Archive for March, 2011

Quit Claim Deeds.

March, 2011

Quit Claim Deeds

Sometimes misnamed a “Quit Claim Deed,” or worse, a “Quick Claim Deed,” a Quitclaim Deed, is a very useful document under certain circumstances, but has characteristics that make its use risky under many circumstances.

Most real estate investors will run into use of a quitclaim deed at least once during their investment career. It may be when buying a tax sale property or when a spouse must sign one.

Although some may think that a Deed is a Deed, such is not the case. While all types of deed documents transfer some kind of real property interest, each type of deed has one or more characteristics that are different from other types.

In review, a deed is a document that conveys real property from one party to another. A deed includes a legal description of the land and the names of the party giving up an interest (grantor) and the party receiving an interest (grantee). It also includes words that describe the interests being conveyed. While there are a variety of deed types, with some differences regarding what might be available among states, there are two basic types that are most often of interest: warranty deeds and quitclaim deeds.

A warranty deed, the most commonly used type, certifies that the grantor is the sole and rightful owner of the interest being conveyed, that there are no undisclosed liens or other claims against the property, and that the owner does not know of any defects in the title. If, in fact, it is later discovered that any of these issues were untrue, the grantee would be able to seek legal recourse against the grantor. Of course, whether or not satisfaction could be obtained against the grantor would depend on a number of possible factors, including the financial condition of the grantor and the ability of finding him/her in order to serve legal documents – hence, the importance of title insurance policies which will cover many types of such problems.

In contrast, quitclaim deeds simply convey whatever interest, if any, that the party executing the deed might have. Therefore, if the party is in fact the sole owner, there are no material undisclosed facts, and the deed is properly written, executed, notarized, and recorded, there should be no problems. Unfortunately, there are many possible ways in which that might not be the end result. Possible problems include:

  • The grantor is not the sole owner of the property or even has no interest whatsoever in it and another interest holder or sole owner surfaces in the future to claim the property, resulting in legal headaches, even loss of the property.
  • It later turns out that there was a lien against the property, perhaps with the amount owed even being more than the current value of the property – not improbable in the housing market of the past few years. One way that such a problem could occur is that the grantor did not pay a contractor for work recently completed and the contractor records a lien after the quitclaim deed is given, but within the legal period for filing the lien.

Depending on the facts of a particular case, the grantee may have grounds for a lawsuit against the grantor and/or may at least be able to have the grantor incarcerated if fraud is involved. However, as previously mentioned collecting on a lawsuit judgment or even being able to sustain a lawsuit is not certain if the grantor is judgment proof or cannot be found, respectively. Seeing the grantor jailed for fraud may provide some satisfaction, but (1) the grantor may not be located, (2) fraud is often difficult or impossible to prove, (3) even if there is a conviction, the sentence may be unsatisfactorily light, (4) financial redress is sometimes not provided in the sentence or may not be collectable when it is, and (5) the time and energy that the grantee must put into pursuing either civil or criminal redress will be substantial, as will the related stress.

Quitclaim deeds are often used when one spouse gives up a property interest in a divorce or when one spouse is not receiving a property interest because the other spouse is purchasing a property with separate funds and the two are agreed that the property being purchased will be the sole and separate property of the purchasing spouse. Quitclaim deeds are also sometimes used in transfers of property rights between family members when the involved parties know one another well and are familiar with the history of the property.

Sometimes one has no choice but to receive a quitclaim deed because that is the way it is done by the governmental agency conveying title. This occurs, for example, when a county sells a property because of unpaid property taxes. In this case or in any other case where you acquire title via a quitclaim deed, in order to be able to later sell the property at the market value of comparable properties, you will need to have a warranty deed. This is accomplished with the court ruling in your favor in a quiet-title lawsuit. However, unless prior to accepting the quitclaim deed you had a competent attorney perform a title search or obtained a satisfactory preliminary title report from a title insurance company, you could find yourself on the losing end of the court action and holding a worthless piece of paper.

