Summary

• The unemployment rate in Michigan has been mixed over the last several months and it currently stands at 9.1%
• Foreclosures are on a clear downward trend down 53% year-over-year
• Case-Shiller is reporting that home prices are up in 18% in Metro Detroit over the last 5 months

To see the full report:  2012-12-06 – Michigan Real Estate Economic Indicators

1118 Dover, Pontiac, MI

We were very excited about our latest project at 1118 Dover, Pontiac, MI.  It was a great house in a great location and we knew when we were finished it would be one of the best homes we had ever put together.  However, we had one major concern with this project which was the timing of everything.

We purchased this property at the end of October.  With the renovation projected to take approximately 4 weeks we knew we would be marketing for a tenant just after the Thanksgiving Day holiday.  We know that most people do not like to move during this time of the year for several reasons.  The holidays are always busy for everyone and the weather just isn’t that nice this time of year.  The bottom line is that people just don’t like to move during this time, so we knew it would be a challenge.

Nevertheless we stuck with systems we have in place.  Using them, our renovation actually finished a week early which gave us a jump on the tenant marketing.  Once we began marketing we put our full tenant marketing plan into motion.  This included a sign in the yard, ads on sites like Craigslist, discussions with the neighbors, discussions with our current residents and of course holding rental open houses.

Now I cannot lie, even with our full press on the marketing side the phone did not ring nearly as often as it had with other properties.  However, the thing we noticed was that there were several candidates that had extenuating circumstances that were forcing them to move.  For instance, one person called and told us that her current landlord was selling the property they were living in and they had to move by January 1st.  Another tenant was in a situation where their landlord was not fixing a number of major issues in their home and they could not even use the bathtub.  So they were forced to move as well.

Both of these candidates proved to be great candidates and we were very happy with the tenant that we placed.  In the end, our systems simply worked.  From start to finish we renovated and tenanted this home in 5 weeks.  The fastest project we ever completed was done in 4 weeks, but typically things take about 6 weeks to complete.  Given the circumstances we are ecstatic with the results and we realize they were only possible because of the systems we have in place for our renovation, marketing, and tenant screening.

1. Pay the rent on time
2. Take care of the property
3. Stay forever

It stands to reason that if the tenant takes care of the first two items then we’re going to offer to renew their lease each and every year, and we’re going to want them to stay forever.  However, you have to realize that good tenants are not easy to come by, and even when you get them you have to be cognizant of the fact that they have little to no loyalty towards their landlord.  In fact, for most tenants they would probably describe the relationship with their landlord as adversarial.  In our view, this is probably the worst thing that you as a landlord could let happen.  We have a very different view of our tenants – we view them as our partner.

As our partner, we feel that our tenants deserve to share in the success of our investment.  If they meet the three goals we have laid out for them, then we reward our tenants because we want to make the decision to stay forever very easy for them.  You see, the 3rd goal listed up above is really our goal – we want our good tenants to stay forever and we think it’s a very good idea to give them reasons to stay.  So, to do this we have incorporated several programs with all of our rental properties that are designed to reward our tenants for good performance.  These programs provide small benefits and rewards and make our tenants feel good.

Move-In Gift

The first thing we do with each of our residents is to give them a move-in gift the day they move in.  We want to start things out on the right foot and sending a$50 gift card or providing a nice house-warming gift is a great way to do this.  We want our tenants to love their landlord and this is the first step towards getting on their good side.

3-Star Resident Program

Next, we offer each of our tenants the opportunity to become a “3-Star Resident”.  To become a 3-Star Resident, the tenant must pay their rent on time and they must pass the 6-month inspection.  (i.e. they must meet goals 1 and 2).  If they meet these goals we offer them a free gift once they agree to renew their lease.  This free gift is normally something that will improve the home.  It could be a ceiling fan, a motion light, or perhaps a programmable thermostat.  This program accomplishes several things.

1. It gives the tenant incentive to pay the rent on time and take care of the property
2. It gives the tenant an incentive to stay in the property multiple years
3. It provides an opportunity for you to continually improve the condition of your property
4. It makes the tenant feel good!

72 Hour Repair Guarantee

One of the biggest complaints we see from incoming tenants is that their previous landlord would not fix something.  If you want to drive your tenants out this is probably the easiest way to do it.  So, to prevent this from happening we have a 72 hour guarantee.  This program guarantees that we will have someone out to the property within 72 hours if there is a repair issue that needs to be addressed.  If we don’t then the tenant will begin collecting free rent on the 4th day.  Now, this program does not guarantee the issue will be repaired within 72 hours, but someone will certainly be out to assess the issue during this time.  Of course our goal with any repair is to get things taken care of as quickly as possible.  We look at repair issues as a great opportunity to improve the relationship with our tenants and we find that they are very grateful for the quick turnaround times with our repairs.

