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Landlords

Pros and Cons of Assignment of Contract

The most attractive thing about wholesaling as a real estate investment strategy is that you can do it with no money of your own and none of the headaches that generally come with owning a property.

There are two ways to wholesale real estate: double-closing and assignment of contract. We covered the down and dirty of double-closing a few months ago, but now let’s take a look at the pros and cons of wholesaling using the assignment of contract method.

What is Assignment?

An assignment of contract is when a wholesaler enters into a purchase agreement with a seller, giving them the right to sell the contract to a buyer for a fee. The good thing about this is there’s no capital gains tax involved (but you still need to pay about 30% ordinary income tax, depending on your tax bracket, if you’re holding it for less than one year).

Pros

  • Assignment is cheaper than double-closing: Because there’s only one set of closing costs to pay, this is the most cost-effective wholesaling method.
  • It’s a good selling point: You can negotiate a better price from sellers by assuring them that it will be a smooth and easy transaction, you will cover all their closing costs, pay off their lenders, and then deliver their remaining profits to them.
  • It’s simple: You find a buyer, sign an agreement, put the ‘earnest money’ into escrow, then step back and let the deal go through. It’s also easier to explain to titles companies than a double-closing, if the company you’re using isn’t experienced in wholesale deals.
  • Assignment can be done quickly: The process doesn’t require much time from your end – often just the amount of time it takes you to market and find a buyer. Because there’s only a single closing, that part of the process is usually faster than with double-closing, also.
  • It can create opportunities for repeat business: If done right, this can allow you to establish a relationship with the buyer and do repeat business with them over time. The most important thing here is to remain transparent, so that all parties are aware that you’re making money and are bringing value to the deal, whereas this is less clear with a double-close.

Cons

  • Your assignment fee is visible to all: One of the cons about this arrangement is that your fee will appear on the settlement statement. As we said, this kind of transparency can help you form lasting business relationships with your buyers, but it also can make some buyers and sellers wary. If you’re making a hefty sum, the seller might be taken aback or begin to rethink whether they’re getting a good deal or being ripped off by you. By the same token, buyers might think they could get a better price elsewhere, so it’s possible either party could try to back out of the deal once they realize you’re making money off of the transaction.
  • State legalities could be an issue: Realtors lobby hard to keep laws tight against wholesalers so they can avoid losing business in their respective states, so you need to remain vigilant and politically active to safeguard your rights and your business.
  • It can limit your options: You need to verify with your buyer if they intend to pay in cash or use bank financing. Keep in mind that some properties, like short sales and bank-owned homes, can have no-assignment clauses in place, which means you can’t use this method to wholesale these properties.

Assignment of contract is a good way to approach wholesaling if you’re looking for quick, relatively easy transactions and the opportunity to develop long-term relationships in the industry. However, this method might not be the best for those who want to make large profits off of each deal they do, as it can put off buyers and sellers alike. A good rule of thumb is to use assignment only if you’re making less than $10k off a deal, and to always be upfront with all parties about your fee and the benefits you bring to the table in exchange for this fee.

Ultimately, the efficiency of assigning a contract means that you can complete more transactions in a shorter period of time, which can make up for the fact that your fee will be smaller than in a double-close scenario. If you’re uncomfortable with the idea of being transparent about how much you’re making, or if you want to get bigger returns from each deal, then opting for a double-close is probably the better choice.

Image Courtesy of Cytonn Photography

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Landlords

Overview of the Student Rental Market in Metro Detroit

Student tenants can rent anywhere. They don’t always choose to live in student housing, or even in the immediate vicinity of their school, but often rent or split a regular unit instead. That means, no matter where you are in Metro Detroit, you can end up with student applicants for your properties.

You can run into them in three situations: If you’re in or near college towns, near a university in a bigger city, or even randomly, as long as you have student-appealing amenities nearby. And though Metro Detroit isn’t a popular university area, here are some neighborhoods where you can expect student applicants:

  1. College Towns

Landlords in college towns deal with students all the time. If you own rentals near one of the college towns in Livonia or Dearborn, there’s a high chance you’ve already run into them. A lot of these areas have vibrant downtowns, with many gyms, restaurants, and other amenities catering to the younger crowd.

