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

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Q1                                                         

Do I have the right to restrict the number of persons that can occupy one of my rental units?

A1

Landlords can limit the number of people allowed to rent a unit under various occupancy standard guidelines. Many jurisdictions, including HUD at the federal level, states and cities have published guidelines regarding occupancy. However, one must be very careful when applying occupancy standards. Different jurisdictions have different guidelines. Many rules are truly only “guidelines” and may not stand up to a court challenge, particularly when occupancy standards come into conflict with the protected class of familial status under federal fair housing law or under some even more restrictive law at a state or local government.

Although most landlords are probably most interested in occupancy standards because of real or perceived issues related to more occupants (see Q3 below), occupancy standards have historically been justified based on “habitability.” That is, allowing too many occupants makes the unit less safe or less healthy. Typically, guidelines are tied to building codes (e.g., Building Officials and Code Administrators [BOCA] guidelines), number of bedrooms, or number of square feet, but some guidelines make allowances due to sizes of rooms, layout of the unit, availability of other living areas, age of children, and any physical limitations of the housing such as capacity of septic/sewer or water systems.

One must be sure to understand the applicable occupancy standard laws and/or guidelines in order to avoid charges of fair housing law violation. This is particularly true when children occupants are involved, as fair housing laws prohibit discrimination related to familial status.

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Q2

I own a rental home that I wish to list for sale. The lease includes the following clause:

13. INSPECTION OF PREMISES. Landlord and Landlord’s agents shall have the right at all reasonable times during the term of this Agreement and any renewal thereof to enter the Premises for the purpose of inspecting the Premises and all buildings and improvements thereon. And for the purposes of making any repairs, Landlord may deem additions or alterations as appropriate for the preservation of the Premises or the building. Landlord and its agents shall further have the right to exhibit the Premises and to display the usual “for sale,” “for rent” or “vacancy” signs on the Premises at any time within forty-five (45) days before the expiration of this Lease. The right of entry shall likewise exist for the purpose of removing placards, signs, fixtures, alterations or additions, but do not conform to this Agreement or to any restrictions, rules or regulations affecting the Premises.

Does the BOLD section mean I cannot list it for sale until the lease is within the 45 day period of expiration? Also, if I sell the property do I need to negotiate a buy out of the exiting lease with the tenants?

A2

State laws do not limit and lease agreements usually do not limit the landlord in marketing a tenant occupied property for sale or leasing. However, this particular clause does appear to limit the landlord to within 45 days prior to lease expiration for displaying signs for either selling or leasing. One could argue that giving the landlord the right to do so within the 45 days does not eliminate the right to also do so earlier because it does not explicitly forbid doing so. However, contrary to what one sees on TV and in the movies, such technicalities seldom work in real courts.

Even if the words are taken to limit signs, the words do not limit listing of the property. In fact, the words do not even prohibit showing of the property to potential tenants or buyers at any time, whether before or within the 45 day period. Most leases have a specific clause allowing the landlord or his agents to enter the property for a variety of purposes, usually including showing the property to potential tenants or buyers and some states provide that right by statute. Assuming your lease agreement has such a clause, you should compare this clause with the BOLD one to see if it clarifies or conflicts in a way that might create ambiguity and possibly render the clause unenforceable.

I think that the most certain way to resolve the issue might be to encourage cooperation by providing some incentive to the tenant. Perhaps, unbeknownst to you, the tenant would be interested in terminating his lease early and early termination could be traded for modification of the clause. Otherwise, payment of some nominal amount of money might encourage cooperation.

Finally, unless the lease agreement has a specific clause requiring a buyout or otherwise terminating an existing lease, leases go with the property. That is, both the tenant and the new owner must abide by all terms of the lease agreement.

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Q3

It is my opinion that more occupants results in more wear and tear and increased other expenses. Can I charge a base rental price for one person with an additional amount for each additional person without being in violation of discrimination laws?

