Single family home rental clients sometimes wonder why owners limit their bottom rental price, even though the market may suggest they should go lower. Here is how I explained this to one family who thought a leasor of Townhouse B should be willing to take $1,775 per month rent for a $300,000 townhouse after failing to negotiate the same price for similar Townhouse A in a market with too much inventory. My client is pretty convinced that if we call all the 4sales, we will find a desperate owner who is willing to take $1,775 per month rent.
In the case of Townhouse B (which was also listed for sale at $325,000), the owners last mortgage was for $178,000, which is a surprisingly low % (high equity) position by today's standards. So, let's say they actually had an $180,000 mortgage at 6.5%, 30 year conventional mortgage.
Townhouse B owner's continuing costs are:
1,137 (Mortgage Principal & Interest)
152 (Monthly Association Fees)
575 (Monthly RE tax escrow $6,900 divided by 12 months)
60 (Monthly home owners insurance escrow)
$1,924 per month
If the owner's mortgage is greater, and most are, or the interest rates are higher, the P & I is larger. This explains the reaction of the last rental offer of $1,775 per month for Townhouse A. The owner would go down no lower than $1,850 per month. $1,850 per month is probably less than her cost to keep ownership.
Of course, every homeowner's situation is unique and their reaction will vary.
One thing to keep in mind, if we find an owner who cannot afford to pay the bills, can't sell and has to do something, it would probably also be an owner who has mortgaged 100% of their equity, missed 2 or 3 mortgage payments and is getting letters from the bank. These owners are often in denial about their true situation and are looking for a miracle.
With a $300,000 mortgage at 6.5%, the P&I payments would be $759 larger the analysis of Townhouse B and they would need $2,683 to break even... won't happen. The bank would not allow the owner to rent once they start foreclosure or agree to consider a short sale.
Jim Broline
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