Introducing an auction for a rental house?

Question

I'm a conscientious land lord and try to give good customer service, so I don't want this idea to paint me as a greedy slumlord.

The vacancy rate for Denver SFRs has dropped under 2%, and when I talk to prospective renters they often say how desperate they have become.

It's really a nice spot on the supply and demand curve to be, and rents are increasing sharply in response.

Al Williamson has posted about going for niche markets to make extra income. The niche I'm thinking about is the desperate newcomer to Denver.

My idea is to have an open house, then have the equivalent of a silent auction for it.

Hand a slip of paper with a link to your online application. Padmapper.com has a great one https://www.padlister.com/rent_applications/new/893291

The prospects at the open house actually know better than you do how much your house is worth, because they've recently been looking at many of them, and losing out because of high demand.

Let them set the price.

Has anyone ever tried this in a tight market?

Mark H. · Answer

Interesting concept, but given a choice, I'd rather pick a tenant with more time on the job or a more stable housing history than one willing to pay even $100 more. Those that are the most desperate for housing might be desperate for a reason (dogs on the insurance company's banned breed lists, bad credit, etc). Having too many applicants seems to leave an opening for a fair-housing complaint.

John Evan Miller · Answer

That is a good point. The cost of turn-over can quickly eat up a profit margin. If I really like the tenants after the first year of the lease, I will tell them that though a renewal will allow me to raise the rent, since they are such good tenants and I do not want them to leave, I will leave the rent as it is to encourage them to stay. A 3-5% increase is just not worth the risk of losing a good tenant. Plus, letting the tenant know that you appreciate them and want them to stay can go a long way to keeping them right there.

Mike H. · Answer

My biggest fear in calling the current landlord is that the worse the tenant is, the better the landlord will make them out to be when you call. They're trying to get rid of a bad tenant - even if they have to stick someone else with them. As far as price. I agree with the previous posts. I don't want anyone paying over market. The fact is if they're willing to pay over market, they're probably desperate. But at some point, reality will set in and they'll be looking for a new place to stay - at a market rate - in no time. I'm trying to avoid the turnover as thats the biggest expense I see in my limited time being a landlord (5 years). When I'm avoiding turnover, I'm making tons of money. I thought I was in the zone for a little while there as I went about 10 months with only 1 move out (17 houses but only 14 of them in that period). I've since had three more move outs in the past 3 months. Each one has cost me an entire month of rent plus the cleanup and some repairs on 2 of the 3. So when it comes to rents, I would much rather price the house where I think its a good deal and will help keep a tenant long term than to get an extra $50 to $75 out of it and deal with the turnover. Not only is the cost a headache but the re-keying, re-listing, re-showing adds to the effort as well. So while I can see the profit potential in the bidding idea, I'm not sure its a good long-term model that you're going to really benefit from as much as you'd think.

John Evan Miller · Answer

There really isn't a good exchange for a thorough background check. I have seen that some landlords have skipped calling the landlords of properties that the applicants rented in the past since their income/expense ratio and credit score looked good. They turned out to be horrible tenants. A simple call could have saved a lot of headaches.

Kevin Dickson · Answer

Mark H. and Steve Babiak, Very good points, and I've definitely seen that play out as you say. In fact, if the neighborhood isn't top tier, you actually have to be a little below market to attract a good tenant. But $100 less for a good tenant is a tradeoff is usually worth making in those neighborhoods.

Steve Babiak · Answer

I have to agree with Mark H. on this. From when I had tried to rent something at or above market once, the ones who were willing to pay above market all had some issues that indicated they would not be paying for long. Better to have somebody whose background checks out fine, and get a fair market rent amount.

John Evan Miller · Answer

I am a little confused by that statement. Do you mean that your vacancy rate has been high? If you have high vacancy it could be due to several factors such as lack of demand or high rent. Even if a rental is not in a great neighborhood, there should be enough potential tenants as long as your property is in similar or better condition than the surrounding ones. If the rental demand is not there, I am not sure about how well a bidding war will turn out for you.

Kevin Dickson · Answer

I haven't had the guts to try it yet, mainly because the vacancies I've had lately aren't perfect homes in a great neighborhood. I reactivated the link for anyone who is curious. Online rental applications through Padmapper.com saves you time at showings because the prospect can fill it out AND pay for it after the showing. It also happens to have a fill-in-the-blank for "price you want to pay"

John Evan Miller · Answer

That is an interesting idea. What a way to stay on top of supply and demand. We do it with real estate listings all the time. Multiple offers create price wars. So why not use the idea on rental properties. I couldn't find your link. But, if it was me, I would give my applicants an application that had your terms (who pays for maintenance, utilities, term etc) and have them submit their rental rate. Plus, I would tell them upfront that you have multiple interested parties. Tell me how it works out.