Once ‘Ugly’ Property Management Grows as U.S. Home Rentals Surge

By Hui-yong Yu

(Bloomberg) -- Meg McKennon’s workload has surged since the Seattle real estate agent switched to managing residential properties. Now she gets paid for finding tenants instead of buyers -- an easier task as rentals soar.

“In the past two months, my business probably came close to tripling,” said McKennon, who started management company Dwellings Seattle Real Estate in 2010 after selling houses for 15 years.

When a couple moved out of a two-bedroom house managed by McKennon in August, before the lease was up, she increased the monthly rent by $200 to $1,900 -- and still had her pick of applicants. “I could have rented it 10 times over,” she said.

Just as the U.S. housing boom gave birth to such homebuyer websites as Zillow Inc. and Redfin Corp., services for rental properties are thriving following a surge in foreclosures and stiffening of mortgage standards. Membership in the National Association of Residential Property Managers has almost doubled in five years to a record 3,400 members, according to the Chesapeake, Virginia-based trade group.

“We are riding this sea change in how housing is changing in the U.S.,” said Reggie Brown, chief executive officer of All Property Management LLC, a Seattle-based Web service that sells property managers leads on homeowners who want to lease out their properties. “The only growth is rentals.”

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.

Even Seattle-based Zillow, known for its Zestimate home- price estimates, added rental listings almost two years ago.

‘Dramatic Shift’

“There has been a dramatic shift toward renting,” Chris Herbert, research director of Harvard University’s Joint Center for Housing Studies, said in a telephone interview.

Property managers for rentals handle such tasks as screening tenants, helping landlords set rents, resolving disputes and ensuring lawns get mowed. They charge homeowners about 8 percent to 14 percent of the monthly rent, depending on the manager and city.

“It used to be no one did property management,” said Alan Townsend, a San Diego real estate agent who has managed homes for the past 16 years. “It was the ugly part of the business.”

Lower Pay

While one home sale can earn a real estate agent $10,000 for two months’ work, property managers may make $1,800 per property per year, Townsend said.

“Real estate agents think we’re crazy -- except when they have no income,” he said. “Those agents are now flooding into the market.”

Property managers face a challenge in proving they are a benefit to homeowners, said Rob LeRoy, marketing director for Dwellings Seattle Real Estate.

“They are known to cut corners, have poor customer service and tend to create hostile relationships with tenants -- at least, that’s a common perception in the eyes of the public,” he said. “We’ve certainly done our best to prove that property management companies can behave ethically and professionally, yet still be profitable.”

More competition has driven down the average fee for property managers to about 8 percent of one month’s rent from 10 percent in the San Diego area, Townsend said.

Rentals Gain

At a time when many Americans are wary of buying a home or can’t qualify for a mortgage, rentals are gaining in cities that have relatively robust job growth, such as Seattle, or pools of transient workers, including Washington, Los Angeles and Las Vegas.

In the greater Washington, D.C., area, about 70 percent of Reliance Property Management Group LLC’s 100-plus clients are homeowners who were transferred out of the area by their employers, said Angela Gammon, co-owner of the Leesburg, Virginia-based company.

“We’re in a very transitional area with government contractors -- military and so forth,” said Gammon, who used All Property Management to find clients when she got into the business in 2004.

U.S. apartment vacancies fell to a five-year low in the third quarter, enabling landlords to increase rents to an average effective rate of $1,004 a month from $997 in the second quarter and $981 a year earlier, according to Reis Inc., a New York-based real estate research company.

Attracting New Clients

“When rents go up, that gives people enough cash flow to hire professional management,” said Diane Castanes, a partner at Phillips Real Estate Services in Seattle, which manages about 140 apartment complexes as well as a portfolio of single-family homes and condominium associations. “Now with the rental market so strong, we are bringing in an increasing number of single- family investors as new clients.”

Handling the rental -- and re-rental -- of a home is often too much trouble for an owner, said Jay Young, co-founder of Real Property Associates, a management company in Seattle.

“There are a lot of hairy things,” he said. “You can have the best-screened tenant and who knows? Maybe they lose their job, or go nuts and skip out, or bring a dog when the owner doesn’t want that. I’d say 95 percent of the time things go smoothly, but there’s always that 5 percent that takes 20 or 30 percent of your time.”

Competition for clients has intensified to the point where many property managers are advertising their websites directly on search engines rather than paying to list on a site such as All Property Management’s, Brown said.

Here to Stay

Still, such services as All Property Management and RentList.com probably are here to stay as property management becomes more popular, said Michael E. Nelson, president of Excalibur Home Management LLC in the Atlanta suburb of Cumming. Nelson has used both services to find clients for Excalibur, which manages about 1,250 properties and is expanding throughout Georgia.

Nelson said he expects more rental properties to shift to professional management as regulations governing landlords become more complex. A 2008 rule, for example, requires renovations or repairs affecting lead-based paint in homes built before 1978 to be carried out by a contractor certified by the Environmental Protection Agency, he said.

Managed by Owners

It’s difficult to find precise figures for the percentage of U.S. rental housing that’s professionally managed. The Census Bureau surveyed rental-property owners and managers in 1995 and is working on a new rental survey that will be released toward the end of next year, said Richard A. Levy, a statistician at the agency.

Of about 8.8 million single-family rental homes in the U.S., including detached houses, condominiums and mobile homes, about 19 percent were professionally managed and about 78 percent managed by owners, with non-responses accounting for the remainder, according to the Census Bureau’s Property Owners and Managers Survey in 1995.

“I believe over the next 20 years that’s going to start shifting closer to 50-50,” Nelson said. “As the law becomes more difficult for individual landlords to navigate, they’re going to need to hire a professional property manager.”

It’s hard to make money overseeing single-family homes, said Tim Overland, chief operating officer of both Security Properties, a Seattle-based apartment developer and investor, and its management affiliate, Madrona Ridge Residential, which handles about 3,000 apartment units.

“It’s a very low margin business and a low barrier to entry business,” he said. “In order to make that business financially feasible, you’ve got to have quite a few units under management.”

Housing Crisis

Property management may have a role to play in fixing the housing crisis, said Brown of All Property Management.

In August, the Federal Housing Finance Agency, regulator of mortgage financiers Fannie Mae and Freddie Mac, sought ideas on handling foreclosed homes held by the government, which totaled 248,000 as of June -- almost one-third of the total U.S. foreclosed homes seized by lenders. Brown filed a suggestion with the FHFA that the homes be put up for rent with property managers hired to oversee them.

“If institutions were more thoughtful about how they manage their real estate portfolios, the market would recover faster,” Brown said. “We can be a clearinghouse to help them find skilled property managers.”

Housing probably won’t recover until 2015 as consumers and banks reduce their debt loads and the employment market recovers slowly, Brown said.

“What’s going to change is the percentage of U.S. households that are rental versus owner-occupied,” he said. “It’s now almost 40 percent, but that number is definitely going to grow.”

--Editors: Daniel Taub, Christine Maurus
To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net