Question           

Where would I find information on a tenant who left the place damaged, dirty, etc. We had to use all of his security deposit to fix and clean everything. He still owes us over $300.00 and said he would pay. Can you help? Thanks.

Answer

There are a lot of potential issues related to your problem. Significant issues might be (1) which state your rental property is located in, (2) the specific terms of the lease agreement, (3) exactly what fixing and cleaning you did, (4) what you have done regarding accounting for the unreturned security deposit, and (5) exactly what you have done regarding the $300 you feel he owes you. I do not have information concerning your case regarding most issues, so I can only answer in generalities.

You will need to check the laws for your specific state. The most current and accurate information regarding deposits is usually available via the web site for the state where the rental is located. I will, however, briefly discuss some important issues regarding your question.

Laws regarding security deposits vary among states. Most states have specific statutes that (1) limit the maximum deposit that can be collected from a tenant by a landlord, (2) specify what the things can be deducted from the deposit for – usually unpaid rent and damages, but possibly other things, and, in some states, (3) how/where the deposit can held and/or the rate of interest, if any, that must be paid by the landlord, and (4) the necessary accounting regarding the deposit that must be provided to the departed tenant, the time within which it must be provided, and the penalties for not providing the accounting in accordance with state law.

The statutes of most, although not all, states specify maximum security deposit amounts that can be collected from a tenant. The maximum is usually stated as a multiple of the first month’s rent, typically one-and-a-half or two times. Some states allow a larger deposit for furnished units or an additional deposit for a tenant having a water bed.

Many states consider any amounts collected other than first month’s rent (e.g., last month’s rent) to be included within the maximum allowable deposit no matter what the landlord might call the funds – e.g., cleaning deposit. Some states also include any pet deposit in the maximum, other states do not. Most states will allow the landlord to allocate funds collected among different categories of deposits as long as the total of all amounts collected is not more than the allowable maximum.

In general, an amount called a deposit is potentially fully refundable if the tenant pays all rents owed and does no damage to the property – normal wear and tear cannot be treated as damages. Most states will not allow a landlord to avoid the maximum limit by calling the amount a “fee” instead of a “deposit.”

It is advised that landlords have written/signed move-in and move-out check lists proving that the tenant did the damage and failed to leave the unit as clean as he found it (photos are also useful) and proof of costs of correcting damages.

Most states require landlords to provide a detailed accounting to the departed tenant for amounts not refunded upon termination of tenancy. Most states require that the accounting and any refund due must be provided to the departed tenant within a certain time following the end of tenancy, typically from 7 to 30 days. A few states require the accounting only if the departing tenant provides a forwarding address or only if the tenant specifically requests it.

It is particularly important that landlords follow the rules regarding return of and accounting for any portion of deposits not returned because many states have serious penalties if the ex-tenant pursues the matter in court. Penalties can include disallowing any deductions from the deposit and/or double or triple damages. Although it is probably possible for a landlord to file a lawsuit for unpaid rent and damages even if subjected to penalties, it will be more costly and may depend on a judge’s opinion regarding allowing such a suit after the landlord has been penalized for failing to follow the law.

If you have followed all relevant state laws, have followed procedures that will allow you to provide proof of your claim, and have provided a written demand for the $300 amount – either within the accounting documentation you provided or via a separate demand letter – you should be able to file a lawsuit for the amount owed plus costs of the lawsuit.

Question

I’m a somewhat new landlord who has not previously had trouble with non-pay tenants. The tenants in one of my 4-plex units has not yet paid the rent that was due a week ago and a friend, also a landlord says that I should serve a pay or quit form. What is a pay or quit form?

Answer

The form that you reference is usually called a “Pay or Quit” notice. This is a notice that is served on a tenant who did not yet pay the rent for the current month or even for previous months. It informs the tenant that he/she should pay the delinquent rent(s) or vacate the premises within a certain number of days.

A few states require a grace period after the rent due date before the landlord can serve the notice. The length of the grace period is typically in the range of 3 to 15 days.

The number of days given in the notice for the tenant to pay or quit also varies among states, typically in the range of 3 to 30 days. If the tenant has not paid the delinquent rent by the end of the notice period, the landlord may file for eviction. In some states the notice period can vary depending on whether a fixed term or a month-to-month lease, the length of tenancy, or the time since the last previous notice was served.

A few states allow immediate filing for eviction when rent is not paid when due. A few states allow use of an “Unconditional Quit” notice, giving the tenant no option of remaining even if the back rent were to be paid.

The details of each state’s laws on the subject vary significantly and can include issues not mentioned above. It is important for a landlord to understand the laws of the state where the rental property is located.

