I just read this interesting article by Chris Paulis that argues the importance of employing a professional photographer when selling your home.
Chris points out that it’s a real disservice when your home isn’t accurately represented to prospective buyers. He contrasts the photographs for a $1.7 million listing with a $600,000 listing (both from 2011). The $1.7 million home is probably a grand home, but you can’t tell from the pictures.
Meanwhile, the $600,000 home looks warm and interesting. If the prices on these two homes had been the same, a buyer would be far more likely to visit the one with better images. In this scenario, it’s obvious that the professional photographs make a difference.
Below you can see the difference between a point-and-shoot set to auto and a professional photograph using the appropriate settings, camera lens, and lighting.
Another interesting point in the article revolves around who hires the photographer. Many Realtors use a point-and-shoot camera, but have no understanding of aperture, shutter speed, or white balance. Chris says the result is often over- or under-exposed photos that don’t encourage someone to visit the property.
Chris argues that a Realtor is earning 3% or more of the selling price and should invest the $500 – $700 for better pictures. He goes so far as to say that homeowners should demand the agent hire a professional. Of course, Chris is a pro photographer whose business includes taking pro photos for real estate listings, so he’s got skin in the game.
What do you think? Would you demand a professional or look for a “middle of the road” solution? Would you pay the $500 for better photos yourself?
What’s a fair commission for selling your home? $5,000? $15,000? $50,000? That last amount is what you’ll pay on the sale of a typical $1,000,000 property in America today. For an average $250,000 house, you’ll end up spending about $12,500 in commission.
Is it fair? If you ask the typical real estate agent what a fair commission is, the most common answer you’ll receive is 5-7% of the sales price. And that seems logical right? Because the “percent of sale” approach seems to align the agent’s incentives with your own. If you get a higher price for your house, the agent gets a bigger payout.
But what if your house is worth $250,000, and your agent sells your home for $240,000? That’s a difference of negative $10,000 to you. Guess how much it impacts the agent’s real bottom line?
To understand why, first remember that the selling agent doesn’t receive the whole commission on a sale. Typically, 50% of the commission is offered to the buyer’s agent as incentive to bring the buyer to see the house, and another 40% of what’s left goes to the broker for whom the agent works. Of that $12,500 typical commission, the selling agent ends up with about $3,750 (or 1.5% of the home’s sales price). Second, remember that because the agent’s fee is a flat percent of the whole value of the home, the agent receives the bulk of the commission even at terrible sales prices.
In other words, for doing a sub-par job of selling your home, the agent still reaps $3,600 in this scenario.
“But my agent is different! She’d never cheat us”, you say. And maybe you’re right. Maybe your agent is different. But what if there’s an offer on the table for $240,000. The offer arrived just 6 days after listing and it has excellent terms. Your agent sees that $3600 commission in sight. Might she not encourage you to take the lower offer? It would be easy to justify. The housing market is soft. And this offer has really good terms.
She probably doesn’t feel like she’s cheating you.
It gets worse.
What if you have a $220,000 mortgage on the property? The difference between a $250,000 sales price and a $240,000 sales price ends up being more than half of the profit on your home after you deduct selling expenses. Instead of walking away with $17,500, your take away is only $8,000. (I’m excluding transfer taxes and other fees to make the comparison simple).
I’m not the first one to point out this unfortunate reality. Freakonomics (the book) explores this situation in depth, comparing sales of agents’ own homes to those they represent. And not surprisingly, they found that agents selling their own homes left them on the market longer, and sold for a higher average price. A great case study from Jonathan Meer confirms these findings. (It was featured on the Freakonomics blog.)
Unfortunately, Freakonomics stops short of providing a solution. At least I think they do.
So here it is. Here’s the fix.
The Big Fix
We know that real estate commissions should be heavily weighted on achieving a fair sales price. To do this, we need to offer the selling agent an escalating incentive fee for selling the house at a higher value. We also need to keep the buyer’s agent’s incentive flat (otherwise, the buyer’s agent won’t do a good job of representing the buyer).*
Let’s take the $250,000 example from above. In our new scenario, we’ll set aside 2.5% of the expected sales price for the buyer’s agent. For the seller’s agent, we’ll use the following approach.
