Welcome to Residential Real Estate Leasing!

Residential Leases are in high demand in most metropolitan areas. As the costs to own property continues to increase, the rate of the population that are renting their primary residence will increase.

Included in this course are several important skills need to be a successful with residential leasing, including:

• How to Prospect for Leases
• Lease Listing Proposal
• Marketing a Lease
• Collect Applications
• Due Diligence
• Contracts and Disclosures
• Property Management Overview

The course is taught by Robert Crawford, a seasoned Los Angeles Real Estate Broker. This course is NOT theoretical. Robert uses several of his recent deals to illustrate the process. Go in-depth with the financial and practical aspects of residential real estate leases. There is also a large focus on the common pitfalls and warning signs to watch for before acquiring a lease listing.

 

Residential Leasing Process

In order to avoid potential pitfalls and ensure all parties close the deal happy, leasing a property is a process that must be followed. 

 

This process begins with a relationship with the property owner and a signed lease listing agreement giving authorization to market the property for a fee. Aggressive marketing will then lead to incoming leads of potential renters that must be qualified and schedule showings to see the property. 

 

The Listing Process:

Listing Agreement

Stage Property

Marketing

Showing

Application

Background Check

Lease Agreement

Move-In

Money

 

Use this process and the lease listing checklist to ensure you have complied with all legal aspects and have clearly documented the lease to avoid potential future disputes.

 

Key Market Indicators

The rental market consists of properties that are for lease or have been recently leased. 

When beginning to assess the rental value of a property you must consider how rental value and rental appraisals are measured. Official bank appraisals are based on properties that have been leased within the last six months in the surrounding area. This is the measurement you should use in determining your current rental value.

To help you gain some insight into the pricing puzzle we’ll look at a few key performance indicators of comparable properties.

• Price-to-rent ratio
• Price per square foot
• Absorption rate
• Average Days on Market

 

Theses indicators give a data driven picture of a current real estate rental market. Please keep in mind that each property is unique. The location, condition, amenities and macro-economic factors all affect the price.

Let’s take a look at each of these key market indicators:

Price-to-Rent Ratio

The price-to-rent ratio is a valuation of how affordable a property would be for renters in the local housing market. Fair value can be calculated based on the Price-to-rent ratio on a home.

Current Sale Value ÷ (12 x Current Monthly Rental Value)

= 

Price to Rent Ratio

This indicator is used to determine if the current value of a property is a fair value. Generally it measures whether a property would be cheaper to rent or cheaper to own after paying a mortgage.

For example, if the average local home is worth $300,000 and the average rents are $1,200 a month:

$300,000 ÷ (12 x $1,200) = 20.83

The higher that number climbs, the more affordable the market is for potential buyers and worse for renters. This is important to understand whether the total monthly rental revenue would cover a property’s mortgage and fees.

The lower the price-to-rent ratio is, the more affordable it is to rent the property. This is not good for a potential buyer and likely means that at the current price, the market rents would not cover the total of the property expenses.

As you can see, the numbers will vary depending upon both the average home valuation and the average of what the renters market can carry for monthly rent expenditures. What this reveals to buyers is it might be better to rent a home rather than purchase it.

The use of a price-to-rent ratio is comparable to the price-to-earnings ratio for stocks. When a stock price is high, and its earnings per share relatively low, the P/E is high. A high P/E often indicates that the stock is too expensive and the share price is headed for a drop.

What someone is willing to pay to rent a place is that home’s “earnings.” Just as in the stock market, a high home price related to the rental earnings mean homes values will probably drop.

Cities with a high price-to-rent ratio are the least buyer friendly. If your current market has a high ratio, you should consider selling. 

Price Per Square Foot

As you might be able to determine from the name, price per square foot is the valuation of each square foot of the livable area of a property.

This metric is primarily used to compare and contrast similar properties. Since it is unlikely that each comparable will be the exact same size, this allows two or more properties to have a comparable value.

