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by Steve Bergsman

In the mid-1990s, the high-tech entrepreneur created one of the earliest Internet banking application businesses, which he eventually sold to PeopleSoft Inc. Glassano may have been unemployed, but his inventive mind was still at work.

When I ran into Glassano earlier this year, he had recently joined a Pleasanton, Calif., start-up called SmartZip. His new titles were president and chief executive.

“I kicked around for a couple of years after the JPMorgan Chase deal looking for a new business,” he told me. “I was more interested in something that had more of a business-to-consumer application than business-to-business, where I previously spent most of my time.”

The other factor in his employment decision-making was to join a company that would benefit from the current economic climate rather than be hindered by it. SmartZip fit the bill.

SmartZip was incubated by another Pleasanton firm, NorthPoint Financial Group, and then spun off as an independent company earlier this year. In June, it launched the public beta Web site, www.smartzip.com.

“I was doing some work with a venture capitalist and I met up with NorthPoint, which was in the process of raising money for SmartZip,” says Glassano. “Ultimately, in order to get properly financed, it needed to be an independent, software-focused business, and once that occurred I joined.”

SmartZip was attractive to Glassano for the same reason I became interested in it when he told me about the new venture: It would create analytics-based investment ratings for single-family real estate.

Basically, SmartZip would use proven stock and bond ratings analytics to create a very comprehensive base of real estate investment attributes, and on a 1-100 scale it would offer investors and homebuyers an easy way to assess whether a property was worth buying.

In short, properties would be rated two ways: a “growth” score for risk-tolerant investors seeking above-average appreciation and an “income” score for risk-averse investors looking for consistent monthly cash flow.

Think of it this way. Thirty years ago, if you wanted to invest in stocks or bonds, you might have called upon your Uncle Harry, who was a stockbroker, and you would rely on his expertise. Now, however, you can just go online, find a company like Morningstar, and figure out from its ratings and reviews what stocks seem like a good investment.

The single-family real estate industry is much like the stock industry was 30 years ago. If you live in Indianapolis and wanted to by a home in Oakland, Calif., you might call your Uncle Barry, who is a Realtor there, and ask him to find something for you to buy.

Realtors are generally knowledgeable and reliable sources of information, but only for a specific local. If you wanted to buy an investment property in the San Francisco Bay Area, your Uncle Barry might know the Oakland market extremely well but would have little knowledge of Pleasanton, Cupertino, Mountain View or even San Francisco proper.

“My sense is,” says Glassano, “the real estate market has the potential to be a bigger area of investment as an asset class than it currently is, but the transparency of the information, analytics and the understanding of returns (or potential for returns) has not been approached like it has in other asset classes.”

Again, if you were interested in stocks and were looking for a company where the share prices had the potential to rise significantly in the years ahead, you could easily get the information from any number of brokerage and independent analytical sources. For example, if you popped onto the Morningstar Web site, you might see something like this: “PetSmart is well positioned to capture a greater share of spending on pets.”

Wouldn’t it be great if you wanted to buy that Bay Area property and could find research saying this particular home has the potential to see price improvement in the years ahead based on neighborhood stability, high income of nearby homeowners, and schools with a good reputation for delivering solid education.

That’s what SmartZip promises.

“We look at factors and fundamentals that contribute to a property’s ability to perform,” says Glassano. “We can run regression tests and find those variables that tend to correlate with the sustaining of values: supply of new housing, population growth, job growth, and such trends as education and safety. From a statistical analysis, we can sort out what are the factors that are most influential in having predictive power.”

In its beta-testing phase, SmartZip is only covering the California and Florida markets, but once it works out the kinks, probably in the first quarter of 2010, it will go national.

Steve Hoffman, a real estate investor who lives in Pleasanton, has picked up properties in such diverse cities as Atlanta, Raleigh, Portland and Austin, and has been helping to do the beta-testing.

“The SmartZip site has started to mature with more tools and features,” says Hoffman. “I’m quite amazed with it. There are lot of sites you can go to for finding homes and property values, but SmartZip is really cool because as an investor it allows you to find geographic markets that have investment potential and then be able to drill down. Once you do that you can start doing your own comparisons and analysis based upon what your objectives are as a real estate investor.”

Steve Bergsman is a freelance writer in Arizona and author of several books, including “After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade.”
Copyright 2009 Inman News

by Robert Griswold

Q: I have been a tenant in a rental home for the last few years. A few months ago I signed a new 12-month lease but I just bought a new home and will be moving in next week.

A: In most residential leases, there are no provisions for the tenant to unilaterally break or terminate the lease because he or she purchased a home.