If the agent sells the property for less than $242,000, she receives no commission at all. At $242,000, she receives just 0.5% commission. For every $2,000 in increased price, she receives an extra 0.5%, through a sales price of $250,000, where the commission will total 2.5%. For every dollar earned beyond that, the agent and the homeowner split the amount above $250,000, 40/60, respectively. Take a look at this table that shows how the value work out.
Sales Price | Commission
- $240,000 | $0
- $242,000 | $1,210
- $244,000 | $2,440
- $246,000 | $3,690
- $248,000 | $4,960
- $250,000 | $6,250
- $260,000 | $10,250
Using this approach, the selling agent is incentivized with $1,300 to negotiate the buyer up from $246,000 to $248,000. That’s real incentive!
If the agent does an outstanding job and sells the property for $260,000, she can earn a whopping $10,250 (equivalent to 40% of the value in excess of $250,000).
The key to such a scenario is knowing the market value of the home. For that, the answer is simple: prospective sellers should get a pre-sales appraisal. This appraisal, ordered and paid-for by the seller, serves as the basis for setting the sales price.
That Is…Assuming You Still Want an Agent
This approach assumes you (as a seller) still want an agent to represent you. In Meer’s paper we linked above, there is significant evidence that agents don’t offer much value at all beyond listing your house on a multiple list service (MLS).
In fact, based on our own experience, we believe that the two most critical aspects of selling a property are:
- Pricing it right.
- Putting excellent pictures and a great description on the MLS.
Is it worth paying agents and brokers 5% for that? Perhaps it is for some. But our guess is that FSBO will become an increasingly popular sales tool over the next decade as the internet and technology erodes the advantages agents have traditionally enjoyed.
What do you think? Can a more fair system work?
*To properly incentivize the buyer’s agent, we’d need a more complex discussion. But I think that this, too, is possible, based on the outcome of a post-offer appraisal.
(photo credit: mbowlersr)
Selling your home is emotional business. It’s easy to measure your self worth by whether or not you get an offer, and if you do, by the size of that offer. It’s also easy to get tied up in the drama of it all–to stop thinking rationally about your home’s value, and to start focusing instead on emotionally charged aspects of the sale.
A pre-sales appraisal (PSA) can help you cut through the emotion, price the home right, and sell it fast. Based on our own selling experiences, we’re believers in the PSA, especially in a difficult housing market. A PSA will run you between $300-500 depending on the region, but you may be able to get the selling agent to cover the cost. We talk about this towards the end of the article.
To help us explain the reasons for a PSA, here’s a story of a typical home selling experience.
Our tenants recently informed us that they don’t plan to renew with us for another year, and we’re planning to sell the property. When we first started renting the place, I was in the midst of a law course as part of my MBA program. I developed the lease agreement that follows on my own based on information from that class, conversations with other landlords, and some general themes from other leases I had seen.
Please note that I am not an attorney. If you use this agreement in whole/part, you do so at your own risk. Realize that states, counties, and communities have differing laws governing rental real estate. These laws frequently include limitations on:
The story of how we purchased our house is a good one–not just because everything fell neatly into place for us, but also because our experience with the Realtor we picked was pretty exceptional. A few weeks ago I realized that in the three years we’ve been operating this blog, we’ve not once talked about buying this house, the “fixer-upper of our dreams”. We see our Realtor on a regular basis at our church, and after we talked a few weeks back, I promised him a personal review along with a story of how he helped us get this place.
Before we lived in this house, we actually lived in a smaller single family home in the same neighborhood here in Baltimore County, MD — just about 1.5 miles away. Just married and still without kids, Kim and I used to walk the neighborhood at night–sometimes as much as two miles away from our house–talking and catching up on the day. We knew that at some point we wanted to buy something a little bigger that we could work on together (we were already home improvement junkies), but in the Fall of 2005, housing prices were hitting their peak and moving up was a pretty expensive proposition.
That didn’t stop us from looking, though. We looked at one house that was awesome, just like the one we live in now size-wise, but with 2 acres of land and an in-ground pool. At $575,000 there was just no way to make that work in our budget. We had resigned ourselves to stay in our split level single family for several years. Until one day we were walking through a section of the neighborhood that we hadn’t seen before, a section that had just the type of house we wanted. These houses were on smaller 1/3 acre plots and generally didn’t have pools, but the wooded surroundings were beautiful, and with no fences between the properties, they felt like they had much more land than they actually did.
Unfortunately, none of these houses were for sale.
