Archive for July, 2011

Q&A – Acting As My Own Agent To Sell My Property

July, 2011

Some Questions & Answers

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Q1

As a landlord in Baltimore, MD, where can I get information on what I need to know when acting as my own agent to sell my property; i.e., sale by owner? How do I negotiate with another real estate agent representing a buyer?

A1

An owner always has the right to sell the property without hiring a licensed real estate broker – i.e., act as his/her own agent. However, there are reasons why doing so is often not advisable. I will mention a couple of them.

One is, of course, when the owner is not sufficiently knowledgeable and experienced to protect himself/herself in (1) setting the price, (2) qualifying potential buyers, and (3) negotiating a final contract that contains adequate contingencies regarding a number of issues, particularly when dealing with a sophisticated potential buyer who has a sharp agent.

Another is when the property is other than a few residential units. It is usually difficult for someone who is not a licensed agent to obtain sufficient information regarding market value of commercial properties and larger residential properties, which can result in pricing it too high and not obtaining offers or too low and giving away some potential profit. The number of units where this is a significant issue depends on the type of property, the location of the property, and the degree of assistance the owner might be able to obtain from acquaintances who are active licensed agents, appraisers, or sophisticated investors. Also, larger properties are usually sold via networking among licensed agents who have somewhat captive buyer and seller clients. Most owners do not have access to that network or to other marketing tools available to professionals who deal in large properties.

It is possible to end up with a higher net sale price when using a competent experienced agent that more than offsets the commission being paid.

Regarding the issue of negotiating with real estate agent representing a buyer, the best protection is: (1) understanding the process as well as a professional would and acting professionally; (2) pricing the property correctly; (3) providing adequate financial and other information, including a complete detailed info package if it is more than a duplex; (4) try to detach yourself from the personal issues as if you were acting as agent for the owner; and (5) don’t let an agent, who may have done dozens of similar deals, intimidate you or push you into unacceptable terms.

For a review of buying and selling issues and some insight into the issues that you might not be aware of see our “Buying & Selling Income Property” eCourse, of which I am the author. Keep in mind that most buying issues are relevant also as seller issues, just viewed from the other side of the fence.

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Q2

I am owner of a rental property in Phoenix, AZ and am interested in selling the property while I still have a tenant in it. Do I need to offer the tenant first right of refusal to buy the property? If so, what formal document or form must I use to confirm my wish and confirm the tenant’s decision to buy or not buy?

A2

Unless there is a written document giving the tenant a first right of refusal, either in the lease agreement itself or via separate written contract, you do not have to even tell the tenant that you are selling the property, although it might result in a better relationship when needing to show the property or have inspections performed if you keep the tenant informed. Absent some explicit clause in the lease agreement specifying otherwise, the lease follows the property. That is, the buyer would have to honor the lease agreement and the tenant would have to continue fulfilling the terms of the lease.

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Q3

I have renters who signed a “no pets” lease. They are now keeping pets. I would appreciate suggestions on course of action.

A3

I assume that you just discovered the violation and that the tenants know that you know. It is important that you now take immediate action to correct the problem in order to avoid the possibility that your inaction could be taken by the tenants and even by a judge to mean that you have waived your rights to enforce that lease provision.

Your first step is to serve written notice on the tenants with the notice demanding that they immediately get rid of the pets. In many states you can serve a notice that both demands that they cure the default within a certain number of days, the period varying among states, or immediately vacate the premises. Some states have a format referred to as a “Cure or Quit Notice” while other states have other names for a type of notice that can be used to accomplish the same thing. For example, the appropriate notice might also be titled “X-Day Notice of Violation of Lease.”

Failure of the tenants to cure the default within the period specified by state law allows the landlord to immediately file for eviction. Although most states require the landlord to allow continued tenancy if the tenants cure the default; some states allow the landlord to demand that the tenants leave even though they have cured the default. For example, Nevada has both “Notice of Breach with Right to Cure” and “Notice of Breach with No Right to Cure” types of notices. Without knowing the state in which the rental property is located, I can’t be more specific on this issue. I suggest that you click on the “Forms by State” link under “Landlord Legal Forms section of your membership home page and check what’s available for your state.

