Q1                                                

Is it legal to rent my own condo without a broker?

A1

To my knowledge (and I’d bet a lot of money on it), no governmental jurisdiction restricts the right of an owner to manage his own properties. Most, perhaps all states require a license to manage property of another for compensation, some requiring a real estate broker license, others having a special management license.

Be sure that you know and follow your association’s CC&Rs, Bylaws, and Rules & Regulations related to rentals and that you provide copies of those documents to tenants. Also be sure that your lease agreement explicitly covers those items by including a clause whereby the tenant acknowledges having read the documents and promises to abide by them. I highly doubt that an association can legally require an owner to use a broker.

Those who do manage their own properties should be sure that they understand and follow all federal, state, and local laws related to rental property – including those related to fair housing, tenant screening, and lead-based paint. Even if using a broker, one must be sure the broker is knowledgeable and follows the laws because the owner will ultimately be at risk for a broker’s mistakes.

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Q2

An ex-tenant moved to another state after I got a judgment for damages. What can I do?

A2

A judgment obtained in one state is usually collectable in another state. In fact, the only defense a debtor would usually have against collection is if he could convince the court at his new location that the state where the judgment was obtained was not the proper jurisdiction. This is unlikely to be possible when the litigation related to rental housing. Check with the clerk of the Court where the debtor is now located to determine the exact procedure for that particular Court.

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Q3

I recently evicted tenants who had 4 months remaining on a 2-year lease when they moved out. I am keeping the security deposit due to unpaid late fees and damage of a counter top and two large stains on bathroom floor. I just received a phone call from their supposed lawyer, threatening a law suit against me for the deposit. I have pictures of damage receipts for replacement costs, which exceeded the amount of damages, and detailed list of each month late fee was not paid, along with copied checks and deposit slips. I sent this information to them explaining why they were not receiving the deposit back. Do I have all of my angles covered? Can I take them to court for the remainder months of the lease and yet unpaid damages?

Am I legally in the wrong for not having a joint inspection and only sending an accounting for the non-returned deposit.

I live in Ohio and believe the time for providing an account summary of the deposit is 30 days. I thought I read it was 30 days after the tenants had actually moved out. They moved out on the September 4th I sent the certified letter to them on September 27^th.

Am I legally in the wrong for not having a joint inspection and only sending an accounting for non-returned deposit?

A3

The answers will depend somewhat on whether or not you provided an accounting for the non-returned security deposit within the time required by the law of your state. As you thought, it appears to be 30 days in Ohio. If you can prove they moved out on September 4^th and you have a Certified Mail receipt, you should be OK regarding timeliness.

My cursory research did not turn up anything to show that Ohio requires a joint move-out inspection, but that is something you could further research.

In some states the requirements are different, even eliminated when a landlord actually fully completes an eviction, not simply terminates their tenancy.

If they were actually fully evicted, the date would be the date the sheriff removed them. If there was not such a removal, you would hopefully have some evidence to indicate the date they left.
Anyone can sue anyone else for any reason, real or imaginary. The important thing is to appear in court to defend yourself. Otherwise, the plaintiff will likely obtain a default judgment of whatever was asked for in the complaint.

If you are worried, consider having a competent landlord-tenant law attorney advise you and perhaps send a letter on his stationery wherein he takes the position that you followed the law. If a suit is actually filed against you, keep in mind that it is almost always best to be represented in court by an attorney if the other party is represented by an attorney.

Another possible approach is to file your own lawsuit for yet unpaid damages or other items, as filling first could help support your position.

Finally, you should consider negotiating a settlement that is acceptable to both parties after finding out which particular charges are objectionable to the ex-tenant. Going to court costs time and money.

Q1

I have some concerns regarding screening for criminal records. What should the rejection threshold crime be?

A1

You are right to be concerned about this issue. A comprehensive discussion of this subject is way beyond the scope of this forum, but I’ll briefly mention a few issues.

In general, convicted criminals are not a protected class under federal fair housing laws. An exception is that those who were convicted of past drug use, as past drug use is considered a disability. Those currently using drugs or those convicted for the manufacture or sale of drugs are not protected. However, state or local laws may have protected classes not in federal law or may more generally prohibit arbitrary discrimination on the basis of personal characteristics. Regarding the latter, it is possible that a specific judge might rule that a criminal record is a personal characteristic in a jurisdiction having such a law.