A3

I am not aware of a statute or court ruling that prohibits a landlord from charging extra rent for additional occupants. Two different scenarios come to mind. One is when additional occupants are added during an existing lease term and the other is when filling a vacancy.

Good lease agreements often include a clause that requires the landlord’s permission for a “guest” to stay beyond a certain time (e.g., two weeks within a 6-month period) and a rent increase if the stay will be long-term or permanent. Obtaining consent of the landlord provides the opportunity to amend the lease agreement in other ways in addition to a higher rent. However, it is best to have the increase amount(s) written into the lease, whether for a long-term guest(s) or for an additional co-tenant(s), for a number of reasons, including (1) to avoid arguments later and (2) to minimize any fair housing claims as discussed below.

Of course, most rent control ordinances will limit extra rent for additional tenants and the rules will vary among different rent control jurisdictions. For example, under the Los Angeles Rent Stabilization Ordinance, rent in a controlled unit may be increased by 10 percent for each additional tenant with the exceptions that rent may not be increased for the first minor dependent child of a tenant of record as of 12/8/90.

However, you do need to be very careful to avoid any hint of discriminating against any protected class under federal, state, and local fair housing laws. Of most certain relevance is the fact that in 1988 Congress made it illegal to discriminate against families with children when it amended the Fair Housing Act of 1968. This added protected class is known as “familial status” and includes a variety of defined individuals besides the traditional family unit. Some states and local governments have further extended such protections.

Accordingly, you almost certainly can’t charge more for an additional child than for an additional adult because you consider children to be more likely to cause certain types of damages. I would personally not charge extra for any number of children. That is, if you charged an amount for one adult and a higher amount for two adults, charging for any number of children, whether there is one or any other number of adults, might be considered a violation of familial status protection under federal law or under some issue covered under state statute or local ordinance. However, although this is something about which I’d be concerned, I don’t know of any specific law or court decision to back up that concern.

Charging more for more tenants when filling a vacancy adds the additional complicating issue of how to advertise the varying occupant-dependent rent. Advertising the minimum rent will likely cause a problem when the potential applicant is told that the rent will be higher. The problem is minimized by including the numbers in the advertising or at least discussing the issue immediately upon first contact with potential, whether via phone or email or face-to-face. This should include any additional security deposit if maximum is based on monthly rent.

In my opinion, landlords should resist the temptation to charge unreasonable extra rent for additional tenants. One should realize that the increased expense of additional occupants is proportional to the number of occupants. If adequate screening and proper selection are utilized four occupants should not significantly increase the risk of damages compared to two occupants. More occupants will increase normal wear and tear, but not proportionally. Even utilities that might be paid by the landlord will usually increase relatively little with additional occupants, certainly not proportional to the additional number. This is because (1) there are usually significant minimum service fees independent of usage and (2) few if any usage costs depend directly on the number of occupants.

Retaining good tenants is usually much better than replacing tenants sooner than necessary because one took advantage of tenants when allowing additional occupants. In my opinion, having adequate lease clauses and an acceptable occupancy standard limits a landlord’s downside risk related to additional occupants.

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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.

Look Beyond the Score

Credit reports have always been considered the single most valuable screening tool because of the wealth of information contained in the report. However, reading through a credit report is one thing, understanding the substance of the report may be quite another thing.

It is important to educate yourself on how credit reports are complied and how credit data is presented in reports. There can be variables in collection and presentation of credit data among the three major credit bureaus. When you choose a tenant screening vendor and select from credit screening options, make sure you know what you want before you order. Study a sample report to familiarize yourself with its data presentation and terminology.

An available report option is a scored credit report. Such an option is generally well worth any additional fee imposed by the screening vendor. In fact, many landlords prefer to use a scored credit report as this quickly gives them a benchmark to compare against their rental qualification criteria. They choose a scored credit report to make a more consistent, objective determination of the applicant’s creditworthiness. The cost is minimal compared to the time and effort that must be expended to adequately protect your rental investment. Furthermore, in most states, a credit report fee can be collected from the applicant.