  1. University Areas

Besides college towns, there are also spots near universities like the University of Detroit Mercy and Wayne State University (both in Detroit City) and Oakland University in Rochester. These have fewer student tenants looking to rent in the immediate area, as a lot of them commute from home, but you’ll still run into student applicants here fairly regularly. 

  1. Randomly!

There’s a community college in Royal Oak, but that’s not the reason students rent there. They rent there for its trendiness and great nightlife. Students can show up in any area like this, as long as it’s young, vibrant, and appealing to them. Some students would much rather live in a great neighborhood and just commute to their university, so regardless of your proximity to a school, you can still run into them occasionally.  

One of the most significant differences between student vs. non-student tenants is that they usually lack established income or credit history. But that doesn’t mean you should skip considering them altogether–you just have to know what to look out for.

How to Screen for Student Tenants

They should have a reliable source of funds, whether that be student loans or a supportive parent. Just make sure to also screen any cosigner that will be paying the rent. 

Once their financials are set, use your better judgment (and their track record, if any) to see if they’ll make good tenants or not. Obviously, the number one concern with students is that they’ll throw crazy parties and treat your property like a messy dorm. However, you can’t just discriminate against students on this basis alone – you’ll need clear criteria for selecting tenants, and be able to show that a particular applicant didn’t meet those criteria. 

Be careful of how you phrase things, especially when you don’t accept students and cosigners flat out as a blanket statement. You can have a policy that dictates no acceptance of cosigners, but in this case, you can never accept cosigners for anyone else without risking being accused of discrimination.

Student renters come in all forms, and they can crop up anywhere. You may not market your property to students, but if you’re near a trendy area that’s desirable amongst young people, you’ll likely get at least a few student applicants anyway. Your property doesn’t even need to be located close to one of Metro Detroit’s colleges or universities. 

So be prepared to handle student applicants when they appear: conduct proper screening and don’t be discriminatory when considering them–as long as the financials make sense and they have a co-signer that can guarantee you their rent!

Have you had student tenants in Metro Detroit? What was your experience with them?

Image Courtesy of Andrew Neel

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Flipping Landlords

How to Target Metro Detroit Landlords with your Flip (Part 2)

Last week, we looked at how to plan your flip to target an owner-occupier buyer in Metro Detroit. This week, we’ll take it a step further and consider how to market flipped properties to another kind of buyer, and one which most flippers wouldn’t necessarily consider right off the bat: landlords.

Landlords are probably not going to pay as much as an owner-occupier would, but they could be a consistent buyer for your properties, so building relationships with local buy and hold investors could be a great back-up strategy for marketing your flips.

Especially in the current economic environment, having a consistent buyer for multiple properties could be a serious boon for flippers. More people are choosing to rent long-term rather than buy, and this trend is likely going to continue as we slowly recover from the financial strain caused by coronavirus. But, while first-time buyers could be shying away from buying now, investors are always on the look out for a good deal.

So, here are some points to consider when targeting Metro Detroit landlords as buyers:

  • Landlords are Investors, Just Like You: This means they won’t be sold purely on light, airy spaces and nice kitchen counters – they want to see the hard numbers when making their decision. Highlight the financial benefits of the property when marketing to them, like whether the area has low vacancy rates, the rent-to-price ratio, and CapEx projections for any maintenance that will be required in the coming years.
  • Lower Margins: Buy and hold investors will be looking for a deal, and in Metro Detroit they’re unlikely to be looking for a single family home that costs several hundred thousand dollars, meaning your margins on each sale will be lower. However, you may be able to compensate for this in the volume of sales you do, since a landlord could become a guaranteed buyer for multiple flips. If you build relationships with local landlords, you can also do off-market deals with them, saving both of you time and money spent on marketing and agents’ commissions.
  • Out-of-State Buyers: When you consider the fact that the rental market in Metro Detroit attracts tons of investors from out of state – and even overseas – to the area in search of high rent-to-price ratios, you can see how marketing to this group can significantly widen your pool of buyers. Most of these out-of-area investors look for properties that are fullyrehabbed and ready to rent out, meaning a fresh flip could be the perfect choice for them.

