Archive for July, 2012

Being a Successful Landlord

July, 2012

Being a Successful Landlord

Most landlords get into the business because they think that owning rental properties would be financially rewarding either in the short-term, the long-term, or both. Many landlords have been successful, some spectacularly so.

It is important to understand that landlording is a business that requires knowledge, organization, and a lot of hard work.

Ways to improve your chances of being a successful landlord include the following.

Education

Knowledge is important for success on a number of levels. At one extreme it will make your job easier. At the other extreme it will keep you out of serious financial and/or legal trouble.

Education is not a one-time thing, but requires a continuing commitment. Investors and managers must keep up to date regarding laws at federal, state, and local levels. Additionally, they must keep up with market trends.

Properties

The chance of being a successful landlord is greatly improved when the investor makes good choices when purchasing properties. It is not always possible, even with the best of management skills, to make up for buying bad properties.

Location – As we’ve all heard many times (probably ad nauseam), the three most important things related to value of real estate are “location, location, and location.”

Physical Condition – A property that is a good candidate for purchase often looks to be in bad condition. That’s OK if it has the “right things wrong with it.” “Right thing” examples include needing paint and having ugly wallpaper, things that are usually easily and relatively cheaply fixed. However, the “wrong things wrong” such as bad floor plans or unstable soils are not usually economically corrected.

Tenants

Landlord-tenant interactions can potentially result in both financial losses and a variety of legal problems. Having “good” tenants means both selecting good ones in the first place and retaining good ones for as long as possible.

Adequate screening is critical to obtaining good tenants and proper selection from those who have been screened is important in order to both end up with a good tenant and to avoid claims of discrimination.

You should try to keep good tenants as long as possible. Vacancies are one of the largest expenses in the operation of income property. Vacancy costs can be minimized in three ways – first, by minimizing tenant turnover; second, by minimizing the length of unavoidable vacancies; and third, by minimizing the delay in commencing an eviction when one appears necessary.

Accounting

In order to have a successful business of any kind it is necessary to know the financial status of its operation at all times. There are a number of ways for real estate investors to implement accounting and property management systems that
are easy to use and provide the information required to (1) manage their properties effectively and profitably, (2) easily file accurate tax returns, and (3) have the necessary records in case of an IRS audit.

Documentation

A wide variety of documentation is generated by a properly operated landlord business.  Documentation can be divided into two categories – (1) property related and (2) tenant related.

For both categories, landlords must create adequate documentation and retain it for appropriate lengths of time.

Maintenance

Not staying on top of routine maintenance and necessary repairs is one of the most shortsighted and costly mistakes that landlords can make.
First, poorly maintained property does not attract the best tenants. Second, if the property is not kept in good repair the new tenants will start out having a bad experience and after complaining to the landlord they may also file a formal
complaint with governmental housing agencies. Third, many types of maintenance items that are not taken care of when initially discovered, can eventually be the cause of other problems that are substantially more costly to correct.

Risk Management

Real estate investing includes numerous potential risks and it is important that these risks be managed. Most landlords are aware of the importance of using limited liability entities as a means of providing asset protection, but asset
protection is only one aspect of risk management.

Asset protection becomes important primarily when all other risk management measures have not been totally effective – that is, asset protection actually becomes the protection of last resort.

All risk management measures, including asset protection, are like insurance in that you have to put things in place prior to occurrence of the catastrophe, not after the fact.

I bought a rental house with an existing tenant.

July, 2012

I Bought a Rental House with and Existing Tenant.

Q1

I bought a rental house about 5 months ago that had an existing tenant. I was told by the seller that the tenant had no security deposit. The tenant is now leaving and claims to have a $600 deposit that he wants returned. Who is responsible for returning the deposit?

A1

You need to first determine who is telling the truth. Did you not obtain a copy of the lease agreement prior to buying the property that confirmed what the seller told? The original should have been turned over to you upon close of escrow. Additionally, even when copies of lease agreements are provided by the seller, one should NEVER buy a property occupied by tenants without requiring that each tenant execute an Estoppel Certificate.

If you have a lease agreement copy confirming that there was no deposit, ask the tenant to provide a copy or an amendment or addendum showing something different. If there is a discrepancy, you will need to resolve it by comparing dates of execution and signatures between the documents. If there is only the tenant’s version, you may have to go by that unless the seller is willing to testify differently.

By law in most, perhaps all, states, the current owner is responsible for the deposit even if not given credit for the amount at close of escrow. If there is in fact a deposit you will have to fund any part of it being returned. It would then be
up to you to attempt to collect the deposit amount from the seller.

If, by chance, there is no written agreement, it could be a bigger problem because it will be the word of the tenant against the word of the seller.

Unless adequate documentation was used by the seller, including a detailed move-in checklist that was provided to you by the seller, there will be additional problems if you try to deduct from the deposit any amounts for damages that occurred prior to your documentation of the condition of the property during an inspection following close of escrow. Of course, return of the deposit and/or an accounting for any portion not being returned must be provided the tenant within the time required by your state’s law.

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Is There a Max Amount on Security Deposits?

Q2

I am interested to know if there is a max on what a landlord can charge for security deposits and for performing credit checks.
A2

Most states limit the amount of deposits that can be collected and there can be serious penalties for violating the rules. Although a few states have no statute limit, the maximum allowed varies from one to two times the monthly rent in most states. Most states do not allow landlords to avoid limitations by calling the amount of funds something other than a security deposit. You need to check the landlord-tenant law of your state.

Some states have specific limits by statute regarding the amount that can be charged for credit reports. Other states limit the charge to the actual cost of obtaining the reports from outside vendors. However, in most states if the matter were to come before the court, the requirement is that the amount be reasonable, taking into account your cost for a report and the time required for you to process it. Typically, $25 to $40 is acceptable. Experienced landlords or property managers in the area of your property should be able to tell you what is acceptable.

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When a Contractor Does the Job incorrectly.

Q3

When a contractor does the job incorrectly, is it easier to have the job corrected when the contractor is licensed than when he is not?

A3

One of the many reasons to utilize licensed contractors is that it is often easier to resolve such problems. For a licensed contractor, one can often get satisfaction through the state agency that licenses and regulates contractors. Most states
require that licensees be insured (which protects you against certain liabilities). Many states provide for a recovery fund that covers consumers and/or require that licensees be bonded.

If the work was not up to standards or if there was any fraud involved, the contractor, whether licensed or unlicensed will often resolve the problem rather than have the owner file a complaint with the state contractor’s board, after which the matter will be on his record or even result in suspension or loss of his license. The degree of help one can get varies among the states. If all else fails, one can still sue the licensed contractor. Of course, one can always file suit against any contractor, licensed or unlicensed, but, lawsuits take time and money even if involving an amount of money that can be done in small claims court or a similar level of court in states which don’t call them small claims court.

