The current real estate market has created a new category of homeowner transferee: the “Accidental Landlord.”
Most homeowners have not considered renting or leasing their properties. They simply expect to sell one home and move directly into another, occasionally facing short-term storage of household goods. However, today the BMA report and the appraisal bring home a hard truth—many homeowners simply cannot afford to sell their homes at all. Although this may be a “temporary” situation, it presents challenges to the transferred homeowner and is very real to all of us in the relocation industry.
How does the rental of a transferee’s home affect their move to the new location? Factors for the relocation counselors and real estate professionals to consider may vary widely from one location to another, but here are a few points to consider:
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When a homeowner leases out his or her property, the home is no longer the primary residence. It is now considered an investor-owned property.
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Homeowner insurance policy expenses will be higher for an investor-owned property.
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Securing a mortgage on a new residence and/or refinancing the old residence may present additional complications. Transferees may need to consider if they will be able to purchase a home in the new location while they own another home.
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Homeowner association restrictions may prevent or limit the lease or rental of the transferee’s current residence.
Typically, the income from the rental or lease will help—but not cover—the entire cost of the principal, interest, title insurance, PITI, and maintenance of the home. However, if the transferee is renting in the new city, the costs there may be lower than homeownership in the destination city.
The combined effect of the received rent and lowered costs for the new residence may even out the transferee’s cash flow. But now we have two residences in a rental mode—the transferee will not be a buyer. These homes are now part of the “shadow inventory.”
The Corporate Role
As there are many sources of information readily available, transferees often research their upcoming moves using such sources as Trulia, Zillow, Realtor.Com, and community chambers of commerce for cost-of-living comparisons. By doing so, homeowners can identify the need to lease their homes early on in the process.
Jan LeQuier, CRP, director of relocation services for The Home Depot, Atlanta, GA, remarks that many transferees are now requesting assistance to rent out their current homes. “It is difficult to find such assistance for homeowners, as most real estate brokers are not set up to provide this type of service.”
Predetermining a transferee’s financial position to sell his or her home is critical. To facilitate a smooth transition from origin city to destination requires that all parties work together to prevent wasted time, relieve anxiety, and allow the transferee to make a well-informed decision about the move. The best approach to ensuring a satisfactory move for both the employer and the transferee requires a new mindset.
“I don’t think anything makes relocating during this market ‘easy,’ however, having this type of information allows the associate to make an informed decision,” LeQuier said.
According to The Home Depot’s recent experiences with its transferees, approximately 19 percent of the relocating associates have chosen not to sell their homes in the origin city. Sixteen percent have decided to rent the homes instead. In the destination city, approximately 44 percent of the transferred associates who are homeowners at origin have decided not to purchase immediately in the new location.
The Real Estate Broker
When the BMA and general market trends do not support a realistic sales price for a transferee, it is time for all parties to think “outside the box.” Astute, well-trained listing agents recognize that a rented home does not generate a sales commission. Yet this same home can represent “deferred” income from the sale when the market improves. Monitoring the market changes, advising the transferee with periodic reports, and keeping in touch will provide a sense of confidence and keep the relationship alive.
With no real estate sales, commissions are not earned. Payment for the BMA on the origin side and rental assistance fees paid to the agent on the destination side can help to compensate the real estate professionals for their efforts.
When a real estate agent finds a tenant for the transferee’s current home, there is often a small fee paid. The overall impact to brokers and the relocation departments is diminished income.
Dana Eskridge, CRP, vice president of relocation & corporate service at Better Homes and Gardens Real Estate Metro Brokers in Atlanta, stresses that “maintaining an ongoing relationship with the transferee throughout the lease period may result in listing the property for sale when the market improves. This is crucial to provide for future income from these sales. It also creates a more comfortable mindset for the transferee and family, allowing them to make a transition to the new city.”
Eskridge adds, “although there is a great need for property management, most traditional real estate companies in the Atlanta marketplace do not offer this on a large scale. With the exception of our corporate inventory listings, we refer the homeowners in need to a full-service property management company that has dedicated staff and capital to this purpose.”