Many of them also look for ‘turnkey’ rental opportunities, meaning properties which have a tenant and property management company in place, so you can find a tenant and then sell your flip as an active rental investment. You can also partner with a local PMC to show landlords that your property comes with the whole package, turning it into a mostly hands-off investment for them.

  • Invest in Different Markets: Selling to landlords can also widen the pool of areas you can invest in, since a strong rental neighborhood and a strong seller’s market are two different things. This gives you the chance to flip properties in lower-price areas, with less upfront capital. You also won’t need to shell out as much for high-end fixtures and fittings, since these won’t matter to a landlord like they would to an owner-occupier.

Landlords may not be your primary market, but they can account for a healthy secondary market when it comes to finding buyers for your flips. Keep these points in mind when targeting local buy and hold investors with your flip, and you could end up with a lifetime customer for your business.

Image Courtesy of Lisa Fotios

Categories
Landlords

How to Target Metro Detroit Owner-Occupiers with your Flip (Part 1)

Home values in Metro Detroit were on the rise at the beginning of 2020, and are expected to continue to increase in the aftermath of coronavirus, making it an attractive market for flippers looking to add value to distressed properties. In this 2-part series, we’re looking at how flippers in the Metro Detroit area can tailor their properties to appeal to different types of local buyers in today’s economy.

The ideal buyer for a flipper is an owner-occupier, since they buy emotionally and thus will usually pay the most for your property. In a perfect world, you’ll even have multiple owner-occupiers vying for your house, leading to a bidding war that drives up the price. The key to generating this kind of demand for your property is to make sure your flip is targeted to appeal to buyers in your area.

So what do owner-occupiers in Metro Detroit look for when purchasing a house?

  1. Location, Location, Location: If you’re just getting started in flipping properties in this area, the most important thing to do is pinpoint the neighborhoods with the strongest demand from buyers. Completing an attractive flip will mean nothing, if it’s not in an area that owner-occupiers actually want to purchase in. In Metro Detroit, the areas with the strongest appeal are cities with vibrant downtown areas, like Ferndale, Royal Oak, Rochester, Plymouth, etc. The cities near these areas are also good places to focus your search. Do as much due-diligence as possible to familiarize yourself with an area before deciding to invest there, since even a few streets over in one direction can make a big difference in terms of desirability.
  2. Floorplans We’ve seen several flippers lose their shirt on a flip they did a great job of renovating, but the property had floorplan issues they didn’t or couldn’t address. Low ceilings in a basement or the upstairs of a bungalow, pass-thru bedrooms, nowhere to dine, inaccessible garages and more. Stay away from these types of projects unless you are really good at calculating an ARV that takes them into account, or your budget includes addressing them.
  3. Amenities: More than ever, homebuyers expect everything to not only be done and done well, but they want all the amenities included. Study what the market wants and include as many as you can in your budget.
  4. Security: People want to feel safe in their homes, but bars on the windows aren’t the most aesthetically pleasing design feature. Consider adding smart security features, like digital keypads and mobile-controlled alarm systems, to give your property a leg up over the competition.
  5. Social Distancing: In the era of the new normal, homeowners are starting to look at properties in a different light. Houses which have large outside spaces, home entertainment features, or are located in less population-dense areas might have a higher appeal than ever before. The same goes for layouts which are conducive to a whole family living and working from home, so think about including a dedicated office space and segmented living areas.

Plan your flip to include these features, and you’ll be in the best position possible to produce a quick sale, so you can get started on your next investment property ASAP!

Keep an eye out for Part 2 of this series, where we’ll be looking at how you can target a different kind of buyer with your Metro Detroit flip: buy and hold investors.

Image Courtesy of Lisa Fotios

Categories
Landlords

What Does the Future Hold for Oakland’s Rental Market

As the effects of COVID linger on, what everyone hoped would be a quick crisis is turning into a more protracted affair. How is this affecting Oakland County’s rental market?

Home to both economic and industrial growth as well as substantial employment opportunities, Metro Detroit has been one of the country’s more attractive markets where buyers have been able to take advantage of strong rental income opportunities pre-pandemic.

Now, in Michigan alone, over a million workers have filed for unemployment; in areas like Pontiac, the percentage of those seeking temporary financial relief might be even higher than elsewhere in the country. So what can we expect to see in the local rental market over the next few months, as Oaklanders start to bounce back from the shutdown?