Be aware that many states severely limit the type of work (e.g., no electrical or gas modifications) and the maximum dollar size of the job (typically $1,000 or  less) that unlicensed contractors can legally perform. Be sure to check the law
of your state if you are considering use of an unlicensed contractor. Usually, one would not be able to utilize the contractor licensing agency to deal with an unlicensed contractor when the work done does not require a license.

If you are considering withholding payments in a dispute with a contractor, be sure that you understand mechanic’s lien issues.

It is important to always use care when selecting a contractor. Due diligence includes verifying that (1) the contractor is properly licensed for the particular tasks associated with the project if required by law, (2) there have been no unresolved complaints filed against him with the BBB or, if licensed, by the licensing agency, (3) the contractor carries adequate liability insurance and, if the contractor has employees, the required workers’ compensation insurance, and (4)
prior customers have been satisfied. For detailed discussions about this subject see the LandlordOnline.com “9 Steps to Avoiding Problems When Hiring a Contractor” Mini Training Guide.

Oral or Written Lease Agreement?

July, 2012

Oral or Written Lease Agreement?

In general, contracts of almost any kind can be either oral or written and each can be equally valid and enforceable no matter what the legal purpose or dollar amount involved.  However, most states have adopted a legal doctrine called the Statute of Frauds and put the doctrine into their statutes.  these laws are fairly uniform among the states and cover a number of contract issues.

Specific to real estate, Statute of Frauds laws require contracts related to most real estate transactions to be in writin.  As examples, contracts to list real estate for sale or lease with a broker must be in writing to be enforceable in Court and oral contracts for those purposes are worthless.  This is usually so even though there might be indisputable non-written evidence as to the contracts, for example, unrealted third party witnesses.  Many states further specify certain items that must be included in such contracts.

Statute of Frauds laws of most states require a lease of real estate for a term of more than one year to be in writing.  However, an oral lease for a term of one year or less is binding and will be enforceable regarding most terms normally found in a lease.  An oral lease can be amended orally.

As a practical matter, all leases of any duration should be in writing because the written document provides a record of the terms of the landlord-tenant relationship so that its terms and conditions can be easily and clearly discernable by the parties, their heirs, or assignees.

As for any type of oral contract, oral leases regularly cause problems for both landlords and tenants because it is often difficult to determine what the terms of the lease are.

This can be the result of a number of factors, including the folowing:

  • Misunderstandings by either party at inception of the agreement,
  • Misremembering or forgetting terms later by either party,
  • Purposeful distortion of terms by one party or the other, and/or
  • Limited or no way of proving the lease terms.

Often a witness to the oral lease can be of value, but that may require that the witness be impartial or at least not a beneficiary of the lease in any way.

When an oral lease ends up in Court, the judge can sometimes make a reasonable decision based on circumstantial evidence.  for example, if the disagreement between landlord and tenant related to the amount of rent, then cancelled checks or recipts would prove what the rent was for those past months.  However, it would usually not support or deny any rent increase.

Sometimes a judge makes the decision based on which party can provide the best circumstantial evidence whether or not that evidence is directly relevant to the disputed issue.  However, when there is no clear evidence of who might be telling the truth, the judge may make a decision based on who was the best liar.  If both parties are equally believable or equally unbelievable, the decision is most likely to be in favor of the tenant.

Judges sometimes will not enforce certain terms of an oral lease.  Non-typical lease terms will li,kely not be enforcecd.  Even certain typical terms may not be enforced.  for example, it is not uncommon that a judge will refuse to enforce a late penalty provision that is not in writing.

A month-to-month oral lease can continue for many years so long as it remains a month-to-month lease or a lease for a term of no longer than one year.

The bottom line is that oral leases are only as good as the paper they are written on.

Applicant Bankruptcy on Credit Report. What should I do?

July, 2012

Applicant Bankruptcy on Credit Report.  What should I do?

Landlords have the right to set specific tenant selection criteria to include any factors based on valid business principles. As a landlord, you are free to choose to use almost any standards as long as legitimate business criteria have been applied, consistently, without discrimination, and in full compliance with all applicable laws.

With that in mind, you may legally reject any applicant who has previously filed for bankruptcy, (even if the bankruptcy discharge was completed several years ago) if you have a firm (preferably written) policy of “no bankruptcy” (within a specific period, if desired).

Federal fair housing laws do not include a protected class for financial status. If the landlord’s criterion is rejection of an applicant who has filed bankruptcy and the criterion is applied to every applicant without discrimination, the rejection of the application is a legitimate business decision by the landlord.

On the other hand, you may not wish to have such an absolute policy. You may decide that a more flexible policy regarding bankruptcy filing is appropriate for your properties and applicant pool, for example, a filing within a certain recent number of years. The key issue is that you absolutely must apply the same standard to every applicant.

A bankruptcy filing will be reported to the major credit bureaus and appears in the public records section of a full credit report. If, as recommended, you have prepared a rental information packet, including your written selection
criteria, the prospective applicant will know your eligibility requirements, know his personal bankruptcy history, and decide whether to submit his application.

In general, adverse credit information remains on a credit record for 7 years. However, a person’s bankruptcy may be reported for a longer period from the filing of the case. The bankruptcy will appear even if the person voluntarily dismissed it before the discharge, but the credit reporting agency must report the dismissal.

For bankruptcy, the length of the period depends on which Chapter was filed. Chapters 7, 11, and 12 may remain for ten years from the filing date. Chapter 13 usually remains for seven years from the filing date. Accounts from creditors listed in bankruptcy will usually remain seven years from the date they were reported as included in the bankruptcy.

Bankruptcy is governed by federal law found in Title 11 of the United States Code. The Bankruptcy Code supersedes any conflicting state law by reason of the Supremacy Clause of the Constitution. Although states may not regulate bankruptcy, they may pass laws that govern certain specific aspects of the debtor-creditor relationship.  Accordingly, bankruptcy law is much the same from state to state except for the types and limits of exemptions. Exemptions are those assets of the debtor that are legally beyond the reach of the bankruptcy trustee and, hence, of the creditors. The debtor in bankruptcy keeps the exempt property. Federal and state laws define the kinds and values of property that are exempt and the definitions vary greatly among the states.

Although tenant bankruptcy is probably not particularly common, it is an issue about which landlords be knowledgeable. While this article is concerned with applicants whose credit reports list a bankruptcy, there are a number of other reasons that knowledge of bankruptcy law is relevant to landlords. Regarding existing tenants, landlords need to (1) know what to expect when a tenant files bankruptcy, (2). What they can and cannot do after a tenant’s bankruptcy filing and (3) how a bankruptcy affects the continuing tenancy of a tenant filing bankruptcy. These issues will be only briefly touched on in this article.

