This is a follow-up post to one I wrote  a month ago about selling my home by owner.  The outcome of the prior is now pretty obvious:  I was completely unsuccessful at selling my home by owner.  But given that there are 5 other homes that are still on the market that were up for sale by real estate agents in my neighborhood, I really do not feel too bad about that failure.  The truth is that the real estate market sucks.  And it is even worse for owners of condos and townhomes, because the only real differentiation they have is price.  It was particularly difficult in my neighborhood because one of the homes went up for a short sale and essentially undercut the prices of all the other sellers in the community.  But this is the reality of the market, and honestly, does not seem to be getting better any time soon.

Given this reality, I was left with a few options:  keep the house on the market and continue a price war with my neighbors or try my luck on renting the property.  Given that there were already two other properties on my street that were rentals and that I had enough equity to make it fiscally realistic, I decided to go the rental route.   Keep in mind that I was not flying blind into this decision.  Last year, I took a semester long real estate class as part of my MBA, so I had a pretty good list of prerequisites before making this decision.  I figure that I would share these before I started as it was pretty good advice when it was given to me.  The first prerequisite was that I had at 20% down on the home.  Apparently, this is a magic number for renting property.  At 20%, you are free of any PMI obligations that increase your monthly costs on the home.  Also as a good rule of thumb, you can rent your home for around the same cost of a mortgage on 80% of your home’s value.  The second prerequisite for me was that I had enough money set aside to maintain my mortgage if my renter defaulted on the property.  And, finally the third prerequisite was that I fully understood the laws around renting in my state.  Missouri really makes it easy, because they publish a guide called the Missouri Landlord/Tenant guide.  I gave this a quick read through prior to advertising my property to ensure that I knew what I was getting into.

After making the decision to rent the place out, I was really left with two key problems I needed to work out.  The first was how I would advertise the property.  And, the second problem was once I had found the renters, how would I do background checks to make sure they would be a good fit.  The first problem was actual quite an easy one to solve.  I called up a couple of my friends that were renting properties and asked them how they found their place.  The overwhelming response was that they used Craigslist to find their future home.  This really just reinforced what I had already known—if you want to rent a property in St. Louis, start at Craigslist.  The second problem was a bit more involved.  It is common sense to run a background check on potential tenants to screen them before they rent the property out.  But if you have never done this before, it is a bit overwhelming to get started.  Like with most decisions, I turned to the Internet to try to get some answers.  And believe me, I found a bunch of services willing to help.  What I found pretty amusing was how bad each of these service’s websites are.  As a web developer, I tend to judge a book by its cover, so it was pretty tough to trust financial information to a company that overlooked the design of the site.  In the end, I selected Transunion’s SmartMove service to do background checks.  I liked this service because it was from a reputable provider and they verified the prospective tenant online versus having to put the onus on me to collect the social security number and appropriate sign-offs.  With that said,  I never ended up using this service.  But, more on that later.  After selecting a service, it is extremely important to determine what your criteria is for selecting a qualified candidate.  Doing this ahead of time really makes the final decision easier, and it is actually pretty important if you run into any legal questions about how you select tenants.  My criteria was simple.  The rent could not be more than 35% of their monthly salary (preferably closer to 30%), they had to have clean credit, and had to have a good rental history with their previous landlords (no evictions, etc).

After I had all the prerequisites and process questions out of the way, I set out to find a potential tenant.  I posted the ad in Craigslist and to my surprise I started to get serious inquiries right away.  Within the first week, I had two showings scheduled.  The first showing was a bit nerve wrecking at first.  Going into it, I had to prepare a rental application to hand out.  This turned out to be pretty simple.  I grabbed one of the Internet that matched up well to ones I had filled out in the past.  I then modified it so that it would describe the rental process that I had put into place and so that it collected all the information that I needed to put the SmartMove process in motion.  The showing itself was much different than what I had experienced when selling my home by owner.  Rather than rely on the other real estate agents to show the property, I had to do it myself.  Most of the questions centered around month-to-month costs and square footage questions.  Since I had done a lot of that ground work when I was selling my house, it was pretty easy to field these questions.  The most surprising part of the process was the willingness for potential tenants to give away personal financial information without me really even asking.  I would simply mention the need for a credit check in the process and I would get a life long credit history complete with long stories about how they ran a foul.  I ran this by a friend of mine who also rents properties and he said that this happens all the time.  He told me that you will get a lot of “sob” stories, but just to hold out because there are tenants out there that have good backgrounds.  I thought that this was the best piece of advice I got before renting a property.

One of the first people to contact me about the place was not a potential renter at all.  Her name was Diana from stlrentit.com.  She runs a website that connects landlords and tenants.  She said that she had a few tenants looking in the area and would like to have them come out and take a look at the rental.  I was of course a bit suspicious of the service to start, but her process was very straightforward and the agreement I had to sign put no risk and (most importantly) no costs on my end to show the place.  So, I agreed and showed the property to her clients.  I went through the same process that I had gone through before to show the place.  But this time, they were interested and filled out an application.  Rather than going through SmartMove, I opted to use Diana’s resource for credit checks.  This made the process a little easier, but did require a little bit of trust on my end.  After receiving the credit information, I read through the reports for about an hour.  I had gone through my own a couple times before, so I had a pretty good idea what to look for.  I then made a few phone calls to verify employment, call references, and confirm positive rental history.  This actually ended up taking a couple days because it was tough to get a hold of people and I really only called references that I could verify the phone number from a secondary source.  After a bunch of positive results from my screening, I then accepted the application.

The only stumbling block left was getting the lease signed.  For my lease, I decided to go with EZ Landlord Forms.  I chose this company because early on I used them as a resource to find out more information about renting the property.  They then allowed me to create a sample lease and I found that their wizard was not only very intuitive but it covered all the points that I had read about in the Missouri Landlord/Tenant Guide.  It was nice that it was not only easy-to-use, but also it was thorough and was reviewed by attorneys in the state.  The form ended up costing me $20.  I thought that this was a little expensive, but the quality was apparent.

As you can tell by this post, the process to rent a property and become a landlord is pretty involved.  In the end, I think that I did my due-diligence to find my new tenants.  But, it goes without saying that no process is 100% bullet proof.  In the end, I stuck with my criteria and made what I consider to be a sound decision.  But at the end of the day, I still worry a little about the decision and hope everything turns out for the best.

This entry was posted on Monday, March 1st, 2010 at 10:36 am and is filed under Misc. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.