Hard-to-sell homes: Renting is an option, but a tough one

For rent sign on lawn

We understand why a growing number of homeowners might be tempted to rent a hard-to-sell house or condo.

You have to move or are stuck with an investment property that's taking longer to sell than you expected. Maybe a lot longer. Weeks drag into months, your neighborhood is a forest of "For Sale" signs and buyers aren't willing to pay as much as they were just a few months ago.

So why not trying renting for a year, make some money and see if the market improves?

Becoming a landlord is like getting married -- not to be entered into lightly. It carries responsibilities you may not want, costs you may not be able to afford and tax consequences you're probably unaware of.

Experts advise you make your decision with emotions in check and a clear understanding of the pitfalls and complexities.

Start by asking if your house really has declined in value, or is failing to sell because it isn't fairly priced.

"Some people have a very fixed idea of what they think their house is worth, and that may not be backed up by the market conditions," says Ron Phipps, a real-estate broker in Warwick, R.I.

Price escalations have been dizzying in many parts of the country, and owners who saw their houses soar in value, then decline somewhat with the leveling of local markets may be seduced by what Phipps calls "phantom equity," the real-estate equivalent of paper gains. A house may well recover its previous value, but the burdens of being a landlord are enough that a reality check may be in order.

Prices have already fallen, and the number of unsold homes grown the most, in many cities.

"A house that isn't well-priced, or has market-appeal weaknesses" a bad kitchen or yard "won't sell in these markets," he said. He advises getting multiple opinions on price, and considering them carefully, before making the decision to ride it out with rentals.

Robert Haskins did all that. But the bottom line was sobering. He bought his house in Gardiner, Maine in 1993, at what turned out to be the top of the market. When his job as a computer systems manager took him to a neighboring state five years later, he was left with a house that had declined in value by an estimated 10% to 15%.

"I just wasn't willing to go to a real-estate closing and pay money to sell my house," he said. Haskins decided to rent, and became a long-distance landlord from his new home, 90 minutes away in New Hampshire.

Haskins did what more experienced property managers suggest.

"Go in with your eyes open and prepare for the worst," advised Hans Stahl, who manages corporate home rentals in the Detroit area. "Take the emotional aspect out of it, and then you can be a good landlord."

What does that mean? First, sit down and do the math -- and there'll be a lot of it. Figure out what you can charge for rent, what the tax consequences will be, what sort of tenants you want. You also need to consider how long of a lease you want to commit to and how you're going to handle the details of property management once you're no longer in the house, and maybe living quite a distance away.

Haskins relied on Nolo, a company that provides do-it-yourself legal resources, in books and on the Web. "It helped me understand a lot of the business things," he said, "like how to pick a tenant, how not to discriminate." It also reminded him to do things professional property managers take for granted like doing a credit check on prospective tenants.

"I went into it with two things in mind: Can they pay, and will they take care of my property?" Haskins said. For his small house in Maine, Haskins told tenants he expected them to cut the grass, handle snow removal and be responsible enough to alert him to other problems.

"It's my job to pay for the plumber, but their job to call," Haskins says.

But, Stahl cautioned, many tenants who rent single-family homes expect such services to be covered by their rent. A lease should be clear about what is expected of both parties.

His firm also serves as property manager for most of the houses his firm rents, Stahl says, handling everything from screening prospective tenants to collecting rents and providing handymen for maintenance. (Many of his clients are corporate executives in the auto industry, serving two- or three-year rotations through overseas outposts.)

Stahl said a standard fee might be 8% to 10% of the monthly rent, plus one month's rent for finding and screening a tenant. Haskins declined to use a manager he didn't think the fee was worth the service and handled his own affairs from his new home in New Hampshire.

"I was lucky," he said. "I rented for more than four years and only had two tenants." The problems were mostly minor some maintenance, diplomacy issues with the neighbors but in the end, he got what he wanted:

"I sold 10 years after I bought for $100 less than I paid for it," he said. "It was a bad market."