How much do people matter in managing SFR?
Tech is great, but what happens when you don’t know who you are leasing from or who your escalation point is?
In my last post, we talked about how leasing occurred in scatter site single family home rentals in the olden days before Bluetooth and self-showing lockboxes. Self-showing lockboxes have undoubtedly been one of the most important tech improvements for SFR.
Clearing this hurdle of showing in-person with leasing agents gave SFR aggregator/operators a little more confidence in their ability to lease. Further subsequent improvements to the self-showing lockbox technology and data also allowed for deep pre-screening of residents while also streamlining 24/7 access to homes.
Prospective residents could be required to answer customized landlord questions while also needing to provide a valid credit card prior to entry. After viewing properties, potential renters would receive programmable follow-up questions and even be given follow-up questions to determine their level of interest. If potential residents were not interested in the particular home they viewed, app interfaces allowed residents to see similar and neighboring homes managed/owned by the same party.
To say it made our previous self-showing open houses seem antiquated would be a massive understatement. While running the operations for a large hedge fund circa 2016, there were times where we had over a 100 active listings in the far corners of a single MSA like Birmingham, Alabama. With old school, in-person agent showings, the human capital needed to lease that many units simultaneously was simply not tenable.
Simultaneous to the self-showing options, digital contract signing options like DootLoop and DocuSign became standard and normal. It was possible for a resident to view a property, be approved, sign a lease, and move-in without ever talking to or meeting a human affiliated with the owner or property manager. In all the new technology SFR operators and property managers thought they had discovered the Rosetta Stone to make SFR (even lacking density) mirror multifamily.
It was not uncommon for large SFR managers or owners to lean heavy, heavy into tech and remote team members. For a 1000 unit SFR portfolio in Tampa, you could have a portfolio manager in Cleveland, OH, a call in Center in Topeka, Kansas, remote customer service team members in Mexico or (offshore) in India, and a rental payment processing center in New York.
How could anything go wrong?
The euphoria around centralization, consolidation, and tech was palpable in the industry. Covid became even more gasoline on the flames of excitement. There was (and is) just one small problem, absolutely nothing in scatter site SFR is uniform or standard–no matter how much the manager or owner try to make it so. The variability of the product often made the uniform remote process a non-sequitur. Some owner/aggregators tried to throw more tech at the process; some owner/operators didn't care because they were building machines to only eat equity. The most observant owner/operators understood that local matters and people matter.
At Auben, our core philosophy has always been based around local experts.
All the emphasis and effort on renovations and inspections is ultimately an attempt to control the controllables enough to create a desirable home for a future resident. Once a home is “rent ready,” it signals the baton handoff to the next department and team member.
Single family rental leasing has consistently tried to take pages from the multifamily playbook but SFR has always lacked the two biggest multifamily advantages/attributes: uniformity and density. Even without these characteristics, in the early days of Auben we tried to copy the multifamily showing techniques and design a personalized resident viewing experience.
Prior to the invention of electronic self-showing lockboxes, we scheduled and arranged personal tours of our homes in a very analog process. Residents called in, and, if we were lucky, we were able to answer. Until you have listed and tried to lease an affordable priced rental, it is hard to fathom the intensity of call volume that a single rental listing can generate. Years later while using Voice over IP phone systems which tracked all of our activity, we saw that with 30-50 active listings, it was not uncommon to field 200 phone calls a day.
The questions and inquiries always ran the full gamut, however, because our initial homes were predominantly in working class neighborhoods, the most common initial question we received was, “Do you accept Section 8?”
We did and do. But, having a Section 8 voucher was not immediate grounds for approval. We discovered with many other landlords or rental agencies that a voucher meant automatic approval. If memory serves, we made this mistake just often enough to create a policy change where, regardless of any subsidies or assistance programs, you still had to meet our rental criteria.
As the calls rolled in, we scheduled resident viewings with very little pre-screening activity. Residents called, asked to view one of our properties, and went on our scheduled showings calendar. Our leasing specialist, originally my dad, logged many miles covering the far corners of the CSRA, opening up doors for prospective residents—when they bothered to show up.
It was remarkable how many “no call, no shows” we encountered. Affordable home leasing is not easy on the ego.