The Property Manager
Rental assistance in the destination city always has been available; however, managing the home left behind is a need that was created by the housing bubble. The transferee must weigh the cost and benefits of a property management company versus independently renting out the home.
In the Greater Atlanta area, several property management firms are in operation. Scott Jacques, the marketing director for Crown Realty and Management, describes the process. “A full-service property management company offers many programs that may include advertising the property for lease, screening and tenant placement, collection of security deposits, maintenance of escrow accounts, rent collection, recordkeeping, and maintenance and repairs to the property.”
Depending on the level of service the homeowner requires, assistance is available should a tenant not pay and the eviction process will be handled. Local ordinances may vary on issues such as the notice to vacate, both from the tenant to the landlord and likewise from the landlord to the tenant.
Another important service to the landlord is the financial accounting for the property’s cash flow. This will be very valuable at tax time or when an owner chooses to sell or refinance the home. When this home is offered for sale, having a record of the potential rental income may help to attract an investor buyer. A property management company will offer this service.
Without the services of a property management company, the “Accidental Landlord” must consider how to obtain a credit check and screen potential tenants. The lease terms will need to be worked out, addressing who pays for cable, utilities, and maintenance. Typically, escrow accounts must be established for the security deposit. Collection of the rent must be arranged. When a landlord is local to the property, it is easier to manage on one’s own. A long-distance landlord faces more challenges.
According to Jacques, in the Atlanta area during the past three years, there has been a great increase in the number of homeowners who are now leasing out their homes. Recent trends show that more than 80 percent of the homeowners who are currently leasing out their homes are doing so because their homes do not sell.
This is in contrast to the years prior to 2006, where only 25 to 30 percent of the leased homes were homeowners rather than investors. Once the market improves, most of the “non-investor” owners will market their homes for sale. A small number of people may choose to continue to lease the home as a secondary source of income.
Financial and Tax Concerns
When a homeowner becomes a landlord, new tax reporting requirements may apply. The landlord must account for rental income and for the property expenses that are used to offset that income. A tax preparer may need to be consulted.
Judy Jones, vice president of Metro Home Mortgage, an affiliate of Wells Fargo Mortgage, in Atlanta, remarks that most lenders and loan programs will not allow the current mortgage payment to be offset by rent for qualifying purposes until there is at least one year of continuous rental history for that property. This affects the transferee who has secured a lease recently on his or her current home and is trying to qualify for a mortgage in the new location. Jones adds, “for the buyer to qualify for a mortgage with the new house payment and the old house payment, it will be very, very difficult to do.”
Typically, when a borrower has an existing mortgage on another property, the documentation required for a mortgage application on a new home includes the “usual” normal paperwork, plus a copy of a two-year lease on the current home, a 12-month history of rent receipts, and tax returns that include this rental income. On occasion, a lender may accept a one-year lease with the history of rental payments received, along with a review of the credit history of the tenant.
Refinancing also is a challenge, as the lender now will consider the home to be an investment property. To refinance, a minimum of 25 percent equity will be required.
Modifying the loan to reduce the payment may not be allowed by the lender, as the home no longer is considered to be a primary residence. A home that is leased out also means that the homeowner obtains property insurance as an investor owner. There are higher liability limits and increased costs because of the increased risk of claims.
Conclusion
The current market has put a few new “roadblocks” in the way of reaching the goal to provide a smooth transition for the origin city to the destination city. When a transferee cannot sell his or her current home there is no finite break between old and new locations. This “interim” status will prolong the stress and distraction for the whole family.
When the needs are met to assist the “Accidental Landlord,” the transition still can be a smooth one.
Risk versus benefit is a concern for any transferee considering a job in a new location. With the prospects of becoming an “Accidental Landlord,” this becomes a very difficult decision. Our industry needs to consider what support we can give and what information is available to allow the transferee to move forward. The move then will be a success.
Valerie A. Fortier, CRP, is director, corporate listings, for Better Homes & Gardens Real Estate Metro Brokers, Atlanta, GA. She can be reached at +1 404 843 2500 or e-mail valerie.fortier@metrobrokers.com.