There are a number of issues that must be considered when using criminal record in screening. First, (and probably most important) you must be sure that the applicant is really the person in the criminal record report. Second, your qualifying criteria related to criminal records, which should be in written form, must be reasonable and related to the safety of others. As examples, you could be treading on dangerous ground by denying housing to a person convicted of embezzlement or even someone convicted of armed robbery as a teenager 25 years earlier with no subsequent criminal record. Third, your criteria must be applied equally to all applicants in order to avoid fair housing claims. You cannot do criminal checks on some applicants and not on others or have different criteria because of the applicant’s appearance or other characteristic. Fourth, you must understand that the criminal record check does not guarantee an applicant is not a criminal, as there are numerous reasons why the report might not show a  single conviction for even repeat offenders.

Accordingly, be sure that you understand federal, state, and local anti-discrimination laws if you are using criminal record reports when screening tenants. You should consider consulting a competent local attorney who is knowledgeable about the specific issue for advice regarding your decision criteria.

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Q2

Is it normal that both my wife and I be required to sign a personal guaranty when refinancing a property owned by an LLC of which I am the sole member?

A2

If an LLC, corporation, or other limited liability entity is not highly financially qualified (e.g., a GMC or Microsoft) at least some of the owners or managers should expect to personally guarantee the loan unless it is to be non-recourse. It is often required that both spouses sign as guarantors for loans because, in many states, the other spouse’s income and assets cannot otherwise be made liable for the loan. Similarly, landlords must consider the same issues when leasing to a limited liability entity.

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Q3

Can I require a tenant to be responsible for all repairs and maintenance?

A3

That might depend on a number of things, including the state where the rental property is located, the type of rental unit, and the types of repairs you want to include.

In some states, the tenant cannot be made responsible for some types of repairs. The theory is usually that a current tenant should not be responsible for repairing things that were nearly worn out when he moved in, particularly things that are costly. The type of rental unit might also make a difference. In general, a tenant can likely be made responsible for more repairs in a single-family home than for a unit in a multi-unit building.

The type of repair for which a tenant can be made responsible might also depend on whether it’s a $25 dollar repair or a $2,500 repair. You should not expect to  make a tenant pay for replacement of a non-repairable HVAC system that is 20 years old. When considering tenant repair responsibilities, you must always take into account landlord responsibilities under federal, state, and local habitability laws.

However, just as important as “can you do it” is “do you really want to do it.” Even if you can legally require the tenant to be responsible, you should understand that it might not be beneficial for you to do that. I’ll mention a few of numerous possible issues.

First, the tenant may neither make the necessary repair nor report the problem to you. This might occur because (1) he doesn’t know how, (2) he hasn’t sufficient funds available, or (3) he just simply doesn’t want to spend the time and/or money to deal with the problem. Deferral of repairs and maintenance can result in substantial collateral damage. For example, failure to repair a leaking roof can lead to ceiling and/or wall drywall destruction and serious flooring and/or cabinet damage. A neglected $100 repair by a licensed roofing contractor can turn into thousands of dollars in repairs, the costs for which you may never be able to collect from the tenant.

Second, the tenant may (1) fail to hire the necessary professional services for complex jobs or for tasks that by law require use of licensed contractors, due either to lack of knowledge of the law or unwillingness to pay the cost of a qualified contractor, or (2) do inferior work himself, potentially even increasing the damage in the long-term because of collateral damage. Bad work is often more costly to correct than having it done correctly in the first place. For example, he may perform plumbing repairs that later fail, causing costly damages to your unit and/or to property of a subsequent tenant. Even worse, he may illegally do work (e.g., electrical or gas) for which state law requires a licensed contractor and/or local law requires a building permit. Your liability could be greatly increased if the faulty work resulted in serious injury or death to a subsequent tenant or other party.

Third, in the course of doing the work the tenant may cause injuries to third parties or may himself be injured. You may be held liable and, for some possible scenarios, you may not be covered by your insurance.

Finally, there are circumstances under which there could be issues regarding payroll taxes and/or worker’s compensation insurance because you assumed the tenant could be treated as an independent contractor whereas the IRS and/or state taxing authorities would classify the tenant as an employee.

The bottom line is that it is usually much better to charge a higher rent and retain responsibility for most, even all repairs. If you do decide to make tenants responsible, you need to (1) be sure that your insurance covers you for any liabilities resulting from repair work being done by a tenant, (2) have adequate lease clauses regarding the issue (including clear definitions of what items are the responsibility of tenant and landlord, respectively), and (3) make regular inspections of the property to be sure that necessary work in being done in an acceptable manner.

Disaster Planning – Part 1

Introduction

This article is the first in a 3-part series on the subject of Disaster Planning.

