FACT: Renters Have Poor Credit? (Austin: days on market, spring break, sales)

[aakridge]

I spoke with a property manager today. He seems like a practical person, but I'm not sure. He made it a point to tell me that home owners that wish to rent out their property need to be realistic: people that rent don't have high credit scores, and when they do they're not that far from buying a property of their own.

In short, I think he was trying to say that if you want someone to say in your house for a long period of time, then find someone that has a low credit score. That seems kinda risky to me, but maybe he's right. Though, when I was a renter (4 years ago), I had excellent credit. I had student loans, etc, so I had to wait 6 years before I could buy a property. I wasn't making tons of money, AND I didn't have the down payment. I'm not sure what to think of this message I just received. What are your thoughts?

[neddy]

We have great credit and we are renting since we just moved here. Wanted to make sure that we ended up in the right spot. Will be here about a year then buy.

[austin-steve]

The type of property you are renting, and the quality of condition you are willing to put it in before renting it out, will determine the quality of tenant you will attract.

What the PM told you is less true today than it was 2 years ago, but again, it depends on your property and where it's located. It also depends on how good your property manager is at evaluating prospective clients. Some PM's don't decline enough tenants, some decline too many. It's a tough balance to achieve. A bad tenant can cost thousands of dollars, but so can a home sitting vacant for three months waiting for the "perfect" tenant.

Throughout the 1990's and through 2001, when our rental market was steady and strong, I automatically declined any applicant with poor credit. If there was an open collection account, late payments, charge-offs, bankruptcy, etc., I declined them and moved on. There were always plenty of better applicants that would come along in short order, so I had the luxury of only accepting fully qualified applicants.

That changed in 2002. It changed very quickly. When Austin's economy hid the skids starting about mid-2001, and we started bleeding jobs after 911, we lost the inflow of new workers that fed the rental market for the previous decade. We also started losing our good renters as they became buyers, as lenders relaxed their standards and new home builders began agressively going after our renters as potential buyers.

And at the same time, because the sales market for resale homes tanked also, frustrated sellers were deciding to rent their home and wait for the market to improve, which created a glut of rental homes. It was a perfect storm of bad circumstances for landlords in Austin, as rental rates fell 25% to 35%, and vacancies and days on market for rent homes increased substantially.

All of a sudden, property managers and landlords in Austin had to make the decision to either risk prolonged vacancy, or start accepting tenants with spotty credit who would have been eliminated a year before. So, our mindsets changed drastically as Property Managers. We started looking harder at rental history and employment, and stopped letting poor credit automatically eliminate a rental candidate. Also, personally, I dropped what was an almost universal "no pets" policy, as the risk of prolonged vacancy started to outweigh the risk of pet damage.

Today though, the pendulum is swinging back the other way. Because of Austin's strong job growth, and tightening lender standards, the pool of qualified renters has risen again. Landlords are raising rents on renewal, and good clean properties in good locations rent fast and attract good tenants.

Here is a chart that illustrates the steep drop our rents took after 2001. So far 2007 is continuing a strong slope upward again.

[pilotskid27]

I get the strong feeling that whoever told you that was trying to convince you not to attempt renting your house. (Or, for some reason, was trying to sell you a bill of goods.)

There are many, many reasons that people rent a home---most of which have nothing to do with lack of creditworthiness or ability to pay. In fact, in my business, I have grown to discover that there is a huge pool of very, very wealthy people who need to be in Austin either part-time or for a short period of time, and simply do not wish to encumber themselves with ownership for the time they are here.

Austin Steves answer is well thought out and accurate. It is a law of supply and demand. If there are a lot of properties in need of renters, the criteria for application will be lower....If demand outstrips supply, the criteria for application will be tighter.

In any case, if you are renting a home to someone, take reasonable precautions (background check, etc.) to ensure the tenant will hold up their end of the agreement, and go ahead with the plan!

[austin-steve]

I have grown to discover that there is a huge pool of very, very wealthy people who need to be in Austin either part-time or for a short period of time, and simply do not wish to encumber themselves with ownership for the time they are here.

I just sold a duplex in 78703 where a Doctor has been renting for 22 years. There are a lot of people like that in Austin, as you say. Also, lots of people move here and don't want to commit to a particulat location right away, or they want to make sure the new job or the schools pan out, so they rent. Also, a lot of people plan to build a custom home and the process of finding the lot, choosing a builder, and actually building the home can take 2 or 3 years by the time they actually move into the new home.

This is all tied to job growth and a strong local economy though. We have a good 4 to 7 years left in this cycle, then things will probablt fizzle out again as happened in 1986-1991 and 2001-2005.

Steve

[statefan]

That is exactly what we did. My husband had been in Austin working since January. The kids and I were in TN until my daughter finished school. Other than a trip down here on spring break, I had never been to Austin. There is no way I was going to commit to buying a house in a city I knew little about. Unfortunately, I did not know about this website before we moved, but still, with small children 7 and 5, I do not want them in a sub par school. I also do not want to live in a bad "area". You can research cities and schools all you want, but until you live in an area and talk to moms and other people, you really have no clue!

So our decision to rent was based purely on that, and had nothing to do with our Credit Score. We have one year to make another decision.

[austin-steve]

You can research cities and schools all you want, but until you live in an area and talk to moms and other people, you really have no clue!

Oh so true. I sometimes worry about the neurosis displayed by my baby-boomer generation with regard to just about every life decision. I'm guilty of it too, especially with my kids and their schools. When I grew up, our parents just sent us to whatever school was in the neighborhood, and my Mom admited to me that she and my Dad never even gave it a second thought nor did they discuss "best schools" with any of their friends. They also never discussed the real estate market or worried about how much their house was worth, etc.

Steve

[love roses]

I'm guessing people worry about how much their homes are worth because noone really stays put like they used to. I didn't think about what the "best" schools were when I was a little kid, as where I grew up only had one high school. When I was 16, and moved to the giant metropolis of Clear Lake, my step dad was the one who talked about Creek vs. Lake. He thought Lake was better, so that's where I went. (I had to delete some of the story, because I start rambling and telling "Edith Bunker" stories, IE, there's a point, but it takes a massive narrative to get around to it)

[swaushorn]

Austin Steve - thanks for putting the kibosh on that argument quite eloquently. As someone who was in the credit reporting business for many years and has seen my share of credit reports - I'd say it's a crap shoot to say that long term renters have lower credit scores is quite preposterous especially in light of all the sub prime mortgages cratering these days during resets due to "poor credit".

The reason for rising home ownership has risen is not only affordable conventional rates, but also the availability of boutique loans to those "less desirable" credit scores.

I just don't agree with that blanket statement about credit scores.