We learned, in time, to trust but verify. Calling to confirm appointments and trying to group scheduled showings was the result of many mad dashes to empty doorsteps and unanswered calls to residents who had been extremely eager to access our homes only 24 hours prior.
In addition to grouping showings and verifying appointments, our other biggest improvement was pre-screening questions. Asking residents to confirm they had no prior evictions, met income requirements, and had the minimum credit score didn’t ensure they were going to tell us the truth, but it did at least allow the honest ones to opt themselves out.
Many of the processes would be fundamentally changed by self-showing lockboxes, but core practices continued.
In my last post, we discussed home variability and how a lack of uniformity contributes to challenges in property renovations. Equally important to the initial renovation process are the initial inspections and then the ongoing repairs and maintenance.
While at Auben, I rarely lost sleep over inspections because our size and scale allowed me to see every home somewhere (often everywhere) in the process. However, during my time managing renovations for the hedge fund, we were completing over 100 renovations a month and needed detailed, visible checkpoints.
As we attempted to standardize renovations, we also worked to improve our inspections, repairs, and maintenance processes prior to occupancy. One of our first attempts was to incorporate detailed inspection assessments prior to listing our homes for rent. We hired individuals with construction and renovation backgrounds to inspect the work of our project managers in an attempt to catch flaws before listings hit the market. We also allowed property managers to walk our homes and create their own punch lists.
In markets with post-occupancy or quality-control issues, the inspection process became absurd. We would have our renovation manager do a final punch list on our contractors. Our inspector would then inspect the work of our renovation managers prior to listing. Our property manager would then do a pre-listing inspection. Finally, one of the above (or sometimes all three) would come back and do a pre-move in inspection before the resident moved into our home.
How did we manage to continue missing items?
Because the lenses our folks were looking through were different for every person.
We discovered our property managers and inspectors usually focused on different things and both needed calibration. Inspectors were consistently focused on technical workmanship–zeroing in on if things were square, level or plumb. While property managers would tend to only look for paint overspray and curb appeal.
Both parties were right–and wrong–simultaneously, and it required a lot of hand holding and collaboration. Our local teams were created to work together, but this handoff from Renovation to Leasing was contentious even with our most functional teams. The inspectors who were intended to be Switzerland (diplomatically neutral) seemed to have a hard time understanding that the homes were not new construction and could never be flawless. Our property managers who were routinely asked to achieve nearly impossible asking rents could not understand that the budget was not infinite.
I tried to reduce the process (and friction) to focus on safety, functionality and curb appeal.
For curb appeal, we did in-market training with the entire team gathering in the front yard at the curb of our homes and looking at the home from a prospective renter’s perspective. Most of our properties were fairly basic 1960’s ranch homes, which we made small improvements to like adding red mulch, painting front doors and shutters, and planting hearty, low maintenance bushes like boxwoods.
I was a stickler for curb appeal, as we were consistently pushing rent and were the highest-priced rentals in historically working class neighborhoods unaccustomed to the rental prices we were asking.
Inside our homes we had more attractive features like stainless steel appliances and new LVP (laminated vinyl plank) flooring, but we still needed to get our residents out of the car and through our front doors. One of the most routine scenarios we had was large budget home renovations having lots of issues post-occupancy. We discovered that the homes we bought that were in the worst shape, often had the most ongoing issues–no matter how much money we spent renovating them. There was a really strong correlation to the fact that these homes often sat vacant as distressed properties for long periods of time prior to us purchasing. No matter how much time and money was spent on renovation, trying to simulate heavy use of the mechanical systems as a result of the occupancy by a family was different. Families who had paid thousands of dollars to move into their dream home had collapsed sewer lines during their first week of living in their homes.
How data and tech fueled SFR growth…
As discussed in my last post, as Auben Realty began to grow, we created rental guidelines and policies to help further define our leasing standards. I wanted the business to grow primarily because I saw a massive void in the market for intentional, investor-focused SFR property management. Daily, I also saw the impact our investment was having in our communities.
Others also saw the opportunity to own SFR. And while we began to grow the framework of our property management company, the beginnings of institutional SFR ownership also began to grow. No one called it SFR (single family rental) in those days, but you began to see large buckets of institutional capital enter the SFR asset class for the first time. Starting initially on the West Coast in San Francisco and other cities in California, companies like Waypoint, Invitation Homes, American Homes 4 Rent and Tricon began to enter the single family rental asset class with lots of cash and an appetite for disruption.
