Minnesota attorney Aaron Hall speaks with Tom Sedlack, general manager of 33rd Company, a property management service. Tom explains some of the typical problems landlords run into and how 33rd Company can help solve them.
Aaron: I am Aaron Hall, Attorney in Minnesota. Tom Sedlack is with us today, he is a rental property manager. And for landlords who buy investment properties to rent out, Tom is a lifesaver because he and his company come in and manage all the day to day issues for landlords. You know, Tom, one of the common frustrations I hear from landlords is they think they are going to make a lot of money and instead they end up pouring a huge amount of time into managing the property, trying to figure out what works in getting good tenants. So let’s start out, what are the reasons that people get into property rental as landlords in the first place.
Tom: In the current market, obviously with a huge debacle in the housing market, there is a lot of incentive now for people who are underwater or who have moved for various reasons like a job, relocation, or something and maybe just don’t want to sell a home at a tremendous loss in the current market. So they have elected to consider renting their home. Some who get in with a very short-term focus of — I just want the market to recover, and then I will sell my home and at least mitigate my damages. And some may have a longer-term perspective. So I think this is the first if it is, and they are kind of called accidental landlords in many cases, but in a lot of times, we find that those individuals once they do rent their homes, find out they do get a significant tax but, instead, they get cash loans, they get long-term appreciation and equity build up all along the while that they have a tenant in place and all those end up being a very compelling reason why you would want to keep a home as a rental potentially for a long term.
Aaron: So in different types of rental homes, there are townhomes, condos, single-family homes, apartments. What do you handle?
Tom: We actually focus on the single-family home market, and the reason we do is it’s a very difficult market to manage for independent landlords that are trying to manage a single-family home. You have a lot more complexities involved in managing: you have all different paints, different carpets, different locations, there is no common area, there are no onsite managers. You would have in an apartment complex. You really are extending a significant amount of trust to the tenants when you have a single-family home situation, notwithstanding the structure itself. You also have the residents saying that the structure is located in and placing bad tenants in the middle of a good residential neighborhood, and this would be a huge mistake. It can cause a lot of long-term problems.
Aaron: What types of problems do landlords face that eventually cause them to say, “I need somebody like Tom to manage my property. I am done with this.”
Tom: Absolutely! There are a lot of things that landlords don’t even know themselves that they don’t know. It’s one of the things where they don’t know what they don’t know. Everything from city licensing laws, landlord-tenant laws, Minnesota is probably one of the most tenant-friendly states in the country: lots of laws applicable to tenants, to privacy quite enjoyment, everything to dispositioning the security deposit in a certain amount of time and within a certain parameter, so there are a lot of complexities involved. And then, of course, you have maintenance and how many, or do you have appropriate contractors that can take care of things on a timely basis? So you can avoid having court-escorted actions or delayed maintenance — all those sorts of things that just add a layer of complexity. When it comes to tenant screening, this is where a lot of independent landlords really get themselves into trouble. HUD has escalated and, in fact, the number of HUD violations for discrimination have gone up almost exponentially in recent years. A lot of them give individual homeowners who don’t know what the fair housing laws are, what discrimination really means, what parameters are involved in terms of treating people equitably and fairly. Between applicants and all of that, it can very easily land an independent landlord in court for a HUD violation, and that filing starts at $11,000, so it is extremely important thing for landlords to recognize what they do not know and to, again, seek out the services from a professional management company to help them avoid those risks.
Aaron: In the early 2000’s when property values were continuing to rise, we were one of many people who decided, “Hey, let’s buy an extra property; rent it out. The money from the rent you could use to apply towards a mortgage and the property value would increase. We sell it and make a lot of money.” It did not turn out that way, I was greatly frustrated with trying to find good tenants. Many months would go by before we could find a good tenant. And then when we got a tenant in, they may not pay, and now we have a back hole issue. Then there were problems and issues, you know, repairs or tenants making too much noise, and then the homeowners association complains. So it was all the time I was spending on this that caused me to get a property manager. What amazed me most was how much we actually made financially by getting a property manager. It did not actually cost us. We made money because a property manager advertises it. Often, you are able to charge more than a single landlord trying to do a little advertisement, and you get somebody in immediately because property managers are constantly advertising. You do not have to wait a few months and lose that rent. And then just not having the hassle of tenants calling you, “hey, the toilet’s clogged, and we can’t unclog it,” — things like that.
Tom: Absolutely, I think that really hits the nail on the head — a good property managing company, even with the fees that they would charge, which by the way are tax deductible. You are going to make more money and do less work and have a greater probability of a much higher successful outcome with a management company than you would trying to do it yourselves. Everything from marketing, for instance, 33rd company markets to over 200 websites, brochure openings. We got some of the best rental marketing available in the country, and our vacancy rates show at extremely short. Generally, we can rent homes in 30 days or less and find quality tenants while we are doing so, and then, of course, tenant screening is so critical. Setting good, experienced parameters in where to look for, how to screen, and where to set the thresholds, are very critical. For instance, our income standard is 3x the rent. Each tenant, whether they are married or not — both get screened. But when we screen from that income standard, we screen and the applicants are required to have 3x the rent and income. So if we have unrelated people that are not married, they each have to make 3x the rent. If they are married or there comes in other finances, then we allow them to share their joint income, but that is a very high standard for screening that we use, to make sure that we apply a consistent bar, find a consistently good tenant and then move forward. And then, of course, the other benefit with the management company is maintenance. Our company manages several hundred homes over a hundred million dollars with the residential rental properties, and we get huge volume discounts on contractor maintenance services that can save the owner a lot of money as well. So it’s all those hidden pockets of value that add up to a much greater return for the individual owner than they would get themselves.