Bankruptcy law seeks to benefit both debtors and creditors by seeing that debtors get relief from debts they can’t pay and creditors get paid from certain assets of the debtor or from his future income.

The primary purposes of bankruptcy law are to (1) give a debtor an opportunity for a new start by relieving the debtor of debts or rescheduling payments in a way that the debtor can handle and (2) repay creditors to the extent that the debtor has assets that can be used for payment. Both procedures take place under a Court approved and supervised plan.

The impact of an applicant having previously filed bankruptcy can depend greatly on which type of bankruptcy was filed. The types of bankruptcy proceedings are referred to by the chapters of the federal Bankruptcy Code that describes them.  The most commonly used chapters are Chapter 7, Chapter 11, and Chapter13 filings.

A filing under Chapter 7 is called a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Trustee, with the proceeds being distributed to creditors according to the priorities established by law. In many Chapter 7 bankruptcy cases involving liquidation of property, there is little or no money available from the debtor’s estate to pay creditors. As a result, in these cases, there are few issues or disputes and the debtor is normally granted a “discharge” of most debts without objection. This means that the debtor will no longer be personally liable for repaying the debts.

Chapter 11 is a reorganization proceeding, typically for businesses, where the debtor remains in possession of the business assets and continues to operate the business subject to the oversight of the Court and the creditors’ committee.

Chapter 13 (sometimes called a wage earner plan) is an adjustment of debt of individuals who have regular income, both current and future, that repays creditors over time through a Court approved debt management plan.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made major changes to the Code restricting the availability of discharge for Chapter 7 and substantially reducing debt relief available for Chapter 13. In addition, the Act imposed more stringent eligibility requirements for those individuals considering bankruptcy and requires approved credit counseling before they can file. Under the new Act the position of landlords and other creditors is improved over the previous Code provisions.
A key change affects the procedures landlords must follow when dealing with a tenant who has filed for bankruptcy. The Bankruptcy Code protects the existing tenant from discrimination based solely on the fact that the tenant filed bankruptcy.  Landlords cannot legally terminate a tenancy solely because the tenant is a debtor in a bankruptcy proceeding. This is not the same thing as the tenant being protected from discriminatory treatment based on the tenant’s financial history. It is simply the tenant’s right to deal with financial troubles through bankruptcy that is protected under bankruptcy law.
Why would a landlord want to reject an applicant who has filed for bankruptcy? The primary reason is financial. While recognizing that bankruptcy is a legal right allowing relief from certain debts, a landlord wants a tenant who has a satisfactory history of credit management. Specifically, the landlord wants a tenant who has the ability and willingness to pay rent. A bankruptcy filing indicates the applicant was unable to meet his financial obligations during a certain period.  The underlying event necessitating bankruptcy may have compromised the applicant’s ability to meet future financial obligations. The landlord may not want to take a chance.
However, many landlords set financial criterion that allows some flexibility in evaluating bankruptcy filings.  Bankruptcy filing is a voluntary measure that seeks to remedy a bad situation that is not always an indication of irresponsible money management. Job loss and/or major medical expenses can quickly change the financial picture of any individual. Bankruptcy filing may well be a positive step to regaining financial stability. If the applicant is otherwise qualified according to your standards you may wish to consider the overall picture and assess your risk accordingly.
You might give greater importance to the applicant’s credit management history since the bankruptcy filing. If the applicant is nearing the end of the record period, and the bankruptcy has been fully discharged, while still taking the bankruptcy into account, you may focus on the most recent year period of credit history (for instance, the last three or four years). You will take into consideration how long ago the bankruptcy was filed, the applicant’s current source and stability of income, and the amount of outstanding debt to help you determine your risk.

You may elect to offer tenancy based on acceptance of conditions such as a co-signer or guarantor, a higher security deposit (as allowable by state statute), or a shorter-term lease. You are still bound by fair housing laws and cannot discriminate by selectively offering different terms to different applicants.

There is another consideration in that, assuming an applicant has adequate income, he should be more credit worthy after a bankruptcy than before. First, discharged old debts will no longer have a claim on future income. Second, bankruptcy cannot be filed again for a number of years.

You can set your qualifying requirements as high as desired regarding financial criteria. In practice, however, you should not set standards so high that you never find anyone meeting those standards. The important issue for landlords is
to establish selection criteria that make good business sense and to evaluate every applicant against those standards without discrimination.

I Closed on a Rental Home…

July, 2012

Q1

I closed on a rental home in Tucson, AZ a month ago which had a tenant whose lease has over 6 months remaining. The rent is due in a few days, but the tenant provided a “Notice to Terminate Lease” in 30 days. Her basis for termination is that the rental agreement does not address a transfer of ownership and so she has the right to break the lease without paying the break lease fees.

My research did not find anything supporting her position. Am I correct that the tenant must abide by the rental agreement until it expires?

A1

Change of ownership does not affect a lease agreement in any way unless stated otherwise in the document. The tenant cannot use the sale as an excuse to break the lease or to avoid adhering to any terms contained in the lease agreement.

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Q2

An applicant’s application information checks out except for one thing. The prior address listed on application does not appear on PALS results. In fact, for the period of time the applicant states he was living at a particular address, PALS comes up with a different state for that same time. Plus, the report shows two different DOBs, although they are close.

A2

The first thing that I’d do is ask the applicant if there is a reason for the address difference without giving the address except perhaps the state to see if he/she comes up with the address in that state in agreement with that from PALS. There can be many valid reasons why addresses disagree. I myself have at times had several different addresses that I used for various purposes at the same time, sometimes among several states, all legitimate.

Regarding the date of birth, have you not copied his driver license? If his driver license agrees with his application, there may be an error in PALS. Does the credit report agree with the PALS report? One must remember that different grantors of credit report at different times and do not all update records at the same time.

Incorrect digits (e.g., a 5 instead of 6), transposition of digits (e.g., 47 instead of 74), and a variety of other data entry errors are common. Also, dates sometimes end up in error because there are defaults in the system. For example, if only the month and year can be entered without the day of the month for a particular system and someone enters 5/25/64 as only 5/64, the system may default to 5/01/64.

Finally, one must remember that there are a number of workers in the credit reporting system, from creditor to reporting agency, most being low-paid employees, so there will be errors. Usually, most are not significant, so no one bothers to correct them. When using any type of screening report, one must be alert for discrepancies, but one must also attempt to resolve them and then decide which of any unresolved ones are important.

Again, when you don’t understand something about an applicant, simply ask.

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Q3

I had an applicant whose previous addresses did not match their online reports, and the ‘landlord’ they gave as a reference was not listed as the owner of the addresses, etc. In questioning this I asked to see their driver licenses (not provided with the application) and last tax return (to verify income and address). They decided not to rent the property. Do I still need to send a notice of denial?

