Can't sell, thinking of renting?

My words in italics. Unable to sell their home in today's market, many consider renting a viable option. It is, if you take the right approach. Consider this couple, "Stephanie Smith couldn't sell her home. Smith, her husband Mike, and their three children moved from Woods Cross, Utah, to Duvall, Wash., in 2007 after Mike was offered a Washington-based job.

In 2005, the Smiths paid $195,000 for their four-bedroom new construction home in Woods Cross and had almost no equity. So, the couple needed to sell the house for at least $250,000 to bring down the monthly payment on their new home in more expensive Duvall.

But in Woods Cross, the housing market turned sour.

"All of a sudden there was a dip," Smith says. "In our neighborhood, most people sold their houses within a week. But suddenly there were a lot of houses for sale and nobody was buying anything."

Because the Smiths couldn't sell the Woods Cross home, they took another tack: They decided to rent out the house and serve as long-distance landlords.

However, the decision to rent created new issues. In the past year, the Smiths have gone through two renters. They barely make enough in rent to cover their Utah mortgage.

Tough spot to be in. I've written previously about the dangers of being to aggressive on rents. You want to be a GOOD VALUE compared to your competition. If you're on the high end in your area, you eliminate the best qualified renters for those with bad credit, job history and criminal records.

The Smiths rely on Mike's brother to do repairs on the home. They hope to sell it -- to either the current renters or to new buyers -- this fall.

But living in two states away makes things more difficult, Smith says.

"I can't see the house, I have no idea what's going on," Smith says. "What does it look like? I can't pop in and just check.

"I'm so far away, there's hardly anything I can do."

Again, tough situation. I would never recommend a long distance rental without property management. Perhaps the Smiths can rely on family, but that is also fraught with complications.

Sell or rent
The Smiths are hardly the only couple to suddenly and unexpectedly become long-distance landlords. When faced with both a relocation and a house that won't sell, some owners decide renting the house is the only option left.

Such a decision should not be taken lightly, experts warn.

While the Smiths haven't faced any disastrous scenarios as landlords, others living thousands of miles away aren't so lucky. Mansion-sized headaches can include destructive tenants, missing rent and eviction notices.
“There are two ways you really get to know someone -- when you marry them and when you rent to them.”

Denny Grimes, a Fort Myers, Fla., real estate agent and real estate columnist for the Fort Myers News-Press, says long-distance landlords must remove the rose-colored glasses and prepare for the realities of turning their home into a rental.

"When people make a decision to rent, most make the mistake of not renting property like a business," Grimes says.

He shares a real estate saying that underscores the challenges facing long-distance landlords.

"There are two ways you really get to know someone -- when you marry them and when you rent to them," Grimes says.

Dale Siegel, a real estate attorney and mortgage broker with Circle Mortgage Group in White Plains, N.Y., agrees that homeowners need to tread carefully before jumping into the landlord business.

"If you plan on renting, make sure you can cover your monthly nut," Siegel says, referring to the cost of principle, interest, taxes, insurance and unexpected repairs.

"If not, how much will renting cost you each month?" Siegel asks.

It's not necessarily a bad idea to own rental property that is cash flow negative. Sometimes it's a good idea, depends on the house, the neighborhood, the market, YOUR INCOME, many factors. You MUST know your market or know someone who does, this person should be experienced and successful as a landlord.

Before deciding to rent out the house, an owner should closely look at the competition's rent and decide whether the market rates are high enough for the owner to break even.

As a landlord, it's hard to over-stress the danger involved in overestimating rents. Been there, done that. NEVER take rental rates provided by sellers at face value. Always demand a three year lease history, with special focus on when rents were last raised. Again, if you don't have experience, find a successful landlord.

In areas glutted with new construction or large-scale developments, it can be hard to generate the level of rent necessary to cover expenses.

High vacancy rates also tend to depress rents. Rental vacancy rates are highest in the U.S. South at 13 percent and lowest in the West at 6.9 percent, according to the Department of Commerce's Census Bureau. The Midwest (10.6 percent) and Northeast (7.4 percent) fall between the two.

In the first half of 2008, SLC's vacancies were just over 5% which is considered "fully rented." This is a great market to own rentals, especially as buyers are less able to get financing. Landlording will likely get better, not worse, in these times.

Still, renting out the house at a rate that doesn't quite cover expenses could be preferable to selling the house at a huge discount, Siegel says.

It's way better than overcharging and getting less than desireable tenants. In my experience, the top three rules of landlording are, find the right tenant, find the right tenant, and, well, you get the idea...

"It might be better than taking a big loss," he says.

Expert help
Homeowners who become long-distance landlords overnight need to follow the basic rules of finding good tenants.

