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

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.

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