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Tony's Newsletter - May 2009

Vacancy

FRPM closed out April with a vacancy rate of just over 5%. That's the highest all year. Last month I listed the reasons tenants were giving notice. This month, the top two reasons were 180 degrees opposite from one another. The #1 reason was that the tenant bought a home and #2 was that the tenant either lost a job or hours or pay were cut.

Home buying

The stars are lined up just right for first-time homebuyers. Extremely low interest rates, huge tax credits, little to no money down, and fantastic buys are all making it very attractive to buy a home right now. Idaho Housing has a program where they loan the buyers the tax credit money, which is due next year plus interest when the buyer's do their taxes.

Economy

Nearly everyday, we have a tenant calling stating they lost their job, their hours were cut, or have some other financial reason causing them to move. April was our highest month for tenants skipping or bailing out without notice. We have three who actually care about their credit and informed us after they had moved that they had left to take a job elsewhere and will continue to pay rent until the unit is re-rented.

News

We are also getting a lot of proactive calls from tenants prior to renewal requesting rent discounts and other incentives and citing the news as the source of the information.

Security Deposits

Interesting enough, we are also seeing a tremendous trend in tenants surrendering the property cleaner and damage free. We can only assume that a full deposit refund is now more important.

Prediction

With the government doing what they can, from keeping the economy out of a depression or minimizing its duration, I can only imagine that once we get through all of this that we will see some pretty good inflation. If that is the case, I am going to predict that our rental market will improve greatly and rents will increase. Prior 9/11 and before the rates really started dropping and the government put pressure on the lenders to make home ownership easier, FRPM preleased a majority of our inventory; meaning we found tenants before the old tenants moved out. I'm looking forward to those days again.

Advertising

I've been mentioning advertising quite a bit. Maybe something you're not interested in, but certainly something that I am studying and trying to improve. We've developed a new advertising tracking device which so far is clearly telling us where our signed leases are coming from. Data collection can be misleading. Perhaps one advertising campaign creates tons of leads, but if those leads aren't converting to leases, then is it really worth the time and money? In the past 3 weeks, one lease signing was contributed to classified advertising in the local paper and this advertising is the most expensive. With just a little bit more data, I think we'll be ready to reduce our advertising in the paper. The question then is, do we simply cut that cost out, which cuts the owner's advertising cost down, or do we replace it with something like radio or maybe even TV spots? Not sure.

Swing Shift

For the safety of our leasing agents, we don't show properties when it's dark out. Now that it's staying light out, we've added a swing shift so that we can show properties after hours. We did this last spring and through the summer and we had great results.

Commissions

As I travel around the nation and either teach or be taught, I always visit other companies' offices. Since most states require a real estate license to be a property manager, their property management business is run much like a real estate office. The company charges a low management fee to cover overhead and profit. They then hire agents who do not receive salaries, but receive commissions. These commissions are "leasing fees" and "renewal fees," which are both paid by the owner and go to the agent. A leasing fee is generally equal to one month's rent. A Renewal fee is generally equal to half of a full month's rent. Sounds expensive, huh? Well not really. I can't recall the date, but it was around the 1950's that real estate agents started offering co-operating commissions. Prior to that, the listing agent also found the buyer. Today, most of all listings are sold by an agent other than the listing agent. A far better approach. Imagine this same kind of system where you don't just have FRPM trying to rent your property out, but you have 100 others trying to do the same thing. I think rents would increase, days on market would decrease, and the owner's bottom line would increase. Do I have you convinced? Unfortunately, FRPM can't just take the initiative. It's something that the market as a whole would have to adopt. One of my goals is to get licensing required in Idaho. Once that comes about, then I think you could have such a program in place and an improvement in our market.

Sales Market

My comments on both the rental market and the sales market are always simply based on what I personally am seeing. In a whole, perhaps things are very different as I primarily support our FRPM clients so perhaps my experiences aren't quite the same as everyone else's.

Distress Sales

Except for my buyers looking to buy apartments, in every other case most of the listings being identified are either a short-sale or a bank-owned property. My dealings with these have not been very pleasant and so far, not a single deal has closed. I'm still plugging away and still hope to get one closed as there are some really good buys.

Fannie Mae

Sounds like Fannie Mae who buys mortgages on the secondary market is looking at some new ways of slowing down the foreclosures, or at least keeping them off the sales market. Some of the ideas I've heard really sound good. The distressed sales are hurting value. Anything to slow the volume down, will surely help the lenders and the homeowners. I'll be updating this as I learn more.

HUD

In the rental market update I mentioned the great HUD loan programs. I read in an article that about 80% of all new loans are HUD guaranteed, which essentially means they are guaranteed by the taxpayers. As I have said before, I am certainly not an economist or financial wizard, but this does concern me just a tad bit. With the great buys, fixed low rates, etc., I really don't think we are going to have a problem. But with little to no down, values continuing to drop, and with the economy as it is, any lost jobs will undoubtedly cause a few homes to go under foreclosure again. I guess it really depends on the economy, so we'll just have to wait and see.

Why buy now

Prices are down and rates are amazing. In my mind, it's time to buy and buy as much as you can. In the last year I have bought or have been a partner in 4 investment properties. On the last one, our interest rate was 4.875%. With the prices down and the low rates, properties are cash flowing nicely. And, our return without factoring in any appreciation is far greater than the common CD. Yes, probably in all cases, these properties have lost value since the purchase, but the return is still there. We're in a cash positive position with good reserves. Additionally, as I mentioned in the rental market update, I am predicting inflation in the near future, which means rates will surely go up making cash flow much harder.

I'm now a broker

I completed all the necessary classes and took the test in April and am now a real-estate broker. I will continue to sale under Swope Investment Properties as an Association Broker. What does that mean? Not much. I've got a little more education and perhaps real estate production than others, but that's about it. If my broker, Mike Swope, were to get sick or have to leave the area for an extended time, I could cover him. Other than that, all is the same. My next real estate goal is to get my CCIM designation.

05-20-2009
Tony Drost
Property Management
08-29-2016

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