Is your real estate investment business or property management business ready for a fire, a hurricane, a flood, or whatever other unexpected event might occur tomorrow, next week, next month, next year, and/or beyond? It is not only 9/11 or Katrina level disasters that should be of concern. Are you even prepared for a hard-drive failure that could occur at any time?

According to the U.S. Department of Labor, over 40% of all businesses that experience a disaster never re-open and 25% of the remaining businesses close within two years. The smaller the business the less likely that it will be prepared.

Many small business owners believe that preparing for disaster requires more money and/or time than is available. However, the most important steps for surviving a crisis cost relatively little. Being totally unprepared can be the costliest plan of all.

The only certainty about the unexpected is that it will happen some day. Even a minor incident can become a disaster if not managed properly. Disaster planning is like insurance in that you have to put things in place prior to occurrence of the disaster, not after the fact.

What Could Go Wrong?

There are an infinite variety of things that could go wrong for a landlord or property management company in the course of running the business.

How about a burglary of your office? Would they get your computer and your backup CDs lying on the desk or the external hard-drive under the computer desk? What if they stole the files containing personal data regarding all applicants for vacancies over the past 5 years? Do you know the legal penalties and potential financial liabilities for not adequately protecting this information?

Most business owners are fully aware that things can go wrong, but this awareness does not always translate into action. The human component of disaster planning is the weak link due to reluctance, fear, or uncertainty on how to plan.

The impact of an event may be quite different for different businesses. What might be considered a disaster for some is just an annoying disruption for another. For effective disaster planning, all those involved in a business need to have the same definition of a “disaster” and an understanding of what to do, how to do it, and who should do it.

The first thing you must do is complete what’s commonly called a risk assessment. The purpose of the assessment is to (1) identify what could go wrong, (2) analyze the effect on your business if something does go wrong, and (3) determine what priority you should place on each event so that you can minimize your risk exposure by committing limited resources to the greatest risks.

During this assessment, you must think of all the risks and threats that your business faces. Threats include anything that could happen to your employees, tenants, family, property, equipment, and records.

The degree of risk for different types of disasters varies significantly in different areas of the country. Every area in the country is subject to some type of natural disaster, whether floods, hurricanes, earthquakes, ice storms, high winds, wildfires, or landslides.

California has a greater risk of earthquakes than Florida, while Florida has a greater risk of hurricanes. However, even though a particular event is unlikely or has never happened before does not mean that it will not happen tomorrow. For example, the biggest earthquake in recorded history that occurred in the continental U.S. was in Missouri in 1812, not in California.

For most other categories of threats, the risks are somewhat similar throughout the country, although infrastructure-related threats can vary greatly between one city and another. Of course, the categories of risks and threats depend upon the type of business. The point is that risk assessment must be customized to each specific business.

Vulnerability

After identifying potential risks and threats, you must decide how vulnerable you are to each of them. You must rank the threats in two different ways. First, rank them in order of frequency. For example, how often does power to your computer get interrupted? List the expected number of months between events. Obviously, this is difficult to do for those events that might occur years apart.

Impact

You must next rank your vulnerabilities to these threats by the financial impact they’ll have on your business. That is, how much would it cost to replace or repair?

For hardware (e.g., a new computer hard-drive), this is not simply the cost of purchasing the hardware or of obtaining a replacement if under warranty. The cost must include (1) the cost of the down-time until you can obtain a replacement or repair and get it installed, (2) the labor costs involved for installation of the drive, (3) the cost to reinstall all the software, and (4) the cost to recover data from your backup or to recreate or update the lost data if a backup doesn’t exist or is not recent, respectively.

Finally, it must take into account lost business during the down-time. For a landlord or a property management company, this might include the inability to collect rents.

Risk Exposure

Now divide the cost of the event by the months between occurrences of that event to give you a measure of risk exposure for each threat. The higher number, the more important it is to protect yourself from that threat or at least minimize the damages resulting from it.

Of course, in the real world, the numbers are not easy to come up with, will not be very accurate, and the answers will not be exact. However, the method does provide a way to prioritize disaster planning tasks. Accordingly, it is much better to do the analysis using guesses than to do nothing.

Resident (On-Site) Managers – Part 3

This article is the third of a 3-part series regarding resident managers, the first part having appeared in a March issue and the second part having appeared in a May issue of the Weekly Newsletter. Resources for detailed discussions of the subject are found at the end of this article.

Actions, Dress, and Grooming

The resident manager represents you and your property. Accordingly, you have a significant interest in ensuring that you and your property are well represented.
Actions – During the job interview, pay attention to the applicant’s language, tone of voice, and vocabulary. If you have concerns about the applicant’s speech and manner, the chances are that your tenants may have the same concerns. Appropriate actions are a part of good customer service to attract and retain good tenants.