A3

Legally, you may not need to send anything. First, as I understand it, they withdrew their application. Second, if you did in fact indicate denial, it was based on identity and previous landlord issues rather than related to a credit report. However, you did utilize reports and you would buy a lot of protection against claims by sending a letter “confirming” that they had withdrawn their application because they were unwilling to provide information necessary to resolve discrepancies in information provided to you.

This type of problem and a lot of wasted time can be better avoided by requiring proof of identity when the application is submitted. I recommend that two ID documents be provided, with one being a government photo ID such as a valid driver license, military ID, or passport and the other being another photo ID or a SS card, motor vehicle title or registration, or a valid credit card. Make copies of ID documents and don’t accept an application without doing so.

You did right in verifying ownership of previous address property.

I recommend that landlords attach a document to each application form handed out that states exactly what is expected and what checks will be made for every applicant in order to avoid wasted time and expense for all parties concerned. It doesn’t hurt to include a fair amount of detail regarding what will be done as part of the screening processes including that verification of identity, ownership of previous rentals, and exactly which screening reports will be obtained. Also state that the application will be automatically rejected if not fully completed or if discrepancies found are not resolved to your satisfaction.

The bottom line is that the more written advance information provided to potential applicants, the fewer potential “bad” tenants will submit an application, the less wasted time you will spend on filling vacancies, and the less risk there will be of Fair Housing or FCRA claims.

Expenditures – Part 4 – Travel Away From Home

July, 2012

Expenditures – Part 4 –Travel Away From Home

In previous installments of our series regarding expenditures we discussed some basic principles regarding expenditures including “travel expenses related to the property or management thereof.”  The most recent article concerned local travel. In this article we will discuss another issue regarding travel, specifically expenses related to travel away from home.

The IRS says you are traveling away from home if:

  • Your duties require you to be away from the general area of your tax home (as defined) substantially longer than an ordinary day’s work, and
  • You need to sleep or rest to meet the demands of your work while away from  home.

To determine if you are traveling away from home, you must first determine the location of your tax home using criteria specified by the IRS. Generally, your tax home is your regular place of business no matter where you maintain your family home.

As stated in a previous article of this series, you can deduct the ordinary and necessary expenses of traveling if the primary purpose of the trip was to collect rental income or to manage, conserve, or maintain your rental property. In review, an ordinary expense is one that is common and accepted in your industry and a necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. For a landlord, such travel may be necessary for a number of reasons including:

  • To attend out-of-area education related to your business,
  • To purchase equipment or materials related to your business that are not  locally available or can be purchased elsewhere at a lower enough price that the travel time and expense are justified, or
  • To check on rental properties are that are located in a distant location.  Even when a property management company takes care of day-to-day management for a distant property, the owner should put in occasional appearances at the distant property in order to inspect the property and to meet with management company personnel.

As also previously stated, you must properly allocate your expenses between business and personal activities. This is particularly important when traveling out of the area of your residence, when landlords would sometimes like to be
accompanied by family members or engage in personal activities during the travel.

If a spouse or other family member or another individual accompanies you on a business trip you generally cannot deduct his or her travel expenses. However, when a husband and wife travel together, the expenses of both will be
deductible as long as both spouses materially participate in operation of the business and both participate in business being conducted on the specific trip.  However, when one spouse does not usually otherwise materially participate in
the business or does not participate in the business related to the specific trip, the IRS does not allow deduction of all expenses related to the non-participant spouse.

If an employee or business associate accompanies you, you can deduct the cost if the person (1) has a bona fide business purpose for the travel and (2) would otherwise be allowed to deduct the travel expense

When  landlords utilize their personal automobiles for out-of-area travel, they need to follow the same procedures as when using them for local travel that were discussed in Part 3 of this series. The most important items are maintaining a mileage log and retaining receipts related to the trip. It is also highly recommended that an extemporaneous record be maintained for all aspects of the trip, including both those directly related to the business purpose of the trip and those that were used to fill in between business activities. The latter may be attending an evening movie, browsing in the local mall, or other activity used to fill otherwise wasted time. The government does not expect a travelling business person to spend all waking hours attending to business, so attending an evening movie after a day of conducting business should not affect the deductibility of the day’s expenditures (other than the movie cost).

Even one or more non-business days sandwiched between two business days will not necessarily prohibit one from deducting all expenses of the trip. For example, when business is done prior to a weekend and again following the weekend, the lodging expenses related to the weekend days will usually be fully deductible.  However, if one day is spent doing business, a week is spent visiting nearby relatives or participating in some other activities not related to the business,
and another day is spent doing business, expenses related to the week of personal activities are generally not deductible unless there are special reasons that justify the schedule.

If one drove a vehicle a distance of two days drive away for a particular meeting and needed to meet with the same or another party in the same area a week later or along the way at a location still a significant distance from home, it could
probably be justified that it was more reasonable, perhaps even significantly less costly to make a side trip during the week between meetings rather than return home and make a separate trip.

If you have one expense that includes another expense that is treated differently tax-wise, you must separate expenses. For example, only 50 percent of meals and entertainment expenditures are deductable, so if the hotel includes one or more meals in the room charge you must allocate the cost between meals and lodging, doing so in a reasonable way.

If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can only deduct the business-related travel expenses,
but this can usually include the total cost of transportation to and from the location where business was transacted and all expenses directly related to the business portion of the trip.

A trip to a resort or on a cruise ship may be considered a personal trip even though the promoter advertises it to be primarily for business. The scheduling of incidental business-related activities during the trip, such as viewing videos
or attending lectures on general business subjects, will not change what is really a vacation into a business trip. We will discuss the specific case of educational cruise travel in a future article.

If you travel outside the United States and spend the entire time on business activities, you can deduct all of your travel expenses. If you do not spend your entire time on business activities, it becomes more complicated and the part of
the costs that will be deductible depends on a number of factors. There are also special rules related to travel outside the North American area, with this area being specifically defined. Further discussion of travel outside the United States
is beyond the scope of this article.

This article has covered certain basic issues related to business travel away from home. Considerably more detail regarding the covered issues and discussions of still other issues related to travel away from home can be found in IRS Publication 463.

Landlord-Tenant Law Basics

July, 2012

Landlord-Tenant Law Basics

Most aspects of landlord-tenant relationships are regulated by state and local laws. However, federal statutory law may be a factor (1) in times of national/regional emergencies, (2) in preventing forms of discrimination (e.g., fair housing laws), and (3) regarding certain health or safety issues (e.g., lead-based paint). Failure to obey the law can be costly and ignorance of the law is not a legal excuse.