Price per square foot answers the question, “Am I getting more or less house for my money?” Though it is a commonly used metric, there can be several issues with focusing only on the price per square foot.

Other factors, such as property condition, amenities and location (i.e. the direction the home faces or the surrounding neighborhood) may push the price per square foot up or down.

Also, property improvements won’t necessarily increase your price per square foot. You may have excellent upgrades in the home, a brand new kitchen or remodeled bathrooms but if your home is not in a desirable part of the city, you won’t necessarily garner more price per square footage.

Therefore, although price per square foot is a commonly used tool for home valuation, there are other important factors, which need to be taken into consideration for determining home price.

Absorption Rate

Real estate is a unique market. Unlike stocks and options, real estate requires a time-consuming process to transact.

While stocks and options can be traded for a profit within seconds, real estate transactions can take weeks. This extended length of time has a dramatic effect on the overall marketplace and slows down the rate of change. 

The rate at which properties lease in a localized market during a given time period is called the absorption rate. The absorption rate is a calculation based on dividing the number of leased properties in a month by the number of available properties currently for rent.

For example, if there is a neighborhood that has 10 homes listed for lease and 2 households in that same area actually leased last month, the absorption rate would be 2/10 = 20%.

A high absorption rate, generally over 20% or more, means that homes are leasing quickly and it would be considered a owner’s rental market. A lower absorption rate means that homes are sitting on the market and there is more supply than demand, favoring tenants and generally lowering prices due to demand.

The absorption rate is considered one of the most important market indicators and should dictate rental pricing and demand trends of the current market.

Average Days on Market

The average days a property sits on the market before going into escrow is one part of the absorption rate. This indicator tells you how hot the market is at the current moment.

The shorter the amount of time a property sits on the market, the better for a Owner. A short period means high Tenant demand in the market.

A buyer’s market, when there’s more supply than demand, the homes take an average of 60 days or longer to lease. This happens when more homeowners are looking to lease their properties than there are qualified tenants willing to pay their asking price.

In a Tenant’s market, Owners will likely have to accept a lower price than they ideally want. This hyper-competitive market is all about property condition and price. These two factors directly control a Tenant’s decision and perceived value.

Investing in your property to improve the design and condition will make your home stand out compared to similar choices. After all, a buyer is searching for the best deal in the market with the perceived value of each property.

From a Tenant’s perspective, this is the best time to rent. It allows Tenants to find deals that could easily appreciate in value. 

A Owner’s market is just the opposite. Demand is greater than the supply. The market conditions are ripe and price is a hot commodity.

In a Owner’s market, it should take less than 60 days to lease the property. In fact, in a Owner’s market with the right price, condition and marketing, properties should receive multiple applications.

The third type of market is when the average time on the market is between 60-90 days. This market would be considered neutral and has benefits for both Tenants and Owners. This type of market will likely see more negotiations between the two parties since a buyer has slightly more leverage than during a hot sellers market.

 

Residential Types

When working with a residential property, it’s important to understand the type of property and the nuances associated with that type. Residential real estate includes any property that is zoned by the local authorities for dwelling use or potential dwelling use. This would include the standard home, individual condominiums, vacant land that could be developed into a home or multi-family apartment buildings with no greater than four units.

Single-Family Homes 

This type of structure is a individual dwelling of various sizes that have no shared walls and are on a independent lot with unique parcel number. These properties could have a attached or detached garage or accessory dwelling unit. Single family homes may also be referred as SFH or SFR’s in abbreviation.

Condos

Condominiums (also known as “condos”) are individual units within a larger building or community. Condos share a wall or two with other units, and generally come with homeowners’ associations (HOAs), which require the residents to pay monthly or yearly dues. They are popular in urban, high-density areas, where there are many restaurants and shops.

When representing condo leases, ensure to always get a copy of the HOA rules and regulations and disclose them to the tenant before signing a lease.

Co-ops

Cooperatives, or co-ops, are a slightly different way of holding a title to a shared building. With a condo, you own the space within your unit, but with a co-op, everyone owns the building together. Because of the shared responsibility, there’s often an interview process to become part of the community and restrictions on the sale or use.

