A new client contacted us unexpectedly a few years ago with close to 70 single family homes in Springfield, Ohio they needed help with. They were from upstate New York and had purchased these properties over a 24 month period through a buyer’s agent based in a county just north of ours. As far as I know, they never saw the properties before they bought them. They had learned via the internet that Springfield, Ohio had some of the cheapest housing stock in the nation so they were confident in their purchases.
These owners were not the only ones enticed by our ‘bargains’. We have worked with buyers from California, Washington and from Canada as well. They all thought they were going to get rich quickly because the asking prices of houses here were a fraction of what property was selling for in their hometowns. They all bought their properties without consulting a local professional, and they all came to us after their business plans fell apart.
Common Mistakes and Misconceptions
- These buyers all failed to consider the condition of the properties they were buying and the true cost of the initial rehab and ongoing upkeep and repair.
- They also consistently over-estimated the amount of rent they could collect and the number of months each year they should expect to collect it.
- They did not necessarily overpay for their houses, but they overestimated their profit margins.
- Almost all of these owners initially assumed they could manage their properties themselves from a distance. Lower and moderate priced scattered lot single family housing requires a hands on approach to day to day operations that managing from a distance does not allow.
- Hiring an un-licensed property manager.
To their credit, our friends from New York did hire a property manager to help them. Their mistake was hiring an unlicensed individual as their manager and by the time we got involved they had lost tens of thousands of dollars.
Discounted Purchase Price = Extra $$$ To Put In Service
I have not bought a house yet for under $20,000 that did not require at least some repairs, and most require fairly extensive upgrades. The upgrades almost always involve big ticket items like roofs and windows. Our out of state owner discovered this truth as well. Our new clients were introduced to a local contractor who started rehabbing the properties. Before long the contractor had volunteered to help find tenants, collect rent, and do ongoing maintenance and repairs. This sounded like a terrific arrangement and things went along just fine at first.
Things eventually fell apart because there was no tenant screening or selection process in place for new tenants. There were other reasons too but this was the big one. By the time we got involved barely half the properties were occupied and the tenants in half of those were not paying rent and in need of eviction. The owners were understandably angry and frustrated. I am sure the manager, who was essentially a one person operation, was feeling overwhelmed and taken advantage of as well.
A Licensed Property Manager’s Fiduciary Responsibility Is To YOU!
While our owners did lose a lot of money in rent, where they really got killed was in the cost of repairs and rehabs. While their loyalty to their manger was admirable, it was their manager who was doing the construction work. Not only was there no competitive bidding going on, but from what we could tell the manager was billing the owners at a very substantial mark-up. This was in addition to the compensation he was collecting as a percentage of the rent collected.
The unlicensed manger was the only person making money on these houses. Somewhat unbelievably, we found instances where work was done on houses that should have been torn down. We found truly terrible, uninhabitable houses in very tough locations with new roofs on them. It would have been hard to prove that the manger’s actions were fraudulent or criminal. The owners were after all paying him. He may have been incompetent, but the owners supported his actions by giving him a free hand.
It’s Against The Law
Under Ohio law, acting as a property manager without a license constitutes a first degree misdemeanor and subjects the offender to a civil penalty of up to one thousand dollars per violation. Had the manger been reported to the Ohio Division of Real Estate, observed, charged, prosecuted and found guilty, he would have owed thousands of dollars in fines.
Fortunately for our owner, this story has a happy ending, but there are several lessons to be learned here.
- The first lesson is you cannot manage property on your own from a distance.
- The second is you need to have a set of basic standards for your property manager, including being licensed.
- Three, one should at least spend the amount of time and effort to select a property manager that one would spend to qualify a new tenant.
- A good property manager will make you money far beyond the fee you will pay them.
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