Future Home Buyer Program

This program is designed to put a long-term view into the minds of our tenants while at the same time encouraging them to pay the rent on time.  The way this program works, the tenant will receive a $50 voucher each month towards the purchase  of the property.  They only receive this voucher if the rent is paid on time and their voucher balance will only remain if they continue to pay the rent on time.  So, if they are late one month after 6 months of online payments they will lose all of their vouchers.  In addition to this, they must remain in the program for two years to become eligible to use the vouchers.  If they complete all the requirements of this program we will be happy to offer to have them purchase the property.  Heck, we may even finance it for them if they want because by this time we will have an excellent relationship with them and a very good record of their payment history.

I know some out there may be wondering what it costs to implement all of these programs, but I would argue these programs pay for themselves.  Vacancy is the biggest expense you will face as a landlord and you can easily run into thousands of dollars of costs and lost rent if you have a property that sits vacant for even one month.  By encouraging your tenants to stay as long as possible you will limit your vacancy and reduce these costs as much as possible.  This will allow you to easily pay for these programs and make you much more successful as a rental property owner.

However, have you thought of any unique ways to increase your monthly cash flow?  You may think you’re limited but here’s an idea you should try out on every one of your rental properties.  If you’re a rental property owner,  you’re gonna love this technique.

In fact we just used this technique on the last property we leased.  Normally this property rents for $750 per month but after a short discussion with the tenant he was more than happy to increase the rental rate to $815 per month.  So how did we do that???

We Talked About our Upgrade Program

The answer is actually pretty simple.  We gave him the McDonalds treatment.  When you walk into a McDonalds and order a hamburger the first thing they ask you is if you would like fries with that? I love fries and I’m sure you do too – they go great with a burger.  Well, let’s pretend we’re McDonalds but we’re not selling burgers, we’re renting houses.  What do you think McDonalds would offer their prospective tenants once they agreed to rent?  If you really think about it there are hundreds of things you could offer.  In this particular case, the tenant took one look at our “menu” of available upgrades and said:

I want the big screen TV!  Make it happen!

There was no coaxing or fancy selling tactics, this tenant needed a TV and for $65 additional per month he was willing to have us provide the TV for him.

Now obviously this is just one of numerous examples of things you can offer with your rental properties.  The idea is to have the upgrade pay for itself during the first 4-6 months of the rental period and the remainder of payments will be pure profit increasing your cash flow.

In this particular case we purchased a 42″ plasma tv and had it installed.  Our cost was $450, but over the year we will receive $780 in cash flow.  Furthermore if this tenant stays another year our cash flow will skyrocket the 2nd year making all $780 pure profit.  It also creates options for us in the second year.  Perhaps we’re happy with the tenant and we would like to offer a lower rate around $800/mo.  The tenant will be happy with the discount and we’ll still receive $50 per month over market rate!  How many landlords do you know of that create situations where reducing rent helps them retain tenants and increase cash flow…this is how you do it!

This is a great program and I recommend you start offering it on every one of your rental properties.

The thought is that the tenant is responsible for having the utilities in their name and they are responsible if the bills go unpaid.  This is true for the gas and electric bills but you should be aware of one small distinction with the water bill.  In Southeast Michigan if the water bill goes unpaid most municipalities have the option to transfer the past due water bill to your property taxes.  It does not matter whose name is on the water bill account – the water bill effectively becomes a lien on the property!  You can certainly try to fight this, but it will be a losing battle and the ramifications of not paying your taxes could mean the loss of your property through tax foreclosure.  It is certainly nothing to play around with.

In our experience we’ve found that about half of our tenants are responsible about the water bill.  The other half seem somewhat clueless with regard to money management and as a result we see a lot of water bills going unpaid.

To combat this, we’ve changed our policy on how we’re handling the water bill.  In our leases we now take on the responsibility of paying the water bill.  We actually use this as a selling feature in the rent negotiation and we’ve been successful at getting the desired rental rate to cover the water bill charges.  Our experience has been that $50 per month generally covers the water bill and that’s what we’re charging extra on the rent.

Now some of you may be concerned about the water usage.  What happens if the tenant decides to fill up a pool or a water bed.  Well, (discounting other concerns with these activities) we also have a clause in the lease the stipulates we cover up to $50 of water usage.  If the tenant uses more than this we have the right to bill them for the excess.  In all likelihood we will not do this unless it is excessive, but we have the right to and we would do so if it became a regular occurrence.

I was speaking to one of my clients this past week, and the discussion revolved around his confusion about Michigan property taxes and how they work. 