The three major credit reporting agencies in the United States are: Experian, Equifax and TransUnion. Each reporting agency gathers information from various credit providers and supplies credit data on individual consumers, using its own formulas for calculating credit scores.

Information in the credit file is compiled into a three-digit credit score. The numeric value helps predict future credit performance based on past credit behavior. In general, the higher the score, the more likelihood the applicant will have the ability and willingness to pay as agreed and the less likelihood of default/delinquency.

The most commonly used credit scoring model is the Fair Issac Model expressed as a FICO score. In 2009 Fair Isaac Corporation, officially adopted the brand FICO™ as its corporate identity. The company retains its legal name, Fair Isaac Corporation, however, the company logo, website, and other company materials now reflect its new identity: FICO.

The FICO scoring range is expressed as between 340 and 850. Many landlords consider a good score to be 700+. However there is no magic score that guarantees a good tenant. There are life events such as extended illness, death, divorce, or student loans that, while having a major effect on credit scores, may warrant consideration under your rental policies, your particular type of property, and market conditions. Each landlord must set his rental criteria at the level of risk that is acceptable for his business. Some landlords will be willing to accept more of a risk than will other landlords.

FICO scores take into account the consumer’s payment history (35%), amounts owed (30%), length of credit history (15%), amount of new credit (10%), and the mix of credit types (10%). If your applicant does not use credit or is newly establishing credit you will likely not be able to obtain a credit score. If a score cannot be calculated the report will carry a notation such as “risk score not calculated due to lack of credit history” or note that the credit file does not contain any trade-line account which meets the following criteria of (1) the status date is within the last six months and (2) a balance updated within the last six months.

A score by itself is indeed only a number, but if a credit report is the only tenant screening done, then a credit score is likely to provide the best guess of future credit behavior.

While a credit score alone won’t predict every aspect of the applicant’s future behavior, for those landlords who “know the score,” a credit score speaks volumes.

It may be, however, that the reasons behind that score speak even louder. By reviewing the “reason codes” on the credit report as to why the score was not higher, a landlord can focus on patterns of behavior that could indicate potential problems or highlight current difficulties. Looking beyond the score to recognize potential problems is a way to reduce risk.

There are red flag conditions that can exist even with an acceptable credit score. Perhaps there are occasional missed payments even though a serious pattern of delinquency has not yet been established. This fact coupled with other information in the report or negative information received from previous landlords or employers could indicate potential trouble for the future. One red flag indicator is late or skipped utility payments. If utilities are unpaid, think that rent will fall behind very soon. A collection item for a previous utility balance requires careful investigation to evaluate the root cause and/or subsequent action.

The scored credit report will show the reasons, negative reasons, why the credit score was not higher. The credit bureau’s risk score factor reason codes allow credit reviewers to better understand the consumer’s credit behavior, warn of potential future problems, and indicate actions that could help improve the individual’s credit score.

Each reason category has an approximate weight assessed against the total credit score. Reason codes can be categorized as follows:

• Previous payment history (credit performance – 35%)
• Ratio between current balance and credit limit (level of indebtedness – 30%)
• Length of credit history (15%)
• Types of available credit (10%)
• New credit inquiries (10%)

The following code descriptions are only a sampling of the several dozen code explanations that could be shown on credit reports.

• Serious delinquency
• Serious delinquency and public record or collection filed
• Derogatory public record or collection filed
• Time since delinquency is too recent or unknown
• Level of delinquency on accounts
• Too many accounts with balances
• Number of accounts with delinquency
• Amounts owed on accounts

• Length of time accounts has been established
• Proportion of balances to credit limits on revolving accounts is too high

The following credit message illustrates how negative codes might appear on a credit report:

Credit Score: 561 (Fair Isaac Model)                                                                        

Score Factors:

Account(s) not paid as agreed and/or legal item filed

Length of time (or unknown time) since account delinquent

Number of accounts delinquent

Proportion of balance to high credit on bank revolving or all revolving accounts

Credit reports can also carry advisory messages to alert of potentially fraudulent or inconsistent information based on the data submitted for input – address, date of birth, phone number, driver license, and Social Security number.