Bob Riley, Coldwell Banker
I got in touch with a friend of ours, Bob Riley with Coldwell Banker, who worked as a Realtor in the Howard County/Baltimore County area of Maryland. I asked him how much a property like the ones in the nicer section would go for… His estimate: around $400,000. That was at the high end of our price range, but still do-able without becoming house poor. Still, no properties were for sale. And we really liked only about 15 of the houses in this section of the 45 that were there. These 15 homes were full size colonial models, and were the only ones that would entice us to make a quick move.
Bob suggested that we let him write letters to these 15 homeowners to see if any of them were interested in moving. We thought this was a long shot to say the least, but figured it couldn’t hurt. Bob was anxious to get the business.
Two homeowners got in touch with Bob. One of them wanted an outrageously high price (sort of a “sure, we’ll sell for 50,000 more than this house is worth), but the others said that they had been considering retiring to Georgia and wondered if Bob was serious when he wrote about having two motivated homebuyers who wanted to raise a family in that house. Of course, he was serious, and we were excited!
The owners said they were willing to do a FSBO for 400,000 based on other home sales in the area. They were actually relieved, because the house wasn’t really in “for sale” shape, but we didn’t care, because we were in the market for something we could fix up and make our own!
Long story short: we sat across from the owners and wrote a contract for the house together, face-to-face. Bob brokered the deal and the house appraised for $401,000. We found just $1,800 in minor structural repairs during an inspection, and closed about 30 days later. The owners moved to a temporary house in Georgia while they built the retirement home they’ve always wanted, and we moved in just in time for Thanksgiving.
All in all, the experience was absolutely fantastic. We felt very blessed to have found and moved into a house that never even listed on MLS. The owners felt like they got a great deal… a fair price for a house and they didn’t have to do any work to get it ready for a sale.
If you’re thinking about moving in the Baltimore County / Howard County area of Maryland, we highly recommend Bob Riley. He was an excellent real estate agent. Here’s Bob’s contact information:
- Bob Riley, Coldwell Banker | Phone: (443) 676-6620 | Online Website
Tell Bob that you heard about him from Fred and Kim at One Project Closer!
Kim and I have been members of our community pool since we adopted our kids 3 years ago. Like community pools across America, it’s a great place to meet other folks in the neighborhood, cheer for the swim team, or cool off after mowing the lawn on a hot Saturday morning. We love it, and our kids love it too.
Like many community pools, over the past 10 years our membership has been steadily declining, from a high of around 200 families, to only about 90 last year. The problem was accelerated by the great recession, with most of the departures occurring more recently. Of course, pools are luxuries, and when purse strings get tight, pool dues are a relatively easy thing to cut.
Unfortunately for the remaining pool members, much of the baseline cost for running a pool is fixed. Sure, you can reduce operating hours and maybe employ one less lifeguard on duty; but things like maintenance, chemicals, administrative staff, taxes, insurance, and the like don’t vary much with the number of members. So, when membership drops, these fixed costs are spread across fewer people, and the price tag has to go up.
The Death Spiral of a Community Pool
Our community pool was caught in the death spiral. As the recession heated up, down pressure on wages in our middle-class community became a reality. For some families, it was true loss in wages. For others, it was probably the reverse wealth effect–families felt it necessary to save more and spend less because their perceived wealth had dropped. Either way, membership declined…fast.
And the pool board responded as many non-profit boards do, by raising rates on the remaining members to cover the fixed costs. The pool went from just under $400 / year in 2007 to a high of $950 / year in 2009. While that seems almost unbelievable, it’s worth noting that in 2009, $400 of the $950 price was a “surprise” surcharge levied in August to keep the pool open because membership had not increased to expected levels throughout the summer. We paid the surcharge in installments to keep our bond.
In was clear to us and the majority of the remaining members that current rates were unsustainable. But what could we do? We couldn’t afford to charge less, and no one could afford to charge more. That is the definition of a terrible business situation, and it’s the last stages of the death spiral.
Challenging the Death Spiral: How to Overcome Collapse
Perhaps you’re reading this and you’ve seen this same set of circumstances in your own community pool. How do you get out of the death spiral? Hopefully our story will help you. I’m confident it can be done, but it requires a lot of effort from everyone, and some very counter-intuitive thought. Here’s the strategy our pool is employing (more or less)…
1) Don’t focus only on the price side of the equation. Quantity of members is just as important!
