Archive for November, 2011

A co-signer for only one of the roomates

November, 2011

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Q1

An applicant has offered a cosigner. Is there a way for a cosigner to take on responsibility for only the one tenant for whom she is signing, if tenants are jointly and severally liable for full rent amount each month?

A1

There can be a difference between a cosigner and a guarantor, but pretty much the same issues relate to either.  Both agreements are contracts between the guaranteeing party and the landlord, so they can pretty much be written however those parties can agree. However, I would personally require the cosigner or guarantor to be jointly and severally liable just as is the co-tenant who needs the cosigner or guarantor. You must remember that co-tenants are usually made jointly and severally liable for the full rent amount so that the landlord can seek payment against all or any one individual. A landlord is usually likely to collect from the one who is best financially qualified and/or the one who is easiest to serve with a lawsuit if one or all of the tenants disappear. This may well be the cosigner or guarantor.

Hopefully, you are doing full screening on the proposed cosigner and utilizing the same qualifying criteria as you did or will do for the co-tenants. I will also mention that the agreement should make it clear that the cosigner is only providing a financial guarantee and has no rights to tenancy or other type of occupancy. This is to avoid the need to evict the cosigner before obtaining possession, an unneeded additional complication. Finally, I will mention that, for some states, it is important to have the spouse of the cosigner also sign the agreement in order to avoid the potential that in some states, one can’t collect from income or assets of a non-signing spouse. Accordingly, if only one spouse is signing in such a state, it is important to be sure that the income and assets on which financial qualification is based are truly those of the signing spouse.

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Q2

I do not understand the criteria regarding when a rejection letter is required for an applicant.

A2

Landlords using consumer reports for evaluation of rental applicants must follow the provisions of the Fair Credit Reporting Act (FCRA). The FCRA requires landlords who deny a lease based on information in the applicant’s consumer report to provide the applicant with an “adverse action notice.”

An adverse action is any action by a landlord that is unfavorable to the interests of a rental applicant. It includes not only a landlord’s denial of a rental application but also a landlord’s action that imposes a burden not required of all tenants. Common adverse actions by landlords include

  • Denying  an application
  • Requiring  a cosigner on the lease
  • Requiring  a deposit that would not be required for another applicant
  • Requiring  a larger deposit than might be required for another applicant or raising  the rent to a higher amount than for another applicant

The landlord must provide the notice if the adverse action in any way is based on a consumer report that played a factor in the landlord’s action, even though its action is based primarily on an applicant’s income or prior reputation as a tenant. In fact, even if the information in the report plays only a small part in the overall decision, the applicant must be notified. This means that the landlord must usually send a notice if hiring a tenant screening company or even if just looking at a credit report.

As examples, landlords must send an adverse action letter to applicants who are denied a lease if the following describes the decision related to denial even if other factors also played a part.

  • A  tenant screening company is hired which gives the landlord a report that  includes negative information leading to rejection of this applicant
  • A  consumer screening agency is used that supplies only a credit report and  the applicant is rejected on the basis of information in the report,
  • A  local landlord or owner association has an arrangement with a tenant  screening company that provides a member with a report on an applicant  that results in the landlord deciding that the applicant is unacceptable,
  • The landlord pays someone on a contractual basis (as an independent contractor rather than an employee) to do tenant screening and the contractor’s report leads the landlord to conclude that he shouldn’t accept the
    applicant,
  • The  landlord contracts with a property management company to investigate applicant  and the landlord rejects an applicant based on what the management company says.

An adverse action report is generally not required if the basis for the rejection is one of the following:

  • Information obtained from applicants themselves on the application form or in conversations with them or
  • Oral  or written information provided by an applicant’s reference.

Furthermore, landlords usually needn’t send a formal adverse action letter if the following describes the situation.