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Income – What Is & What Isn’t

July, 2011

Income – What Is & What Isn’t

Landlords take in money, some being taxable, some not. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. There are other receipts that are not rent including deposits and vending machines amounts.

Rents                                                                                    

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property.

When to report – When you report rental income on your return depends on whether you are a cash basis taxpayer or use an accrual method. If you are a cash basis taxpayer, you report rental income on your return for the year you actually or constructively receive it.

You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account. If you use an accrual method, you generally report income when you earn it, rather than when you receive it. You generally deduct your expenses when you incur them, rather than when you pay them. For more information about when you constructively receive income and accrual methods of accounting, see IRS Publication 538 (“Accounting Periods and Methods”).

Advance rent – Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. For example, you sign a 2-year lease for your property and receive $800 for the first month’s rent and $800 as rent for the last month of the lease. You must include $1,600 in your income in the first year as well as any other rents received during that calendar year.

Other rent related receipt – Some receipts that are related to rent can be included in rents. Late charges are probably the most-often received income in this category.

Deposits

Do not include a security deposit or other truly deposit amounts in your income when you receive it if you plan to return it to your tenant at the end of the lease absent any claim for damages or unpaid rent at the end of the lease. Non-refundable fees, even if called deposits must be reported in the year received.

However, if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. If an amount is to be used as a final payment of rent, then, even though called a security deposit, it is advance rent that must be included in your income when you convert the deposit to rent.

Payment for Canceling a Lease

If your tenant pays you to cancel a lease, the amount you receive is rent and must be included in your income in the year you receive it regardless of your method of accounting.

Expenses Paid by Tenant

If your tenant pays any of your expenses the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses although there can be cases where the payments are income but the amount must be capitalized and depreciated over a number of years.

As an example, the furnace in your rental property stops working while you’re out of town and your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the repair payment made by your tenant as a rental expense.

As another example, your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill. Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the utility payment made by your tenant as a rental expense.

Although one could not include as income the amount paid by the tenant and not deduct the amount on an income tax return, it is usually better to do both in order to provide a paper trail of what actually occurred.

Property or Services

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

For example, your tenant is a painter and you accept his offer to paint your rental property instead of paying 2 months’ rent. Include in your rental income the amount the tenant would have paid for 2 months’ rent. You can usually deduct that same amount as a maintenance expense.

Q & A – Will a lien on your property hurt your credit score?

July, 2011

Some Questions & Answers

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Q1

Will a lien on your property hurt your credit score?

A1

Anything that is a matter of public record, which a lien will be if/when recorded, will affect one’s credit record if credit bureaus discover it when checking records in the county where recorded. Although it might take days, even months after the lien is recorded for it to appear in a credit report, it is almost certain to eventually appear.

How much it affects one’s credit record in general and score in particular will depend on both the type of lien involved and the other items on which the score is based. Liens can be filed by mistake or, for a mechanic’s lien, because of a dispute with a non-performing contractor. Although the risk score will be affected in accordance with the algorithm by which the particular risk score is calculated, the degree to which a lien affects a particular person in any given transaction will depend on the type of lien, why the lien occurred, the purpose of the credit report, and whether the person/business being asked to grant credit is able and willing to consider those specifics.

Liens can often be removed by showing the liening party that a mistake has been made. For example, a state income tax lien can likely be removed by showing the taxing authority that one was not a resident of the state, was not employed within the state, and performed no self-employment activity within the state during the tax year for which the tax lien was filed. As another example, a mechanic’s lien can be removed by showing that the lien was improper due to insufficient notice or filing against the wrong party. Paying off a valid lien should also be taken into account by the risk score provider and/or the potential grantor of credit.

Further discussion cannot be provided without knowing specific facts, including the type of lien involved.

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Q2

I’m confused by the eviction process in the state of New York. Based on the forms provided for NY state there is no 3 day notice. Please clarify if that notice is required. Thank you

A2

For some states there is not a form titled “X-Day Notice” (with X being the number days required for the tenant to pay the rent, cure other types of defaults, or surrender the premises to the landlord). For those states a generic form must be filled in so as to work for any notice to “do something or leave.” This is sometimes because a state has different notice period requirements for different types of terminations due to lease defaults.