The Government’s Response:

Last month, Governor Whitmer announced the Eviction Diversion Program to assist landlords who are struggling to collect rent payments from tenants affected by the pandemic. Under the said program, landlords can get back up to 90% of missed rents.

Separately, Oakland County’s local government has also begun offering a one-time relief from the federal CARES act through the U.S. Department of Housing and Urban Development (HUD), which will allow “residents to pay up to three months of past-due rent, mortgage and utility payments as a result of a temporary job loss, reduction in work hours or other income hardship caused by the COVID-19 pandemic.”

However, as the eviction moratorium is set to be lifted this week, to date, the Detroit Free Press estimates a backlog of about 75,000 evictions, which could turn into an even bigger homelessness crisis. Despite the relief options offered to landlords and renters alike, financial instability will cause a slow burn moving forward.

Near-Future Implications

Rent control and financial instability may prompt landlords and owners to liquidate their assets. On the other hand, financially stable investors may be at a better advantage to close in on new investments, with property prices and mortgage rates at an all-time low. Both of these kinds of scenarios are expected in the short-term, with people becoming more conscious of spending habits and liquidity.

Yet Oakland County comprises a wide range of rental market types, each of which will feel the impact of the shutdown differently.

For example, in high-price cities – like Berkeley, Birmingham, Huntington Woods, Pleasant Ridge, and Bloomfield Hills – prices and demand have remained high throughout the lockdown, and are unlikely to be significantly affected in the future.

In super competitive rental markets, like Ferndale and Royal Oak, the story is the same: tenants are eager to get their hands on properties in these trendy areas, and so are rental investors. This makes it tough to find a good deal on an investment property in these cities but there’s a chance that coronavirus will influence desperate sellers to let their homes go at a bargain price, so it could be a good time to try to enter into this market.

In neighborhoods that are still transitioning from lower to higher demographics, like Hazel Park and Oak Park, the opportunity for picking up a rental property at a depressed price is even greater, but so too are the potential risks. The lower demographic areas in these cities will have been harder hit by the shutdown, and may take longer to recover, meaning it could be a few years before rental demand reaches pre-pandemic levels once more.

What about in cities that were already struggling pre-recession? In Pontiac, for example, economic recovery from the loss of the auto suppliers industry has been a slow process, and one which is likely to be set back even further by the COVID-19 shutdown. This means that employment could be even harder to come by, putting tenants in a difficult situation when it comes to affording their rent.

There are a lot of vacant properties in the southern parts of the city already, and if more businesses are forced to close, it could also exacerbate this problem. In addition to impacting home values, this would also create an even more pronounced unemployment crisis, as more local jobs are lost.

For the rental market, this could mean lower purchase prices – giving investors the opportunity to snag a deal during the current downtrend – but also potentially lower rental incomes. For properties which are already tenanted, it may take longer in these kinds of areas for tenants and landlords to recover, and for cash flow to return to pre-pandemic levels.

Although the market is slow-moving now, Metro Detroit remains to be one of the most highly competitive rental markets with tremendous opportunities for investors, and we’re expecting the market to pick up again in the long-run. Properties are still being rented all throughout Oakland County, even in Pontiac and similar-demographic areas.

For now, only time will tell exactly how long it will take for the rental market to bounce back completely, but landlords and investors would be wise to remain vigilant to spot any opportunities in the market.

Image Courtesy of Daniel Frank

Categories
Landlords

Should You Allow Tenants with Pets?

Pet-owners are everywhere in the U.S., where roughly 68% of households have a cat or a dog. Yet a recent survey by Avail showed that only 55% of landlords allow pets in their properties. 

Even if you’re a pet-lover yourself, you may be hesitant to allow pets into your rental properties. This is understandable – but are there situations in which it’s okay to allow tenants with pets?