This seems dead obvious, right? If you have more members, you can charge less. Notice how the death spiral assumes that membership levels are out of the pool board’s control. In fact, it’s more insidious than that. The death spiral assumes that dropping the price will result in lower net revenues even further. This isn’t necessarily true. In fact, it could be just the opposite. Take this simple example:
Let’s assume that at $500 / year, the pool can attract 50 members, at $350 / year, the pool can attract 75 members, and at $250 / year, the pool can attract 150 members. Quick math will tell you to charge $250 because it will provide the highest total revenue (assuming that your variable costs don’t increase substantially with more members, which they probably would not). The important thing to remember is that demand is NOT linear with cost. This is a maximization function – and the key is the find the maximum revenue.
Seems simple on paper, right? But the reality is that dropping the price in the face of declining enrollment is extremely hard to do. Why? There are two reasons: (1) Net revenues are already dropping and our models–and more importantly mindset–are based on a stagnant or declining membership; and, (2) Because we do not know how much a price drop will increase membership. It seems like a gamble in an already difficult time, whereas raising the price on existing members seems to return more concrete results.
2) Take Big Risks on Price
There is no crystal ball that will tell you how much a price drop may effect your membership levels. You must take this risk and test the results. It’s a hard decision to make, but here’s some guiding principals:
- Realize that price sensitivity for luxury items is significant. This means that a reduction in cost is likely to have a more profound effect on purchasing patterns than for other goods or services.
- Research other local pools and undercut them. Sure, it sounds vicious, but it works. In all likelihood, that pool’s members aren’t going to leave for a lesser cost, but new prospects are more likely to choose your pool over theirs.
- Make the drop significant (30% or more). You’ve probably had many people leave the pool already because the price just kept climbing. Significantly reducing the price sends a new message to those members who dropped out: “We heard you. We want you back. Give us another chance.” If folks knew that the price was $500, they may have seen pool membership as out of reach – a luxury they couldn’t or didn’t want to afford. If you reduce the price to $350, there’s a very positive psychological effect on the buyer – they can now afford something that was previously out of reach.
3) ADVERTISE. ADVERTISE. ADVERTISE.
Armed with your price reduction in hand, it’s time to get the word out. Enlist your membership to help you. Be bold. Here’s some ideas:
How to Advertise a Community Pool
1) Cast a New Vision. Just last year we were “the pool that keeps raising rates.” How do people know if they join the pool this year the rates aren’t going to skyrocket next year? We need a new message. The new message is, “we’ve learned from our mistakes… our goal is to keep rates low and to get membership up. That’s our overriding goal and we need your help and membership to achieve it.” Now, that’s not what you print on the advertisements, but its what your members tell people in conversation.
2) Craigslist. Believe it or not, a lot of people look for community pools on Craigslist. You should repost your pool’s ad every 3 days, especially from February through May. Include pictures. Link to the web site. Brag about your rates and features.
3) Signs. That’s right. You know all those signs we all hate to see? They work. Put up signs on the premises that are easy to see from the roads. Make the new, lower price visible to everyone who drives by. Ask permission to put up signs in nearby community associations.
4) Door Hangers. Sometime in late April, get your membership together to deliver door hangers to surrounding communities. You can buy door hangers for about $0.25 / a piece in bulk. Make your message clear and succinct. Brag about your pool’s benefits and your lower price.
5) Word of Mouth. Offer your members discounts for referring new members. Educate your members on the changes your making (make sure you give them that new vision you created in #1). Give them talking points for when they’re meeting with their neighbors. Get the buzz going!
6) Newspapers. Run a few targeted ads when the weather gets hot and people are thinking about pool memberships. Brag about your lower price and your pool’s features.
7) Host “free” Events in Early Summer. Right when the pool opens, hold a “family free” day to get folks to come to the pool. Tell your membership to make sure they come so that the pool has a big community to be a part of.
8) Give members free passes. Give each of your members free passes so they can bring friends to the pool. Give them as many free passes as they can use, but only let them bring the same people twice. Make sure when people come to the pool for free that they get handouts with information on joining the pool.
9) Advertise in local HOAs, schools, post offices, and whereever will let you! Get the word out everywhere.
Will All This Keep the Pool from Closing?
That’s a tough question to answer.