Early movers into the space had a lot of assumptions about SFR's similarities to multifamily that largely proved to be incorrect. But it really didn't matter how wrong (or how right) they were when they were consistently buying at a fraction of home replacement cost. These large buyers targeted primary sunbelt and growth market cities like Phoenix, Dallas, Austin, Atlanta, and Charlotte and built strict buy-boxes around the number of beds, baths, square footage, distance from city center, etc. The acceptable vintage of a home constantly migrated to newer: for some aggregators starting at post 1950/1960 moving post 1980 to post 2000.
All of these restrictions and modifications of acquisition standards were attempts at controlling the variability of ownership of an extremely variable product: scatter site SFR. These large buyers/owners would discover that no matter how much they controlled their processes, it was extremely common to have multiple houses in the same neighborhood (or even on the same street) with dramatically different floor plans, mechanicals, and finishes. Even with access to the best data and risk modeling tools, trying to determine the projected amount of maintenance or capital expenditures proved to be very challenging.
As messy as the operations were, many of these large buyers realized they could essentially build machines to eat the equity. And the operations for owning would simply be a byproduct of a future sale. Available inventory and cheap money made for exponential full-throttle growth. For a great companion read, check out The Big Long, written by Waypoint founders Colin Wiel and Doug Brien. It details the challenge most operators were facing of figuring it out at 100 miles an hour trying to buy hundreds (or thousands) of homes a month.
Along with an abundance of capital coming into the asset class, the data and technology also began to quickly evolve. Zillow, Trulia and other real estate data platforms began to break down the closed doors of fragmented local market multiple listing services (MLS). This allowed an analyst sitting in Charleston to feel confident about suggesting an offer on a home in Kansas City, site unseen. Most offers were contingent only on a renovation manager or inspector's field inspection to ensure the house matched the photos and there were no major red flags.
A potential homeowner—with multiple financing and inspection contingencies—didn’t have a chance of winning the contract to buy a home when competing against the no-contingency cash offer of a fund.
A hedge fund owner who I worked for called it "a data revolution" and referred to data as being the new oil. SFR was a vastly different asset class from the one I entered only a couple of years earlier. However even as the data became more accessible and available, data integrity was always in question, mainly due to home condition variability. Rental comparisons were also nearly impossible to obtain with any reliability. The truth was (and still is) that most SFR owners were small local mom and pops who intentionally kept low profiles and built systems not to scale but to keep their sanity as single operators.
In order to combat variability of product, the hedge fund I worked for tried to create rubber bands of expected renovations around the age of the homes. The older the home, the more you were going to spend. Pictures became really important.
@Michael Smythe Indeed you do. One of the things we have done really well over the years is consistently question and update our processes to always seek to make them better.
Creating standards to get rid of bleeding heart syndrome…
As we continued to work through our renovation standards, we began to define our leasing standards. It was a very analog process, but, luckily, Natalie loved the forensic portion of tenant background screening. Similar to efforts on the project management side, all of the lessons learned on leasing were learned with pain—a lot of pain.
We learned that no credit was not necessarily good credit, and that people will make up references and blatantly lie about evictions and delinquency on applications. We also quickly came to understand the value of a positive history of previous residency. A positive previous landlord reference (from someone not related to the tenant!) became our holy grail.
We tracked payments with paper notes and consistently followed up with residents about small delinquent balances. Initially, there weren't good property management software options for managing single family rentals. There were standard multifamily leasing softwares like Yardi, but single family rental management was still off everyone's radar. Several years later, our incorporation and utilization of a new SFR software, Appfolio, would prove to be a game changer for us, assuming positive control of residency from inception.
Every resident came with a story, and our bleeding hearts consistently led us astray, so we formed leasing guidelines. This was also necessary in order to be compliant with Fair Housing Standards. As important as the previous landlord reference was, the application process really orbited around credit score. Being in affordable housing against the backdrop of a tumultuous economy, we were consistently seeking credit scores above 600.