Landlord-Tenant Law protects landlords and tenants in the renting of real property, both residential and commercial. It defines the rights and obligations of landlords and tenants during the tenancy.

All states have landlord-tenant laws although there are variances among the states. Most states’ laws are similar, sharing general principles of contract law, property law, and, in some states, consumer protection statutes. A number of states
have based their statutory law on either the Uniform Residential Landlord and Tenant Act (URLTA) or the Model Residential Landlord Tenant Code. Some city and county governments also have enacted various landlord-tenant regulations. There can be instances where the local statute has stricter regulations than does the state statute. The general rule is that local regulation cannot go against state or federal regulation but can impose the stricter rule if the general rule is silent upon the issue.

Landlord Tenant Relationship

The landlord-tenant relationship is founded on duties proscribed by either statutory law, common law, or the individual lease document. What provisions may be contained in a lease (oral or written) are normally regulated by statutory law. Any provisions that do not comply with statutory law are illegal and are unenforceable. The location of the real property determines the applicable state law.

The tenant has a property interest in the land (historically a non-freehold estate) for a given period of time. The length of the tenancy may be for a given period of time, for an indefinite period of time, (e.g. renewable or cancelable on a month to month basis), terminable at any time by either party (at will), or at sufferance if the agreement has been terminated and the tenant fails to leave (holds over). If the tenancy is tenancy for years or periodic the tenant has the right to
possess the land, to restrict others (including the landlord except for specific purposes) from entering upon it, and in most cases, to sublease or assign the tenant’s interest in the property. The landlord-tenant lease agreement may eliminate or limit some of these rights by statutes.

Unless the lease states otherwise, there is an assumption that the tenant has a duty to pay rent. State statutes may provide for a reasonable rental value to be paid absent a rental price provision. Summary eviction statutes commonly allow a landlord to quickly evict a tenant who breaches statutorily specified lease provisions, particularly a failure to pay rent. Landlords in many states are restricted from evicting tenants in retaliation of action the tenant took in regards to enforcing a provision of the lease or applicable law.

In most states, commercial landlord-tenant law is significantly different than residential. For example, many states allow the landlord to lock out a commercial tenant for non-payment of rent provided that
correct procedures are followed, essentially shutting down his business.

Landlord Responsibilities

In most jurisdictions a landlord’s general responsibility can be summarized as a duty to:

  1. Maintain the premises in a fit and habitable condition.
  2. Maintain the common areas of buildings and grounds in safe and sanitary condition.
  3. Comply with building, housing, health, and safety codes.
  4. Keep all electrical, plumbing, heating, and ventilation systems and fixtures in  good working order.
  5. Maintain all appliances and equipment supplied or required to be supplied by the landlord.
  6. Provide running water and reasonable amounts of hot water and heat, unless the hot water and heat are supplied by an installation that is under the exclusive control of the tenant and supplied by a direct public utility hook-up.
  7. Provide garbage cans and arrange for trash removal if the landlord owns four or more residential units in the same building. Some jurisdictions also require recycling containers.
  8. Give at least 24 hours notice, unless it is an emergency, before entering a tenant’s unit, and enter only at reasonable times and in a reasonable manner.
  9. Evict the tenant when informed by a law enforcement officer of drug activity by the tenant, a member of the tenant’s household, or a guest of the tenant occurring in or otherwise connected with the tenant’s premises.

Tenant Responsibilities

In most jurisdictions a tenant’s general responsibility can be summarized as a duty to:

  1. Keep the premises safe and sanitary.
  2. Keep the plumbing fixtures as clean as their condition permits.
  3. Use electrical and plumbing fixtures properly.
  4. Comply with housing, health, and safety codes that apply to tenants.
  5. Refrain from damaging the premises and keep guests from causing damage.
  6. Maintain appliances supplied by the landlord in good working order.
  7. Conduct himself in a manner that does not disturb any neighbors and require guests to do the same.
  8. Permit landlord to enter the dwelling unit if the request is reasonable and proper notice is given.
  9. Comply with state or municipal drug laws in connection with the premises and require household members and guests to do likewise.

 

Rights of Tenants

There are two important tenant rights that the landlord must protect:

Covenant of Quiet Enjoyment

The courts have upheld the right of the tenant to quiet enjoyment of leased premises regardless of whether the lease agreement contains such a covenant. This covenant ensures the tenant that during his tenancy, the tenant’s use and enjoyment of the dwelling unit will not be disturbed by someone with a superior legal title to the land including the landlord. The covenant between landlord and tenant provides the tenant with the right to exclude others from the premises, the right to peace and quiet, the right to a clean and habitable environment, and the right to basic services. If the tenant is deprived in whole or in part of the beneficial use and enjoyment of the leased premises due to actual or
constructive action by the landlord, a breach of the covenant has occurred.

Warranty of Habitability

The implied warranty of habitability is a legal doctrine in most states that requires landlords to offer and maintain leased premises in a safe and sanitary condition fit for human habitation for the duration of the lease.

In the past landlords were only required to deliver possession of the premises to the tenant in return for the tenant paying rent. However, courts began to uphold that the lease by its nature was a contract and was controlled by principals of contract law. The lease contained mutual dependant warranties – the tenant’s promise to pay rent and the landlord’s imposed obligation to provide habitable premises.

A material breach of obligations by either party relieves the other party from his obligation as long as the breach continues. If the landlord causes a material breach of the warranty the tenant may be entitled to such remedies as damages, lease termination, rent abatement, or repair and deduct expenses. The landlord’s obligations do not extend to breakages, malfunctions, or other conditions which do not materially affect the health and safety of the tenant nor is the landlord held to correct conditions caused by misuse or inappropriate use of the premises by the tenant, the tenant’s family or invited guests.

States that have adopted the implied warranty of habitability through statute or judicial law have used one of two approaches to determine habitability requirements. One approach uses local building codes which have specific minimum requirements for essential services such as water, plumbing, and heat. The other approach uses common law definitions of habitable housing conditions.

An important point for landlords is to understand the source of their state’s requirements (building codes or common law) since the source of the warranty controls the landlord’s responsibilities and tenant’s remedies. States that use building codes as the source of warranty make it easier for compliance because they have detailed, specific requirements for repair and maintenance responsibilities. In states that use common law definitions for habitability, implied warranty is independent of building codes and it may be more difficult to satisfy requirements. Landlords may be responsible for repairs and maintenance under building codes and responsible for repairs and maintenance under the common law approach. Landlords may thus be held to more responsibilities for habitability in those states that use common law definitions for warranty of habitability.

Landlords are advised to check for state and regional variations that may impose additional requirements to ensure habitable conditions.