Getting out of the death spiral isn’t a guarantee. The reality is that even the best leadership can’t always recover a lost cause. But the alternative–to keep raising rates on existing membership and to hope against hope for new members–is a surefire way to drive the pool into the ground. It won’t work, and the pool will be up for sale in no time.
Using this strategy coupled with a low level of temporary borrowing, we’ve gotten enough members signed up to open the pool for the full summer. We still need to get more members in coming years, but our hope is that by committing to low rates and focusing on increasing membership, we will be successful!
P.S. On a totally unrelated note: one of our new community blogs, A Concord Carpenter Comments is giving away a Bosch Cordless Pocket Driver. Visit that link to enter the contest. If you’re a blogger, you can get 10 entries by publishing the giveaway on your site (we just did!)
I recently finished reading Freakonomics, an excellent book by economist Steven Levitt and journalist Stephen Dubner that explores how incentives affect people in ways that we wouldn’t always intuit. They apply the disciplines of economics and statistics to other-than-financial scenarios, like exploring the unusually high incidence of cheating in Sumo Wrestling (a sport that boasts honor as a central theme).
One of my favorite parts of the book deals with whether real estate agents garner higher sale prices for their clients than if the client were to simply sell the house on their own. In order to tease out the answer, Levitt and Dubner look at a variety of sales data in a particular locale and examine the average sales price differences between agents’ selling their own homes vs. other people’s homes. They also looked at how long a property was on the market in each situation.
What did they find?
As you might expect, they found that, on average, a real estate agent’s home sold for more money, and stayed on the market longer than a typical property. They also found that, on average, homes sold with the assistance of an agent didn’t sell for any higher than those homeowners who sold on their own.
What Levitt and Dubner found didn’t really surprise me… it all comes down to incentives.
Realtors Are Motivated to Sell Properties Fast, Not at a High Price
Most real estate agents in today’s market charge 5-6% of the sales price of the house for their services. Of that amount, half is usually provided as an incentive for the buyer’s agent, making the selling agent’s take only about 3%. But, that 3% is usually split 50/50 with the agent’s company, which means that the agent is likely to get about 1.5% of the sales price.
Let’s say you have a house that’s worth $250,000. With some effort and marketing, a real estate agent can get you full price. But, with less effort and marketing, they can get $240,000. To you, the difference between $250,000 and $240,000 is a whopping $10,000 – more than 2 months pay for most Americans.
But what’s the difference in the agent’s take? 1.5% of $250,000 is $3,750, while 1.5% of $240,000 is $3600, a difference of only $150!
If selling the property for $250,000 takes 20 more hours of work (e.g., additional showings, open houses, etc.), you can see that it just doesn’t make sense. The Realtor would only be working for about $7.00 / hour for those hours.
A Better Way to Pay A Real Estate Agent
So if straight commission isn’t a good way to pay, what’s the better alternative?
Levitt and Dubner don’t get into this… but I think the best way is to set a basic fee for listing the house, and then pay a large incentive above a certain sales price.
For instance, you might pay $1000 for standard listing services, and then 50% of the price above some base price. In our example, perhaps we would pay $1000 for basic listing and settlement services, and 50% of the sales price above $250,000. In this model, our agent is highly motivated to exceed the target sales price of $240,000 by as much as possible, since his take is highly dependent on sales price.
Of course, this relies on homeowners knowing approximately what their home is worth and being willing to negotiate with the agent. Unfortunately, since real estate agents are the ‘experts’, they normally dictate the compensation model. Most people buy and sell houses only a few times in their whole lives, and aren’t really ready to negotiate these terms. In most cases, they also wouldn’t know what is ‘fair’ for the base price, and being off by even $10,000 in this attribute could lead to paying an inordinate fee to the agent.
What do you think about Real Estate Agents?
I’m really curious what you think about real estate agents.
Are they worth the price? Is there a better way to motivate them to get the highest price available? How do you make sure your not getting ‘taken’?
P.S. Freakonomics started as a NY Times blog. If you like examining the other side of everything, you can follow it at that link. The link for the first book is at the top of the article. There’s also a sequel called Super Freakonomics, if you haven’t gotten enough 🙂
Just before year end I told you that we were refinancing our house again, this time to a 15-year, 4.25% fixed-rate loan. The goal was to drop our interest rate by another .75% and save about $1,600 dollars per year in interest payments.