For example, a report option provided by TransUnion offers:

ID MISMATCH ALERT message appears when: the input address, SSN or surname does not match what is on file; when a minimum of four inquiries have been made against the file within the last 60 days; or when an invalid ZIP code is entered.

HIGH RISK FRAUD ALERT messages appear if: address, SSN, or phone number have been used in suspected fraudulent activity; the information on an application is inappropriate, such as a commercial or institutional address; or if the SSN has not been issued by the Social Security Administration or is that of a deceased person as reported by the Social Security Administration

Special messages may highlight specific credit file conditions such as:

• Presence of consumer statement
• No subject found

A good source of training on how to read credit reports can be found on the major credit bureaus’ Web sites as well as major Internet based screening vendors’ Web sites. Knowing how to correctly interpret credit report information is a matter of education and experience and will be the key in your selection of tenants.

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 a family that has been leasing my single-family rental home now for almost two years, and they still have another year on the lease. Unfortunately, for reasons I won’t go into, the wife has asked her husband to leave the house. She has changed the locks on the doors (at her expense), and wants to have his name removed from the lease. I guess her concern is that he has a legal right to live there if he’s on the lease. She has, and will continue, to make the monthly payments. My questions are: (1) can I legally remove his name from the lease or do I need his consent (and signature), (2) Should I cancel her previous lease and draw up a new one, and (3) should I just keep the remaining lease in effect?

A1

You need to be careful what you do. I am not an attorney, but will give you my opinion based on a lot of experience as a landlord and property manager as well as having some knowledge of other legal issues.

First, your current lease is with both husband and wife. Absent a Court order, you cannot legally remove the husband from the lease without his agreement. Doing so would put you in the position of breaking the lease as far as he (or she) is concerned, possibly reducing your chances of recovering future rents owed under the lease, even potentially making you liable for damages.

Second, if there are marital problems and a possible legal separation and/or divorce, you could get yourself into a major hassle by siding with one of the parties against the other.

Third, it is to your potential disadvantage to allow removal of the husband from liability on the lease to begin with unless you are certain that the wife is in fact capable of paying the rent herself.

You could consider refusing to allow removal of the husband from the lease during the remainder of the lease term. Consider that many divorces result in the wife’s financial position becoming significantly reduced. It is more likely that she might not be able to pay the rent for the remaining year of the lease than that both together would be able to pay it. You could also consider telling her that she should get a Court order against the husband trying to live there if she is concerned about him claiming that right.

You should have no obligation to release one party from the lease even if there is a divorce. Both parties usually remain legally responsible for all liabilities following a divorce even though the Judge might assign liabilities between the parties when dividing the community assets and liabilities. For example, if the Judge awards a particular jointly held Visa credit card to one of the parties, Visa can still collect from the other party if the first party fails to pay and failure to maintain credit accounts by one party after a divorce will often damage the credit record of both parties. The same principles would usually apply to a lease or any other contract.

If, however, you are willing to release the husband from the lease because (1) you are certain that she will have the ability to pay the rent no matter what happens regarding her life, including if there are significant legal costs from a protracted divorce action or (2) you wish to provide charity, then you could tell the wife that you cannot remove the husband from the lease without his written agreement that it be done. She could point out to him that removing him will eliminate his liability for the lease, perhaps providing incentive for his cooperation.

