in and base your comparisons on similar areas. In other words, if you live in Hermosa you should not be using Wicker Park as a barometer.

Single family/Townhome/Condo

Condos and townhomes are popular among younger families, older folks and singles. There’s different types of condos to consider, too. Skyscraper towers with their $700+ assessments attract a far different population than small, self-managed walk-up conversions.

Single family homes generally attract an older, more stable population. But some will target ranches and split levels while others will want bungalows, Georgians or Victorians.

Uniqueness

Do you own/want a Prairie Style house in a neighborhood full of Colonials? Or a vintage walk-up on Sheridan Road? A 3 story loft built into the chimney of a Chinatown noodle factory? Or this contemporary beauty that’s nestled in the middle of pre WWII brick in Lakeview? The market for non-conforming properties is always the toughest to gauge in terms of speed and price. If you’re trying to sell or buy something that’s out of whack with its surroundings you need to be aware that the market statistics in your immediate surroundings only marginally apply to you. They’ll have an effect on price, but less impact on market time.

Beautiful story, but that would have been a very hard house to sell.

Beautiful story, but that would have been a very hard house to sell.

Age of Property

New constructions and rehabs fresh out of the developer’s hands are in a totally different market from owner-occupied homes. Buyers interested in one will have a very hard time shifting gears to consider the other.

Current buyers are used to seeing nothing but rehabs on the market, since it’s been dominated for years by conversions of distressed properties while homeowners waited out the downturn before listing. Meanwhile, sellers who have occupied their homes through the downturn may have pushed too-small homes to their limits, or run short on funds to maintain them. If you’re trying to sell your home of the past ten years, you cannot consider the performance of the prefab Green Tech home they just built down the street.

Nearby Schools

As poor as Chicago’s public school reputation may be, proximity to a good school (public or private) will still buoy up the surrounding neighborhood. NorthCenter and Edgebrook have both largely survived the downturn with minimal loss in value due to their strong public schools, while their neighbors Irving Park and Jefferson Park took a tumble without similar strength to anchor them.

Lender vs Cash

Who is likely to buy your building? Someone who needs a loan or someone with cash? At low prices and very high prices, cash buyers can cause a feeding frenzy. In the middle price ranges you find mostly buyers with mortgages, especially between about $150k and $450k. Cash dominant areas are going to seem to move more quickly because it takes less time for a cash deal to close.

Price

This should be a no-brainer, but you really do need to consider your budget/target sale price as part of determining your specific market. The markets under $100k and over $1m have been on the upswing for several months already. In the middle we’ve seen slower growth.

Politics

The politics of a neighborhood will affect how quickly your market recovers. Some folks don’t want to live in TIF districts. Others may shy away from high property taxes in a particular area, or only want areas with blue recycling carts. Given the long history of some members of the City Council some folks may have sworn to never again live in Alderman So-and-So’s ward. The city, county and state also court buyers into some neighborhoods with down payment assistance and lower loan interest rates.

Figuring out what portions of the market to watch is like finding your Chinese astrology symbol on a placemat.

Figuring out what portions of the market to watch is like finding your Chinese astrology symbol on a placemat.

What to look for

So you’ve determined that you should be watching for new construction single family homes in the Bell school district, or perhaps you’re looking for a 1960’s condo along Harlem in Montclare. Now that you know what types of homes you should be watching, what signs should you look for?

  1. Shortening market times. This means how long it takes a property to sell. You can find this information on many real estate sites. Just look at the date the listing was posted and when it went under contract. An average of 3 months is good. Anything shorter is great. Anything longer and you’ve still got a long way to go.
  2. More resales. As owners surface from underwater status, more of them will list their currently-occupied homes for sale. When you start seeing homes on the market while the owners are still living in them, that’s a very good sign.
  3. Fewer renters. In a rising market, the homes temporarily occupied by renters will return to the sales market. A good chunk of those renters will convert to buyers. Many of them were waiting for their credit to recover after short sales in the late 2000’s.
  4. Homes selling at list price or higher. Realtors aren’t going to turn around and start listing homes at higher prices. They will let buyers in multiple offer situations bid the prices up over list. For a long time now we’ve seen the average sale prices of homes at anywhere from 50-95% of their list prices. When that tips over 100%, your market is on its way back.
  5. Homes sitting under contract for 60+ days. A house is “under contract” if the seller has accepted an offer but the deal has not yet closed. For years now, contingencies in sales contracts have been plentiful but one specific type of contingency has been largely absent – the home sale contingency. This means that the purchase of a new home is contingent on the buyer selling their prior home. In the slow market, most places have been under contract for 30-45 days even when lenders are involved. If you start seeing homes under contract for 2-3 months, you can bet there’s a home sale contingency involved. This is a very good sign.
You cannot simply price your house higher than the market and hope to lead the market recovery.