Townhome

Townhouses are a hybrid between a condo and a single-family home. They are often multiple floors, with one or two shared walls, and some have a small yard space or rooftop deck. They’re generally larger than a condo, but smaller than a single-family home.

Multi-Family

Multi-family homes are the least common type of residential building. They are essentially a home that has been turned into two or more units. They can be townhouse-style or have multiple floors, and range in size from a duplex to a four-plex; anything more than four units is considered commercial apartment building. Some multi-family homes have a separate entrance for each unit, while some share a main entrance. The distinction between multi-family units and condos is that the units can’t be purchased individually; there’s one owner for the whole building.

Apartment Building

Single lots that include five or more residential living units are considered Apartment Buildings. Some apartment buildings are high-rise structures with hundreds of units and others are low-rise communities with multiple apartment structures. These properties are generally managed by a central, internal leasing department. Always check with the building management to confirm they work with Tenant Broker Agents.

Residential Leasing Terminology

Real estate is a complex legal market.

The benefit of understanding the vocabulary used during a transaction is critical. The law binds two agreements together with unique terms and legal definitions.

It’s important to include a comprehensive glossary because understanding the terminology is the first step to being successful in a real estate transaction. Certain terms are commonly used by real estate brokers and will inevitably be used when you try to sell a home.

This glossary has terms and definitions in plain English. There are many abbreviations used in real estate listings as well as specific terminology that are used in different markets.

Absorption Rate: The rate at which homes sell in a localized market during a given time period is called the Absorption Rate. The absorption rate is a calculation based on dividing the number of homes sales in a month by the number of available homes for sale.

Active Listing: When a property is listed for sale in the MLS, it is given a status of “Active” to indicate that the seller is currently marketing the home and soliciting applications from Tenants.

Appraisal: A report highlighting the estimated value of the property completed by a qualified third party. This is typically done for the benefit of the buyer to ensure the property is worth what they are paying.

Appreciation: The increased value of an asset.

Application to Rent: A formal document that states the general details of the applicant such as current address, rental history, employment history, references and other important questions.

As-Is Condition: The acceptance by the Tenant to lease the property in the existing condition of the premises at the time the lease agreement is executed.

Association Fee/HOA Fee: In addition to a mortgage, certain housing communities such as town homes have a monthly fee associated with maintaining the common areas and amenities.

Building Code: The various laws set forth by the ruling municipality as to the end use of a certain piece of property and guidelines for design, materials and type of improvements allowed.

Certificate of Occupancy: A document presented by a local government agency or building department certifying that the property is in a condition suitable for use.

Closing: This is the final meeting, where the Tenant and Landlord sign the necessary paperwork; complete the transaction and release/take possession of the property. Usually the representing agents attend.

Closing Disclosure: A form that provides the final details about the mortgage loan. It includes loan terms, projected monthly payments and how much the extra fees will be.

Collateral: Something of value (in this case your home) that is held to ensure repayment of a mortgage or loan.

Commission: A percent of the sale price of the home that is paid to agents. The seller usually pays commission to both the buyer and listing agent.

Comparable Properties: Homes in the area of interest that have recently sold and have similar features.

Contingencies: Conditions that must be met in order to close the transactions. Contingencies are typically tied to a date, referred to as a deadline. If the contingency is not satisfied, the contract may be canceled.

Debt-to-Income Ratio: A lender will look at a borrowers debt versus income to determine the amount of loan they are eligible for and if they can repay their debt plus the home loan.

Default: A failure to perform a legal or contractual duty.

Depreciation: An accounting practice that subtracts the cost of a capital asset over its estimated useful life expectancy or the value of the real property caused by deterioration or obsolescence.

Dual Agency: Two licensed real estate brokers co-operate to represent the property owner in marketing and selling a real estate asset.

