Charting New Terrain (JPM)

How foreclosures and the mortgage crisis are transforming the rental market

by Diana Mirel

The following is an excerpt from the Jan/Feb 2009 issue (Volume 74, Number 1) of JPM�, Journal of Property Management.����

Home foreclosure filings continue to increase at unprecedented rates - as of September 2008, one in every 475 housing units received a foreclosure filing, according to Realtytrac. With the mortgage and credit crisis making headlines every day, real estate managers in the residential rental sector cannot afford to ignore changing market conditions and must recognize the impact foreclosures have on this part of the real estate industry. As worrisome as this trend is, foreclosures in today�s volatile market offer unique opportunities and possibilities for real estate management professionals, specifically those managing rental properties.

�In the big picture, homeownership rates are dropping, which means there is more need for rentals� and that�s a good thing for property management,� said Robert Machado, CPM�, MPM, president of HomePointe Property Management in Sacramento, Calif. �Property management usually runs counter to the market conditions. When times are tough in sales and real estate, it is pretty solid for property management.�

However, increased rental demand does not immediately translate into reliable renters. Often, this new pool of prospective residents has poor credit due to the foreclosures. Property managers must learn how to serve an influx of new renters with tarnished credit while residents.

To face these complex challenges, many management firms are revising their standards, offering more flexibility and allowing leniency for prospective renters with foreclosures. With no hard and fast rules for renting to these new prospects, managers who operate on a case-by-case, property-by-property basis have had the most success.

A Bigger Pool

While foreclosures and the mortgage and credit crisis have significantly slowed real estate sales, the property management business is booming. Eric Luneborg, owner/broker, of CAL Property Management in Dallas notes increased traffic unlike anything he has ever seen in his 15 years of experience.

�There is more choice out there and a lot of people who are losing jobs or changing jobs, so there is a lot of volatility,� said Luneborg. �When you have a lot of movement like that, people will make changes in how they live and where they live.�

Specifically, Luneborg notes a dramatic increase in renters, in both the low-end and high-end rental markets. With lower-end markets less able to absorb a slow economy, these residents have increasingly been looking to move into more affordable housing. Meanwhile, the higher-end rental market is also experiencing an increase in prospective residents because renters who would qualify for $1,000-$2,000 per month in rent would formerly have been home buyers.

�We�re seeing a higher quality renter hitting the market,� said Luneborg. �For those people, it is harder to get home financing, so individuals and families who would have qualified for a loan a year-and-a-half ago are making great renters today. We�re able to capitalize on an incredible pool of new renters that we didn�t have a year ago.�

The full article is available as an online exclusive in the Jan/Feb 2009 issue (Volume 74, Number 1) of JPM^�, Journal of Property Management.�

IREM Members have free access to the JPM� online archives and the �Online Exclusives,� articles that are only available on the IREM Web site. Non-members can subscribe to JPM� at www.irem.org/jpm.