This applies to all circumstances where a tenant might find it advantageous to break a lease, such as finding a better deal on an apartment, a job transfer, a change in a relationship, or any other personal situation that arises and the tenant suddenly decides it is in his or her best interest to relocate. The only exception would be if you had negotiated with the landlord in advance for the right to terminate the lease.

This “lease termination” clause can be specifically and narrowly written to be only for certain predetermined reasons like a home purchase, a job transfer, or it can simply allow the tenant to leave without stating a reason. In today’s weak rental market for most areas, landlords are willing to agree to a lease termination clause that would allow you to break the lease under mutually agreed upon terms such as a flat dollar amount or a penalty of one or two months’ rent.

Unfortunately, you did not plan ahead and now are expecting the landlord to absorb the loss of income on your rental home. You should have considered the fact that you would be obligated for another eight months on your current lease before purchasing the home. It may have been helpful to contact your landlord in advance when you first began to look at a purchase option.

Even though there is a lease and the landlord is not obligated to any changes in the terms, you may have been able to work together to start marketing the rental home while you are still there and possibly limit your liability if the landlord is able to re-lease the property before your lease expires in eight months. However, at this point, you should still contact your landlord immediately and explain the situation and see if he will agree to take a set amount of money if you agree to vacate this weekend and leave the property in excellent condition so he can have it back on the market immediately.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of “Property Management for Dummies” and “Property Management Kit for Dummies” and co-author of “Real Estate Investing for Dummies.”  E-mail your questions to Rental Q&A at rgriswold.inman@retodayradio.com. Questions should be brief and cannot be answered individually.

Your costs go up every year, but you are afraid to raise the rent for fear that your long-term tenants will move or because you want to help them out.

After a few years of not raising rents you are so far behind that you have to raise rents 25 percent to 50 percent in order to catch up.

The first thing you won’t be able to do is maintain the property as well as you could if you were keeping up with inflation and taxes. You also don’t make as much money as you think you should. This will be a double whammy when you go to sell the property.

Savvy investors look at the maintenance of the property when they decide how much they are willing to pay for it. If the property doesn’t look good enough, it won’t fetch good rents, hence the value is lower.

The second thing they look at is the rents. Too often you see advertised that “rents should be higher.” Buyers immediately ask themselves, “well, then, why aren’t they?” They begin looking for reasons and find deferred maintenance.

Here’s why lower rents mean lower sales prices. While they are looking at rents investors are using a couple of figures to multiply the net income by. One is the gross rent multiplier. That is a figure that, among other things, when multiplied times the gross rental income, gives a rough idea of what the property ought to sell for. The lower the rent, the lower the sales price (or what the investor would be willing to pay).

Another is the capitalization rate, which is the Net Operating Income divided by the the asking or sale price. The Net Operating Income is the gross rents less vacancy allowance less expenses. The lower the rents, the lower the cap rate. An acceptable cap rate in most parts of the country now is around 7 to 8 percent. So if your rents aren’t high enough, your sales price will have to be lower to create an acceptable cap rate.

Can you do it everywhere? Absolutely not. Some places in the country even keeping rents as high as they were last year is a challenge. But that is a different topic. Where at all possible, raise the rent every year.

If you raise the rent a small amount every year, say three to five percent, it is too small an amount to make it worthwhile for your tenants to move, but large enough that you stay even or even get ahead a little. Just be sure to do it every year. You owe it to yourself, your property and your good tenants.

Copyright 2009 Cain Publications, Inc., used by permission.

Robert Cain is a nationally-recognized speaker and writer on property management and real estate issues. For a free sample copy of the Rental Property Reporter call 800-654-5456 or visit their web site at www.rentalprop.com.

Obama Extends the Home Buyers Tax Credit

The housing tax credit

• The measure limits the purchase price of the home to $800,000.
• It also imposes income caps so that people who make more than $125,000 annually and couples who make more than $225,000 would not be eligible for a refund.
• Anyone who collects the tax credit but sells their home within three years of buying it must return the refund.
• Current homeowners who are buying a new primary residence would be eligible for a $6,500 tax credit starting Dec. 1 if they owned their home for five consecutive years in the previous eight.
• Military families who have been deployed overseas for 90 days or more in 2008 or 2009, would have until April 30, 2011 to sign a contract.
• The program is estimated at $11 billion

 

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Most of these people moved into the building thinking they would have continued use of the pool without the worry of maintenance or expense, and now they just walk by it each hot day to see it covered and going to waste! What is their recourse? –Pearl M.

A: Your sister’s landlord is imaginative, I’ll give him that. But he’s also avoiding his contractual obligations, and even setting himself up for a nightmarish legal mess. Let’s get to the simpler issue first.

