Dennis McCurdy:
Probably the most important aspect of an investment. As part of the management, selection of the tenant and dealing with your tenant and the lease are all important aspects of that. So let's go to the smaller part of the conversation and just talk about the tenant in conjunction with the fact that management is probably, let's call it the engine that runs the investment, and let's call the tenant the fuel that takes care of the engine itself. What thoughts do you have, Brett, as far as selection of a tenant?
Brett McCurdy:
I'm not sure where you really want to lead with this.
Dennis:
Okay. Well, break in whenever you can. This is a trial.
Brett:
Why don't you just keep talking and then I'll nudge you a little bit here and there.
Dennis:
Okay, break in when you can. The tenant is a huge part of the investment. As we've discussed before, most property managers want the tenant to move as often as possible because they make more money. I had X update the rentals the other day, and most property managers will tell you that their average tenancy is a year and a half to at most two years for single family homes. For apartments, it's almost always around one-2 year. In the case of Argyle, which is our only apartment project. Our average tenancy is over three and a half years. So we're painting, fix up, rerenting, rental fees and vacancy, at least half of what everybody else is doing. And again, the bottom line of that is because we take good care of our tenants. If something breaks, it costs me just as much to fix it if I do it tomorrow as it those three weeks down the road. If I do it tomorrow, my tenant's happy. Three weeks down the road, they've known about something for three weeks and they're annoyed. They may even come to you and threaten to withhold some of the rent.
Dennis:
It's important to make sure that the tenant knows you care. A good example is the other day, Frank went over to one of our properties to replace a light switch. He knocked on the door and the elderly parents opened the door and this little dog ran out and disappeared. It just took off. Frank said he didn't think its little feet ever touched the ground. He opened the door and it was gone. Frank drove around the neighborhood for over two hours on his time, no charge, looking for this little dog. We called every night for the last three nights to find out if they found the dog and the answer was no. We called this morning, the answer was yes. These people really know we care and that's important.
Dennis:
So many landlords treat the tenants as if they were second class citizens. Somebody comes in and looks at the property that the fair market plan might be 2,000 and 2,100. You do 1,950. All of a sudden they know they've gotten a good deal. They stay. When you show a piece of property, you make very, very sure that the property is something that you would be proud to live in if you were looking to live in a house of that size. Don't bring a tenant in and show them a house that's full of roaches, or the walls are banged up, or it's dirty. They open the refrigerator and they see food from the prior tenant who moved out six weeks ago. You just don't do that. Your tenant is way, way, way more important.
Dennis:
Over the years, RIC has had one eviction. That eviction was two ladies with children. They were young. One would babysit and the other would go on downtown and bar hop. And then the next night they'd switch and they kept getting further and further behind. Even though I'm a real nasty man (joke…), they somehow thought that I was a soft touch and they wound up getting evicted. We hadn't been in business for more than about a year and a half when this happened. I was married about a year and a half when it happened. I drove by, the ladies had their furniture on the street. They were waiting for the children to come home so that they could tell them what was going to happen, which they didn't know. They just indicated, "we know we made a mistake and we'll never make a mistake again, but we don't want to go."
Mr. McCurdy:
I went home and I called my new wife. I told her I wanted to make a loan to these ladies so they can move back in again, because I didn't own the house. She made the right comment. She said, "Don't you dare." I went home for dinner. We were sitting having dinner. She looked at me and she says, "You did it anyway, didn't you?" I said, "Yes." Those people stayed for 12 years. They were never late and they were gold.
Dennis:
As far as our single family homes, our average tenancy is seven and a half years. We have tenants that moved in in 1992, and they're still in the same house, and they're still there. We have tenants that have had children and need a bigger house. They call and they say, "We need a bigger house. We're three months pregnant, so you've got six months to find us a place where we want to stay with you." The last time I took a tenant to court was in early 1980s. You need to treat your tenants well and you need to realize the value.
Dennis:
Now, as far as the cost, when you look at these things, if we have a tenant who stayed seven and a half years, we have lost probably at least five rerental fees. But again, our philosophy, as you know, is to not create vacancy rerental, paint and fix up. It's good for the manager. It's not good for the owner. When you screen your tenant, find out as much as you can about them. Look them in the eye. Don't want them to send in an application. Go through the property with them. Have one of your agents go through it.
Dennis
Teach your agent what to look for when you see them. Because when the tenant is looking for a piece of property and he likes the property you're showing, he or she, then they're on their very best behavior. You're going to see the nicest person they're ever going to be. You need to find a way to break that shell down. You can tease them. You can ask them questions. You can look at their car and see if it's clean. You can look at them and see if they're clean. You can see if you're there with them one-on-one or your agent, then you can find out what questions they asked and what they were concerned about. If they ask you questions as to where the nearest bar is, you may be concerned. But these are all things you can't see on an application.
Dennis:
When the application comes in, you run the credit down. If there's a flaw in the credit, you ask them about it. Ideally you bring them in and sit down and talk to them before you approve them. In Maryland, we're allowed to take up to two months security deposit. You might tell somebody that because it's a little shaky, you'll take the two months security deposit. But after they've been in the property for six months, you have a good idea if they take care of the property. If they request the second month's security deposit be applied toward the seventh month rent, there's nothing wrong with you going and looking at the property and taking the money out of the security deposit, which costs you money anyway, and use it towards the seventh month. After six months, you know what you got. It's not a bad way to bring somebody in who is a little weak and it gives them a break at the end of six months.
