Using the new tenant’s Security Deposit to pay off the last guy

March 24, 2011
1967 Elcona Mobile Home

Image via Wikipedia


My friend and I were looking through a group of very low end mobile homes in a rural setting. These homes were for sale dirt cheap but had great cash flow numbers to back them up. How great?  On the order of 60% cash on cash return before expenses.  I say before expenses because the guy who was selling the homes had no real records to speak of.  Just a hand written rent role on the back of an envelope.  It appeared to be the kind of thing he may have whipped up ten minutes before we got there so that he had something to show us.

It was clearly not enough to gather any sort of fiscal assessment.

The best I could do was to take a reasonable guess at what the expenses might be and interview a few tenants to see what they pay for.   I wasn’t really interested in using these as rentals, but instead my idea was to start getting tenant buyers into the mobile homes. Instead of $200/month in rent, I could likely get $1000 down and $300 per month for someone who wanted to buy the home.

Since the buying mindset is different than the rental mindset, I could also make the new tenant buyer responsible for maintenance.   Homeowners always take care of their own repairs, but renter will look for the landlords phone number at the first sign of a problem.

The opportunity, something you should always be looking for with a real estate investment, was that I thought I could increase the income and nearly eliminate the expenses by getting in “Buyers” instead of “Renters”

I then asked the seller how much money he was holding for security deposits. I use this seemingly innocuous question to verify how much income he is actually getting, as landlords typically set the security deposit at about one months rent.  I also ask  “so security deposit is usually one month’s rent then?” as a follow up question later on.

What he came back with surprised me:

“I just use the security deposit from the guy who moves in to pay off the guy who moves out.”

It was a great example of the old phrase robbing Peter to pay Paul.  Of course, you can see the problem with this – what if you can’t find a new tenant?

It also told me that he was running his business really tight, or possibly had the habit of blowing any cash he got in his hands.

In my mind security deposits are funds that you should never touch, but instead set aside in a separate account.  By spending the funds he was supposed to hold this guy was breaking a level of trust that could get him into trouble later.

If , for any reason , you find yourself dipping into the security deposit’s you are holding, it is a warning sign that your business, and possibly your moral fiber, is in trouble

We eventually passed on the group of mobile homes, mainly because there was too much deferred maintenance and they were a bit too far from where we like to operate, but the lesson has stayed with me.

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Getting people to keep apartment showings

February 27, 2009



Getting people to keep apartment showings

by James Miller

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It happened to me again yesterday.

I had a 5:30 showing set up at one of our vacant apartments. I arrived promptly, unlocked the place flipped on all the lights and set out the applications.

The guy never showed up to look at the apartment.

I waited for him to show for 20 minutes and then decided to take off.

It may or may not surprise you, but the events I just described are not that uncommon for property managers. I am pretty diligent about calling people the day of a showing appointment to remind them, but even with that measure in place, I still get around a 50% no show rate.

It really blows my mind that people will take the time to ask you about a place, set up an appointment and get directions, then decide not to show…or even call.

I have to admit I didn’t call this guy the day of the showing, but I had talked to him the night before.

Here is what I think happens in these situations and some of the steps I am going to take to try to resolve them. If you have any suggestions or ideas, please let me know..

1)The person I am talking to forgot about the appointment… although in this guys case, I doubt that you can forget about it that easily. We set the appointment  just the day before.

2) The person I am talking to is too polite to tell me on the phone that they are not interested in the apartment, so they set up a showing, knowing they will not show.

3) they may have looked at an apartment earlier that day and decided to take that one, blowing off the rest of the showings they had set up.

4) They knew about the appointment, but after a day of work were just too lazy and decided the couch or a trip to the bar sounded better.

There are probably a lot of other reasons that they won’t show as well.

