Brokerages dabble in property management at their own risk

Commentary: It's not always possible to please both property owners and their tenants

By BRENTON HAYDEN

The residential ownership business is slowly awakening from its six-year nightmare to a real estate economy that has changed fundamentally since the salad days of 2006. Adapting to today’s real estate reality requires rethinking a few traditional beliefs.

Homeownership may never be the same. Nearly 11 million homes entered foreclosure in the past five years. One million fewer households own their own homes and 4 million more Americans rent than in 2006.

It is unlikely that homeownership will improve much anytime soon as long as fewer than half of all mortgage applications are approved and only 38 percent of the population has a FICO score as high as the average successful borrower.

Renter household formation surpassed new owner-occupied homes in 2007 for the first time since 1985 and has held the lead since, according to U.S. Census Bureau data. An average of 718,500 renter households a year were formed from 2007 to 2010, while owner-occupied households decreased at an average annual rate of 147,250 during the same period.

Homes have lost 35 percent of their value, and homeowners have lost $7 trillion in home equity since 2005. They would have lost a great deal more equity if it weren’t for small investors, who entered the market and transformed millions of foreclosures and short sales into rentals, accounting for 1 out of 5 home purchases in the past three years. Investors have built single-family rentals into a new asset class and the largest rental category in the nation.

Here’s another measure of how much residential real estate has changed. From a peak of 1.37 million in October 2006, membership in the National Association of Realtors has fallen by nearly 27 percent, to just over 1 million as of last month. Since 2007, membership in the National Association of Residential Property Managers has increased 67 percent, to just over 3,800 in July.


Brenton Hayden

Property managers? In these extraordinary times, opportunity is found in surprising places. New property management companies specializing in single-family rentals are springing up around the nation.

Once low on the real estate totem pole, professional property management today is the key to turning millions of former foreclosures into cash flow generators, making it possible for a single investor or a small partnership to buy and hold dozens of properties. As plans develop for a secondary market in securities backed by single-family rentals, ratings agencies like Fitch and Standard and Poor’s have made it clear that they will look to property management to determine how they are rated.

The rise of property management has not gone unnoticed by many brokerages. Coldwell Banker, Re/Max and Keller Williams are just some of the national brands whose local franchises have wholly owned property management subsidiaries. These are most prevalent in foreclosure centers like Las Vegas, Phoenix and Florida markets where they provide one-stop service to brokerages’ investor customers. Some also place a high value on leads qualified by property management firms whose tenants today are tomorrow’s buyers.

Many brokerages, however, are realizing that often brokerage and property management are oil and water. First, there’s the cultural gap between the commission-based, agent-driven brokerage model and the monthly fee management model, which can easily become a financial management problem as well when internal financial systems cannot handle both kinds of transactions.

Then there are great differences in the training, certification and state licensing requirements for management and brokerage, which require professionals to undergo time-consuming training and licensure.

Finally, property management can be a risk, not a boon, to the customer base and reputation of a brokerage. Property managers by the nature of the job are in the position of pleasing both owners and their tenants simultaneously. Sometimes it is simply impossible to do both. One of the greatest risks for brokerages entering property management is losing customers or reputations.

Thriving in the new real estate reality begins with understanding the changed landscape and building new relationships with those who can serve mutual customers best. Alliances between brokerages and property management firms based on respect and a commitment to quality can deliver the best of both worlds to the newest players in residential real estate: investors and their single-family tenants.

Brenton Hayden is chief executive officer of RentersWarehouse.

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