Earnest Money: The deposit made from the buyer to the seller when submitting an offer. This deposit is typically held in trust by a third party. Upon closing, the money will generally be applied to the down payment or closing cost.

Economic Rent: The market rental value of a property at a given point in time, even though the actual rent may be different.

Exclusive Agency Listing: A written agreement between a real estate broker and a property owner in which the owner promises to pay a fee or commission to the broker if specified real property is sold during the listing period.

Fair Market Value: The sales price at which a buyer is willing to pay a seller with both having a reasonable knowledge of the relevant property facts.

Force Majeure: A force that cannot be controlled by parties to a contract and presents parties from executing the provisions of the contract. This includes acts of God such as a flood, earth quake or hurricane and acts of man such as riots, fire and war.

Guarantor: The entity that guarantees a debt or other agreement.

Guarantee: A formal promise or assurance that certain conditions will be fulfilled.

Highest and Best Use: The use of land or buildings, which will bring the greatest economic return over a given time.

Indirect Costs: Development costs, other than material and labor costs, which are directly related to the construction of improvements, including administrative and office expenses, commissions, architectural, engineering and financing costs.

Lease: A legal agreement in writing , whereby the owner of real property, the lessor or landlord, gives the right of possession to another entity, the lessee or tenant, for a specified period of time and terms.

Legal Description: A geographical description identifying a parcel of land by government survey, metes and bounds or lot numbers of a recorded plat including a description of any portion thereof that is subject to an easement or reservation.

Legal Owner: The legal owner has title to the property recorded in the official records.

Letter of Attornment: A letter from the grantor to a tenant, stating that the property has been sold and directing rent to be paid to the grantee, otherwise known as the buyer.

Lot: A parcel of land, generally referring to a part of a subdivision of a block.

Lot Size: The size in square feet of a parcel of land that is commonly referred to as a lot.

Low Rise: A building with fewer than four stories above ground level.

Market Value: The highest price a buyer would be willing to pay in a competitive and open market with all facts being disclosed.

Multiple Listing Service (MLS): A member only service to list real estate properties that are available for sale. These are the most reliable sources to receive up-to-date listing information.

Occupancy Rate: The ratio of rented real estate units compared to vacant real estate units.

Pay-Per-Click: A measurement of digital advertising that charges for each action taken by a user interacting with your ad.

Pay-Per-View: A measurement of digital advertising that charges for each impression made by the end user in viewing your advertisement on their screen.

Plat Map: A map of a specific area which shows the boundaries of individual parcels of land.

 

Price Elasticity: Economics dictates that supply and demand are a function of price.

Principal: The underlining amount of the loan that is borrowed.

Property Condition: The overall condition of the property for sale including but not limited to the design, layout, foundation, roof, electrical system and air conditioning systems.

Real Property: Land and anything affixed to the land, including buildings, fences, plumbing and heating fixtures or other items not considered personal property.

Rent: Revenue in the form of a fee paid, generally periodically (i.e. monthly or yearly,) for the use of any real property, land, buildings and equipment.

Residential Lease Listing Agreement: A document negotiated and signed between the property Owner(s) and the representing Real Estate Broker that outlines the terms and conditions of selling the property including price, commission, marketing, disclosures and time frame of listing a property for sale.

 

 

Specific Performance: A required action compelling one of the parties to carry out the provisions of the executed contract.

Tax Base: This is specifically for seniors, and it allows them to convert the equity in their home to cash.

Tax Lien: A statutory lien, giving the state or municipality priority in a sale for nonpayment of property taxes.

Tax Roll: A record containing the public details of all parcels of land within a county, the names of the owners, assessed values and yearly tax amount are contained within the information.

Tenant: An entity who retains possession and permission to use real property according to an executed lease agreement.

Time is of the Essence: Means that performance by one party within the period specified in the contract is essential to comply with the agreement.

Title: A legal document proving current and proper ownership of the property. Also referred to as a Title Deed, this document highlights the history of property ownership and transfers.

Vacancy Rate: The percentage of available units for rent in multi-unit property.