Accordingly, although a quitclaim deed is usually risk-free when it involves the spousal transactions previously mentioned and can be relatively low-risk for a family transfer under circumstances mentioned above, buying property on a quitclaim deed is always risky and should be avoided. If a quitclaim deed is the only form of deed that a seller is willing to provide, the buyer should ask “why?” and take steps to protect himself, including all possible due diligence.

Additional Information

The issues discussed in this article and many other issues of importance to landlords are covered in our eCourses and/or in our Mini Training Guides.

Is It Legal For The Seller To Voluntarily Pay The Buyer Rents

March, 2011

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

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Q1                                                                

Is it legal for the seller to voluntarily pay the buyer rents for the property before the closing occurs, based on proposed settlement date?

A1

The basic answer is that buyers and sellers can agree to anything they wish, but either party can be at risk when doing something outside of escrow. The principal reason for having an escrow is that an independent party with fiduciary duties to both buyer and seller is in charge of the funds and making sure all necessary things are done, including payment of loans, commissions, back taxes, etc.

Regarding the receipt of rents by the buyer prior to close of escrow, there is also a potential risk that the buyer could become liable for something that occurs prior to transfer of title even though the buyer has no management control.

There are, however, times when it is desirable, even necessary to do things, including transfer of funds, prior to closing escrow. When doing so, both buyer and seller should be sure that the items are documented by signed written agreements within escrow documents.

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Q2

I was wondering if there’s an occupancy limit. Basically, I’m renting a two bedroom apartment and it was originally rented to a husband and wife who had twin boys and a daughter from a previous marriage. Since then, another daughter from a previous marriage has moved in and the eldest daughter is pregnant. That’s a lot of people in a two bedroom unit. I was wondering if they’re no longer in compliance to a law or something along those lines. Thank you!

A2

I can’t give you specific advice because occupancy issues can depend on federal, state, and local laws as well as various facts regarding the particular unit, but I will provide some general information.

Limitation of the number of people allowed to occupy a rental unit has been a hotly debated issue in the rental housing industry for many years. Unfortunately, there is still no definite statute that covers every type of property and every practical situation in detail.

In general, landlords may establish occupancy standards that are truly tied to health and safety issues or related to legitimate business reasons such as limitations of electrical or plumbing systems. However, when it comes to occupancy limitations, there are potential federal, state, and/or local laws that must be considered. Further complicating things, health, safety and business issues are often gray areas and there is no guarantee that following rules of one jurisdiction won’t result in problems with jurisdictions at a higher or lower level.

Many state and/or local housing codes include space rules that restrict the number of occupants based on the size of bedrooms.

Even the federal HUD rule on the issue is only a “guideline,” a memo to regional HUD directors stating that Congress didn’t intend to develop a “national occupancy code” and hinting that states should set their own standards. This has resulted in states developing occupancy standards that were either less or more restrictive than the federal guidelines. The federal guidelines can be found at www.hud.gov. You need to check with your local and state housing agencies regarding their rules, if any.

While it is legal to establish reasonable space-to-person ratios, landlords must be careful that their occupancy standards do not conflict with fair housing laws, including the protected class of “familial status.” That is, they must not use the standards to discriminate against children. For example, if you allow three adults to occupy one of your units, you shouldn’t even consider refusing to allow a couple with a child or one adult with two children occupy a similar unit.

Landlords must also be careful regarding those with a physical or mental incapacitation that would be considered a handicap under federal fair housing laws and ADA as well as under state or local fair housing laws. Landlords must allow for flexibility in occupancy limitations under the “reasonable accommodation” requirements of those laws in order to avoid the substantial financial and other penalties associated with discrimination against this class. This can most often come up when a care-giver for an applicant or tenant is involved.

As with all matters that involve fair housing, landlords must be sure to treat all applicants and existing tenants equally, as applying different occupancy standards to different applicants or existing tenants can result in costly discrimination claims. It may be that the safest way to avoid problems is to use common sense and use standards that are at least as generous as the federal guidelines, but follow state and local rules if more generous than federal guidelines.

