Smart Moves by Ellen James Martin

RENTAL UNITS CAN OFFER BIG SAVINGS

During the worst of the economic downturn, many homeowners become landlords -- albeit reluctantly. Their reasons varied: Some, who'd gone through a job transfer or divorce, rented out a home rather than sell at a loss. Others, who'd lost jobs, converted their homes to rentals to avert foreclosure.

Fast-forward to an improving economy in 2012. Many reluctant landlords -- sensing a strengthening market -- are now ready to sell. This constitutes a potentially golden opportunity for homebuyers willing to consider a rental unit, says Sid Davis, a real estate broker and author of "A Survival Guide for Buying a Home."

"Buying a rental home is not for everyone. But if you can look past the (issues involved) you might get a tremendous deal," Davis says.

Why is it often possible to get a rental unit for a very good price? Because the market for rental homes is limited; few buyers can visualize how good an untidy rental property could look when it's cleaned up, according to Davis.

"Often the mere fact that a house has been used as a rental gives it a taint. Buyers assume all tenants have severely damaged the places where they live. These fears are sometimes justified but not always," he says.

Davis contends that bargain hunters need to distinguish between beat-up properties and those that just show poorly.

Davis estimates that savvy purchasers can often obtain a rental home in fair condition for at least 10 percent under the price for a comparable owner-occupied abode. He says a deep discount is especially likely if the home's owners are paying out more money in mortgage and carrying costs than they're taking in via rent.

Are you a homebuyer willing to consider a rental unit as your family's next home? If so, these few pointers could prove useful:

-- Seek to gauge the sellers' level of motivation.

Among the disillusioned landlords now eager to sell are would-be investors who bought properties during the downturn in hopes of making a healthy profit. But their plans were dashed by bad experiences.

"For these folks, their whole rental plan failed to work out as expected. For a variety of reasons, they couldn't collect enough rent to cover their costs. So now they're rushing to sell," says Leo Berard, charter president of the National Association of Exclusive Buyer Agents (www.naeba.org).

-- Seek to visit the place when the tenants are absent.

Davis says that as a rule those living in rental units are unhappy at the notion that their landlord plans to sell. Even if they're OK about moving, they have little motivation to keep the place presentable for would-be buyers.

"Renters can become easily disgruntled about a sale. For this reason, many try to sabotage the selling process," Davis says.

To make sure you can check out all of the property without interference from the tenants, he recommends you try to see it when they're absent. That way you can give the home greater scrutiny. For example, you could go into a walk-in closet or check inside the kitchen cabinets.

-- Always ensure you get an in-depth home inspection on a rental unit.

Some rental properties are overseen by professional management companies. But Davis says this offers no guarantee that a place has been kept in good repair and that all its problems have been caught.

"Many professional management companies handle only routine matters -- like mowing the lawn -- or emergencies, like a leaking water heater," he says.

What professional rental managers often miss are less obvious issues, such as a roof that's leaking into an attic. Also, they rarely deal with tenant-caused problems, like damage to hardwood floors or carpeting.

To ensure you identify all the problems with a rental property, Davis urges you to hire "a darned good home inspector."

To find one, he recommends you ask your real estate agent for a list of at least 10 candidates and then pre-screen them on the phone before making your choice. You can also find inspectors through such professional organizations as the American Society of Home Inspectors (www.ashi.org).

-- Obtain estimates for all major repair issues found by your inspector.

For 15 years -- until he sold the last one recently --Davis owned six houses that he rented out. This experience taught him that renters often don't bother telling their landlord about problems until they're very serious.

"A dishwasher might have been malfunctioning for months -- running all over the kitchen floor and harming the floor boards underneath. But until it stops working completely, the landlord or management company may never hear about it," Davis says.

As a prospective owner of a rental property, you need to know in advance how much it would cost to repair all of a home's problems. To do this, Davis recommends you get estimates for all needed repairs cited in the inspection report. Then use this data as a negotiating tool to either get the work done or lower the price of the property.

-- Search for a rental property whose problems are only superficial.

Despite indications of an improving housing market in many parts of the country, bargain properties are still widely available in many areas. But among those that carry the steepest discounts are rental properties, Davis says.

"Remember that despite the stigma, not all rental properties have serious problems. Some have solely superficial issues," he says.

To find a true bargain, Davis says the best approach is to look at any rental property you're considering with fresh eyes.

"Some long-time rentals are in disastrous shape. Never buy one of these, no matter how cheap, because they can cost a fortune in money and time to fix. Instead, look for a place that's just messy on the surface and just needs a little paint," Davis says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)