  • The  applicant is not accepted because the landlord, when asked by the  applicant, won’t vary a rental term such as the rent or deposit amount or the pet policy,
  • Information supplied on the rental application indicates that the applicant cannot meet the landlord’s criteria – e.g., no income,
  • The landlord learns from a conversation with the applicant that he has to move in by a certain date because he’s being evicted and the eviction is  considered to indicate a poor risk,
  • The landlord or his employee calls the applicant’s past or current landlord, employer, or personal reference and which provides information that leads to rejection, or
  • A self-employed applicant provides tax returns that show an income below the landlord’s qualifying criteria (e.g., “3 times the rent”),
  • Upon analyzing an employed applicant’s pay stubs the landlord discovers that the applicant was untruthful regarding place of employment or income when filling out the application form.

In particular the law requires landlords to provide tenant applicants with a notice that informs them about the adverse action, identifies the consumer reporting agency that provided the report that contributed to the landlord’s action, and specifies consumers’ rights under the FCRA.

The notice must include:

  • The name, address and telephone of the CRA that supplied the consumer report including a toll-free telephone number for CRAs that maintain files nationwide,
  • A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it,  and
  • A notice of the individual’s right to dispute the accuracy or completeness of any information the CRA furnished, and the consumer’s right to a free report from the CRA upon request within 60 days.

It is best to send the letter Certified Mail return receipt requested, providing proof that the letter was received by the applicant on a specific date. At a minimum send it with a Certificate of Mailing proof of mailing, as this will at least prove when it was mailed.

Landlords who fail to provide required disclosure notices potentially face legal consequences. The FCRA allows individuals to sue landlords for damages in federal court. A person who successfully sues is entitled to recover court costs and reasonable legal fees.   The law also allows individuals to seek punitive damages for deliberate violations of the FCRA. In addition, the FTC, other federal agencies and the states may sue landlords for non-compliance and get civil penalties. However, a landlord who inadvertently fails to provide a required notice in an isolated case has legal protections, so long as he can demonstrate “that at the time of the violation he maintained reasonable procedures to assure compliance” with the FCRA.

The above discussion relates only to federal law. As for many property management issues, landlords must also understand and abide by any more restrictive consumer credit laws that might exist in their particular states.

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Q3

How much can I charge for an application fee?

A3

The maximum application fee depends on a number of factors, including (1) the law of the state where the property is located, as some states specify the maximum, and (2) the number of qualified applicants you are willing to eliminate. The costs associated with changing rental units are significant for the average tenant and applicants sometimes must apply for more than one vacancy, so the application fee can prevent potential tenants from applying for vacant units when the fee is larger than usual. The effect of price depends on the particular type and location of the property and the financial status of potential tenants for that particular property.

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Would You Live In Your Rental?

November, 2011

Would You Live In Your Rental?

We ask the question in the title of this article because we want to make a point. Most tenants spend just as much effort into finding a new home as you put into marketing your vacancies, perhaps even more. Some may even put as much or more effort into the task as you would if you were looking for a new place to live.

All landlords want good tenants, where “good” basically means those who will pay the rent on time each month, take care of your property, and not cause trouble for your other tenants or residents of neighboring properties. The type of tenant you want should not be willing to live in just any property. If he is so undiscriminating that he doesn’t care about the quality of his housing, he probably won’t care about how he takes care of your rental or how he gets along with others.

Those looking for a new rental home evaluate available rentals in the same manner as you would evaluate a place to live. At the top of their list when beginning to look for rentals are location and price. They want a location in a safe and attractive neighborhood that is convenient to their workplace or school, to shopping, and to cultural and/or recreational attractions. Price is equally important to most tenants and, for many, has historically been of more importance than location. However, with $3-$4 per gallon gasoline (with possibility of even higher in the future), location is becoming evermore important, because long-distance driving can result in commuting expense comparable to rent. When a tenant does the math, he sees that he is ahead financially to pay an extra hundred dollars in monthly rent rather than commute an extra 20 miles per day round trip, 5 days per week.

