Archive for September, 2010

Renting to full time students

September, 2010

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1

I have 3 full-time student applicants for my rental property. They currently have no jobs but parents are co-signing for them. Question: Do I have to have co-signers sign the rental agreement as well? I am thinking I should but I am not really sure about it.

A1

What the parents should sign depends on what status you wish them to have. That is, do you want them to be co-tenants, with all the rights associated with tenancy, or do you want them to only guarantee the lease. If they become co-tenants, you would have to evict both the students and the parents and there are potential significant disadvantages to having to do this. Whether titled “co-signer agreement” or “guaranty agreement” is not important. What is important is what the agreement says.

There are a number of issues important to an adequate guaranty agreement, including that (1) it is clear the co-signers/guarantors are not being given any tenancy rights, (2) the co-signers/guarantors are made responsible for all financial aspects of the lease including both rents and damages, (3) it allows the landlord to proceed for collection directly from the co-signers/guarantors without pursuing the tenants, (4) both husband and wife of a married couple be required to execute the guarantee, and (5) when co-signers/guarantors are not able to appear in person to prove identity, their signatures be notarized. I always used a separate guaranty document, but the guaranty could be within the lease agreement as long as it is properly worded.

You should consider consulting a competent landlord-tenant law attorney for your state the first time, so that you have an adequate agreement that is fully consistent with the laws of your specific state.

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Q2

I recently purchased a house and when I put my “for rent” sign in the yard was quickly called by the HOA informing me that rentals are not allowed by the HOA. I checked and sure enough there is a declaration in their bylaws that describes the ban on rental property. Is this legal? Any ideas on what I can do about this? I will be calling a lawyer tomorrow for his opinion, but I was wondering if anybody else has had this problem.

A2                                                                

The basic framework of an association is set up through the CC&Rs and the Bylaws. These documents usually give the board the authority to draft, implement, and enforce any other rules that will preserve the values of the units, enhance the quality of life for residents of the community, or improve their convenience or safety.

Even though owners may think that such restrictions are overly dictatorial, courts have, in general, upheld them because the CC&Rs and Bylaws were agreed to when the unit was purchased.

If buying a property that is governed by an association, one must always be sure to make approval of various association documents a contingency. This should include the CC&Rs, Bylaws, the Rules & Regulations, the current Annual Budget, and other financial information, as well as disclosures regarding any pending or expected litigation.

Some states have laws that require that certain information (typically including the items listed above) be provided to a buyer even if not required by the purchase contract. These states would also likely make real estate agents responsible for ensuring that buyers are provided such information. This may be an area where you have some recourse.

If you were not provided information required by law you might have recourse against the seller, the escrow agent, or the association. If there was one or more real estate agents involved who did not meet his/her responsibilities, you may have some recourse against an agent.

If you were provided the opportunity to read the CC&Rs and Bylaws prior to purchasing the property, then your only option might be to live in it yourself or sell it.

The reason associations prohibit rentals is that there is a general belief that tenants do not behave as well as owner-occupants and that landlords do not maintain properties as well as owner-occupants, resulting in potential lowering of values for properties within the community. Many lenders believe this to be so and have limits on the percentage of rentals within a community where they will make loans. Loans insured by FHA and VA will have such requirements.

While you should certainly be consulting an attorney, one who is knowledgeable and experienced about your specific problem, you should also do your own research ahead of time. The real estate department or commission in your state should be able to provide information regarding the issues on its official Web site and/or via telephone.

There should also be a local real estate broker or property manager who knows what courts have had to say about the legality of a rental prohibition by an association in your state if there has been such a case.

One other thing that might be of value is to determine whether any other owner is renting a property in the community with or without knowledge of the association. The failure of the association to previously enforce the restriction against owners might prohibit them from enforcing it against you.

Again, you should consult an attorney, but the above should give you some things to research and to discuss with the attorney.

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Q3

What happens if the tenant refuses to move out after being given a thirty day notice? I am on a month-to-month lease with the tenant.

A3

It depends a lot on the laws of the particular state as well as on other issues.

First, the landlord must have given notice in accordance with the law of his/her state. This means at least the minimum time required (30 days in most states, but it varies) and “legal” service of the notice.

Second, the landlord should not accept rent for any period beyond the effective termination date. Doing so will extend tenancy another 30 days in most states. This means that rent for the final month should not be collected in most states if the tenant had paid a last month’s rent instead of or in addition to a security deposit.

Third, if the tenant fails to leave, start the eviction procedure. The tenant will be liable for the rent until they do leave.

Finally, the landlord must be sure to return the security deposit and/or provide a detailed accounting for any part of the deposit not being returned within the period required by your state’s law. Many states have serious penalties for failing to do so.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

Violation of religious rights?