Applicant References

July, 2012

Applicant References

Even though the most important tenant screening tasks are credit reports, criminal records, and eviction records, references can also be of value in evaluating applicants as potential tenants.  The primary reason why references can be useful is the fact that, while an applicant has a good credit rating and there appears to be no criminal record or evictions in the jurisdictions checked, there is no guarantee that an applicant will be a good tenant. References can provide information regarding an applicant’s character.

There are basically two different types of references of potential interest to the landlord. One is from previous landlords and the other is from those who know the applicant personally.

Previous Landlords

Most experienced landlords recommend asking the applicant to provide rental history for the past three years. Usually that will provide one or two previous landlord references in addition to the current landlord reference. Going back farther than three years may be counter-productive in that records are unavailable or contact personnel are no longer there.

Some landlords will be forthcoming about giving out information while some will be reluctant to provide any information other than tenant name, residency dates, and monthly rent. Their reluctance to share information is not necessarily a negative response to the tenant or an unfriendly behavior. Some people like to talk more than others do.

Some current landlords may be upset enough with the tenant to say nothing bad about them to allow them to move to your vacant property. For this reason, you should contact the applicant’s landlord prior to the current one rather than depending solely on a current referral.

What you are trying to find out is whether the applicant paid the rent on time, kept the rental property in good condition, was considered a good neighbor, and otherwise materially adhered to the lease agreement. In short, from his past rental behavior, can you determine if the applicant is likely to be a future good tenant?

Limited Rental Histories

There are many potential applicants who have limited rental history, no recent rental history, or no previous rental history at all. Refusing to consider such applicants may significantly reduce the pool of available applicants. This is particularly true in certain locations and/or under certain economic conditions.

There can be many good potential tenants among the following three categories of applicants for which the landlord cannot obtain information from previous landlords:

(1) Those that have never lived in rental housing,

(2) Those who have resided in rental housing, but not as lease signing tenants in recent years, and

(3) Those that have been homeowners for quite a while, but are returning to rental housing, either by choice or necessity.

Category 1 includes those who have only recently left the nest. These potential applicants not only have no rental history, but they also often have little or no credit history. College students and first-time job holders are often in this category.

Category 2 includes those who were spouses or roommates, but have not themselves signed a lease agreement.

Category 3 includes those who have just sold a home and need to rent for a period of time until they find a replacement property or have one constructed, as well as those who have lost their homes due to the current housing market collapse or through some other financial catastrophe. Those who were unable to meet mortgage, property tax, and insurance costs may easily be able to meet the expense of monthly rent.

For applicants in any of the three categories, landlords must sometimes consider utilizing personal references as a qualification tool.

Personal References

Personal references differ from landlord references in that that a personal reference will be an individual that has never rented to the applicant. Personal references are character references offered by family, friends, business associates, community leaders, etc, who can personally vouch for the applicant.

Some landlords feel that such references are worthless, since most applicants are not likely to provide the name of someone who would give a bad reference. The fact that information obtained from personal references can be difficult to quantify and assess in measurable terms also leads some landlords to use this source of information sparingly.

Other landlords view personal references as a third party opinion, and while acknowledging the potential for bias, recognize that behavior observed over a period of time is indicative of future behavior, much as the applicant’s credit history reflects future credit management.

Most landlords who utilize personal references prefer to use hard data to evaluate candidates and “soft” information obtained from references only as a tie breaker for equally qualified applicants.
In spite of the suspect value or difficulty of using personal references, landlords should realize that, properly used, personal references can be a helpful screening tool and in some situations may be necessary.

Obviously, landlords must understand the differing values of reference sources. A parent’s reference may be of little value unless the parent is willing to provide a financial guaranty for the child’s lease, with a guaranty usually eliminating the need for qualifying the child. A reference from a pastor, priest, rabbi or other religious leader or from a former teacher, counselor, coach, scout leader, or employer who has long-term knowledge of an applicant’s character can be meaningful.

Landlords must also use care in selective use of this screening tool so as to avoid discrimination claims. It is important that the tool be used based on lack of credit or rental history, that is, financial or behavioral issues, not because of any characteristic that is prohibited by fair housing laws. However, if you understand and follow fair housing laws you shouldn’t be afraid to exercise your right to adequately screen applicants.

Checking References

References are of little or no value unless the landlord puts some effort into checking them. There is also a benefit to contacting personal references in that certain information supplied by the applicant on his rental application can be cross-checked with the reference. This allows the landlord to help determine the truthfulness of the applicant’s statements and also to ferret out false references that would aid the applicant in trying to fool the landlord.

Landlords should also make some effort to verify the identity of references and confirm that phone numbers or other contact information provided is those of the purported reference.

It is important to schedule interviews for a time when both you and the reference will have sufficient opportunity to communicate. Listening skills are critical since some answers may require clarification before proceeding to the next question.

As with interviews of previous landlords, it is a good idea to use a prepared script in conducting reference interviews. It allows accomplishment of the task in a professional and efficient manner, and ensures all questions are asked of each reference of each applicant. The reference’s responses to questions should also be recorded.

Some Possible Questions

In what capacity does the reference know the applicant? Is he a relative, friend, teacher, etc? A reference from someone who is a relative or friend is less valuable than one who has dealt with the applicant on a business level or in some other capacity.

How long have the reference known the applicant? References usually carry more weight the longer the reference has known the applicant. However, recent knowledge is also important because people can change over the long term.

The value of a reference is greater when you are provided a detailed and believable context for his opinion of the applicant instead of only a generalized statement. The value of a reference also depends on whether or not you heard similar things from each reference you checked, but either way, the reference check will have provided valuable information.

Screening Services

Most screening firms will not contact references. Even those that claim to confirm employment may in reality only look at employment information that appears on a credit report. The business model of screening services does not allow for the time required and the cost of adequately checking references. Additionally, checking references is a subjective task that does not fit the mathematical models used by most firms.

Can We Refuse to Rent to Unmarried Couples?

July, 2012

Q1

If an unmarried couple wants to rent our rental home can we have only the man who is working sign the lease? We don’t want to have the live-in lady to have her name on the lease in case the boyfriend leaves as she has no income. If her name isn’t on the lease and he leaves her we could then ask her to leave, but if her name is on the lease then it would be difficult to ask her to leave and she has no means to pay the rent. Also can we refuse to rent to unmarried couples?
A1

In my opinion, there is almost never a reason to not have every adult sign a lease. On the contrary, there are numerous reasons why every adult should be required to sign, some of which are discussed herein.

Federal, state, and local fair housing laws protect against housing discrimination. You will need to research your state and local fair housing laws to determine if there is an applicable statute protecting unmarried couples from housing discrimination. Many states do allow a landlord to use unmarried status as criteria for refusing an application. If allowed by law and your rental standards you must be sure to apply your standards to all applicants. Each and every applicant must be screened using the same rental criteria, in the same manner, every time.