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Q3

Can you give me some move-in do’s and don’ts?

A3

The issues are covered in considerable detail in certain of our resources, most comprehensively in “Managing Income Property” (Lesson 15) eCourse. Here is a very brief summary of the issues covered in the course.

Start With an Adequate Lease Agreement

A clearly written detailed lease agreement will help protect both the landlord and tenant from fraud or misunderstanding in the event of disagreements or disputes.

Before Scheduling Orientation

Be sure your unit is absolutely rent-ready before you schedule your tenant move-in appointment.

Provide Blank Copy of Lease

When an applicant has been selected he should immediately, certainly before the lease signing meeting, be provided with a blank copy of the lease agreement, with instructions that everyone who will execute the lease should read it over carefully before attending the meeting and make notes regarding any questions they might have.

Provide HOA Documents

Provide copies of all relevant HOA documents (CC&Rs, Bylaws, and Rules & Regulations) to the selected applicant with instructions that everyone who will execute the lease should read them over carefully before attending the lease execution meeting. Approval of the documents should be included in the lease agreement or in a separate document.

Tenant Orientation

Having a formal orientation meeting can reduce the potential for misunderstandings during the tenancy. It is possible that the new tenant orientation will be the only time that both parties are face-to-face until the time comes to conduct the move-out inspection.

Giving Possession

Care must be taken to avoid giving possession before all documentation has been executed by all parties, all moneys have been received, and, if utilities are still in the landlord’s name, arrangements have been made for certain transfer to the tenant. Never let a prospective tenant have keys, stay temporarily in the unit, or even move a single item of his personal property onto the property until all pre-possession tasks are completed. If you indicate transfer of possession in any way, you may effectively have given him a legally protected status of tenant even though no lease was signed or rent/deposit money was paid. It will now require an eviction if he can’t complete the terms of move-in and refuses to voluntarily leave.

Move-In/Out Checklists

Many states require a move-in and/or move-out checklist to be completed when possession is given to the new tenant. Even when not required by law, a comprehensive move-in inspection should be done before the tenant moves in any of his boxes or furnishings.

There is no set format for checklists except as might be specified in a state’s laws, in which case that should be considered the very minimum. In general, a lot of detail is more important than having a short document.

Last Minute Problems

Occasionally, the selected applicant informs a landlord at the time when security deposit and rent are to be paid that he/she is short some of the funds due. You should have specific procedures for dealing with the issue.

Move-In Letter

It is recommended that an informational letter be sent to new tenants that not only “welcomes” them as tenants, but also reminds them of important policies and procedures.

Each issue of the above sections is discussed in considerably greater detail in the “Managing” eCourse.

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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.

New Record Keeping Requirments for Landlords

March, 2011

New Record Keeping Requirements for Landlords

As if a landlord didn’t have enough to do…now this!

New legislation passed under H.R. 5297: Small Business Jobs Act of 2010 will have an impact on tax reporting for landlords and investor-owners. The “landlord provision” under Section 2101 established that “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.”

IRS regulations have long required businesses to provide a Form 1099 to persons or non-corporate entities performing services for payments of $600 or more in the calendar year. Now landlords have the same Form 1099-MISC reporting requirements as other taxpayers in a trade or business. Prior to this legislation, only those real estate professionals actively engaged in rental activities such as property management were considered to be in the trade or business of renting property and required to file informational forms with the IRS.

The Instructions for Form 1099-MISC for tax year 2011 requires reporting payments of $600 or more for rental property expenses but not if an individual investor/landlord is an active member of the Armed Forces or an employee of the intelligence community as defined in section 121(d)(9)(C) and substantially all rental income is from renting a principal home on a temporary basis.

It also notes that other exceptions may be provided in the future. Such exceptions might exempt landlords whose annual rental income is not more than a minimal amount or those landlords who would experience undue hardship in complying with reporting requirements. However the IRS as of this writing has not yet issued guidance on such other exceptions/exemptions.