You did not mention the name the state where your rental property is located. A form that can be used may be available on the LandlordOnline.com site.

Section 8 Basics – Part 2

This article continues the discussion provided in “Section 8 Basics – Part 1.”

Annual quality inspections are also required for continuation in the voucher program. The landlord and the participant family receive written notification of the scheduled inspection date. The participant family is required by the local housing agency to be present during the annual inspection. It is considered a violation of the family’s obligations under the housing subsidy program if the family fails to keep a scheduled inspection appointment. If the housing agency was not properly notified of the need to reschedule an appointment, the agency could terminate the family from the subsidy program.

The participant family can for reasons of health and safety request an inspection of the rental unit during the lease term to ensure the unit still meets the Housing Quality Standards.

Termination of the voucher program participation can occur at the end of the lease agreement term or as family eligibility changes occur. Per local housing rules and regulations the participant family is required to give 30 days prior notification of the intent to move from the current rental unit. If this advance notice requirement is not given, the participant family is in violation of the lease agreement terms and also with the family obligations of the housing voucher program.

If the participant family fails to pay their portion of the rental amount in a timely manner per their lease agreement, the family is in violation of the lease terms. This failure to comply with terms and conditions of the lease and housing program requirements may jeopardize current and future assistance for rental housing voucher subsidies.

The participant family per their lease agreement and voucher program obligations must maintain the rental property in good condition to provide decent, safe, and sanitary living conditions. Damage to the rental unit such as torn window screens, wall damage, broken doors, ceiling damage, etc. are not normal wear and tear items and are the responsibility of the participant family to repair and restore to good condition. If damage violations are found during quality inspection visits, the local housing agency will determine proper course of action and liability for damage repair.

The lease agreement with the landlord and the documentation submitted for program eligibility and approval must list all residents of the rental unit. The participant family is responsible to notify the local housing agency of any and all changes to family household status, composition, etc. Failure to include all adult family members on the lease agreement is a violation of terms of the lease agreement. This could result in action being taken against the participant family or a termination of housing assistance.

Serious violations of the lease agreement may lead to eviction proceedings against the participant family. While the housing agency provides the rental subsidy for the family, the agency is not responsible for the family’s behavior. Non-compliance of lease terms and conditions may necessitate landlord actions to correct deficiencies. The landlord in any action taken to remedy a situation would be advised to send copies of any tenant correspondence, notices, summons, etc. to the appropriate contact in the local housing agency. The housing agency must be kept informed of any issues regarding family compliance to rules, regulations, and lease terms.

The local PHA has no legal authority to act for either the landlord or tenant in remedy actions. The agency does not have the authority or the ability to remove a tenant. The landlord selected the tenant per the landlord’s selection criteria, policies, and procedures. The landlord must be the party to take action if the situation must be remedied with an eviction proceeding. Eviction is the only legal remedy to remove a tenant who is non-compliant with the terms of the lease agreement and refuses to leave the rental property on a voluntary basis.

At the end of the lease, the landlord may renew the lease for a new one year term or offer a lease for a different specified time period. The participant family is required to give appropriate, timely written notice to the landlord and the housing agency if they choose to vacant the rental unit after the initial lease term expires.

If the participant family chooses to remain in the rental unit under the new lease terms, the family is recertified for program eligibility and the rental unit will again be inspected for housing quality standards. The landlord may at a date sixty days prior to the renewal date submit a written request to the local housing agency for an annual adjustment to the rental amount. The housing agency must approve any change in the rental amount before a change can become effective.

Section 8 has both advantages and disadvantages for a landlord. The main theoretical advantage is that the government guarantees the rent. However, in practice there are many ways in which this can become untrue. For example, if the tenant originally qualifies for 100 percent subsidy and a couple of months later the tenant qualifies for only 20 percent subsidy due to a change in financial circumstances (e.g., found a job), the landlord must depend upon the tenant for 80 percent. Furthermore, rent increases are limited and require permission of the housing agency and if the fair market rent (FMR) goes down, the rent the landlord receives is reduced. There are circumstances where the landlord may not receive payments for certain periods of time.

You also have the same problems regarding unpaid rent and damages that you have with any other tenant because the government is not responsible for the tenant’s share of rent or what the tenant does to your property. In fact, you are less likely to collect for unpaid rent and damages beyond the amount of the security deposit than for non-Section 8 tenants because the typical Section 8 tenant has less to go after.

The most basic disadvantage of the program is that the government gets more control of your business. There is an initial inspection, annual inspections, and inspections if the tenant complains about something. Section 8 standards are sometimes higher than habitability laws and/or what the landlord must usually do in order to attract good tenants for the particular property.