At a minimum, landlords should require that each applicant:

  • Be of legal age (18, 19, or 21, depending on state) or an emancipated minor,
  • Complete and sign a rental application,
  • Sign an authorization of release of personal information form for credit reports, employment, rental history, eviction report, and criminal history, and
  • Present at least two forms of personal identification, with at least one being a government-issued photo ID.

Every occupant, age of maturity or emancipated (including spouses), should be named on the lease agreement. In the event one occupant defaults, you have recourse against the other tenant. The fact that one tenant has no income at the time of application does not mean he/she cannot be collected from in the future – he/she may later be employed, win the lottery, or marry someone of significant financial status. Judgments against a person who had no income or assets at the time the judgment was obtained can be collectable for many years later and in other states. And if the person seeks credit at a later date (including when applying to rent) provides leverage for payment because credit grantors sometimes require payment of judgments as a condition of granting credit.

If the boyfriend leaves you can certainly “ask” the lady to leave, but if she refuses you will have to legally evict her or any other person who has moved in, potentially costing you the same time,
money, and stress as if she had been a wife. This is one reason why eviction complaints should usually include “John Does” as defendants. Having the unemployed person(s) sign the lease assures the ability to obtain a judgment
against that person.

In general, the more people who can potentially be held liable for rent and damages the better the chance the landlord will eventually collect what’s owed.

*   *   *   *   *   *

Q2

Can you tell me where I can find notices for my tenant to clean the swimming pool?

A2

There is unlikely to be available a notice form specific to this issue, but you could use a generic “cure or quit” notice and state the issue as being a default of the lease. What you can do may depend on whether or not the lease agreement adequately specifies the tenant’s responsibilities regarding cleaning the pool. If he fails to clean it as often and to the degree specified in the agreement, or reasonably adequate if the degree is not specified, you can serve him with a “cure or quit” notice (the type of notice available and its exact name varies by state). If he fails to cure the problem within the time period specified by the law of your state, you can begin the eviction process. Depending on what the lease agreement says on the matter, you might also be able to pay someone else to do the work and bill the tenant for the cost.

*   *   *   *   *   *

Q3

The lease agreement specified no pets. I knew at least 2 large dogs were there and tenant failed to have them removed per my request. Tenant is now out but the dogs seriously damaged carpeting. I had to replace carpet that was otherwise in perfectly good condition. Do I need to prorate the price of carpet and installation in this instance? Carpet at three interior doors has been scratched to the backing and I have not yet had it replaced. Also, the house still really reeks of urine after installing the new carpeting. Is there a way to remove the smell and do I have recourse here?

The tenant quit paying rent during the 60-day notice and there is no security deposit. I Plan to file a small claims action when the final tally has been made.

A3

Proration replacement cost – You cannot charge the tenant for the total cost of replacing the entire carpet in the unit. There are two different issues regarding this issue. First, depending on the floor plan and the location of carpeting, it may be acceptable to replace carpeting in only certain rooms. Second, wherever carpeting is replaced you cannot charge for the full cost of carpeting, but must allow for depreciation.  The percentage of cost of replacing damaged carpet (labor and materials) that may be charged against the tenant is determined by dividing the number of years the carpet has been in service (including the period the unit was occupied by the tenant who damaged the carpet) by the useful life of the carpet. There is more than one number that might be justifiable for useful life, but it is usually least arguable to use the number of years warranted by the manufacturer.

As examples, assume a carpet that the manufacturer had warranted for 15 years. If the carpet was 10 years old when the tenant vacated the unit, the tenant can be charged 5/15 = 33.3% of the replacement cost. If the carpet had been new when the tenant moved in a year earlier, the tenant can be charged 14/15 = 93.3% of replacement cost. If the carpet was 14 years old when the tenant moved into the unit and the tenant remained for one year or more, the tenant cannot be charged any part of the cost of replacement.

Similar considerations must be given to window coverings, appliances, and other components of a rental that would be considered capital items (have a typical useful life of longer than a year) when they require replacement rather than repair.

Regarding the carpeting at doors that hasn’t been replaced, you could proceed as with the other carpeting as long as the departed tenant caused the damage as evidenced by the move-in and move-out checklist.

The smell – While there are a number of products available for the do-it-yourselfer, it is often better to hire a competent vendor. Often, it is necessary to deal with the problem at the source of the odor. This may mean treating the underlying flooring – be it concrete or wood – and to replace not only carpet and pad, but also all carpet strips that have been exposed to the urine. Unless this is done, following installation of new carpet and pad alone one may find that the bad odor often returns after the “new carpet” smell goes away. Accordingly, although you have already replaced carpeting, if flooring and/or carpet strips were not previously adequately dealt with you may have to have the carpeting pulled up and proceed with adequate treatment related to flooring and carpets strips and also treat the new carpeting that was in contact with problems underneath.

Landlords can usually charge a departed tenant for the full cost of dealing with the urine problem.

Unfortunately, a significant percentage of applicants will have pets and even more will likely have them in the future and they won’t always obey lease terms regarding pets. Accordingly, under some economic conditions, in some market areas, and for some types of property it sometimes becomes necessary to consider allowing pets in order to fill a vacancy without otherwise lowering qualifying criteria. Allowing pets, but utilizing adequate lease clauses can be better than dealing with the results of unauthorized animals.

It is often better to select a tenant who has pets and has a good credit record, has no criminal record, has a good rental history, has been employed at his current job for several years and has income that is more than sufficient to pay the rent and all other financial obligations than to select a tenant who has no pet but is seriously deficient in one or more of the above or other qualifying criteria.

For landlords who have desirable property and when there is a good rental market, it can be possible to prohibit pets and still have an adequate pool of applicants. When it is necessary to allow pets in order to obtain an otherwise acceptable tenant, having adequate procedures and documentation in place is important in minimizing potential problems.

Having an adequate lease agreement is very important, including clauses that specify in detail the penalties for having animals without written approval of the landlord. Within the lease agreement or as a separate document tied to the lease agreement there must be an adequate animal agreement. Finally, a security deposit of the maximum amount allowed by state law and, if allowed by state law, also a separate pet deposit.  Discussions of these issues are available in our eCourses, Mini Training Guides, and Blogs.

Moving Tenants In.

July, 2012

Moving Tenants In

A good beginning for a new tenancy starts with clear understanding of the legal rights and obligations of both parties. Utilizing adequate move-in procedures can reduce problems both at the beginning of a new tenancy, throughout its term, and when the tenant leaves.

Provide a Copy of Lease Agreement

The lease agreement is a very important document that can govern the entire landlord-tenant relationship and a clearly written, detailed lease agreement will help protect both the landlord and tenant in the event of disagreements or disputes.