Rather than just renting to anyone, Grimes urges landlords to ask prospective tenants to fill out an application with references who can attest to a tenant's history of paying rent on time.

Grimes also recommends running a credit report on a prospective tenant and using a rental contract that spells out the terms of the rental agreement.

These contracts often are available in state-by-state layman's books available at libraries and bookstores. Laws vary by state, so it's important to choose the appropriate contract.

Including damage clauses and documents that spell out late payment fees (or on-time payment incentives) and eviction procedures can assist the absentee homeowner if trouble arises.

"Don't waive those requirements, thinking it's cheaper in the long run to get somebody in there," Grimes says. "If they're not paying their bills other places, they won't be paying you. Go in with your eyes open."

"If you think finding a tenant is hard," Grimes says, "try getting rid of one."

Long-distance landlords also face some unique challenges. For this reason, owners who are relocating and considering renting out their homes may benefit from consulting with specialists before making any final decisions.

For example, a tax adviser can share how deductions may change as a result of moving out of a primary residence and renting it. Property taxes may increase now that the home is being used as a rental instead of serving as the owner's primary residence.

Homeowners who become landlords also should ask lenders about any new rules that may affect them. Siegel says many lenders recently tightened standards for borrowers who intend to buy a second home while renting out their first property.

In such cases, a lender might do an appraisal of the first house to more accurately gauge whether or not the homeowner is likely to get a decent amount of rent for the property, Siegel says.

Or, the lender may require documented proof of a renter and rental income for the first house before providing mortgage insurance on a second home.

Property management: A solution?
Some long-distance landlords worry about how they'll address day-to-day emergencies when they live so far away. Others don't possess the expertise or stomach for doing landlord duties.

In such situations, Grimes suggests hiring a professional property manager as a practical alternative.

"When the toilet breaks, they get the call," he says.

Professional property management companies screen potential renters, make sure rent arrives on time, perform minor repairs and thoroughly check properties for wear and tear. In exchange, they take 5 percent to 10 percent of gross rent received.

While this can cut into the owner's profit -- or increase the owner's debt if the rent isn't high enough to cover the owner's costs -- it can provide peace of mind, Grimes says.

If your income permits, it may be far better to take a near term loss to get a long term gain. People get rich in real estate due to property APPRECIATION...

"For absentee owners, there's a difference between handling a rental and having boots on the ground," Grimes says.

To preserve value and make sure the front lawn stays sales-ready, homeowners often need someone willing to thoroughly examine the home inside and out.

While neighbors, friends and family may be able to do quick spot-checks, they won't be as invested as someone paid to do so.

And some property management companies are headed by real estate agents, so they can do double-duty when it's time to sell.

Of course, not all property management companies provide high-quality services.

Before choosing a property management company, it's important to ask the right questions. Mark Heppard, president of Mutual Property Management in Farmington, Mich., suggests the following questions.

14 questions to ask a property manager

1. Do you work with the owners of single-family homes or condos? Can you provide references?
2. How do you communicate long-distance (e.g., e-mail, phone, letter) and on which topics?
3. Can I see a sample service agreement, outlining the services provided?
4. Do you handle property staging for rental?
5. How will you advertise my property (e.g., newspaper, Internet)?
6. How do you screen tenants and handle viewings?
7. Do you provide a trust account for security deposits?
8. How do you handle routine maintenance issues? Are your contractors licensed?
9. If a property emergency arises, what procedures are in place to respond quickly?
10. Who drafts and executes the lease documents?
11. What's the procedure to deal with late payments and handle the eviction process?
12. Do your services comply with government regulations?
13. How do you report monthly and year-end accounting?
14. If I decide to sell, do you offer additional services?

"Consider the reputation, accreditations, fees and testimonials of current clients," Heppard says. "If financially doable, the right property management company can save you a tremendous amount of effort, money and heartache."

Best of both worlds?
Sharon Simms, a real estate agent in St. Petersburg, Fla., knows that today's economic environment is tough on those who wish to sell.

So, she offers a potential solution to her clients -- she can place properties on the market for sale and for lease.

"In the MLS listings, we state that the property is listed as both and that the owner will do whichever produces a successful contract first," Simms says.

A lease can either state a fixed purchase price or leave the price open to a future agreement between parties, Simms says. However, a fixed purchase price won't entice many buyers until prices start rising again, as today's homes cost less than last year's.

And even the best agent can't change economic realities, especially for owners who are "upside down" -- meaning they owe more on their house than it's actually worth.

"In most cases, especially if the owner bought the house in 2005 or 2006, they will be losing money on either the sale or the rental," Simms says.