Landlordonline.com provides three different such forms for the State of New York. They are:

1)    Notice of Termination of Residential Lease

2)    Notice of Breach with no Right to Cure Residential

3)    Notice of Breach with Right to Cure Residential

If you take a look at all three forms you will see that 1 and 2 do not give the tenant a right to remain even if he/she cures the default, whereas, 3 allows the tenant to remain in occupancy if the default is cured. It is my understanding that the only defined 3-day notice for NY State is that for a “Pay or Quit” notice and that the notice period for other lease defaults depends on clauses in the lease, except for regulated units for which it is 10 days. It is also my understanding that the City of NY allows ”unconditional quit” notices (1 & 2) only for the case of a holdover month-to-month tenancy.

If you are in need of a “pay or quit” notice, you would need to adapt notice 3 by adding the necessary words, including the amount that needs to be paid, as that is the only one which allows the tenant to remain after curing the default – in this case, paying the rent owed. An alternative would be to obtain a dedicated “pay or quit” notice form from some other source.

If you want to provide more detailed information about the matter, I may be able to provide additional help. However, I am not an attorney, I do not have personal knowledge about specific NY state laws other than what I find in my reference books, and I cannot give legal advice. Accordingly, I advise you to further check landlord-tenant law NY State (and of any local jurisdiction that might have more strict regulations) or seek the advice of a competent NY landlord-tenant law attorney.

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Q3

Can a landlord ask for a pet deposit in addition to a 1-1/2 month security deposit?

A3

The answer may depend on the state in which the rental is located, although some states do not cover this issue by statute, leaving it up to judges to decide if the matter goes to court. Some states consider a pet deposit to be part of the security deposit, with the total maximum being the maximum security deposit under state law. Other states do not have any limits on pet deposit or pet rent. Let me know the state and I’ll see if I can provide information.

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Disclosure Issues – Part 1

July, 2011

Disclosure Issues – Part 1

Once upon a time and throughout the land, the basic rule of buying anything, including real estate, was “Caveat Emptor” – that is, “Buyer Beware.” In more general terms it was consumer beware and applied to a purchaser of any product or service. The seller or landlord had no responsibility to disclose defects in what he was selling or leasing and had no liability for any problems the buyer or tenant had following the transaction.

Things have changed, particularly regarding real estate. Over the past several decades, the legislatures and courts have put more and more burden on sellers and landlords to fully disclose defects in the real property they are selling or leasing.

It is very important that adequate disclosure be made by sellers and landlords to buyers and tenants, respectively, in order to avoid (1) risk of misunderstandings and disputes and/or (2) violation of laws, either of which can be costly. While many disclosure issues are important only in sales transactions, other issues can potentially also be of concern in a leasing transaction. Adequate disclosure is far less time-consuming, costly, and stressful than is litigation.

Discussions in this article are based on general legal principles that apply to many states. However, as with most issues regarding real property transactions, one should know and understand the laws of his state and local governments and/or consult with a competent real estate attorney experienced in the particular area of law at issue.

Although states vary regarding protections provided to buyers and tenants, all states provide significantly more than was the case a few decades ago. Most states require disclosure of known defects and many require disclosure regarding certain specific issues.

Most states no longer allow a seller to escape liability for known defects by selling the property “as is” except for certain transactions such as foreclosures or sales by government agencies, for example, bankruptcy courts. Most states also provide for tenant protection against “as is” by statute and/or through the legal principle of “warranty of habitability.”

Many such laws usually apply only to residential properties. Typical disclosure laws require a seller to notify a buyer of certain things regarding the property’s physical condition, material defects, or major repairs that might affect a buyer’s decision to purchase the home. Some states have disclosure laws that require the seller or agent to reveal events such as crimes.

While there are issues specific to only a buyer or only a tenant, certain issues must be disclosed to both buyers and tenants. The latter includes the lead paint disclosure that is required by federal law for properties built before 1978 and, in some jurisdictions, by more stringent state and/or local laws. Furthermore, some issues are solely or more relevant to residential than to commercial properties.