Also of importance to most applicants is the condition of the rental property. Few tenants want to live in a unit where windows are cracked; the carpet is badly worn or dirty; the walls haven’t been painted since 6 tenants back; the toilet runs continuously (particularly if the tenant is paying the water bill); or any number of other possible deficiencies. While all units must meet habitability laws, you would almost certainly be unwilling to live in a unit that only just barely meets the law.

When a potentially good tenant sees a property that the landlord doesn’t maintain properly, he assumes that the landlord is likely deficient in other ways, for example, doesn’t respond to repair requests.

On the other hand, bad tenants see a poorly maintained property as a plus. They figure that a landlord who doesn’t take care of the front yard or maintain the wooden fence probably doesn’t run screening reports or check with previous landlords. Such a potential tenant may even assume that the landlord manages the property so loosely that he won’t even notice when the rent is a week or two late. If the potential tenant’s assumptions were wrong regarding screening, the landlord will have wasted time when the applicant fails to submit an application upon finding out about screening. If the applicant’s assumptions were wrong regarding rent collection, the landlord will likely have to deal with a problem tenant.

The next priority may be size and/or floor plan of the living space. The number of bedrooms and baths can be a critical issue. For some applicants, particularly the physically challenged, the rental unit being single-story is often very important even if handicap design features are not needed. When it comes to amenities, there can be a wide variety of items that are of varying degrees of importance. Some tenants must have a pool, while others absolutely won’t rent a property having a pool. Some tenants want laundry facilities within their unit, while others are happy with common laundry facilities on the property, and yet others don’t mind using a Laundromat as long as it is nearby.

Assuming that you already own the rental property, there is little that you can do about most of the issues discussed above. You can’t change the location or change the floor plan (at least cost-effectively). You could rent units for less than market value, but most landlords prefer to get market rents for their rentals.

The things that you can control are the condition of your property and how you represent yourself and your property. Attracting good tenants requires that the property be in good condition and that it show well. The latter means that it has curb appeal. While interior condition may eliminate applicants, you may not even get phone calls if the first impression of a potential tenant driving by prevents him from getting an appointment to see the inside or even calling for additional information.

Accordingly, landlords should maintain attractive landscaping, keep the exterior adequately painted, replace cracked windows, and properly maintain fencing, carports, and other exterior components. You don’t want to give the potential good tenants a reason for not renting your property before they even get inside.

Good flooring, attractive window coverings, clean and undamaged appliances and plumbing fixtures provide a good first impression when they view the interior. Amenities such as dishwashers, microwaves, and, in many climates, ceiling fans also help. Even the age of the heating/cooling system may be of interest in view of increasing energy costs. Offering living space that is both in good condition and attractive attracts better quality tenants, allows higher rents, and reduces the length of vacancies. The bottom line is that you will usually get a good return on your investment in providing housing that you might be willing to live in. Always ask the question, if you wouldn’t live there, why would a preferred applicant want to?

Mom and Pop Exemption law.

November, 2011

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Q1

Can someone explain to me the Mom and Pop Exemption, specifically why it was ever written to excuse landlords with three or less houses to fall under Fair Housing Law?  I am curious as to why this exemption exists, and seemingly to protect landlords who do not have many houses in their name.

A1

The exemptions exists because they were required in order to get the necessary votes in Congress to pass Title VIII of the Civil Rights Act of 1968 (the Fair Housing Act), as amended by the Fair Housing Amendments Act of 1988. In other words, some Senators and/or Representatives felt it important to exempt landlords in certain categories from certain provisions of the Act.  As you will see from the following discussion, the often-called “Mom & Pop” exemptions are very
narrowly defined and have significant restrictions.  Accordingly, landlords must be extremely careful when utilizing them.

In review, Title VIII of the Civil Rights Act of 1968 (the Fair Housing Act), as amended by the Fair Housing
Amendments Act of 1988, (42 U.S.C. § 3601 et. seq) prohibits discrimination in housing and housing related transactions based on race, color, religion, sex, national origin, disability or familial status.