You cannot simply price your house higher than the market and hope to lead the market recovery.

What does this mean for you?

If the market is starting to come back, then the price for your home of choice (or your current home) will be rising. However, sellers should not assume that they will immediately surface from being underwater, nor should buyers panic and think that prices are going to skyrocket out of reach. There are still a lot of foreclosed homes that the banks need to sell off, and the underwater homes may have a lot of appreciation to do before they can resurface. Even if the sections of the market jump 10% this year, remember that an average, sustainable appreciation rate is more like 3% per year.

Realtors may call you and try to convince you that now is the time to buy or sell, using national or citywide statistics. Before you jump on board with them, make sure they’re looking at the right “horoscope” for your particular home of choice.


 

Friday I’ll be back to discuss the taboo against listing prices on “for sale” signs, and how it might be leaving the door open for scammers. See you then!

Celebrity Tenants

Between my current career as a Realtor and my prior career as a stage manager, I’ve been lucky enough to deal with several celebrities during my time in Chicago. Like anyone else, they have to live somewhere too. As a landlord, it’s very possible in Chicago that you’ll be contacted by a celebrity (or a member of their entourage) who is interested in renting your apartment. Here are some do’s and don’ts for dealing with the celebrity renter.

Don't get so starstruck by a famous tenant that you lose your business sense.

Don’t get so starstruck by a famous tenant that you lose your business sense.

Do: Remember that “famous” is very relative.

It might be a professional sports player, a celebrity chef, or a movie star. It could also be a local news anchor, car dealership owner, or even your child’s school principal. Or it could be someone you’ve never heard of, like the bass player from an 80’s hair band or a voice actress from one of your kids’ favorite cartoons. It could even be the author of your favorite real estate advice blog. 🙂 (more…)

Dear Piggy: Help! My new apartment isn’t ready!

pig writing

I was recently contacted by a renter who had lined up an apartment for March 5, or so he thought. On March 1, his new landlord contacted him with a sad confession: they had misinterpreted when the outbound tenant was leaving. His new apartment would not be ready until April 1. He wanted to know his options. This is a situation that occurs more often than you’d think in Chicago. It may not be a 27 day gap like this poor fellow encountered, but a whole lot of renters face at least an overnight gap between when they have to be out of one place and when they can get access to the next.

Not every delay is caused by clerical errors, like the one faced by the poor fellow above. You probably want your new apartment to be clean and fresh for you when you move in. Doing so takes a lot of work, and few large-scale landlords have enough staff members to get every apartment turned over in less than 24 hours as it is. If you want your apartment to be in good shape, you really do need to allow enough time for turnover in between tenants.

Some tenants get unreasonably angry about such delays… and then unreasonably angry all over again when their new apartment isn’t spotless. They wouldn’t fault a fancy restaurant for a little delay while the staff turns over the tables. They generally accept a hotel’s check-in and check-out times if it means that the bedsheets get changed. But when it comes to apartments? The minute a landlord is tardy with the keys, tenants are off to rant about it on Yelp.

Regardless of how you react to the situation emotionally, though, there are five basic routes you can take from a practical standpoint to resolve the issue. If you’re facing a similar situation, here they are, roughly sorted from worst to best.

Break the Lease and Find Another Apartment. (more…)

Buying in 2013? Here’s what to expect.

I don’t really spend much time talking about the home buying market. There’s plenty of folks who write well about that side of the business. I feel that renters and landlords are somewhat under-served, so I focus on them. However, the changes occurring in the Chicago residential market are going to affect everyone this year. It’s time that we have a little talk about what to expect if you are moving from renting to buying.

You’ve probably heard a lot over the past several years about the depressed housing market. If you’re renting, you may have thought you still had some time to take advantage of the lowest home prices and mortgage rates seen in decades. Guys, you’re running out of time. Prices are climbing, inventory is short, and rates are starting to move up again. While the prices aren’t likely to spike back up to 2006 levels any time soon, the bottom of the market has passed you by. (more…)

PSA for the Accidental Landlord: Profit is Not Guaranteed

The alternative of renting your home in a slow market has become increasingly viable in the past few years. I’ve worked with a number of buyers lately who have mandated that their new home be viable as a rental further down the road. Even though the market is improving, there are also still sellers out there who don’t want to short sell and turn to rental as an option. I call it “accidental landlording.” As one of the few Realtors in my office specializing in rentals I pick up several of these each year as referrals from my peers. With at least a quarter of the accidental landlords I meet, I have to have the following conversation:

Me: “Based on the current market, I’m thinking we could get $X per month for renting this property.”