Unfortunately our house, which had dropped $55,000 in value the last time we refinanced, has dropped a whopping $35,000 more in the last 7 months.
Why? because a few foreclosures and distressed sales in our neighborhood have tanked prices. In fact, not a single non-distressed single family sale has taken place in the last 6 months within one mile of our home.
We got the news on Wednesday of last week and were taken back by the sheer magnitude of the drop. I discussed options with our lender and he suggested we verify the appraisal accurately reflected our house’s worth. If we thought it didn’t, we’d have the ability to ask the appraiser to reconsider his valuation.
Now, this is generally a long-shot. Most appraisers do a reasonably thorough job evaluating a house, and any appeal must be firmly rooted in facts the appraiser either did not consider or incorrectly considered. Of course, appraisers are human and can make mistakes, so diligence is important.
If you’re in this situation, here’s the steps you can take to challenge your appraisal. We made it through Step 4 and determined that the appraisal accurately reflected the value of the house, so we decided to look into other options, and then ultimately cancel the refinance altogether.
Steps to Appeal a Real Estate Appraisal
Step 1: Verify the appraisal contains an accurate representation of your home. Check things like square footage, number of bedrooms and bathrooms, whether your house has a deck, lot size, etc. Make sure that every aspect of the description of your home is correct.
Step 2: Verify that the comparative properties (called comps) used for valuation basis are accurately described. For instance, make sure that a house that claims to have a deck actually has a deck. This can be done by examining tax records and driving or walking by the property. If a house claims to have a deck but actually doesn’t, the appraiser may have made an incorrect adjustment to your valuation based on that information.
(Steps 3-on will likely require the assistance of a real estate professional, such as a Realtor)
Step 3: Verify that the comps chosen are the best possible compartive properties to your home. Remember that recency of sales is going to be one of the most important factors. Real estate agents will have access to multiple listing services that can show all the properties that closed within the last 6 months, and will be able to search the database by region. While appraisers will consider active listings for informational purposes, they are a last resort when it comes to property valuation. Just because your neighbors house is listed 10% above the last sale doesn’t mean the values in the neighborhood have increased proportionately.
Step 4: Verify that the comps chosen were not sold under distress. Distressed sales will likely bring a lower value than a traditional market sale. Even if the appraiser chose foreclosures, however, if the overwhelming number of recent sales in your area were foreclosures, he may use that as a basis for accepting the lower indicated value.
Step 5: Prepare a written challenge. In the challenge you will be writing back directly to the appraiser, so respect, clarity, and brevity are key. If you found deficiencies or errors in the report, create a list of those items you would like taken into consideration that should affect the value. Call the appraiser and ask him for the best way to send over the information — it could be as simple as sending an e-mail.
Under new regulations, lenders are required to select the appraiser for a purchase or refinance to eliminate potential bias in the appraisal. This can have the affect of the lender selecting an appraiser who is not familiar with the territory. This can lead to poor choices in comps or failure to consider all aspects of the property. It is always worth examining the appraisal and ensuring it is built on a solid foundation before resigning yourself to the lower amount.
What do you think? Have you ever challenged an appraisal? Were you successful? Tell us about it!
(photo credit: omaromar)
One of the challenges of being in the rental business is overcoming the tension between the desire to earn as much as possible – at minimum making enough that it’s worth staying in the rental business – while not pricing yourself so high that your properties sit empty for any significant amount of time.
When I was ready to advertise our townhouse most recently, I found that I was most objective when I kept the cost of an empty rental in the forefront of my mind, even as I researched how much we could possibly charge. Sure, I was proud of our house, the work we had done; and I DID believe it was in a great neighborhood in a great location. But my pride and joy could not over-rule my common sense when it came to pricing it.
Keeping up with the Joneses … or at Least the Complexes
Since our rental is a two-bedroom townhome with a fenced backyard, a finished basement, community amenities, and totally-new upgrades, I started my research with the local apartment complexes. Our house should command more than a two-bedroom apartment in one of them, for sure.
Once I established that baseline (in my case a minimum rent of $1285), I went onto Craigslist and perused the other rental ads, looking for comparable houses in the area. What I found was three or four other two-bedroom and three-bedroom places, ranging in rent from $1300 to $1500. Those in the higher range had been listed longer, while the one for $1300 disappeared after a couple of days, and I assumed it was filled. But pride aside, our place looked nicer than that one and had the fenced yard, so we aimed just slightly higher at $1375 and decided right away that we would charge a pet fee of $25/month per pet (and an additional security deposit – we learned THAT lesson last time!).