September, 2010

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1

One of my tenants smokes marijuana on a somewhat regular basis.  When I approached him about it he stated that he does this in practice of his religion and that he will sue me for violation of his rights if I take any actions related to the matter.  Can he really do this and do I face any risk if I begin his eviction?

A1

You should counsel him that it is not an issue of religion but a matter of him breaking the law and, assuming you have a good lease agreement, a matter of defaulting on the lease.   Accordingly, if he continues his unlawful conduct, you must proceed with eviction.   This, of course, assumes that you apply the same rule against other tenants regarding use of illegal drugs on the premises.

Fair housing laws prohibit discrimination of the basis of religion, but your action relates to criminal violations, not on account to religion.

Of course, if marijuana use for medical reasons is legal in your state, you must be sure that the manner in which he is using it is in violation of law of your state.   If he is not in compliance with any medical use law that might exist in your state or if he is dealing drugs, you should be able to proceed with eviction in spite of any medical use law.

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Q2

I have 3 tenants (in their mid to late twenties) living in a townhouse.   I am getting reports from neighbors of their constant weekend parties, loudness, and now I just learned they crashed into a fence at the back of the property.   They are six months into a 1 year lease.   What course of action is open to me?

A2                                                                

Regarding the noise, you can serve them with a written notice, in the manner required by the law of your state, to cease disturbing the neighbors.   You should cite the relevant clauses in your lease agreement, rules of the HOA, and any specific local noise ordinance.   If they continue disturbing neighbors, you could start an eviction, again, in accordance with the requirements and procedures of your state’s law.

If you can prove that they did the damage to your fence, get a firm estimate to repair the fence and demand payment. If they fail to pay, file a lawsuit in small claims court for the damages.   You may be able to instead evict them if they fail to pay for the damage, but that option will likely depend on the clauses in your lease agreement and/or the law of your state.   In either case, getting a judgment regarding the damage provides leverage in collection of the cost and will help in getting an eviction judgment if necessary to proceed with eviction.

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Q3

The names on a credit report are sometimes significantly different than the names on the application.   Nicknames usually are not far from the name applicant wrote down in the application.   Can this be due to the applicant using a SS number that’s not actually his?

A3

Before even obtaining credit reports on an applicant, landlords should first verify identity and make copies of verifying documentation.   ID verification should be considered the most important screening procedure.   It can be worse to pull a good report on a false ID than to use no screening at all.   Photo IDs are obviously the most useful and can include driver license, passport, military ID, photo credit card, student ID, etc.   Differences between different IDs should be questioned.

It is not always possible to independently figure out exactly what’s going on.   It could be something as innocent as an accidental mistake by the applicant when supplying the information or a clerical error by the credit reporting agency. The first thing you should do is discuss the matter with the applicants and see if they have a logical and believable explanation.

However, whether or not there is a valid reason, you should not be depending on only a credit report for tenant screening.   Landlords should always verify ID as discussed above and also reconcile the different items of documentation and screening reports.   This means comparing information on application forms, credit reports, criminal checks, eviction reports, previous landlord inquiries, and employment verifications.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

Surviving a Tax Audit

September, 2010

Surviving a Tax Audit

Since the beginning of the new millennium, tax audits have increased to higher levels than was seen during the last decade of the previous century. In light of the recent and still lingering serious economic downturn, further increases in enforcement will almost certainly occur under the Obama administration.

Whether the number of audits is increasing or decreasing or will do so in the future is somewhat unimportant because the probability of the average business owner being audited is actually quite low. However, no matter what it is, the probability is not anywhere near as low as the probability of winning the lottery. Accordingly, we will all want to minimize the probability of a tax audit and maximize our survival condition if there is an audit.

In the unlikely event that you do receive an audit notice from the IRS you should not automatically panic. Most IRS notices are simply requests for some specific item of clarification and/or verification. Sometimes notices simply tell you that you miscalculated taxes owed by a relatively small amount and that (1) you need to send an additional amount or (2) you will be getting a refund or credit.

Even when there is an audit, it isn’t always a tense, face-to-face encounter with an agent. A letter from the IRS saying you added wrong also counts as an audit, at least in the eyes of the Treasury Department. There are basically three types of audits:

  •  Correspondence Audit – The IRS requests a mailed reply to relatively uncomplicated issues. For example, the IRS may request proof of one or more deductions. Under many circumstances, taxpayers have a right to do the audit by mail rather than meet an auditor face-to-face.
  • Office Audit – The IRS requests that the taxpayer bring documents regarding specific issues to an IRS office. For example, the IRS might want to see all the taxpayer’s bank account statements.
  • Field Audit – The IRS agent comes to the taxpayer’s home or office.