Client: “But my monthly expenses are $X+500!!! We have to ask at least $X+600 so that I can turn a profit on this rental.”

Me: “I wish I could say it worked that way.”

Me, internally:

Logo from an indie film that failed to get funding. So Sad,Analogy Time!

So let’s say you’re 25 and you are living in Rogers Park without assigned parking. Poor you. You need a car, though, so you buy a little 5 year old Jetta second or third hand. You can parallel park anywhere and not pay too much. It serves your purposes. You have your brother paint it purple so you can pick it out in the mall parking lot. You cover it in bumper stickers. It’s unmistakeably your car, through and through.

10 years pass. You’re still driving that Jetta, but now you’re working for a catering business in Elk Grove Village, and you have two kids. You finally have to bite the bullet and give up your beloved compact. The folks in town don’t look kindly on your old John Kerry ’04 bumper stickers and there just isn’t room for your life in your car anymore. Back when you were 25 you never thought you’d be in this situation. You didn’t consider if the Jetta would suffice if you wound up in a situation where you had to haul a lot of stuff and small people around.

I had a lot of trouble finding pictures of VWs covered in bumper stickers. Lots of Toyotas, but not a lot of stickered VWs with an acceptable reuse license. VW owners don't like to share their pics.

I had a lot of trouble finding pictures of VWs covered in bumper stickers. Lots of Toyotas, but not a lot of stickered VWs with an acceptable reuse license. VW owners don’t like to share their pics.

A single-purpose purchase will not necessarily serve well when faced with new tasks. The more something is customized, the harder it is to make it change gears (pun intended).

The same thing goes for your home.

Why did you buy your home?

If you’re currently a homeowner, chances are that you didn’t give much though to the rental value of your home when you bought it. You might have thought a bit about resale value, but not about whether or not it would make a good apartment. Likewise, if you took out secondary loans on the property you probably didn’t think about having some poor renter cover that cost on your behalf further down the road.

You probably considered how you could customize the house, the caliber of the kitchen appliances, the color of the wood floors and the size of the yard. You ensured it would suit your particular needs for light, space, and storage. You thought about whether it fit within your monthly budget. You probably didn’t consider whether or not it would generate positive cash flow 8 years later.

There’s a lot of investors out there who won’t purchase a property until they’ve analyzed whether or not it will generate positive net cash flow. They think about what will appeal to the largest number of renters. How long those renters will stay. The cost of gas to drive back and forth to the property. The breakdown rate of the appliances. The value of parking spaces. The depreciation. And when it comes to apartments, there are more owned by investors than by “accidental” landlords. Investors set the market rent rates.

A purchased home should be like the cast of "Star Trek" - very good at playing their specific roles.

A purchased home should be like the cast of “Star Trek” – very good at playing their specific roles.

Meanwhile, a good apartment needs to be like the Saturday Night Live cast: able to do a decent impersonation of any type of home for a short period of time.

Meanwhile, a good apartment needs to be like the Saturday Night Live cast: able to do a decent impersonation of any type of home for a short period of time.

Going back to the car analogy, let’s suppose you tried to lease your 10+ year old Jetta for $180 per month when you were done with it. Laughable, right? Who on earth is going to sign a fourth hand lease on a heavily customized car? And who on earth is going to pay the same for it as they would for a new 2013 Jetta at the dealer?

Why should you expect that your home, bought for and customized to suit your needs, will work well when repurposed as a means of generating ongoing income?

Agents Can’t Force the Market.

If I’m trying to list your home as a rental, I want to list it for as high a rent as I can possibly get. I’m working on straight commission here. Your profit is my profit. However, “possibly” is the real operative word in that first sentence. If it’s priced too high, your home will not rent. Nobody will even see the ads.

Most renters don’t care about your monthly expenses. The general opinion of a landlord is that they’ve got bottomless pockets full of money, especially if they own a fancy condo with granite counters and stainless steel appliances. After all, you have two homes and they have none.

If I deliver a number that’s lower than your cost of ownership, the question should not be “can I find some idiot renter who’s willing to pay $500 over market rates.” After all, that type of renter is not likely to remain financially solvent for long in any respect, and an insolvent renter is a renter headed for eviction court. Rather, the question should be, “which will cause less damage to me in the long run?”