The temptation to not disclose known material facts should always be resisted by sellers and landlords. Other than the fact that the failure could be considered misrepresentation or fraud, one should expect that the information will eventually be discovered by the buyer or tenant.

If discovered by the buyer or his agent before close of a sale escrow, it may result in cancellation or require renegotiation of the contract. This will result in loss of time and may even be costly, depending on the specific circumstances.

If discovered by the tenant soon after moving in, he may be able to legally break the lease. If a serious material fact that was known, or should have been known by the seller or landlord (or agent thereof) is discovered after it has caused injury or damage, the failure to disclose may result in a lawsuit against the seller or landlord (and probably any agent thereof), usually a costly event no matter what the outcome.

Seller Disclosures

A majority of the states require written disclosure of various issues that might be a material factor in deciding whether to purchase a property and how much to pay for it. In some of those states, the requirement is limited to residential properties of four or fewer units. If the buyer is represented by an agent, such a disclosure will likely be required by the broker even when not required by law.

Many states have also made disclosure of certain non-physical matters an issue, either through legislation or court decisions. For example, a buyer’s agent who has reason to believe that his client cannot perform for some reason could be held liable to the seller if the buyer cannot close escrow because of that issue, as could the buyer himself. Similarly, a listing agent could become liable to the buyer for the inability of the seller to close escrow because of an issue known to the listing agent, as could the seller himself. Examples include (1) the seller is planning to file bankruptcy and (2) a divorce is underway.

Courts have generally extended the idea of fair dealing to apply to buyers and sellers as individuals, whether or not a real estate agent is involved.

As a seller, if you have knowledge of a potentially material fact, disclose it as early as practical in order to minimize possible waste of time and money for all parties.

If you are a buyer, require written disclosure regarding all issues of material concern to you. Written disclosure serves two purposes. First, it points out potential issues before you spend the time and/or money to look for them. Second, it gives you additional legal recourse in the future if full and truthful disclosure is not made.

The disclosure statement should cover such items as known (1) zoning, building code, or permit violations, (2) utility services (including whether or not on city water and sewer), (3) soil stability problems, (4) environmental issues such as mold or asbestos, (5) prior significant damage to the property or any of the structures from fire, earthquake, floods, etc., and (6) any pending or potential legal actions involving the property.

Landlord Disclosures

Both habitability standards and disclosure requirements vary significantly among the federal, state, and local governments and their agencies and even among inspectors from the same entities.

Habitability Standards – As a result of shoddy and improper maintenance by landlords, American courts began to hold that there is an “implied warranty of habitability” in housing that is offered for rent. Many states have codified that concept by statute and landlords can now even be held criminally responsible for neglecting certain maintenance in some states. Both civil and criminal liabilities can be very substantial when related to health or safety issues, even when those issues are not explicitly covered by laws.

Habitability standards apply regardless of how low the rent is and require that rental units meet certain standards for safety, health, and cleanliness. The federal guideline standards are quite low compared to those of many states and local governments. The strictest of the different levels of government for the location of a property will be the safest standard to follow.

Types of disclosures – The types of disclosures required varies significantly among states. Examples of disclosure items required in some states include (1) the name of the owner and/or any other person authorized to receive legal papers, (2) the bank where the security deposit is kept, (3) any planned condominium conversion, (4) existence of illegal drug waste, (5) the landlord’s tax number that the tenant needs in order to file for the state’s low-income tax credit, (6) availability of an official registered sex offender database, and (7) existence of “dangerous” mold. In general, most states require disclosure of issues that could cause injury or substantially interfere with the tenant’s safe enjoyment and use of the property (e.g., asbestos) and under general legal principles, failure to disclose such things would increase risks in litigation related to them even if not an issue covered by statute or ordinance.

Landlords should disclose likely material facts, particularly those disclosures that are required by law, as early as practical in order to minimize possible waste of time and money by himself/herself and by applicants.

Rent controlled units – Rent control properties can have additional disclosure requirements. In most controlled jurisdictions, the tenant must be provided the name and address of the government agency or the elected board that administers the control ordinance.