The Department of Housing and Urban Development (HUD) enforces the Federal Fair Housing Act. HUD’s regulations state that: “It shall be unlawful, because of race, color, religion, sex, handicap, familial status, or national origin, to restrict or attempt to restrict the choices of a person by word or conduct in connection with seeking, negotiating for, buying or renting a dwelling so as to perpetuate, or tend to perpetuate, segregated housing patterns, or to discourage or obstruct choices in a community, neighborhood or development. (24CFR Part 14, Section 100.70(a)).”

A protected class is a group of people who share common characteristics and are protected from discrimination and harassment. Federal Fair Housing laws prohibit discrimination on the basis of these protected classes:

  • Race
  • Religion
    – personal beliefs, faiths, practices
  • National
    origin – association of ancestry, culture, accent, spoken language or
    surname
  • Sex
  • Color
    – characteristics associated with certain races and ethnic groups
  • Familial
    status – having a child under age 18 in the household, whether living with
    a parent, a legal custodian, or their designee. It also covers a woman who
    is pregnant, and people in the process of adopting or gaining custody of a
    child or children
  • Handicap
    (Disability) – a physical or mental disability (including hearing,
    mobility and visual impairments, chronic alcoholism, chronic mental illness,
    AIDS, AIDS Related Complex and mental retardation) that substantially
    limits one or more major life activities, having a record of such a
    disability or are regarded as having such a disability

In the Sale and Rental of Housing, no one (including Mom & Pop) may take any of the following actions based on race, color, national origin, religion, sex, familial status, or handicap:

 

  • Refuse
    to rent or sell housing
  • Refuse
    to negotiate for housing
  • Make
    housing unavailable
  • Deny
    a dwelling
  • Set
    different terms, conditions or privileges for sale or rental of a dwelling
  • Provide
    different housing services or facilities
  • Falsely
    deny that housing is available for inspection, sale, or rental
  • For
    profit, persuade owners to sell or rent (blockbusting) or
  • Deny
    anyone access to or membership in a facility or service (such as a
    multiple listing service) related to the sale or rental of housing.

The Fair Housing Act covers most housing. In some circumstances (note underlined words in the 4 exemptions that might be included within the “Mom & Pop” exemptions), the
Act exempts:

  • Single-family  housing sold or rented without the use of a real estate broker or  without the use of discriminatory advertising.
  • Housing  that is intended for and solely occupied by persons 62 years or older or a household with at least one person 55 years or older. To qualify, at least  80% of the units must be occupied by at least one person 55 years or
    older. Qualified senior housing is exempt only from the Familial Status.
  • The  rental of a unit in a multi-family dwelling with four or fewer units where  the owner (or a member of the owner’s family) lives in one of the units.
  • The rental of a room or rooms in a private house where the owner (or a  member of the owner’s family) lives in the house.
  • Lodging  owned or operated by private clubs which give preference to their members.
    Religious, charitable, or educational institutions or organizations which  are operated, supervised, or controlled by religious institutions or
    organizations that give preference in real estate transactions to their  members, provided the organization does not exclude members of a
    protected category
    .

Also, some other Federal Fair Housing laws, most state and local fair housing laws, and other civil rights statutes still apply to “Mom & Pop” landlords. None of the above housing is exempt from Section 804(c) of the Act which states that you cannot make, print, or publish a discriminatory statement. Any exempt housing that violates 804(c) has lost that exemption and can be held liable under the Act.

Furthermore, even if the federal exemptions are properly used, a landlord is not immune against lawsuits by either tenants or government agencies who think that there has been discrimination. Even those who meet all terms of the exemption and may win in a court or agency action, can end up spending a lot of money in defending themselves. In other words, the costs of defending against discrimination claims on the basis of the exemptions could be extremely costly even if the landlord eventually wins in court.