Short selling your home has its problems. It affects your credit, your tax returns, your buying power, and your self esteem. You may face long market times. You’re at the mercy of the banks. Renting frees you from all of that. For some it may be easier to write off a $500 loss each month than a $300k loss all at once. The market times will probably be shorter. The banks don’t have to get involved.

However, renting doesn’t free you from the property itself, and you may find that dealing with tenants and the Chicago rental laws for a year is far worse than dealing with a bank for 60 days on a short sale.

The better approach is to expect both the sale price and the rental price quoted by your agent to be below what you paid for the property, especially if you bought in during the 2000’s. Rather than weighing just the money values, think first as to the benefits of the entire scenario before making your decision.

Three Little Pigs Get a Windfall (Or, Mortgage Discount Points FTW)

Once upon a time there were three little pigs. (I’m surprised I haven’t done this in the past year.) The pigs have a grand adventure in store for them involving building supplies and poached wolf, but for today we’re starting at the beginning of their story, and that means it’s math time.

Yay math time!

Yay math time!

They were each sent out into the world to make their fortunes. When it came time to buy housing, their mother gave each of them a surprise gift of $5000 in addition to the money they’d already saved.

Now, let’s say that they’d each saved up the same amount of cash, had similar credit scores, and all bought $300k townhouses in the same development using FHA loans with 3.5% down. (I know that isn’t how the story goes, but I’m not talking about construction materials today.) However, each one chooses to do something different with their $5000 gift from their mother.

Pig #1: $5000 on new appliances.

The youngest pig spent the extra $5000 on new appliances for his kitchen. He got a new Fridge ($1300), a new stove ($1300), and a new washer and dryer ($1200 each). Ten years later when he sells the property he’ll have spent $154837 in debt service on his mortgage. His appliances would be close to the end of their useful lifespans, so they won’t contribute much to the value of his home. In fact, he might have to replace them all again in order to sell the property.

Maybe he got something awesome like this modular stacking refrigerator.

Maybe he got something awesome like this modular stacking refrigerator.

Pig #2: $5000 towards the down payment.

The middle pig was quite content with the appliances that the developer provided, so he chose to add $5000 to his down payment. This lowered the amount that he had to borrow from the bank. When he sells his property ten years later, he’ll have paid $152163 in debt service. This means he’ll have saved $2674 over his younger brother. He’ll still have to replace the appliances before he moves out, but he’ll at least have saved a nice bit towards the cost.

I should note here that given the same 3.44% interest rates on their loans (which happens to be the current national average), it doesn’t matter what the down payment was nor what the cost of the property was. Over 10 years, the savings will always be $2674 if you add $5000 to the down payment.

Ok, so it's a pug, not a pig. Still, if you saved $2674 you'd be saying "neener neener" to your brother too.

Ok, so it’s a pug, not a pig. Still, if you saved $2674 you’d be saying “neener neener” to your brother too.

Pig #3: $5000 towards 1.5 Discount points.

We’ve talked about mortgage discount points before. Basically, for a fee equal to 1% (one “point”) of your loan paid up front, your interest rate lowers by a specific amount, usually 0.25%.

The eldest pig used the $5000 to purchase 1.5 discount points on his mortgage, lowering his rate by 0.375%. His brothers got loans at 3.44%, but he came in at a cushy 3.065%. Over the next ten years he will spend $147686 on his loan, saving $7151 compared to his youngest brother. This means he’ll actually make a profit on his mother’s gift! (Thanks, Mom.) He’ll also have accrued $3055 more in equity on his townhome than his younger brother, meaning he can replace the appliances and still walk away with a nice $5000 in savings.

Needless to say, the eldest pig made the smart move here.

You bet it feels good, little piggy.

You bet it feels good, little piggy.

The moral of the story is that cash at closing can be spent in many different ways, and that bulking up your down payment is not always the best way to go. First time buyers rarely think about mortgage discount points. In fact, residential buyers often don’t consider points at all, unless they are required to pay them in order to get a loan in the first place. However, if you have the cash to spare and today’s already ridiculously low rates aren’t good enough for you, spending some extra dough to push the rate down even further can have a very good effect on your bottom line. Of course, your mileage may vary and you should always run the numbers yourself after a hearty conversation with your lender.

We also learn that an extra $5000 can go a very long way. When saving cash to purchase a home, every bit helps.

See you Monday.