First, let’s consider the pros and cons of allowing pets in your rental:

Cons:

  • Hard-to-eliminate pet odors
  • Noise from barking, etc.
  • Pet-related damage to your property
  • Possible physical injury or accidents involving neighbors, guests or yourself 
  • Remnants of allergens (saliva and fur) that get in the air ducts, carpet, etc.
  • Fleas and other pests

Pros:

  • Increase in size of tenant base
  • Higher rental rates or fees
  • Possibility of tenants signing longer leases due to limited pet-friendly rental options
  • If you allow pets, there are fewer chances of tenants smuggling them without permission 

At the end of the day, it’s up to you whether you’re willing to accept pets in your rentals. But if you do, here are some guidelines for safeguarding your properties:

Decide What You’ll Allow

Pets come in all shapes and sizes: dogs, cats, birds, fish, rabbits, gerbils, small-scale reptiles, etc., and some have a much higher potential for causing damage than others. So decide which types of animals you’re willing to allow, as well as the number of each and the total number of pets permitted. Will you allow more than one dog? How many cats? Would ten guinea pigs be too much? Put all of this in your lease agreement, as well as: 

  • A statement that allows you to forcibly remove any pet that becomes aggressive or dangerous. 
  • A clause that gives you the power to change your rules on pets, if it’s done with a proper notice period (in case you decide not to allow pets in your properties anymore).
  • The consequences for violation of these rules, like additional fees or eviction.
  • Lastly, you should have a “pet addendum” attached to the lease. This includes specific details about the pet that you are allowing in the rental, and states that any other animal that isn’t registered in the lease is considered an illegal occupant and a breach of contract. If they get an additional dog or replace a previous pet that passed away, they need to have their new pet cleared and registered again. 

And make sure it’s clear what you expect from the pet owner in terms of responsibility for taking care of their animal. So also consider adding these provisions to the lease or pet addendum:

  • They must keep up with the required shots, licenses, and tags for the pet.
  • They must register any pet with you, the landlord, prior to taking them in.
  • They must resolve and pay for any harm done to anybody or anything by the pet.
  • They must take care for and clean up after the pet on a daily basis.
  • When outside, they must keep the pets on a leash or in a cage (depending on the animal).
  • They must acquire insurance with liability coverage for their animal.

Check Your Insurance and Liability 

Check the coverage of your insurance policy before considering tenants with pets. What is the amount of liability coverage in the policy? Are there any limitations, exclusions, or requirements for this coverage? Will they use the list of “dangerous breeds” as a basis for breeds that aren’t included in the insurance?

Charge Additional Fees

Since there is more risk involved when renting to pet owners, you can either add a pet fee on top of the monthly rent, or simply increase the monthly rental fee. Some landlords charge anywhere from $25-$100 per month, per pet, on top of the rent, and they also sometimes charge a pet processing fee (up to $500) when screening applicants with furry friends. Just be careful not to charge anything for emotional support animals. 

Some states also allow you to collect a separate security deposit, called a “pet deposit.” In some states, there is the option to make the pet deposit non-refundable. However, there are states, like Michigan, where the maximum security deposit is only two months’ rent. You need to know the maximum allowable amount of your state and evaluate if this will be enough to cover for pet-related damages which could occur in your property. 

Decide Case-by-Case

Just like any other tenant, make sure you screen the tenant’s background thoroughly. Apart from their financial and credit history, also check their references and ask about their experience with how the tenant managed their pet. Not all pet owners are equally well-trained and equipped to look after their pets!

When interviewing them, make sure you ask: 

  • Does the pet have the proper vaccinations and licenses? Is it neutered or spayed?
  • What breed and how old is the pet?
  • Has the pet ever caused damage to items or bitten anyone?
  • Who will be responsible for caring for the pet?
  • How do they plan to take care of the pet on a daily basis?
  • What is their occupation? (A doctor would have to leave their pets unattended for longer hours than a stay-at-home mom would)
  • Who will care for the pet when they’re not home?

You should also request a recent photo of the animal to keep for your records, and can even ask to meet the pet in person prior to approving their application. 

So, now that the risks, benefits, and processes for allowing tenants with pets have been laid out, it’s your time to make the decision. Will you open your doors to the pet-loving community? 

As a final thought, be mindful that a Fair Housing Law protects disabled people who need an animal for their emotional wellbeing and/or physical safety. The term “disabled” now includes not only the blind or paralyzed, but also those with clinical depression and post-traumatic stress. You can request a note from their physician to verify their condition and need for animal assistance to keep things documented. 

Do you allow pets in your rentals? Why or why not? 

Image Courtesy of Dominika Roseclay

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