Dennis:
As a point of getting the application, once you approve them, you know their birthday, you have a good idea of what holidays they celebrate. It's always a good idea to send them a note on their birthday or call them on their birthday and wish them a happy birthday. Just let them know they're special people that you care about.
Dennis:
One thing that's been very effective is to send a good tenant letter. I have the people in the office go through and say, "Well, these people have been very good." They may not always pay on time. They may have had a problem somewhere along the way, but if they'd been fair, and they've been reasonable, and they taken good care of the property, and they've been honest with you, send them a good tenant letter and say, "Thank you. We just want to send you a check for a couple hundred dollars." And you want to say, "We really appreciate your tenancy. We appreciate having you. Use this towards a meal, a show, the rent, whatever you want. Thanks again." That goes a long, long way to letting people know that you're straight up. You've worked in the property management side. What else do we do that you can think of that's good for the tenant?
Brett:
I mean, you covered a lot of it. Just knowing that you care and that your maintenance team is there if they ever have a problem.
Dennis:
Yeah. Maintenance is another, that's a whole different conversation, but we'll have that at another time.
Brett:
Just knowing that they can call you if they have a problem is big because then they're going to report those problems a lot quicker preventing possibly larger repairs as they fester, like a water leak for example.
Dennis:
Okay.
Brett:
What about on the flip side? I mean, you've definitely had difficult tenants. How do you deal with the difficult tenants?
Dennis:
Just honestly. I mean, the difficult tenants are generally difficult because they're trying to get something that they shouldn't have. I had one just yesterday come in, and this apartment project, we have parking only for one per unit. This guy moved in two roommates, and now he's got three guys living there, and he's saying, "[inaudible 00:11:26], I'd like to have three parking tags." And I'm saying, "You can't do that. I won't do it for the others. I won't do it for you."
Dennis:
He says, "We'll only park one car there. But again, I need the three tags so that if I come in and the guy who has not parked in the right spot, he's out on the street, he has the tag, I don't want to wake him up. So we'll never park more than one car there, but we just need the three tags, so we didn't have to keep switching it back and forth." And I said, "No." He called today and he complained. And I said, "Well, I can give you another choice." And he says, "What's that?" I said, "You can move."
Dennis:
The difficult tenants are generally ones that want something from you beyond what you're prepared to give. They want a special favor. If they continue to want the special favor or if there's continue to be a thing, you're just give them notice. I think maybe the word that I think is most important when it comes to anything concerning real estate investment or management, or whatever, is you have to do what's fair.
Dennis:
You have to remember who you represent. You represent the owner of the property. You best represent the owner by making sure the tenant's happy and the tenant stays. So if you have a disgruntled tenant, especially in an apartment building, you want them gone because they're going to create discomfort for people around you. In one of our apartment projects, they are going to be up at two o'clock in the morning walking around. They're going to be slamming the doors. They're going to be complaining to people that they parked too close to the line or whatever. You need to get them out of there. Your goal is long-term tenants, even though it costs the manager money, it makes the owner money and that's what the manager is paid to do.
Brett:
Would it be fair to say that, I guess the ideal situation would be to treat your tenants like an employee? Because everything you said would be to build a very loyal employee.
Dennis:
Yeah.
Brett:
Treat them well.
Dennis:
That's probably not a bad way to put it.
Brett:
If you treat your tenant like your employee, they'll stay with you. It's a win-win situation.
Dennis:
Yeah. But people don't realize how important the tenant is. I've had people on my staff over the years that have treated tenants as if they were second class citizens, especially in an area like where we invest. Okay? Where you have a major employer, the government, you have Walter Reed, you have National Institutes of Health. You have a lot of people who are on a one to five year assignment and it's foolish for them to buy a house because the closing costs on the front end and back end, they won't break even. So they rent. But I mean, you're talking about nuclear physicists. You're talking about major scientists. You're talking about doctors. They want a nice home for their family, and they want it to be well-maintained, and we're willing to pay for it. You just treat people well. I think that's the key.
Dennis:
Screening, as far as screening is concerned, don't necessarily believe what they say. There are a lot of tenants that are smart enough to know what to misrepresent on applications. When you look at a credit report, the credit report will give you a fraud alert. Look at it. There's a fault alert in almost every credit report I look at and there could somebody that misreported a Social Security number, or name, or an address. Check that out. If they give you a landlord reference and we call the landlord and the landlord gives you a glowing reference on this person, you hang up the phone and you go to the land records and we find out who owns the property that they lived in and you call and you find out that that's the same person that you spoke to or not.
Brett:
Could be friend or someone related just vouching for them.
Dennis:
It could well be a friend. It could be somebody that is anxious to get rid of them. Okay? And they've given them notice. They can't get them out. They don't want to sue them. You call and the landlord says, "Oh, they've been fantastic." So if you have any doubt, drive by their house. Call them and tell them you're going to bring a form over for them to sign, whatever it is, see how they live. If you do the screen properly, knowing that you don't want them to move, unlike other managers, then it works. Let's take a break and eat.
Brett:
Okay.