Here are a few of the things I am going to start implementing:

1) I am going to call them back and ask why they didn’t show.My girlfriend was a recruiter for an insurance company. She would have the same problem with potential candidates and it drove her crazy. she would go so far as to call up people who blew appointments (and didn’t call) and tear into them, telling them that they just blew their chance to ever get a job there and that they should have at least called.
While I am not sure that affected her no show ratio, it apparently made her feel better.

2) I am going to start letting them know that I get a no show rate of 50% and if they can’t make it to call me.
I currently tell them to call if they can’t make it, and they have my cel phone number, but it doesn’t seem to make a difference. I will also point out that if they don’t show and don’t call, I will be calling them back to find out what happened.

One part of the problem, as I see it, is that they have nothing to lose by not showing. Since there is no realistic way for me to get a deposit over the phone, the only thing I can leverage against them is their contact information. I am not going to harass them or anything, but I will let them know that I was waiting for them at the apartment and it wasn’t cool to blow me off.

3) I am going to start letting the apartments show themselves.
While I like to meet the potential tenants, I have, in the past, been so busy that I had to unlock an apartment to let people through to see it without me being there. It works pretty well as I let them walk through and grab an application if they are interested and I think people like to be able to take their time when looking at a place.

I have been doing this with a lot of our lease option houses, as before the market slowed we would get so many requests to see the places it was virtually impossible to handle them.

I would like to hear from other landlords, property managers, and real estate agents, or anyone who has to set appointments with the general public. .

What are your no show/show ratios?

How do you prevent people from not showing up?


The Real Estate Investor mindset.

February 10, 2009


The Real Estate Investor Mindset
by James Miller

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Eliminate the entitlement mentality.

If you are the type who thinks that you deserve certain things just for existing, you should stick to a day job.

We don’t deserve anything.

Please understand that everything we have, has come to us  either as a gift or in exchange for some service.   We need to be grateful for what we have.

It is also good to keep in mind that, from here on out, everything you will receive in your life is owned or controlled by some one else at this very moment.

Understand that everything is your fault.

With very few exceptions, I am certain that everything bad that has ever happened to me can be linked back to something I did that I shouldn’t have, or something I didn’t do that I should have.

Even if you are in a car accident that is caused by someone else, I hear that insurance companies consider you 10% at fault just for being there.

You take control of your life when you realize that you are responsible for the outcome. I honestly feel sorry for people who continually feel taken advantage of, or that they have been victimized.  How little control they must feel they have over their lives.

In high school my car had broken down and the stereo and musical car horn (yeah, I was that cool) had been stolen out of it.

I was very upset.

I vowed to find out who did it. I reported it to the police. I watched everybody and anybody with the suspicion of a tv police detective, I even eventually accused innocent people of the crime.

In reality, I was at fault for not locking the car after it broke down. Even though I lived in a small town, it was an obvious and completely irresponsible thing to do.

I could also say that I was responsible for choosing such a faulty car, or not maintaining it. You see, there are lots of significant points that lead up to any given event, and if you can accept looking at it this way, “blame” and “fault” become a very slippery words.

Mindset of Service

There is a saying that goes “you can get anything you want by helping others to get what they want.”

This is vitally true for Real Estate Investors. Our job is to help people to buy and sell their homes. We use the knowledge we have to make this happen for people whom, most of the time, cannot get it done in any other way.

We are at their service.

If we keep in mind our service to others, great things can happen.  For one, you stand out.

I remember a guy who had called me about an apartment.  I didn’t have what he was looking for, but made some calls to other landlords on his behalf and gave him the names and numbers of a few more landlords that I knew.

He was so grateful he stopped by the house I was working on and told me “Thanks so much, you are the nicest guy I know.”  While I didn’t get him as a tenant, I could tell his compliment was genuine, and for me, was reward enough.

If you do this with enough people, word gets around that you are the person who will go out of your way to help someone, even if you have nothing to sell them directly.

Have a thick skin.

You will especially need this when starting out. Creative Real Estate Investing seems to have a bipolar distribution of proponents that love it and those that think people using these techniques are financial scoundrels,  scamming people out of their home equity.