To say the least, Michigan property taxes can be very confusing, so this week we’re going to spend some time clarifying some of the questions that you may have about Michigan property taxes.

How Are Property Taxes Determined?

Property taxes are assessed based upon the value of your property.  Each municipality has a tax assessing department and this department will send you a tax assessment every year.  The assessment will list two numbers that you need to pay attention to: your State Equalized Value (SEV) and your Taxable Value.

Your SEV is equal to 1/2 of the retail market value of your property.  So, for instance, if your property has a retail market value of $60,000, then your SEV will be $30,000.  You may not agree with the assessment that the local tax assessor makes, and we’ll talk about that more in a moment. 

Your taxable value is the amount that you will be taxed on.  When you first buy a property, your taxable value and your SEV will be the same.  As time goes on, and your property appreciates, your SEV will increase.  However, your taxable value is limited from increasing too much too fast.  In Michigan there is a law that states that your taxable value can only increase by the rate of inflation up to a maximum of 5%.  So, if your property appreciates more than this, your SEV will go up more than your taxable value.  The good news is that you pay taxes based upon the property’s taxable value.  This law was enacted to protect people from being taxed out of their homes.

Important Property Tax Dates

So how do property taxes work in Michigan?  Well, each year you will be issued a tax assessment for your property and you will have to pay your property taxes in the summer and winter.  The dates when each of these activities take place vary by municipality, but the table below gives you a general idea about when to expect them.

Are Summer and Winter Tax Bills the Same?

The simple answer is no.  Again, this varies by municipality, but typically the summer tax bill is much higher than the winter tax bill.  For instance, if your taxes are $2,000 for the year, it would not be uncommon for the summer tax bill to be $1700 and the winter tax bill to be $300. 

As I tell all of my clients, you’ll want to determine what your full-year taxes are and set aside money each month so that the money is available to pay the taxes as they come due. 

How Can I Determine Property Tax Rates

The Michigan Property Tax Estimator is a website you can use to estimate the taxes on a property you are looking to purchase, or estimate the taxes on a property you own.  If you are looking at a property to purchase you will need to know the following information:

• SEV
• County the property resides in
• City the property resides in
• School district the property is in

Now, you will be given two tax rates: homestead and non-homestead.  The homestead tax rate applies if the property is your primary residence.  Obviously this is not the case for rental properties, so the non-homestead tax rate will apply.  Unfortunately the non-homestead tax rate is always higher than the homestead rate.

Now, if you already own the property you will need all the same information as above, but you will replace the SEV with the taxable value in the calculator.

What if I Don’t Agree With My Property Tax Assessment?

In Michigan there is an appeal process that you can go through to fight your property taxes.  In the process you will have to prove your case by showing that properties in the area are not selling for the assessed value that you property has been given.  Fighting your taxes can be an excellent way to reduce the expenses on your property and because taxes can only increase by 5% per year, you stand to have lower tax rates for quite some time after you win your case.

Now, there is a process to fighting your taxes, and if you are an out-of-town investor I would recommend you get an attorney involved that specializes in fighting property taxes.  Typically I’ve seen attorneys charge around $500-$1000 for this service, and they normally guarantee a reduction if they take your case.  Now, if you plan to keep the property for a number of years, you can certainly make back the attorney fees in the tax savings you will see.  If you would like a referral to an attorney that specializes in fighting property taxes please contact us.

Again, I know this can be very confusing, and if you have additional questions on property taxes, I would be happy to help you with this.  Please feel free to email us or give us a call (248)917-4416.

Foreclosures have dominated the real estate market in Michigan for the past several years, but now there is a new trend cropping up – Short Sales.  In a report released by RealtyTrac.com short sales are up 33% nationwide, and that trend is even bigger in Michigan.  Year-over-year, short sales are up approximately 90% in Michigan with  1493 short sales in January of this year.

Compared to foreclosures, short sales make up a much smaller percentage of the distressed sales in Michigan, but they are trending upward.  Banks are starting to realize that selling a property through a short sale is less costly than taking a property back as a foreclosure, so we expect to see this trend continue.  Because of this, we are going to start tracking the number of distressed sales made up of both foreclosures and short sales.  Overall, distressed sales are down compared to where we were two years ago, but the foreclosure numbers don’t tell the whole story anymore.

For now, let’s take a look at their first report for March 2012.

The report lists the top 100 markets across the U.S. and tracks Year-Over-Year (Y-O-Y) pricing changes for both housing prices and rents.  Here is a summary of how Southeast Michigan has fared:

Asking Price Changes – Y-O-Y % Change

• Detroit +4%
• Warren-Troy-Farmington Hills +5.6%

Generally we agree with these trends listed, so we will see how this new index predicts for the future.