In the event you do face an audit, you should consider hiring professional help. Obviously, if an accountant prepared your tax return, he/she should be your first choice if experienced in dealing with the IRS. If you don’t have an accountant, pick a CPA or tax attorney who is experienced in dealing with the IRS. If possible, find one who has previously dealt with the local auditors.

There are a number of advantages in being represented by a professional. One issue is that the IRS backs down in at least one-third of disputes and this is much more likely the outcome when a taxpayer is represented by a professional who has at least the same knowledge of tax law as the auditor.

It can even be further advantageous for the professional to meet the auditor without your presence if qualified to do so. A qualified professional will know what must be provided and what shouldn’t be provided the auditor. The professional won’t know and is not expected to know the answers to many questions and so can’t volunteer “incriminating” information. The professional can promise to provide answers after asking you.

If you will be attending the audit, remember the following DOs and DON’Ts:

  • Do pick a time and place for the audit that is convenient to you and allows for adequate preparation – this is your right.
  • Do consider recording the audit to prevent the IRS from changing the rules part way through – this is your right, but doing so gives the IRS the same right.
  • Do limit the scope of the audit to those issues of the notice – this is your right
  • Do answer as briefly and concisely as possible.
  • Do remember that auditors can be wrong about tax law.
  • Do ask to speak with the auditor’s supervisor if you feel that the auditor is being unfair or does not understand the issues.
  • Don’t lie.
  • Don’t guess if you don’t remember.
  • Don’t volunteer information not requested.
  • Don’t provide documentation that was not requested or related to the issue.
  • Don’t hesitate to pause or postpone the audit if you feel that things aren’t going well so that you can consult with your professional before continuing.
  • Don’t sign any forms at the audit that might take away your rights to claim deductions, appeal, or prevent enforced collection.

Expanding on some of the above points, if you choose to appear for an audit on your own, restraint is your best ally. Provide only the information the IRS specifically asks for and do so without going overboard. The more you talk the more risk of saying something that the auditor hadn’t even thought of and increasing the scope of the audit.

Just because the auditor asks about something doesn’t mean you’ve done anything wrong. If you don’t know the answer to a specific question, don’t guess. For example, if asked the source of funds for a particular bank deposit and you’re not sure of the source, simply answer that you don’t remember, but will research the matter and provide the answer as soon as possible.

Don’t consider an auditor to be infallible. In fact, some observers claim that auditors are wrong in more than half of cases. If you think that an auditor is wrong about an issue, ask to speak with a supervisor or get professional help.

The IRS has the legal right to look at your financial records, but, whether you will appear at the audit by yourself or with a tax professional, it’s advantageous to do the following:

  • Talk with the IRS auditor ahead of time in order to understand the issue(s) and to determine exactly what documentation you need to bring with you.
  • Take with you only the documentation being requested and organize it so that it’s easy for the auditor to find what’s needed. You don’t want the auditor looking through a lot of unrelated documentation and finding other things to question. For any missing receipts, use other documentation to provide the required information. For example, if an expense invoice is missing, use a canceled check or credit card statement to show the expenditure.

Finally, if you are being audited before filing a return for the most recent tax year, you can avoid that year’s return being included in the audit by filing for an extension.

Additional Information
For additional discussions regarding tax issue in considerably more detail than is provided by this series see our “9 Steps to Avoiding & Surviving a Tax Audit” Mini Training Guide and tax related lessons of our “Buying Income Property” and “Managing Income Property eCourses.

Disaster Planning – Part 3

September, 2010

In Review

In Part 1 of this series we discussed the reasons why every business, including the real estate rental business, should have a disaster plan and the preliminary steps to take toward developing a plan and in Part 2 we briefly discussed the development of a plan. In this final part of the series we briefly discuss some additional issues related to developing and implementing a plan.

Take Care of People

Planning and protection of the people in your business are critical components of your disaster plan. Employees, customers (tenants), clients, and your family deserve your best attention. A disaster plan demonstrates your concern for their welfare and safety and your efforts to protect their interests.

Employees

Because employees are the most vital asset for any business, a good disaster-recovery program must begin with preparing your employees in case of emergency and protecting them with a disaster plan.

The very basic step to protect your employees is to make sure that they have the telephone numbers to call in an emergency. The telephone numbers for police, fire department, utility companies, hospitals, and poison control centers should be posted in work locations.

Plan what you could do to ensure your employees’ safety. Develop an evacuation plan and train all employees in what to do in case of fire or other emergency.

Family

Families will always have concerns for the safety of their loved ones. Whether a business owner or an employee, letting families know of your safety and whereabouts is an important procedural part of your disaster plan.

Customers and Vendors

When a business experiences a disruption or closure, customers (tenants), clients, and vendors are naturally concerned how that might impact their business. Property management company clients will want to know about their properties. Vendors will need to know whether to show up as previously scheduled.