We tried different minimum credit scores of 600, 580, 560, 550 while also inserting other provisions like double security deposits. We would discover with time that as flawed as credit score algorithms may be, a credit score below 600 meant a diminishing chance our owners were going to be paid. Many years later when we had a much larger case study, we found a huge increase in delinquency and evictions with our residents who had credit scores between 560-580.
The interesting thing about property management without scale is that it is really hard to see residency in a vacuum as just metrics. You are also fundamentally dealing with people and generally people’s largest and most emotional transactions. Back in 2010 and 2011, there was no digital resident experience. So our residents knew us and we knew them—very well.
We knew Felix was not going to pay his $6 portion of non-subsidized rent, even if it meant consecutive $50 late fees and his father coming into the office. After incurring several late fees, Felix even asked for change for his $20 instead of paying several months in advance. We knew Connie was always going to be grateful for her home and—even while going through extensive medical treatments—was always going to have a positive disposition. We knew Willie Ann did not ever intend to leave her rental and is still there a decade later.
For all the positive ways in which we came to learn and know our residents, we also bit hook, line, and sinker on countless “grandmother died, car broke down, and kid is sick” stories. It definitely didn’t help the situation that my team members shared my excess empathy. Many non-paying U-Haul tenants later, I had to completely accept that Bank of America didn’t care what was occurring with my family. My mortgage payment was due when it was due.
The rigidity in policy was also easier to integrate as I began to further notice a pattern of correlation, consistent delinquency, and eviction with those we offered the most assistance to. Affordable income SFR property management can often be a brutal pill to swallow to one's perception of humanity.
As frustrating as problematic tenants could be, it is hard to describe the immediate gratification of seeing a house transform into a home and an appreciative resident. Because of my contrarian ways, we consistently were on blocks less traveled. Sometimes it worked exceptionally well with our investment spurring on other investors like Second Street in Olde Towne, and sometimes we became the island of bad decisions like our investment on Sharpes Lane in Turpin Hill which was quickly destroyed by vandals.
I often describe those days as waiting for the next person to line up to punch me in the face. But somehow there was enough satisfaction in the good to wash away the struggle.
@Michael Smythe We used to try to always use Lowes builder grade Sahara Beige tiles and we would also try to always leave extra. Agree there are definitely better and more durable products out there these days like LVP.
Most successful investors I know all share the same quality of persistence. Good Luck and stay the course @Chris Momongan!
Improving Augusta one home at a time…
In the fall of 2009, Auben Realty was officially in business. A handful of homes I owned (which I couldn’t sell) and some early-mover, non-local investor-acquired homes rounded out our inventory. We were decidedly in the affordable price range with our rental property offerings in Augusta.
And we would learn and experience hard lessons about property management in affordable income homes. On a home on Lofwood Lane in south Augusta, I never stopped to question why the prospective renter showed up to view the rental in a U-Haul with her family in tow. Six months of non-payment later, I realized she was just seeking a sucker landlord with a slack application process. In those days, I was an easy mark.
After getting burned a couple times by professional, experienced renters who quickly recognized our management inexperience, we began to pivot to increasing our knowledge of subsidy programs, mainly Section 8, which had inherent resident accountability measures modeled into their programs. At the time in Richmond County, Georgia, there seemingly were way more homes and properties than vouchers. So we knew early on that ours had to be the best to stand out from the rest.
Most landlords who invested in affordable and lower income rentals had the mentality that the tenant “was going to trash the property, so why would I invest beyond the bare minimum?” We disagreed. Even with limited capital at our disposal, we adopted the mentality that Section 8 resident pools were like any other applicant pools: There would be excellent renters and renters who would be problematic. Having the best properties would increase our probability of success by letting us pick the best applicants and not having to simply accept the only residents to apply.
In our quest to be appealing, we tried to find aesthetic improvements which would also provide better long-term durability. Beneath decades of bad flooring choices: if there was hardwood; we refinished it. Or, if the condition was good, we buffed and coated the hardwood. Instead of sheet vinyl, we installed ceramic tile–later laying the tile in a brick or diagonal pattern for improved aesthetics. We darkened the grout lines in the tile and sealed them because we found they collected less dirt and grime and showed better after we “turned” the property in preparation for the next tenant.