Finally, the Mom & Pop Exemptions discussed above apply only to Federal Fair Housing law. Fair housing laws of some states and some local jurisdictions define additional protected classes – such as sexual preference, gender identity, occupation, source of income, educational status, medical status, marital status, military background, political affiliation, or any other arbitrary reason – and provide even broader coverage of certain federally protected classes.

I would advise landlords against depending on the exemptions even if they are certain they qualify for the exemptions.

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Q2

My rental house is in CA. I have evicted the tenant and a lock-out by Sheriff was done on the 10th. The tenant left the house empty but left items in backyard and in the storage shed. Do I have to do a Belief of Abandonment or just store his property for 18 days? Not sure what is next?

A2

As for many states, CA has specific guidelines regarding “abandoned” property. The procedures a landlord must follow to avoid the possibility of being held liable for unlawfully taking or converting the tenant’s property depends on the situation.

There is a good discussion of the issue on the California Department of Consumer Affairs web site which is at http://www.dca.ca.gov/publications/legal_guides/lt-5.shtml.  The fact that you followed through on an eviction simplifies things a bit. From the information you provided, I think it highly likely that your situation is as discussed in “Situation 2” on the listed web page.

From my reading of the law, a landlord need not serve notice on any former tenant who was evicted under a writ of possession, as I understand to be your case. In this case the former tenant has 15 days after the landlord takes possession of the rental unit to pay reasonable costs of storage and to take possession of items left in the rental unit.

However, notice must be given to any other party who the landlord has reason to believe might have an ownership interest in some or all of the property. As examples, this would be the case if you suspect that certain furniture was rented from a leasing company or if you know that someone else lived in the house, even though having not having signed the lease, and this person was not named as a party being evicted.

I won’t further discuss the details of the law, as I think the listed web page is well written and covers the matter in greater detail than any discussion I would provide. I will mention, however, that you should document everything you do. If the former tenant claims the property, paying for the storage thereof, be sure to require his signature on a document stating that all property has been returned to him and is in the condition that it was when abandoned. I also recommend that you take photos of the property and that all documentation be retained for at least several years.

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Q3

I have a new tenant that has lied on their application. Can I move to evict faster because they put false information about their employment and eviction history?

 

A3

Although it is possible that your particular state has a different specific procedure related to this particular reason for an eviction, I’d be very surprised if such were so. However, as long as the false information was material to selection of the tenant – i.e., not something the judge would consider too minor for an eviction penalty or something that the judge might accept was a mistake if so claimed by the tenant – there can be an advantage of an eviction for lying on the application compared to many other possible causes. This is that it is unlikely (though not impossible) that the tenant would have a defense acceptable to a judge except as mentioned above.  However, I will mention that a judge might question why you did not discover that the information was false prior to selecting them as a tenant and this could be another problem that might require a reason acceptable to the judge if  the tenant, an attorney, or the judge think of raising this issue.

Whether or not you will need to serve a notice or can simply file for eviction with the court may depend on the law of your state, perhaps even with the specific court of jurisdiction. You may be able to get an answer by phoning the court clerk. Assuming you do not consider this issue to be curable by the tenant providing correcting information, if a notice is required you would want to use a “notice to quit” (if allowed by your state) rather than a “notice to cure or quit.”

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Risk Management – Part 1

November, 2011

Risk Management – Part 1

Life is full of risks to health, safety, security, finances, and happiness. Investing in real estate adds a number of additional risks to one’s life. First, there is the risk of buying the wrong property, one that is in a bad location, in worse condition than you thought, and for which you paid way too much. Then, assuming that one purchases a good property at the right price, owning and managing that property has many categories of risks.

However, there are ways to reduce risk to acceptable levels. Reducing risk is basically a matter of having adequate knowledge and utilizing good risk management procedures.

With this article we begin a multi-part series regarding ways to manage the risks associated with rental property ownership.