If he consents to removal and you agree to do so, then you will need to think about documentation. Whether you have the wife execute a new lease or adequately amend the existing one is probably not significantly critical. However, keep in mind that either way, you should (1) have the wife execute the required document(s) prior to accepting removal of the husband, (2) consider this an opportunity to make any other changes to the lease that you might consider desirable, and (3) make sure documentation makes it clear who is responsible for any damages to the premises as of the date of amendment or new lease – that is, any changes in condition of the property from the move-in condition at original possession date. Related to those issues, if you haven’t recently done a comprehensive inspection of the unit, I suggest that an inspection prior to document execution be part of the deal and that any serious problems be paid for by one or both parties prior to execution.

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Q2

I know that the site is income real estate from a landlord’s side of the fence, but, since I’m a new member, I thought I’d ask my question anyway. I’m considering opening a small sandwich shop business, something my wife has long wanted to do, so that she can have her own business. Can anyone give me any pointers about picking a location?

A2

As with everything related to real estate, the key is the often stated term “location, location, location.” Unfortunately, if you’re in the midst of creating a spectacular menu for your dream sandwich shop, that might not be the most important thing on your mind. However, you need to put location at the top of your task list. Prior to looking for a location you should have a business plan and you must keep your business plan in mind at all times while looking for your location. The right location is often the principal factor for success of a retail business of any kind. You, of course, need good products, food in your case, but no one will know how great your wife’s sandwiches are if no one comes in the door. Obviously, the key question is “how does one determine a good location?” This can be as simple or as complex as you make it. You need to get a demographic overview of the area you’re looking at – age, income, households, etc. You should also look at neighborhood traffic generators, such as other retailers that draw people to the area, industrial or office parks, schools, colleges, and medical facilities. You’ll also want to look at both motor vehicle and foot traffic.

There are sophisticated location analysis tools available that include traffic pattern information, demographic and lifestyle data, and competitive analyses. For a price, a retailer can get useful answers to almost any question he can think of. You will find a lot of services using a search engine. Many experts will tell you that the best place to be is as close to your biggest competitor as possible because you can benefit from their marketing efforts. They probably chose their locations based on the ideal demographics of a particular area and may have already spent significant percentages of their advertising budgets toward driving traffic to their locations. Why spend your money for this task if not necessary? Competition usually generates more business, more traffic, and that’s a good thing. Being located near your competition can be a plus for your business, provided you’re confident enough in your product to compete.

However, you still want to do your own due diligence regarding a particular property, even if your competitors appear to be thriving in the area. Finally, you should consider utilizing a real estate agent who has long experience specializing in leasing in the area of interest in addition to looking around yourself. You shouldn’t necessarily commit to an agency agreement, but agents often know of available properties that not publicly known to be available and properties that will soon be available. Of course, once you find an available space for lease in a good location, you need to negotiate a lease that works for you and your business and this can be just as important as location itself. However, that’s a topic requiring a lot of consideration in itself.

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Q3

I’m evicting a tenant who has until Wednesday to be out. I have not seen the tenant in over two weeks, most likely because he has no power. We had an arrangement for him to pay half his rent on the 16th and half on the 23rd. He never showed up on the 16th, nor 17th nor 18th. On the 18th, I hung the eviction notice.

I went thru the Texas eviction law on this site and didn’t find anything on abandonment of property, as the tenant still has property in the apartment. Therefore, I don’t know when I can remove this property in order to lease out the apartment. I also don’t know what happens if the tenant doesn’t show up to even read the eviction notice before the 3 days expire. Any direction would be most helpful.

A3

Your posting is somewhat confusing. You claim that you are evicting a tenant, but then state that you “hung the eviction” notice. First, an eviction is a formal court action that requires a default notice (usually a “pay or quit” notice if an unpaid rent issue) being served in accordance with the requirements of state law. If the tenant does not correct the default within the time allowed by state law, the landlord may then begin the eviction process, again as provided by state law. Some states, including Texas I believe, allow Unconditional Quit notices, meaning that the tenant needn’t be allowed to cure the default if served with an “Unconditional Quit” notice instead of a “Pay or Quit” or a notice regarding some other default. Actual eviction can take place only after the court issues a ruling on the matter in favor of the landlord.

