Illinois REALTOR® Magazine | July 2012

7 Things You Need to Know About Rentals and Property Management

By Stephanie Sievers, Associate Editor

If there has been one bright spot in the housing market in recent years, it’s been in the rental sector. Hesitant consumers choosing to rent rather than buy, underwater owners pushed out of homeownership through foreclosure or short sales and tightened credit rules that make it harder to obtain financing have played a role in pushing the number of people renting higher.

Add to that the growing number of homeowners who have become reluctant landlords when their homes haven’t sold and more Illinois REALTORS® are recognizing rentals as a market worth tapping.

It’s a change Dennis White, co-owner of RE/MAX Unlimited Northwest with offices in Palatine, Lake Zurich, Crystal Lake and Algonquin, is seeing and as a result, more of his agents are working with leasing, primarily with single-family or townhome rentals.

They help renters find properties, but they also help owners navigate the process of leasing their home for the first time. Other Illinois agents are deciding to take the even bigger step of moving into full-scale property management.

REALTOR® Nicholas Apostal, an agent with Coldwell Banker Residential Brokerage in Lincoln Park, was frustrated he was losing out on business because more consumers were opting to rent instead of sell for a lower price. So a year ago, he partnered with Lauren Hundman, who had a background in property management, and formed Owl Management in Chicago.

Their company found opportunities in managing condominium associations and leasing individual units for owners who have moved but decided to lease rather than sell, said Hundman, lead property manager. Since Apostal is still a sales agent with Coldwell Banker he cannot be involved in any of the management duties or licensed activities of the property management company.

REALTOR® John Vranas, owner of Vranas Ventures in Chicago, has been in the property management business for more than 30 years and if he’s learned anything about the leasing and property management it’s that you have to know the rules of the game.

“You need to know what you’re doing or you not only put yourself at risk of fines and penalties, but you also put your property owner in harm’s way,” he said. “For example, if you don’t handle the security deposit correctly, the tenant has cause to collect damages.”

If you are in residential sales but are thinking about expanding into leasing or even property management, here are seven things you need to know:

(1) Recognize that leasing and property management are different than residential sales.

When you’re working with rentals you’ll be dealing with background checks, security deposits and, in some cases, collecting rent. With that in mind, however, leasing is the most natural transition from sales brokerage, Vranas says. Instead of bringing a buyer and seller together, you’re bringing a landlord and tenant together.

Property management is more complex and long-term. “You are the face, the day-to-day contact. You take on the responsibilities of enforcing the leases and responding to code violations. You really step into the shoes of the owner,” Vranas said

(2) Leasing and property management are specialties. Get educated.

Before you jump into the rental or property management market, it’s important that you are fully prepared. Get educated about this niche market and you’ll be more attractive to renters and property owners. Some local associations offer courses and the Institute of Real Estate Management (IREM) offers designations such as Certified Property Manager or Accredited Residential Manager.

Instructor Patricia Trombello, CPM, president of Technical Training Consultants, Inc. in Lisle, is also seeing an increase in people registering for leasing agent licensing classes. The leasing agent license is a modified license for individuals to lease residential property only. They may not conduct any sales brokerage activity or work with commercial real estate with a leasing license, she said.

(3) Know what is allowed under the license law.

Planning on riding out the market by continuing to sell real estate but also do some property management or leasing on the side? Think again. A licensee can only perform licensed activities for one real estate company/sponsoring broker, Trombello says. If your license is held by your sponsoring broker, any rental work you do must go through them.

In some cases, residential brokerages such as White’s RE/MAX Unlimited Northwest have expanded their services to allow their agents to work with rentals. In Apostal’s case, his license is still held with Coldwell Banker so he can’t be involved in any of the day-to-day operations or licensed activities of the property management company and Hundman holds the managing broker license for that property management company. Be aware of the licensing rules before you branch off into rentals.

(4) Get your paperwork in order.

Similar to the listing or buyer agreements that you use in residential sales, you’ll need to create a management agreement that spells out your duties and responsibilities to the property owner if you are doing property management, Vranas says. You’ll also need a lease agreement, but be careful to check with your local municipality as it may have specific rules that must be followed. [IAR Legal reminds that licensees should not answer questions about terms, changing provisions or modifying leases. They should seek an attorney’s advice.]

(5) Decide how you are going to handle the nitty-gritty — applications, credit checks, etc.

Getting into the rental business means establishing application processes, running background and credit checks and collecting security deposits. If you take on the responsibility of running background and credit checks, remember that  you must comply with the regulations of the Federal Credit Reporting Act, Vranas said.

Agents must safeguard the information they collect through background and credit checks or they could face liability, Vranas said. At RE/MAX Unlimited Northwest, White said they recently hired a third-party source so that it can run background and credit checks in house.

Know the rules for handling security deposits and keeping them separated from other funds. When Vranas collects a security deposit he has it made out to the property owner and instructs them to deposit in a separate account.

(6) Have professional back up in place if things go bad.

If a renter falls behind on rent, the tricky question of eviction may come up. Hundman recommends having a good attorney on call who is knowledgeable about contract law and local landlord rights and ordinances. If you’re going the property management route, she also said it’s important to have plenty of errors and omissions insurance to protect yourself from anything that might come up.

(7) Remember, it’s a volume business.

Rentals may be a growing business right now, but it’s important to go into it knowing that the margins for profit can be thin and it is a volume-driven business. When it comes to commissions, all decisions must be made on an individual company basis as to what each company will charge for its services whether it is a flat fee or a percentage of the first month’s rent. White said agents in his office who actively pursue leasing business have boosted their annual incomes by 25 percent. 


Learn More:

The number of renter households has grown to 34 percent compared to about 29 percent five years ago, according to the National Association of REALTORS®. At the same time, the U.S. homeownership rate fell this spring to 65.4 percent, its lowest level in 15 years.

Another trend? The rise of single-family homes as rentals. Single-family homes account for 21 million rental units in the U.S., or 52 percent of the residential rental market, according to a recent report from CoreLogic.

Learn more about the legal issues involved in property management and earn three hours continuing education at the IAR Fall Conference & Expo in St. Charles. Instructor Lynn Madison’s CE course, “Legal Issues: Property Management,” will cover some of the legal and ethical responsiblities of representing landlords and tenants. www.illinoisrealtor.org/conference

 

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