When your sister’s landlord advertised and showed the property to prospective tenants, you can be sure he touted the pool as a valuable feature of the property.

Sometimes, of course, circumstances may force the landlord to discontinue use of the pool. For example, if an earthquake damages the pool, it will have to be closed — but even then, the landlord can’t simply say, “Sorry!”

Your sister’s landlord may well be in financial difficulties, but that doesn’t mean he can decrease amenities (the pool) that his tenants are paying for. If the tenants have leases, he’s obligated to continue offering use of the pool until those leases run out.

For tenants with month-to-month rental agreements, he can amend the agreements — to specify that the rental comes without use of a pool — with proper notice (30 days in most states). Of course, those month-to-month tenants would expect the rent to be decreased to reflect the lowered value of a pool-less complex.

Now let’s consider his loopy suggestion that the tenants buy the pool and pay for its upkeep. First, the tenants cannot become legal owners unless the landlord subdivides his property and sells them a separate parcel consisting of the land that contains the pool, which is right in the middle of the complex. This is ridiculous.

What he’s really hoping for is that everyone will wink at this obvious fiction and simply take over paying the pool service for regular maintenance. But this is the same as raising the rent — which he cannot do if tenants have leases, and must do properly (with legal notice) if tenants have month-to-month agreements.

Your sister and other tenants have a very powerful option: threaten to go to small claims court if they don’t get their pool back. In court, each tenant would ask the judge to order the landlord to pay them the difference between the rent they’ve been paying while the pool has been closed and the value of their apartments without a pool.

They’d ask the court to consolidate their claims, which courts will do for efficiency’s sake. (Imagine 200 households making identical claims!) This lawsuit will quickly get the landlord’s attention, because although it’s in “small” claims court, the sum of the tenants’ claims will be thousands of dollars. Believe me, this approach often works, and the theory behind it (that the tenants aren’t getting what they’re paying for) is garden-variety contract law.

Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of “Every Landlord’s Legal Guide” and “Every Tenant’s Legal Guide.” She can be reached at janet@inman.com.

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by Robert Griswold

Q: For the past 20 years I have been buying and managing rental homes and I have to say that these days tenants are worse than I have ever experienced.

I certainly understand the economy is bad in our area and many parts of the country, but my management company is unable to collect any money after the tenant moves out. The manager simply gives the case to a collection agency, and I never collect any money from the agency. It has been a repeated problem.

A: You are not alone, as many landlords are finding that tenants who stay and pay, and treat the rental property with respect, are far and few between.

As you unfortunately found out, the amount of damage that can be done in a rental home makes the nonpayment of rent seem like a minor issue. Your first priority should be simply to get your property back in decent condition and start over with a new tenant. It is easier said than done, but the best way to avoid these problems is to very carefully screen and select your tenants when they apply.

Qualified tenants with a stable rental history and good, reliable income are in high demand and can actually find landlords competing for them. I have even seen some tenants who have a resume or reference list that they bring with them that demonstrates to the landlord that they are qualified.

In these situations, you may find that you need to be flexible with your rental rates or upgrade your rental homes so they are more desirable than other comparable properties in your area.

As for the collection of delinquent tenant balances, I cannot recommend a specific company but I can tell you what you should do. Contact your local apartment association or Institute of Real Estate Management (IREM) chapter and ask them for names of companies in your area. Then contact those companies, and then ask for and contact their references.

While the pricing of collection services will vary, they are often quoted on a percentage of the collected amount.

You are not looking for the company with the lowest percentage but the company that has the highest overall net return, and the only way you can determine that is to contact their satisfied customers to see their actual results. Also, be sure to contact rental housing customers only, as the collection account success rate for other businesses may not be indicative of what they can do for you.

The other key recommendation is that delinquent account balances become much harder to collect over time so the sooner you get the paperwork into the hands of your collection agent the better the results.

Another tip is to be sure to file a small claims suit and get a judgment for the money owed, which can be collected in the future as long as the tenant doesn’t file bankruptcy and get your judgment set aside or discharged. This can be your best strategy because while your former tenant may be down on his luck today, I have had tenants call out of the blue asking to pay everything they owe because they are trying to borrow money for a major purchase and need to get the judgment removed from their credit report.

This may be five to 10 years from now, but most people bounce back from financial problems and they will need to pay you in full in order to get a loan to buy a car or a house. While you would prefer your money today, there is still some satisfaction, and the cash will come in handy regardless of when you ultimately collect.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of “Property Management for Dummies” and “Property Management Kit for Dummies” and co-author of “Real Estate Investing for Dummies.”

E-mail your questions to Rental Q&A at rgriswold.inman@retodayradio.com. Questions should be brief and cannot be answered individually.
Copyright 2009 Inman News