Most of our good decisions were born out of bad ones. Brand new carpet looked like a Jackson Pollock canvas after six months of residency by an evicted tenant. Sheet vinyl was no match for washer/dryer delivery day and the ensuing gashes. Flat paint didn’t hold up to children aspiring to be Basquiat as well as paint with a sheen.
We learned what we shouldn’t do by looking at what we had to do again when our residents vacated. We had limited resources in those days, and, for every good decision in terms of longevity, there were horrible decisions made in an attempt at frugality. Used appliances tracked down all over the city died within months of installation with no recourse.
One of the things we began to realize was the incredible variability of product and process with scatter site single family rentals. I wanted to create order and something that could be replicated but was realizing the lack of uniformity was incredible. Neighboring houses on the same street had completely different layouts, different mechanical systems, and differing degrees of functional obsolescence.
Through all of our improvements, we began to collect, accumulate, and articulate what would become our Auben standard and what would become our mantra of Improving Augusta One Home at a Time. As committed as I was to the vision, there were many days and nights where it felt like a vision of one, but I would have many people who would come along for the ride.
The first portfolio of homes…
As I discussed in my previous post, I don’t remember seeing a singular market cycle shift event/turning point in Augusta in 2008/2009. It’s easier to remember the change in terms of news headlines: Big Investment Banks Failing, Real Estate Values in FL and AZ Cut-in-Half Overnight!
Maybe it was my naïveté or contrarian nature but I don’t ever remember feeling like there ever was not opportunity in Augusta. People still needed a place to live and those places were suddenly a lot more affordable.
My first big break would come in the form of a package of homes that a local bank had taken back through foreclosure. I was fortunate enough to meet a banker named Jane who believed in me from the beginning. Given my norm was disinterested bankers–feet on desk, clipping their fingernails into a trashcan–I didn’t take Jane’s trust lightly and spent a lot of time and energy cultivating and maintaining it.
The bank had a small problem, and I was ready to jump in the water to help. The homes were in the areas I wanted to be in Richmond County more specifically: Olde Towne and Harrisburg. But they all needed a boatload of work. One house had a tree “resting” on it–-which we had to remove with a crane.
I did precisely what every entrepreneur should not do and hired friends (and family) and significant others of the friends and family. We were like Motown with the interconnectedness and our ambition but a mile short on our organization and consistency.
My good friend from college, Caleb, who was an investor in California, was one of the first to see the opportunity in Augusta. A fellow to-his-core contrarian, Caleb was sold on an opportunity he wanted to see, and he was soon in-market to look at the dozen or so properties we bought for under $150k.
In retrospect, the sales price doesn’t seem real. A couple of years later, when it was seemingly much worse, we bought a package of 50 homes pre-foreclosure for a couple of hundred thousand dollars and immediately sold the package to my first large investor.
But, in 2009, we were going to begin to make the mistakes which would lead to the creation of Auben Realty. Caleb bought in and work began. Everything was off from day one, but our biggest miss was underestimating the renovation work that needed to be done: $10k became $20k. If we said $20k, it was $40k, and the bigger the budget the larger the variables affecting that budget. I quickly learned that I really wasn’t qualified to estimate the level of repairs we encountered, and my team also wasn’t able to execute on my representations.
We began work on homes on Second Street, Clark, Battle Row and many streets I would learn really, really well riding around monitoring “progress.” The energy and activity was intoxicating, particularly against the backdrop of doom and gloom in real estate at the time. It felt like we were discovering something no one else saw. Learning on the fly, I could barely keep up, but the frenetic pace and seeing daily transformation were early indicators I had chosen a career I would love.
The plan was initially to sell some of the homes to pay for others Caleb would keep, but our execution would alter that. We missed nearly every renovation budget, but thankfully we bought the homes so cheap that we were ok-ish.
As we began to sell some of the homes off in 2009 and 2010, we realized we needed to become more official and try to establish a way for us to keep some of the commission dollars in-house. Natalie got our license, we found a broker for hire, and Auben Realty was born in September of 2009.
We moved office locations from a single-family house in the suburbs of Martinez, GA to an iconic building on 1918 Central Avenue, a former Pure Oil gas station designed to look like an English Tudor cottage. We were official.