We ended up with two roommates, one of whom has a dog, so – voila! – $1400/month it is!
What’s the Bottom Line?
We achieved immediate occupancy; the tenants took keys less than a week after my first ad ran. With that fast a turnaround, I was tempted to wonder whether we could have asked a little more. However, I reminded myself that if we had posted the rent just $50 higher, while we might have gotten it, we would have knocked ourselves out of some of our prospective tenants’ price-ranges. Including those who actually became our new tenants. And with even one month’s delay in occupancy, we would actually have netted $850 less for the next 12-month period:
$1400 x 12 = $16,800
$1450 x 11 = $15,950
It was worth it to us to rent right away instead of targeting a higher per-month rate and missing out on getting to choose our renters from a pool of good people, rather than waiting around for somebody, anybody to please come rent. It’s the fine balance between greed and practicality. 🙂
Those other Empty-Rental Costs…
Aside from just the dollar figure, there are other costs we had to consider when we named our price:
Property Maintenance – as long as our house sits empty, guess who’s mowing the lawn, checking the mailbox, dusting, and whatever else? Yep, us. And we have our own place we can barely keep up with, thank you very much.
(Un)natural Disasters – if a pipe starts leaking, a tree branch falls, or a neighbor’s cigarette starts a mulch fire next door, we don’t want to find out about it days after the problem starts. We want to know right away. And (good) tenants are there to tell you about that sort of thing, so you can address issues while they’re still small and not have a huge, preventable mess to clean up.
Vandalism & Break-ins – Our rental townhouse used to be my house. I lived there alone when I was single, and I felt quite comfortable in the neighborhood. However, even in the nicest of areas, there are “those people” (whoever they are) who scope out vacant properties to damage (or sometimes inhabit!). Maybe it’s fun to be destructive; maybe “they” have anger that needs to be channeled somewhere. Whatever the motive, we don’t want our place to be the one that gets hit. We actually did keep that in mind when we advertised. The house had already been vacant for two months while we renovated, and we knew all the neighbors were quite aware of that (it’s hard to miss a petite white girl hanging out the second-story while replacing windows, as it turns out). Once the work was done, we wanted people – good people, for sure, but PEOPLE – in there as soon as reasonably possible.
There Goes the Neighborhood – this last item was less of a consideration for us this time, but it IS a consideration. If a community has multiple rentals in it, and more than a few are sitting empty for any noticeable period of time, that neighborhood starts to feel like it’s in decline, even if it really isn’t. And once it has felt like a declining neighborhood for a while, it actually becomes one. Because prospective tenants don’t want to dodge tumbleweed or hear only the echoes of their own voices. They want to see an active and vibrant community – even if they only plan to stay for a year. So being a responsible landlord and getting your place filled benefits everybody, not just your own bank account.
What is the most effective way to advertise a rental property? Fred and I had to answer that question in late July, after completing two months of renovations on our townhome following our prior tenants’ move-out in May.
The Old Way to Advertise
Five and a half years ago, when we found THEM, we went the Pennysaver, two-county’s-newspapers, and one major newspaper (for us, The Baltimore Sun) route. It worked; our renters were great, and they stayed five years! But it cost us several hundred dollars to run the ads over the course of the 3 months we were looking. And as Fred mentioned in a prior post, we discovered by trial and error that it’s very hard to find good renters in the dead of winter. So I actually stopped advertising for a while, let the house sit for a few weeks, and then paid for more ads closer to Spring.
And the New Way…
Flash forward to this summer. NOW we have Craigslist! It’s free, everyone knows about it, we were able to include MUCH more information about what we required of tenants, and we posted pictures!
But we thought we could go one better. Craigslist only allows space for 4 pictures and we had done a lot of work and wanted prospective tenants to see ALL the great features of the house. SoFred set up a separate single-page website (he linked here to OPC because we could; but any well-done page would’ve been just as good).
The fact that I had the hotlink in my Craigslist ad made our property stand out among the many others also out there. And the details about the property and our expectations weeded out people who weren’t the right match. It’s a small townhouse, but not one person walking through made that remark. They already knew what they were coming to see, so it was just a matter of whether the location, timing, and cost were right for them.
