Rent Collection Uncertainty Puts Real Estate Sector at Risk

The real estate market is among the Mexican economy’s most important sectors. In 2020, it represented 10 percent of total GDP, establishing it as a vital trigger for economic growth and job creation after the COVID-19 pandemic. Further development of this sector through innovative tools and solutions for its customers is key for the continuous growth of the Mexican economy.

In the real estate sector, apartments for rent played a critical role during the pandemic. Rental apartments were a safe haven for housing developers, protecting them from the slowdown in condominium sales driven by uncertainty of the future. The rental market continues to be a pillar of growth for the real estate sector but the risk on rent collection could seriously affect and cause a contraction in both rental supply and demand.

The pandemic translated to an increase in house relocation among tenants. Some people relocated quickly from one city or neighborhood to another, or returned to live with their families, because their income contracted or they had found a better job opportunity that allowed them to work from home. In many cases, tenants required a dwelling that would provide the necessary space for multiple household members to work or study at the same time. However, many of them could not move to a new dwelling due to the excessive number of requirements by landlords.

For many years, the list of requirements to rent a property in Mexico has been getting longer and longer. This has forced tenants to stay in the same place because they cannot find a suitable place to live where they can easily qualify. The traditional rental process is time-consuming, expensive, and unsafe. Consequently, owners have increased the renting requirements that are now very difficult or almost impossible to fulfill for many would-be tenants.

Today, owners do not have the right tools to do an exhaustive investigation of each candidate who wants to rent their property. Most landlords rely heavily on the strength of a guarantor or “aval” because either they do not have access to a tenant profile at all or can only perform a superficial background check of the prospective tenant. Additionally, a landlord can spend substantial out-of-pocket funds to showcase a property in media and listing platforms. Further, the property could take several months to rent, which results in extra leasing and vacancy costs. Often, signing a leasing contract requires burdensome in-person paperwork that slows the process even more. After a contract is successfully signed and the tenant moves into the property, manual rent collection results in delayed payments and uncollected rents. Also, the tools available to collect rent and recover any associated costs, such as damages, missing payments and evictions, are very limited.

The pandemic further exposed these systemic market risks related to rent collection with an abrupt increase in defaults, contraction of rental demand, increase in vacancies and a hardening of landlord requirements. If this trend were to continue, the Mexican real estate industry would see a fall in the rental market in the coming years, affecting the economy and the interactions between landlords and tenants. This creates a unique opportunity for companies that can create products that solve the problems of landlords, tenants, and brokers.

Several companies have entered this space to provide better solutions through technology. Among them, Homie is a leading solution provider. This Mexico-based proptech startup has developed a sophisticated, real-time, machine learning algorithm that is designed to solve these exact same problems. The company’s proprietary software provides an optimal rental price for any apartment and progressively adjusts prices to minimize vacancy costs by 50 percent. Also, Homie provides its clients an exclusive AI-powered screening tool, which reduces the time that landlords and brokers need to evaluate a potential tenant by seven times and reduces default risk by 10-15 times. Further, this feature allows Homie to reduce the requirements for tenants making the rent application deposit and guarantor-free.

In addition to this, Homie backs the rental payment of all tenants that use its platform. Regardless of whether the tenant pays their rent on time or not, the landlord gets the rent owed deposited punctually into their account each month. Homie goes a step further to support owners and if a tenant defaults on payment, the company not only covers any unpaid rent but also all eviction-related costs.

Clearly, reducing rent collection risk and lowering leasing requirements result in more tenants and consequently lower vacancies for owners. Lowering these risks makes the opportunity to invest in rental properties even more appealing. Allowing tenants better access to housing also results in better quality of life and upward mobility. More supply and demand because of new technology translates into a broader, fairer, and stronger rental market and spurs economic growth.

About the author: Francisco Andragnes is a Professor of Finance at NYU Schack Real Estate Institute, President of the Rental Housing Association of Mexico (AVER), and the CEO of Homie.m