“Hanging a notice” does not constitute legal service of notice in many states, although it does in some. Some states require regular, mail, certified mail, or personal service on the tenant or specific other persons found on the premises or more than one of those ways I’ve listed. Texas landlord-tenant statutes should specify what constitutes legal service.

Whatever is required regarding notices, if the tenant fails to leave, a formal eviction must be done through the court. Although it is often obvious that a tenant has abandoned the premises, taking possession when the tenant can claim possession, whether or not in default of the lease, can result in problems if the tenant chooses to claim he had not relinquished possession.

Whether or not there is an issue regarding possession, there can still be an issue regarding personal property left on the premises. The rules vary greatly among the states. At one extreme, the landlord can do whatever he wants. At the other extreme, the landlord must secure and hold the property secure for months while going though specific notice requirements and holding a formal sale of the property, with the proceeds being applied to debt of the tenant and the landlord providing a detailed accounting to the tenant, perhaps even being required to pay the tenant any amount received that is higher than the amount owed.

Even after evicting a tenant who owed thousands of dollars in rent and did thousands of dollars in damages, the landlord is often required to follow procedures. Failure to follow the procedures of the state can make the landlord liable for the value of the tenant’s property and tenant property sometimes becomes very valuable after the landlord has hauled it to the dump. Some states require formal liens be filed against the tenant property, followed by publishing of notices before the proceeds of a sale can belong to the landlord. Some states require return of items necessary for basic living no matter what the tenant owes the landlord. The procedures in some states depend on why the tenant left.

In all states, landlords must be concerned about property that belongs to someone other than the tenant – e.g., rented furniture, TVs, or computers.

The above issues are some of those that can be a concern anytime that a tenant leaves without formally “checking out.”

I cannot advise on the specific requirements of Texas law. I would guess that they are less onerous than some states, but the only way to know is to track down the current abandoned property statutes of Texas. It should be relatively easy to do this, but doing so may require a little time to both find current statutes and to interpret them. If you don’t want to do the research on your own, consider consulting a competent attorney specializing in landlord-tenant law, preferably one who usually represents landlords.

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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.

Marketing

As was stated in an earlier newsletter article dating Jan 5, 2011 regarding basic issues related to disposing of income property, most of the same considerations apply when selling an income property as when buying one. This includes selecting an agent, determining the value of the property, maintaining control over the deal, being careful about contingencies, and financing issues.

Using an Agent

A good agent will often increase your net proceeds by significantly more than the amount of his/her commission. Furthermore, if the buyer has an agent, his purchase price will likely be reduced by the commission paid to his agent.

Pricing

To determine what your property is worth when it’s time to sell, you follow the same procedures as when you bought and as covered in much more detail in our “Valuing Income Property” eCourse or “9 Fundamentals of Real Property Valuation” Mini Training Guide. You should have valid reasons for your asking price because the buyer will have good reasons for the maximum he will be willing to pay.

Sale Preparation

Regarding both physical and legal issues, it is usually best to correct even expensive problems that might be considered an issue by a buyer.

This applies to issues known by the buyer before writing an offer, which can result in a lower offered price, and issues that are likely to be discovered during the due diligence performed after acceptance of the offer. Having them become an issue in the middle of a deal can result in cancellation of an escrow or re-negotiation of the price or other terms. The seller is often at a disadvantage when having to re-negotiate the price after a long escrow when the idea of starting over can cause the seller to give in to demands he wouldn’t have considered in the beginning. A buyer may also discount the value by more then the costs of fixing problems because he will worry about what other unknown items might later cost him money.