Adequately managing risks of any business, including landlording, can be complex and time consuming, and can involve a number of components and potential complications. Good risk management is achieved through adequate organization and planning.

Risk management includes a variety of activities. Landlord-tenant relations, proper maintenance, adequate record keeping, formal safety programs, adequate insurance, and proper vesting of properties are some of the things that are part of a good risk management program. The goal of risk management is to anticipate and avoid future legal and other problems. When legal problems occur, the goal is to end them as efficiently as possible, which usually means obtaining an early settlement.

As for all businesses, landlords should have a risk management program in place. Some refer to such a program as asset protection. However, asset protection is actually only a part of risk management. Good risk management includes a number of issues in addition to asset protection. Asset protection becomes important primarily when all other risk management measures have not been totally effective. Considering that the goal of risk management is only to protect assets from creditors is a dangerously limited view.

Disaster planning is another part of risk management. Is your real estate investment business ready for a fire, a hurricane, a flood, or whatever other unexpected event might occur tomorrow, next week, next month, next year, and/or beyond? It is not only 9/11 or Katrina level disasters that should be of concern. Are you even prepared for a hard-drive failure that could occur at any time?

You may have already considered the most obvious risks, such as fire or injury related to your rental properties, and have bought insurance to protect against those risks. Unfortunately, there are hundreds of other liabilities with potential for loss that every landlord should consider, many of which are often overlooked or ignored.

Security deposits, lead-based paint, mold, and a bunch of fair housing items are only a few of the many potential land mines that landlords can encounter. Accordingly, it is important that, as a real estate investor, you (1) avoid being sued or becoming the subject of governmental investigation, (2) be the winner in any lawsuit or agency investigation that does occur, and (3) make sure that a potential judgment or penalty does not result in one landing in the poorhouse.

Exposure to lawsuits and governmental actions is minimized by having a good understanding of all the laws related to rental housing and following them all very carefully.

The odds of winning a lawsuit or being exonerated in a governmental investigation that does occur in spite of your best efforts are maximized by (1) not being having done anything seriously wrong in the first place and (2) having maintained adequate records to prove it.

Avoiding financial damage, even total ruin because of losing a serious lawsuit requires that one follow adequate asset protection procedures as part of a comprehensive risk management program. This includes utilizing proper vesting for all properties and carrying adequate insurance.

All risk management measures, including asset protection and disaster planning, require that you have to put things in place prior to occurrence of the catastrophe, not after the fact. Most attempts at after-the-fact maneuvering are usually ineffective. In fact, some methods of attempting to protect assets after the fact by transferring property are considered “fraudulent conveyance” and are illegal. You need to manage risks now, before the event occurs.

A few risks are predictable or at least are things that can be planned for and even controlled to some extent. Included in this category might be:

Death – “when” is sometimes somewhat controllable, “if” is never controllable

Taxes – second only to death in probability

Insurance premiums

Rents

Loan expenses

Employee costs

Operating expenses

Computer problems – backup, backup, backup

Other risks are unpredictable and usually beyond the landlord’s control. Included might be:

Illness, even permanent incapacity

Changing tastes in rentals

The local economy and its impact on the rental market

Actions taken by neighboring landlords

Actions taken by various levels of government or agencies thereof

Some events affect day-to-day operations only, others reduce profits, yet others result in hassle and stress, and still others can cause serious financial losses, even result in bankruptcy.

Risk management can be divided into the four approaches of:

Avoiding risks completely,

Controlling (minimizing) risks that can’t be completely avoided,

Transferring risks to other parties, and

Retaining risks of low probability and/or low maximum potential cost.

Some risks can be avoided or eliminated, others can be controlled or minimized, still others can be transferred to someone else, and some can and should be retained. However, before you can decide what to do about which, you need to identify and analyze them.

We will discuss each of the four approaches in future newsletters. A detailed discussion of risk management is provided in our “9 Steps to Managing Risks” Mini Training Guide.