It is only fair to assume that there will be those close to you who feel the same way.  As Jesus said “Only in his hometown, among his relatives, and in his own house is a prophet without honor.”

You will need to have particularly thick skin with the people closest to you. It is probably best to wait to tell them anything until you have what Ron Legrand calls the “shut up check”, from the bank or title company.

Ready- Fire-Aim.

In this business you can’t wait for all of the lights to be green before pressing on the gas, because the lights will never all be green at the same time.

The best you can do is to start out with low risk ideas, things like Bird-dogging, Assigning contracts, or working leads for another investor.  As you gain confidence and experience you can go onto bigger and better opportunities.

You need to be like an airplane in flight, start off in the right direction, build up speed to get off the ground, and once in flight, continually reevaluate where you are at and what you are doing to best align with your target destination.

Self Motivation

In this business, you are accountable only to yourself. Know your limitations and find people to partner up with to compliment what you lack.

I learned this lesson when I partnered up on a deal with my friend who is a banker, besides getting us a great deal on the interest rate for our loan, he keeps simple yet immaculate records of everything that is going on in that LLC.

I had no idea how bad I was at this until I did this deal with him.  I just knew I didn’t like it.

As a Real Estate Investor, you are also the only person who is going to get the things done that you need done. There is no boss to be accountable to in this business. Only yourself.

Patience and Persistence

Getting something going with real estate can take a long time. In order to find the killer deals you have to kiss a lot of not-so-pretty frogs. Some of these frogs will swear to you that they will turn into a Prince despite the warts.

Every seller I have ever talked to has some reason that his or her house is a great deal. Some actually get me believing it for a while, but very few actually are.

It can be a hassle screening through property after property, but eventually you find the one that is worth it.

Continual learning.

There are a lot of things to learn and some can only be understood by doing them.

One example I can think of is going to the closing for your first bank loan.  Nothing written can precisely, and fully, prepare you for exactly what you will think, see, and feel during the closing.  The party of players sitting around the large conference room type table, the nervousness in the air. the large amount of paperwork you resolve to sign, without fully knowing the meaning of.  The realization that everyone there is getting a piece of you via your bank note.  Nothing can educate you to that experience that  actually sitting in that chair can.

Accept that you will make mistakes.

This is really part of the learning process.  You can’t get around it. Accept mistakes when they happen, and take with it the associated learning experience.

You will have likely paid dearly for it.


How to avoid arguments over security deposits

January 26, 2009


How to avoid arguments over security deposits

By
James Miller


It is no secret that property managers are one of the most sued professions. As landlords and investors we need to be able to reduce the possibility of this any way we can.

It is my contention that most arguments that ultimately lead to court actions stem from some sort of miscommunication.

While there are people out there who try to sue for just about anything, I think most people who end up in court feel that they have been wronged by someone, but have not been able to work it out with that party.

For landlords and property managers, having a good explanation of what is expected will help to reduce the possibility of arguments and court.

I found that repairs cost me much more than tenants expected and I was constantly getting challenged on the costs.

My answer to this problem was to create a schedule of fees for security deposit withholding.  Here is what I came up with:

Schedule of fees for security deposit withholding

This is the general guideline used to determine what charges to hold against a tenants security deposit. It should be noted that this is a general guideline and charges are determined on a case-by-case basis and may be higher depending upon the situation. It should also be noted that we have 21 days by law to return your security deposit. We will do everything we can to speed up the process.

We are fair in our evaluation of what to withhold from a tenants security deposit and do not treat it as a way to profit from the end of a tenants lease. A large amount of effort is needed to turn an apartment, and money is only withheld to cover any excessive damage that is beyond what is normal wear and tear.

Time for our personnel is expensed out at $50/hour.

Materials are expensed pass through.

Light Carpet Cleaning $25 per room, no remaining or difficult stains

Heavy Carpet Cleaning $50 per room, stains remain or are difficult

Extra Heavy stains in Carpeting that require replacement of the carpeting will be charged on a time & materials basis.