Physical issues include inoperative sprinkler systems, out-of-code electrical or plumbing systems, and cosmetic issues such as cracked windows and components in need of paint. Also consider various relatively inexpensive cosmetic upgrades that might make a difference. New exterior paint, cosmetic landscape improvements, re-coating of asphalt, correcting roof problems, and repairing superficial defects that make the property look ragged can have a significant impact on a potential buyer’s initial reactions even to the point of his writing the offer.

Legal issues include tenant disputes, building code violations, delinquent taxes, and missing licenses or permits. If there are any problems regarding inability to obtain legally required licenses and permits, get them resolved before putting the property on the market. One reason to take care of these issues before even putting your property on the market is that some might suggest to a savvy buyer or agent that you are having financial difficulties that could make you desperate to sell and could result in lower offered prices.

Legal Issues

If there are any issues regarding zoning or building codes, it is best to disclose it up front so that it doesn’t become an issue two months into the escrow where it could either kill the deal or require re-negotiation of the price and when you will likely be more compliant after investing so much time into the deal. If there are things that you can’t fix ahead of time or at all, it is best that they be considered in negotiations up front rather than after everyone is expecting escrow to close.

Counter Offers

When you are selling your property it will be the buyer who will be writing the original contract terms and they will likely be written to his advantage. It is almost certain that no offer written by the buyer and/or his agent will be ready for the seller’s signature. You should be particularly concerned about certain items and should try to change them to your own advantage or at least make them neutral. There are a number of general principles that you should follow when trying to modify contingencies in your counter offer.

• It is to the seller’s advantage that all contingencies are automatically approved if not disapproved in writing.
• As we recommended to you as the buyer, it is usually in your best interest as the seller to require the buyer bear the cost of inspections and then take that fact into account in deciding the minimum price you will accept. The reason in this case is that you want the buyer to be responsible for timely completion of inspections and that it not be your fault if a contingency is not met in a timely manner.
• Rather than wanting maximum time for contingency periods as you do as the buyer, you want to be sure that the requested periods are not unreasonably long to avoid them being used to buy time for a non-performing buyer. If the buyer requests a time that is too short, that’s his problem and you can always give him additional time if desired.
• To the degree possible, inspections should be scheduled in order of importance relative to decision making by the buyer in order to force him to cancel as soon as possible if there are problems.

Financing

In order to avoid tying up your property with a deal that has impossible-to-meet contingencies, be sure that all specified terms including maximum interest rate, discount points, and other costs as well as the minimum number of years of the loan are realistic in terms of the current market, with room for probable changes.

Sellers need to be careful when agreeing to pay closing costs for a buyer. They must define exactly (1) which closing costs are to be covered, (2) whether or not any excess from the maximum amount agreed to can be spent by the buyer to buy down the interest rate for his loan, and (3) the maximum amount that can be paid in fees so as to prevent the mortgage broker or lender from increasing commissions or other fees in order to burn up the seller’s allowance.

Financial Records

The value of the property and the amount that a buyer will be willing to pay for it, particularly for commercial properties and for larger residential properties, are dependent upon the income and expenses so you should expect to provide sufficient financial documentation to enable the buyer to make his decision.

Documentation

Be prepared to provide the same documentation when you sell as you should have required when you bought, as discussed in an earlier article. This should include accurate income and expenses data, verifiable from source documents, for at least two years.

Provide good readable copies of all leases and other documents, including amendments, checklists, and house rules so that the buyer can provide copies to lenders rather than you having to make additional copies.

Physical Inspections

As stated elsewhere, you should have taken care of any deferred maintenance before putting the property on the market, so that physical inspections don’t find serious defects that haven’t been disclosed.

Additional Information

Additional brief discussions regarding several issues related to disposing of income properties will be provided in future newsletter articles. Currently, significantly more detailed discussions regarding a wide range of related issues can be found in our “Buying & Selling Income Properties” eCourse. For additional discussions regarding a wide variety of real estate investing and management issues see our other eCourses and our Mini Training Guides.