When an applicant has been selected he should immediately, certainly before the lease signing meeting, be provided with a blank or filled in unexecuted version of the lease agreement, with instructions that everyone who will execute the lease should read it over carefully before attending the signing meeting, make notes regarding any questions they might have, and phone with any questions that might be material to whether or not they will sign the documents. This will reduce the chance that issues regarding lease clauses might derail the process and require starting over in the vacancy-filling process, can save time at the meeting, and helps to make sure that the tenants fully understand the terms of the lease that they sign.

Provide HOA Documents

For the same reasons as stated above for the lease agreement, 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 signing meeting. Be sure that tenant acknowledgement of having read and approval of the documents is included in the lease agreement or in a separate document.

Lease Signing Meeting

Because of the importance of the lease agreement, it is best to require that all prospective occupants who will sign the lease attend a meeting where the lease will be signed. Landlords should be flexible enough in scheduling of the meeting to
reasonably accommodate applicant schedules.
At the signing meeting any special lease clauses should be pointed out prior to signing. As examples, “note that you will be paying all utilities except for trash collection” or “note that smoking is not allowed in the subject unit and the tenant will be liable for any damages resulting from smoking and subject to eviction or other remedies for default.”

Giving Possession

The issue of when possession of a unit should be given to the selected applicant is an important one that has potentially significant legal and financial implications. It should always be remembered that it can require an eviction to remove tenants once they are in possession.

Possession of a unit should not be given to new tenants until (1) all documents, including lead paint disclosure if applicable, have been executed by all parties on the lease agreement, (2) all moneys (cash, money order, or bank check – no personal checks) have been received by the landlord, and (3) if utilities are still in the landlord’s name, arrangements have been made for certain transfer to the tenant. Regarding item 3, allowing possession with utilities in the landlord’s name can result in problems because, in most jurisdictions, if the tenant fails transfer them to his/her own name, the landlord does not have the right to turn them off.

Never let a prospective tenant stay temporarily or even move a single item of his personal property into your vacant unit until all pre-possession tasks, including payment of all funds, are completed and there is no chance that you’ll change your mind about the person’s selection. If you give out the key or indicate transfer of possession in some other way, you may have effectively given him a legally protected status of tenant even though no lease agreement was signed or rent money paid.  It will now require an eviction if he can’t or won’t complete the terms of move-in and refuses to voluntarily leave, potentially resulting in substantial financial loss.

Move-In Orientation

Possession is often transferred by the landlord simply turning over the keys to the new tenants at the landlord’s home or office, perhaps with the tenants being handed a move-in checklist. However, a more formal way of transferring possession, though requiring more time for both landlord and tenant, has significant advantages in reducing risks for the landlord. A good procedure is to:

  • Meet the tenants, preferably all those who executed the lease agreement, at the property for a move-in orientation and walk-thru inspection.
  • Complete the move-in checklist & inventory
  • Provide a few blank maintenance request forms.
  • Give the keys to the tenants.

You should be sure that your unit is absolutely rent-ready before you schedule your tenant move-in appointment. Everything should be clean, and in good working order when you and the tenant inspect the unit so as to avoid the embarrassment of an obvious problem being spotted by the tenant. There should be no pests or mold/mildew issues.

Move-In/Out Checklists

Many state laws require a move-in checklist to be completed when possession is given to the new tenant. The checklist is a written statement of condition of the rental unit at the time of move-in signed by the landlord and the tenant(s). The move-in inspection should be done before the tenant moves in any of his boxes or furnishings.

The original signed checklist should be retained by the landlord in the tenant’s file and a copy given to the tenant for his file. The same checklist, or a copy thereof, will be used to document the condition of the rental unit upon the tenant’s move-out and helps serve as evidence why deductions were taken from the security deposit.
If the landlord prepares such a move-in checklist without the assistance of the new tenant, the tenant in those states where the checklist is mandated, has the right to inspect the premises himself to verify the landlord’s accuracy and detail in
completing the checklist. If there is no law on this subject, the lease agreement should contain a clause requiring that the tenant report any discrepancies within a specified few days of possession.

Free-standing appliances and any other property not physically attached to the real estate are listed on the checklist or on a separate inventory list. Any other furnishings provided by the landlord (e.g. shower curtain, welcome mat, window
coverings) should be inspected and their existence and condition noted.

The tenant should sign the last page of the inspection checklist and initial each other page of a multiple page checklist.

Failure to follow good procedures can have important implications regarding the landlord’s right to withhold any part of the security deposit when the tenant moves out.  Landlords should be sure that good checklists are utilized whether or not required by law in their state. It is better to have more detail than needed rather than not enough. Other than the fact that the more information included, the longer it takes to complete the sheet, one cannot really include too much
information on the sheet.

There is no set format for checklists except for issues that might be required by the laws of a few states. Formats vary from a single page to multi-page documents having a separate page that covers each room or other area in detail. Whichever format you decide to use, it is recommended that the list include the following:

  • Appliances – cleanliness, with notes of any damage
  • Cabinets – cleanliness, with notes of any damage
  • Paint – cleanliness, with notes of any damage
  • Carpets & other floor coverings – condition, with detailed description of any stains, tears, excessive wear, or other damage
  • Closets – cleanliness, with notes of any damage
  • Windows – cleanliness and no cracks
  • Window coverings – cleanliness, with notes of any damage
  • Window screens – cleanliness, with notes of any damage
  • Doors – cleanliness and operation, with notes of any damage
  • Sinks, showers, tubs, toilets – cleanliness, leaks, operation
  • Light fixtures – cleanliness, with notes of any damage
  • Landscaping, if applicable – condition, with notes of any damage
  • Parking areas – clean and oil free

You should familiarize the tenant with operating instructions for electrical, heating/cooling, and plumbing systems as well as furnished appliances. The tenant should be shown the locations of the furnace, air conditioner, water heater, breaker/fuse box, gas valve, and water valve. Supply valves for sinks, toilets, and other fixtures should be pointed out. If it is the tenant’s responsibility to change heating/cooling system filters or keep water softener units filled with salt, the tenant should be instructed in the correct procedures to maintain the systems. The location of each smoke detector and carbon monoxide detector should be noted and the tenant should test each device to verify it is working properly, with the fact that they are working being included in the checklist.
It is recommended that the condition at move-in also be well documented with photos and the tenant should be advised of the documentation. It can be helpful to take some photos during the walk-thru and to include the new tenant in some of the photos to avoid future claims that he was not aware of the condition of the unit at move-in. The tenant should know that there will be equally extensive documentation of the condition of the property following move-out of the tenant including plenty of photos.

Summary

Utilizing good procedures when moving a tenant in provides for a better beginning, can result in a better tenancy, and can minimize move-out problems at the end of the lease.