Aaron: A lot of landlords call me with lots of legal questions because they are having problems. Tenant won’t pay or trying to sue. They are doing action or a lawful detain or…I referred many people to Tom because I say, “Look, it doesn’t make sense to spend all this money dealing with this stuff when you can have a property manager take care of it for you. You will save money.” But, Tom, even though we recommend this, a lot of people will still want to be a landlord. So I have two questions for you, the first one is: Is there anybody who should not use a property management company? Will they actually be better off doing it on their own?
Tom: I would say there very well may be cases where that would be true. If someone, for instance, owns a duplex and they are living on one side and renting out the other, they are there. The 10 o’clock at night clogged toilet call or maintenance issue generally is not going to be much of an inconvenience for someone that may not be living in the same city. So that would probably a case where it might make sense. Or if you are renting out a bedroom or basement or a run over a garage something like that. Absolutely, those are the cases when an individual can do that. Also, if you are just managing one home, maybe 2. It’s small enough where if you have the time, if you are retired, and if you do not mind spending a little extra time each week being involved with some of the day to day things that happen, that could be another scenario.
Aaron: I supposed the challenge there is that they still have to find a tenant initially, which can take a while even if they do not mind the maintenance and the other ongoing responsibilities.
Tom: Yes, that is true. And you still are faced with the tenant placement question: How am I going to find that quality tenant, screen them, place them and also have a substantially good and effective documentation in a form of a lease and addendums that are going to preserve and protect that tenancy?
Aaron: It all answers your point, that as a landlord, you don’t want to just use those standard leases you can get for free on the internet. Often people are hiring us to do it, but I would rather see them benefit by using a property management company. You already have those forms, it is all in place, it is ready to go.
Tom: Absolutely, in fact, some of the leases that you buy at Office Max per se, are not even legal in the state. So a lot of times the landlords would get themselves in even further troubles by using a lease that is not even appropriate for the selling.
Aaron: Tom, one other tip that I picked up from you that I really like, was the fact that you do the automatic payment through the tenant’s bank account. So you do not have to call them and mail them each month in order to make sure that rent comes in and make sure it comes in on time. That eliminates a lot of time the property management company would spend chasing tenants. It also leaves you much more likely to get paid, and property management fees can be lowered as you have that efficiency in place.
Tom: Absolutely. By requiring automatic ACH direct debit right out of their checking or savings account, not only can we add a certain discipline to the rent collection process, we even do that with our co-signers. So if we have a parent or another responsible adult co-signor, they will also fill out an ACH direct debit form, then if we ever can’t get the money out of the tenant, we can direct debit the co-signer and get those funds same day with an ACH automatic transaction.
Aaron: One other problem that landlords often encounter from a legal perspective is dealing with the security deposit. As you know, state laws are very strict about what you can do with the security deposit, that you have to provide a notice within a certain amount of time or refund the money. And, often, if people don’t do that, the penalties are quite high, and there are non-profit organizations that will help tenants pursue those penalties. So it is important for landlords to respect tenant rights, follow the law, and make sure they deal properly with that security deposit. I imagine you have a procedure in place for that.
Tom: Yes, that is another good thing about a management company as we are very process oriented, checklists, and workflow diagrams — all of that to keep us within the hemisphere of the law and to make sure that we do not get into certain violation of security deposit notice, for instance, or the detail behind the withholding that is required, as well, by the state statutes.
Aaron: How did you get involved in this kind of business? I understand that you were a landlord yourself.
Tom: That is right; we actually kind of stumbled into it. We started buying our own rental properties in the nineties and really started working for ourselves managing. And we got to a point where we had enough properties where we decided that we had to hire a management company so we can continue to buy the properties or we going to have to spend some time and learn how to do it ourselves and create our own management company. Because there really weren’t any good management companies back then doing single family homes, in fact, still today there are very very few that can do it very well. So we ended up creating all of our processes, establishing our business models, incorporating the company, and creating the property managing company. And as of about six years ago, we were asked by our friends and acquaintances, “Hey, can you manage my home while I am overseas with my company?” and we said no for quite a while and we finally decided we have a really good process and a really good company. Let’s give it a try. It was just widely successful, and we now have over a hundred million dollars’ worth of residential properties under management. Very successful in terms of just the day to day management and then good common sense management from tenant screening to marketing to even helping owners sell their homes in the end. Sometimes we can even do a facilitations sale between owners and the tenants. Just to give you an example, with over 400 properties in 2011, we have a grand total of only three evictions on the entire 400+ properties. In 2010, we had zero evictions. And you simply do not get there without doing the day to day diligence that is required to make sure that everything is flying correctly.
Aaron: That is amazing. How should people contact you if they are interested in learning more about your company doing property management?
Tom: We’d love to hear inquiries. Our website actually has full information. Even for those individuals that may wish to try and manage their own homes initially, lots of resources are on our website: www.33rdcompany.com. They can also call us at 651-777-5500. This is our main number for our city office.
Aaron: I have a number of clients who have used your company for years and have been very happy. Thank you for coming in today.
Tom: Thank so much.