Light wall patching (larger than pencil eraser, smaller than quarter) $15 per occurrence

Medium wall patching (larger than quarter, smaller than baseball) $30 per occurrence

Heavy wall patching (Baseball size & larger) minimum $50 per occurrence, or time + materials

Cleaning toilet $25 (as evidenced by remaining stains, dirt, mildew or hair)

Cleaning tub $25 (as evidenced by remaining stains, dirt, mildew, or hair)

Cleaning sinks $25 (as evidenced by remaining stains, dirt, mildew, or hair)

Cleaning Windows $10 per window

Missing/damaged outlet or switch plate $5 (plate plus installation)

Removal of trash/debris $45 per garbage bag full. Large items such as furniture and appliances the size of a microwave or smaller at $75.00. Large appliances and furniture at $150 per item.

Property damage: I.E. broken fixtures, windows, appliances Etc. charged at time plus materials. Any cost for outside labor for repair will be passed through with a $15 up charge.

Light bulbs: All lights were supplied in working order with light bulbs. It is the tenants responsibility to provide the apartment to us in the same fashion any missing/out bulbs will be charged at $5.00 per for normal 40-60 incandescent. (bulb + installation) Special bulbs

Fire alarms: Were supplied in working order with fresh batteries. Will be charged $20 per missing/broken alarm.

Unusual odors: If deemed caused by the tenant (pets, spills, left out food) damage will be charged on a time and materials basis.

Lost/damaged Keys $40 per key

Thelpa.com, a landlord protection agency has a great settlement charges guide, as well as a ton of other free landlord forms.

I also created the next document to give tenants as a map to work toward getting as much of their security deposit back as possible.


Hints for getting your security deposit back.

We take photos for our files before and after you move, so we do know what was there before you moved in. Anything unusual or excessive should have been noted on the move-in/move out form. These will be the two major things we use for comparison to determine what charges to apply.

Let us know of any items that need to be repaired or taken care of before you move out. If we can plan for it, it will cost us, and you, less.

Leave all hardwood and vinyl floors in a broom swept condition. Vacuum and Shampoo all carpets.

Use 409 or other cleaner to remove any stains or marks from walls. Check heavy use areas such as switch plates and cupboard handles.

Open a couple boxes of baking soda and put it in the refrigerator and freezer.

If you know you have marks that will need to be touched up, ask us for some paint. In most cases we have the color on record and can provide you with a small amount to touch up any marks.

If you would like to try to fix any holes in the walls, drywall patching compound can be bought in small inexpensive containers. You can save the expense of a putty knife by using an old plastic credit card or ID as a spreader. Just make sure you don’t make the problem worse by leaving a rough surface.

Switch plates and outlet covers are inexpensive; In the large chain stores you can buy a package of ten for under $5. If you have more than one that is damaged it may be worth your time to replace them yourself.

Vinegar and Newspaper works well to clean windows.

Make sure any utility bills, (especially water and sewer if you are responsibile for it) is up to date and paid. Providing us a copy of a last billing statement is a good way to help ensure quick return of your deposit.

Remember to return any loose items such as remote controls, keys, etc.

If you have a difficult stain or other damage you are trying to repair before we go through, call us, as we have seen a lot of situations and have many helpful hints for removing difficult stains and fixing items in a cost effective way.

Our focus is to turn over an apartment with minimal time in between. Any effort on your part to go the extra mile will be noted and taken into account when looking at what we need to withhold from your security deposit.

Both documents are given to the tenants as they move in and when they move out so they know what to expect.


Five things you need to know before becoming a landlord

January 22, 2009



Five things to know before becoming a landlord

by James Miller


These are things I didn’t really give much credence to until I started investing in Real Estate.  I share them with the hope it will raise awareness for those just starting out.

These five items are targeted to those of you starting out who will become landlords in the process.