A separate Form 1099 will need to be filed for each payee. Payments to tax-exempt organizations are not included in this new requirement. A Form 1099 is not required for any contractor or laborer who is paid less than $600 in the tax year.

The exemption from reporting payments made to corporations for 2011 does not apply to payments for legal services. Therefore, landlords must report payment of attorneys’ fees even if the law firm is incorporated.

As stated, the goals of the new legislation are to:

  • ensure that vendors and contractors are accurately reporting all taxable income to the IRS as required by law,
  • hold landlords responsible for providing a Form 1099 to contractors who perform services on rental property,
  • reduce the number of landlords who falsely report deductions for services that were not performed for the purpose of increasing tax write-offs, and
  • verify the deductions that are claimed each year for rental property repairs and improvements.

The number of increased tax filings is expected to reduce the tax gap and result in additional revenues of 2.5 billion dollars over the next decade.

Landlords will be required to provide a Form 1099-MISC to each vendor prior to January 31, 2012 and file IRS and state forms by February 28, 2012. In preparation for the reporting requirement, landlords are advised to review their current bookkeeping practices to ensure that the necessary information is being collected to prepare and file accurate information forms. For some “Mom and Pop” landlords this may mean additional time must be allocated to maintain more detailed records for tracking vendor/contractor information and payments. For those landlords who use an accountant, be sure that you know what your accountant expects you to do regarding documentation.

It will be necessary to gather federal tax identification numbers or Social Security numbers, legal names, and addresses of contractors/vendors that provide services for rental repairs and improvements in order to properly file the Form 1099. The best practice would be to require all service providers to complete a Form W-9 (Request for Taxpayer Identification Number and Certification) prior to work being performed and receiving payment for services. Even if the landlord does not expect to pay the service provider more than $600 total for work done during the year, it is still a good idea to have such a procedure in case of unforeseen future repairs and payments that would exceed the threshold amount.

The Form W-9 is not filed with the IRS but kept by the landlord in his files as support for the tax identification number, address, and name reported on the information form. Tax identification numbers are checked against existing IRS databases to detect fraudulent numbers. Landlords should note that if the W-9 is improperly filled out or false information supplied, the IRS will notify the landlord of any errors and may require backup withholding on payments. In effect, the landlord will be assumed to be the statutory employer of that contractor and responsible for all applicable tax withholdings.

In addition landlords should have a record keeping system to track all payments to specific vendors and contractors made through out the year. Service providers commonly used by landlords include painters, electricians, plumbers, exterminators, landscapers, pool maintenance companies, security firms, other repair/maintenance contractors, or any other business entity which provides a service such as accounting or bookkeeping.

The IRS can impose monetary penalties on landlords who fail to comply with the reporting requirements. The new rules carry an enhanced penalty structure for intentional failure to file the required forms or for late filing. These penalties apply per Form 1099 that is required to be issued. The maximum penalties that can be imposed per year have also increased.

Landlords also may risk repair deductions being disallowed if they are related to payment to service providers and a Form 1099 was not properly submitted.

On a more positive note – while doing more paperwork for the IRS may seem burdensome, in effect it forces landlords to maintain better records, which in itself is a good thing. Full, adequate documentation allows landlords paper protection to claim all legitimate deductions and substantiate their allowance in the event of an audit. Besides, the rules will change again for the 2012 tax year – when Form 1099s must be issued for goods as well as services and when Form 1099s must also be issued for all corporate payees – and now is the time to set procedures in place.

There are other subtleties related to the new law and some issues are yet fully clarified, so landlords need to educate themselves by reading “2011 Instructions for Form 1099” and possible future revisions to these instructions.

Additional Information

For additional discussions regarding a wide variety of real estate investing and management issues see our other eCourses and our Mini Training Guides.

My Tenant is Filing Bankruptcy..