Dress & Grooming

The first impression is an important impression. What you see may be what your tenants see. Is it the impression that you want for your business? Common sense and experience says we can tell something about people by the way they dress, or don’t dress.

Impressionable Tenants & Applicants

It is not just that a resident manager is considered a reflection of the owner or the management company, but the manager is also a reflection of the type of person who will occupy the project, maybe the neighbor in the adjacent unit.

Reports

Resident managers are on the premises for the operation of the property. The owner or property management company should closely monitor resident managers, but not try to perform the tasks assigned to them, as this will result in duplication of effort and a waste of time and money. 

Reords from on-site should provide the home office with a continuous and graphic record of exactly what was done each month and when it was done.  Rather than stand over the manager’s shoulder for specific tasks, let the records show how efficient the manager is and indicate what actions to take to improve efficiencies and provide warnings to take action in time to avoid serious problems.

Supervision
Protect Tenants & Others

Some of the negligent hiring issues discussed earlier are of particular concern regarding resident managers. Tenants and others can be harmed in many ways by a careless or dishonest resident manager including the following:

• Personal injury (including discrimination)

• Physical injury to other tenants or the general public

• Property damage or loss

Personal Injury – This is injury resulting from things such as slander or libel or from unfair discrimination.

Physical Injury – You have to ensure that the property manager does not cause physical injury either directly or indirectly.

Property Damage or Loss – Damage or loss can occur through careless or negligent action or through criminal activities on the part of the manager or individuals under the manager’s supervision.

Protect Your Money

There are a number of ways in which you can lose some of your money because of the resident manager including the following:

• Theft of rents

• Theft of property

• Personal use of accounts

• Damage to residence

Theft of Rents – It is possible that rents that are collected by the manager become “lost” prior to deposit in a bank account or delivery to the owner or the management company. In this case, it is not legal to require reimbursement by the manager unless so ordered by a judge after a successful prosecution for theft or conversion.

Even though cash rents are most at risk of being “lost,” it is possible for checks to be fraudulently converted after theft.

Theft of Property – Although property theft is usually not as much a problem in management as for many retail businesses, it can be an issue. Theft will most usually involve losses of maintenance equipment and supplies, office machines and supplies, or unit appliances or furnishings.

Personal Use of Accounts – If managers have use of property trade accounts or credit cards, receipts and invoices must be required and account statements must be carefully examined each month. Irregularities should be dealt with immediately upon discovery.

Damage to Residence – It is possible that an otherwise qualified manager is not a good tenant. This risk is minimized by following adequate screening procedures, the same procedures that should be utilized for any tenant. Occasional inspections of the manager’s unit, formal or informal, should be made.

Protect Your Applicants/Tenants

Resident managers, particularly if performing screening, have access to applicant information that could facilitate identity theft or other fraud against applicants or tenants. Even when the manager only collects submitted applications and forwards them to the owner or management company, a lot of each applicant’s personal information becomes available to the manager. You must ensure that federal, as well as any additional state requirements regarding safeguarding of personal data are rigorously followed. The least risk results when the manager only hands out the blank forms and information packages, with the completed applications being submitted directly to the owner or to the management company office.

Insurance

There are additional insurance issues that require consideration when a landlord employs a resident manager.
Workers’ Compensation Insurance – As was discussed in Part 1, resident managers must be classified as employees rather than independent contractors. Accordingly, landlords must provide workers’ compensation insurance coverage for the manager as for any other employee.

Liability Insurance

There are three important categories related to liability insurance. One is bodily injury, another is personal injury, and yet another is damage to property of others. Discussions of these and other risk issues were provided in Part 1.

Auto Insurance

Be sure that you require the manager to have motor vehicle insurance with at least the minimum coverages required by your state’s law, preferably much higher. Also, require that you be named as additional insured and are provided written proof thereof. You should also be sure that your landlord insurance includes non-owned auto coverage. This coverage is not in lieu of the resident manager having insurance on his/her vehicle, but it is back-up to his/her insurance.

Quitting & Firing

The old saying that “all good things must come to an end” is true for good resident managers. Good managers eventually leave because they find better opportunities elsewhere due to their abilities. Unfortunately, bad managers also come to an end, sometimes unexpectedly when they simply disappear or when one must be immediately terminated (fired) because of some serious problem.

The impact of any reason for termination of the relationship depends on both the law (federal and state) and the employment contract.