Note that if you think that the lease option exit will not make you a landlord, you are mistaken.  While you do seem to get a higher caliber of character as a  tenant-buyer (probably because as they have more money on the line), you still have to do most of the same babysitting duties as you do with a  straight rental unit.

1) If you are going to be a landlord, you will have to evict tenants.

There is no “if it ever happens”. You will eventually have to evict someone.

People who seemed so nice moving in are the very same ones who will be saying how terrible  you and your apartment are to the Judge when you are in court.

I knew this was a possibility when I bought my first property, but by the time I got to 20 rental units, it seemed I had to start the eviction process more often than my lawnmower.

I have really only had to go through with a full blown eviction a few times, but I have had to serve “pay or quit” notices at least 30 times.  As with a lot of things in Real Estate investing, the things you really don’t want to do, are the very same things that you most urgently need to do.

Serving notices and evicting tenants goes with the territory of being a landlord.  You should accept this and start learning the eviction laws and court system in your area.

Getting a good attorney to guide you in this area is crucial.  If you don’t serve papers correctly, or miss a step in the process, they may hold the case over for a later date, costing you money as the defaulted tenants continue to live in your apartment. And once they know you are taking them to court you have zero chance of the tenants willingly paying you anything.

2) Paperwork, bookwork,  and paying bills will take a lot of time.

Before I started obtaining properties, I could bang out my monthly bills in about 15 minutes.   It now takes me over two hours,  just to get bills for the properties written out every two weeks.

I really should be assigning this task to someone else, but never seem to get around to it. I have to admit that part of it might be my controlling nature not wanting to let go of something so integral to the business.

Paperwork and bookwork take a lot of time too,  getting the paperwork done for a new tenant or tenant buyer to move in involves: a lease,lead based paint disclosure, move in move out sheet, welcome letter, and a schedule of security deposit withholding fees.

Most of these I have multiple copies of, but they all need explaining when turn over the keys.

My brother who is my partner in the majority of our properties is in charge of the bookwork. We use Quickbooks as our accountant seems to speak to that software very well.

Even with this premium software package to speed our bookkeeping, I am sure my brother spends no less than five hours a week on entering information. This is mainly due to the fact that we have several rehab projects that generate a lot of receipts.

The properties are  costing us ten hours per week just to keep the papers in order and get bills paid.  This doesn’t even include the periodic phone calls and letters to the tenants.

3) Advertising expenses will be a lot more than you think.

The classified ads we place are a lot more expensive than I thought they might be.  When I have vacancies, it is normal for me to ring up a classified ad bill of over a $100 before we get the right person in.

Now there are a lot of places where you can advertise for free, like posting flyers at the local convenience store, or on Craigslist, but for us the newspaper classifieds out pull the free ads by about 4 to 1

When you have an empty apartment that is costing you $150 a week to hold, you want to generate as many leads as possible as quickly as you can. Newspaper classifieds becomes a necessary expense.

4) You will have to clean and touch up most apartments after tenants move out.

The law allows for “normal wear and tear” to an apartment. What this means to you is that you can’t force the old tenants to make the place move in ready for the new ones.

Some tenants are really good about leaving things in good shape when they leave, but in most cases you will need to have someone go through and clean the apartment after they have left.

In my experience no one ever cleans the stove.

You will be able to deduct for some cleaning and repair expenses, (I do deduct for a stove cleaning) but this is  a built in cost to apartment turn over.

5) You will need to keep a bigger reserve amount than you think.

“Reserves” is the money that is set aside each month for replacement of things like a worn out carpet.   The problem is that the big ones can take a huge bite out of your checkbook.  A water heater will set you back about $300 if you install it yourself.  A furnace can easily be $5000.

Even if if you have  reserve amount of $50 a month being set aside, a new furnace will take over eight years of reserves to pay for it.  This assumes you don’t use the reserves for anything else during that time, which in eight years, is pretty unlikely.