March, 2011

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 recently phoned to tell me he is filing bankruptcy under Chapter 7. He has 5 months to go on a one-year lease. He is current with his rent. I’m curious if I need to contact the court. Will a bankruptcy allow him to avoid making future payments on the lease?

A1

In general, the filing of bankruptcy affects only debt, that is, unpaid rents, and does not impact the responsibility of the tenant to pay rent after filing. However, bankruptcy law is somewhat complex and was revised effective 10/17/05, mostly in favor of creditors including landlords.

There may be ways in which failure of the tenant to pay future rent would impact your ability to evict without bankruptcy court action, so you should immediately seek legal advice if rent is not received on time during the period when the tenant is under court jurisdiction. In the meantime, you might consider seeing if the court office itself or the trustee for the particular case will provide additional information.

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Q2

I have often had difficulty obtaining verification of employment. What’s the best procedure?

A2

In recent years it has become ever more difficult to get employment information from employers because of the fear of lawsuits. Some employers will not even admit over the phone to knowing their own employee. Many will not give out any information without written authorization from the employee and will only respond to a written request, sometimes requiring that it be on the employer’s own form. Employers may be unwilling to respond via phone, fax, or email.

It is also important that the form be returned directly from the employer rather than passing through the hands of the applicant if possible. If it does pass through the applicant’s hands, you will need to verify the legitimacy of the returned form.

One option is to leave the burden of verification up to the applicant and only require that the employer mail it or fax it to you or that the applicant authorize the employer to respond to your phone call to a phone number which can be verified as legitimate.

As a landlord, you want to determine whether or not the applicant has sufficient income to afford the rental property and that they will pay the rent when due. However, this can usually be accomplished by means other than verification by employers, in ways that usually provide more certainty.

In general, a landlord can request whatever financial information is desired in order to confirm the applicant’s ability to pay under whatever legal, reasonable, and logical criteria the landlord uses, so long as the same requirements are demanded of all applicants.

Employment and income documentation can consist of requiring the applicant to produce the last several recent paycheck stubs. Review the pay stubs to verify that the applicant’s name, current address and Social Security number are the same as shown on the application and, if not, determine the reason for the fact.

If another source of income will be used for rent payment, verifiable documents, appropriate to the source of income, should be requested. Verification of non-employment income must be considered on a case-by-case basis. Verification of non-earned income – including interest, dividends, and other investment cash flow – and of entitlement items – including disability, Social Security, and private retirement – are all relatively easily verified because the recipients are provided official statements of the amounts.

Self employed individuals can be asked to provide copies of their tax returns. Keep in mind that the tax return will usually not be providing current information, as depending on the time of year, it may possibly be as much as 15 months old. It is usually best to consider multiple documents that together confirm what the applicant puts on the application form.

Finally, keep in mind that a good credit record, absence of an eviction record, and a satisfactory report from previous landlords are usually more important than the details of employment. Many tenants pay their rent on time and take good care of rental property with very minimal income, while many others fail to pay rent and/or trash properties in spite of substantial incomes.

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Q3

Am I required to have smoke detectors in every bedroom of my rental units, or is that the responsibility of the tenant?

A3

Specific requirements will vary from state to state, even city/county to city/county in regard to whether it is the landlord’s duty to provide detectors and where detectors must be installed. Your insurance company may also have requirements.

It has become increasingly common over the past couple of decades that it is the landlord’s responsibility to provide detectors in accordance with the applicable law. As a practical matter, I would put them in every bedroom and other living areas of each unit even if not required by any law. Battery operated detectors can be purchased in bulk for under ten dollars each (often including batteries). The safety protection that doing so provides the tenants and the liability protection it provides the landlord is well worth such a minor expense and one then needn’t worry about what rooms are covered by any specific requirements of any level of jurisdiction.

You should be sure that (1) you install new batteries whenever units were vacant, (2) your check-in list includes testing of the detectors, and (3) your lease agreement clearly makes tenants responsible for regular testing and for replacement of batteries when needed during their tenancy.

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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.