And our new renters signed the lease with me 5 1/2 days after my first post on Craigslist! So, yes, it worked quite well.
Rental Advertising Tips
- Price Logically – I perused the existing Craigslist lineup before we ever posted. I wanted to get as much as was fair in the market while still remaining price-competitive. At our price point, we had the best rental available. Most of the rest were condos or condo-townhomes without basements owned by major rental companies. Not nearly as nicely renovated.
- The Cost of an Empty Rental – Might we have been able to eek out a little more rent if we’d advertised a higher rate? Possibly. But we had to consider at what cost. For every month we don’t have it rented, we lose that money and we have a house sitting empty.
- Include Pictures – I was amazed at how many people don’t do this! If you want your ad to stand out, let people SEE the place! (And if it’s in shameful shape and you’re embarrassed to post a pic, that’s your cue that it’s time to do some work before re-renting.)
- Think Like a Tenant – include as much information as you can so you help them make an informed decision before they come out to the property. There should be no “bad surprises” when they arrive; that’s no way to start a landlord-tenant relationship. Don’t forget to list things like laundry facilities, the dishwasher, whether the property has a yard (and a fence), major roads nearby, and any perks that come with renting. These things take your ad beyond the standard “3 bedrooms/ 2 baths” ads that are all around yours.
- List Your Requirements Up-Front – for us, good credit and references were a must. We also ran a criminal background check just to make sure we weren’t bringing violent offenders into the neighborhood. We do want to maintain a good relationship with the neighbors all around that property, too! And for the first couple of days, I got a flood of calls about housing vouchers and Section 8 housing – for which we were not approved – so I tacked that note at the end of the ad. (Another perk to Craigslist – you can edit your post anytime!)
- Refresh Your Listing – Craigslist in our area allows you to re-post an ad (thus bringing you back to Page 1 of the search results) every 48 hours. They just ask that you delete the old ad, which I happily did. And I didn’t have to re-post it a 3rd time; we snagged our renters on the second run!
- Consider standing up a temporary web page – for the small time commitment, we got a big pay-off. The web page is much more attractive than the Craigslist ad and allowed us to load it with pictures.
- Include a Cell Phone Number – I had one person email me. Everyone else called my cell. Because they had questions, wanted to schedule a showing as soon as possible, or wanted to get a feel for how I’d be as a landlord. Trying to do all that through email (even though it does give you more anonymity and privacy) takes much longer.
I can’t believe how much easier it has gotten to lease a property, just in the last five years! It was so easy, in fact, that Fred and I were out again this week looking at potential new rentals to buy. Cooler heads prevailed, fortunately, and we’re just sticking with the one for now. But I’m sure we’ll add more in the future.
The Craigslist Ad
Here’s the text from my Craigslist ad:
$1375 / 2br – Townhome w/fenced yard, newly renovated
2 Bedroom / 1 1/2 bath Townhouse in Parkview Trails Community. Available immediately, upon approval of application!
All appliances new within the past 4 years, stainless kitchen, laundry room in the basement. Plenty of storage, large closets in both bedrooms, wood flooring on half of the main level, new flooring in the full bath, brand new carpet everywhere else. Central A/C. Freshly painted throughout. Fenced back yard w/brick patio and new landscaping. New roof, windows, patio slider and water heater all added this summer to make this place as energy-efficient as we can get it, so utility bills are low! Home Owners Association fees covered by landlord and include pool, tennis courts, and more.
Pets welcome (some restrictions apply), and kid-friendly home and yard. Also great for working professionals.
Security deposit based on credit score. (Looking for a minimum of 650 from at least one tenant.) $30 application fee covers our cost of tenant screening w/credit check.Non-smoking in the house (back- or front-yard ok).
Convenient to Ellicott City, Catonsville, 695, Rt. 29, I-95, Rt. 40, I-70.
We (landlords) live just a few minutes’ drive away, so we guarantee quick responses to maintenance issues or any other items that could arise during your stay. We want you to enjoy living here!
For more information, check our web page: https://www.oneprojectcloser.com/for-rent-2br15ba-townhome-great-neighborhood-1375mo/or call Kim at (XXX) XXX-XXXX.
*not approved for Section 8 or housing vouchers*