Tenants

Landlords and property managers have people to think about that most other types of businesses don’t have – tenants. Without tenants there will be no income for either the owner or the management company even though many of the expenses will continue.

Thinking about the tenants will be of benefit in several ways. First, tenants will feel that the landlord is concerned about their safety, health, and/or security, potentially improving landlord-tenant relations. Second, it will probably provide some protection from liability in case of actual occurrence of an event for which education was provided. Third, it may reduce risk of damage to your property.

Just as discussed above, basic emergency telephone numbers should be made available to new tenants and during a move-in orientation session or the move-in inspection, the landlord or property manager should provide instructions for water and gas shut off valves, circuit breakers, fire extinguishers, smoke alarms, or other equipment.

Priority should be given to fire prevention and fire safety practices because fire is the number one hazard that affects income property. Be sure your rental properties meet all safety requirements in accordance with building codes and fire regulations.

Investors who employ property management services and are themselves not involved with operation or management of the property should determine that the management company considers disaster preparedness for both the company and the tenants.

Take Care of Business

Once you’ve figured out how to keep your people safe, you’ll need to make sure that the business itself survives as well, whether the business is the management of your own rental properties or a property management company that manages properties for investors. That means implementing a plan that addresses your key business functions, who’s responsible for them, and what equipment or services you’ll need to keep running.

Recovery from interruptions in business can vary from a matter of a few hours to a few weeks or months depending upon the nature and severity of the interruption. If the disaster covers a widespread area, resource availability for materials and personnel may be limited and would further complicate recovery efforts.

Self Reliance

When it comes to almost any disaster, you shouldn’t count on Uncle Sam – or anyone else – to step in and fix problems. While city, county, and state officials may be sympathetic to your woes, they often can’t help. By the time you’ve filled out the applications and finally get some money, you might be out of business or your tenants may have all left.

Accordingly, the business that can be self reliant in the event of a disaster has an advantage. The quicker a business responds to crisis, the quicker it’s over and the less damage will result.

Communications

After a disaster strikes, the crisis team’s first job is communication – especially spreading the word to employees about the event and how the company plans to deal with it. For a crisis, the first 24 to 48 hours are critical. Misinformation fills a vacuum and without adequate communication, a lot of misinformation can get out and really damage a business.

For a sole proprietor landlord of only a few units, communication with tenants is often the highest priority.

Be sure that you have a way of contacting your family, employees, tenants, vendors and professionals (e.g., insurance agent or attorney) if you need to do so. Keep contact lists of telephone numbers, cell numbers, and email addresses of those contacts with you for ready access no matter where you are when disaster strikes.

Train & Practice       

Once you get the basic emergency action plan written, tell your employees or, if no employees, the family members or other persons you expect to take over in your absence. Make sure they know what’s expected of them in an emergency.

Training is an important and relatively inexpensive part of emergency preparation that may save a life. More important, proper training can prevent an emergency from becoming a disaster and make all the difference between closing down operations for a few hours and being out of business indefinitely.

Following adequate initial training, most businesses should run practice drills on a regular basis.

Tenant Issues

One of the issues that must be considered in a real estate investor’s disaster planning is what happens to the tenants in event of complete or partial loss of their leased premises and what, if any responsibility the owner has in such an event.

The landlord tenant laws and case laws vary from state to state but most states hold that if a rental property fails to meet the basic habitability tests, the tenant is under no obligation to remain. In addition, local laws may also have specific health and safety requirements for rental properties.

In the event of a natural disaster causing destruction of the leased premises, the implied warrant of habitability holds the landlord responsible for repairing and maintaining the livability of the leased premises. Because the rental home was significantly damaged by a natural disaster or an event beyond the control and responsibility of the tenant, the tenant has the right to consider the lease at an end and move out of the leased premises. The tenant’s security deposit which is held to cover unpaid rent and any damage to the rental unit during the term must be returned to the tenant.

Thus the landlord/investor will have no rent coming for uninhabitable units and only a possibility of partial rent for partially uninhabitable units. Under certain circumstances the landlord may be responsible for assisting the tenant until replacement housing can be found.

A tenant’s problems are greatly reduced when the tenant has insurance that covers damage or loss of personal property from a named peril. Tenants may elect to add additional coverage for loss-of-use or additional-living expense which provides some money to cover things such as rent for temporary quarters following a disaster. Special coverage may also be available to tenants for disasters such as floods and earthquakes.

Fewer problems for the tenant will usually mean less trouble for the landlord from that trouble. Accordingly, tenants should be informed when signing the lease agreement that the landlord’s policy does not provide benefits to tenants and tenants should be encouraged to obtain a comprehensive rental insurance policy.