Two incidents occurred recently at FRPM that made us want to discuss deferred maintenance. Although these incidents that we are sharing show deferring maintenance as a negative, we will also mention a couple examples of where deferring maintenance may make sense.
First of all, as FRPM identifies items that we believe need fixed, it is totally up to the property owner to choose to repair or replace them, so long as there isn't a tenant safety or habitability requirements issue. So deferring the repair may make sense. But our first two examples show where an abundance of deferring hurts value and performance.
Tony was asked to list a small apartment building. The owners provided P&Ls and said that the "books are a lot better with their new property manager" and that the old one was nickel-and-diming them on maintenance. Upon inspection, the property was in poor condition and the lack of maintenance in the past year had caused thousands of dollars of damage. The clogged gutters had caused water to spill over and damage the fascia, soffit and siding. On the interior, the list was vast, but let's jump to the bottom line: unattended water leaks had created so much mold and damage that the property would not qualify for conventional financing and required a cash buyer, or else the sellers were looking at about $30,000 in mold remediation and repairs.
In this example, the absentee owners were very pleased with the improved cash flow by their change in management. But it ended up costing them tens of thousands not that far down the road.
The other example is a very similar story, but comes from one of our contractors who went out to bid some exterior issues. The property owners expressed raving reviews of their new property manager because they were "making so much more money now." According to the contractor, the neglect and delay in some repairs damaged other components that now cannot be fixed but need to be replaced. He also said that the entire property looked "tired" and it was clear that its horrible appearance was steering away good tenants.
Just like the first example, the owners' decision to not only defer maintenance but to go to another management company that didn't bring such items to their attention cost them thousands more, plus a higher tenant turnover and an untold loss of value.
Like we said, we wanted to also give you examples of when deferring repairs may make sense. We had some in mind, but did a quick GOOGLE search to see if we could reference any good links on the subject. Unfortunately all we found were articles of why deferring maintenance and repairs was a bad idea. So we'll stick to our own examples of sensible deferred maintenance:
- Short deferral period. There are tons of examples of where the home owner has budgeted and plans on replacing fencing, siding, roofing, windows, paving, etc. very soon but a need for a short-term fix is necessary until the planned maintenance occurs. That makes sense.
- I know it is hard to believe, but even after passing a thorough screening process, sometimes tenants and/or their guests don't keep a clean house and misuse or neglect the property. It doesn't take long and the next thing you know, you are looking at new flooring, paint and a whole host of repairs and expense. However, the tenants are otherwise very good tenants. In this case, there is a good argument to defer this maintenance until the tenants vacate. Another approach may be to identify those costs and have the tenants start making small monthly payments so that you will have the funds to make those repairs and replacements when the tenants move out.
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