If the tenant must be evicted it is the landlord’s problem and there will be little or no help from the agency that administers Section 8. In fact, they may terminate payments upon commencement of the eviction.

Before signing up for the program, you should read the manual and other documents for the program and be sure that you understand both the advantages and disadvantages of being in the program. You should also contact the PHA for your area to determine if (1) there is funding for new vouchers, (2) there are any local program specifics, and (3) they offer landlord briefing seminars.

There are several documents that the landlord should read thoroughly, they are:

• Voucher form issued to the eligible family,
• Request for Tenancy Approval,
• Tenancy Addendum,
• Housing Assistance Payments Contract, and
• Inspection Form Housing Choice Voucher Program.

It is important that the landlord understand the program before getting involved with Section 8 and, if he does, be sure to select tenants using the same screening and selection standards as would be utilized for an applicant who is not Section 8, only taking into account that Section 8 will initially be paying part of the rent.

Pre-Purchase Due Diligence – Part 1

It is extremely important that adequate due diligence be performed when considering the purchase of real property. Real estate tends to be the most costly purchase that most people make in their lifetimes. Buying a “bad” property can result in serious problems and many problems can be extremely costly. Most of the issues that will be discussed in this series will apply to purchasing a property for investment or for personal use.

There are a number of important categories of concern regarding adequate due diligence. The more important ones include (1) property location, (2) legal issues, (3) physical condition, (4) design issues, (5) natural hazards, (6) environmental issues, and (7) financial issues.

Property Location

We’ve all heard many times that the most important thing governing value is “location, location, location.” We’re sure that almost everyone who would have any interest in buying real estate has a good understanding of this issue and won’t discuss it further in this first article of the series.

Legal Issues

There are a variety of potential legal issues that should be investigated. Included are zoning laws, building permits, possible code violations, and liens or other matters that might affect title. For a property currently occupied by tenants, the terms of the existing lease agreements are also of concern. Investors who are considering a property that has been extensively rehabbed or remodeled must be particularly concerned about whether all work was properly done in accordance with zoning laws and building codes and that work requiring permits was done with the proper permits. Zoning laws and building codes are of particular concern to an investor who plans to rehab or remodel a property in order to ensure that the planned work can be legally done.

A buyer should not rely upon assertions that meeting building code requirements is proof that no deficiencies exist in the property. Building code inspections and property inspections are entirely different types of inspections. Courts have routinely held that the building department inspectors are not liable for construction defects even for items that have been specifically “signed off” as passing inspection.

Physical Condition

Physical condition often includes (1) mechanical issues such as structural, electrical, plumbing, roof, and other components; (2) primarily cosmetic issues of various components such as paint and landscaping; (3) environmental issues related to the property including asbestos, carbon monoxide, groundwater/soil contamination, lead-based paint, mold, and radon; and (4) physical characteristics related to legal issues such as zoning and building codes. The physical condition of a property, from a buyer’s perspective, is determined by observation, research, and testing.

While we will provide in future parts of this series brief general discussions regarding some inspection issues concerning certain specific property components, this series is intended to provide a general overview of various issues related to the purchase of properties rather than a “how-to-do-an-inspection” course.

Seldom is there only one single inspection regarding the physical condition of a candidate property. There are usually multiple inspections, including (1) an initial drive-by and walk-around view of a candidate property; (2) a visit and walk-thru accompanied by the owner or agent; (3) whatever due diligence can be performed before writing an offer, particularly regarding those issues that most impact value; (4) formal inspections during the escrow period, usually including those by one or more professionals; and (5) a final walk-through a day or so before closing escrow.

Although floor plan, window and floor coverings, appliances, and various amenities (e.g., pool) are also important in the buying decision, the focus of physical inspections must be on the conditions of structural, mechanical, and other components of the property.

The physical condition of a candidate property is important in making a prudent buying decision. The condition of the property directly affects both its current value and its potential future value. Current value determines the cost-effectiveness of repairs and upgrades necessary to maximize both near-term and long-term future value. Accordingly, investors should always conduct careful inspections regarding the physical condition of a candidate property to the greatest degree practical and as early as possible before committing additional time and resources to pursuing a deal.

While real estate investors will often need or want to involve professionals in inspecting the physical condition of a property, it is important that investors be able to adequately perform basic inspections themselves. This is particularly true for pre-offer consideration of properties, for which it is usually not cost-effective to hire professionals because of the number of properties that must usually be considered in the process of finding a candidate property worthy of a purchase offer.

The necessity of property inspections holds true not just for older properties obviously suffering from a bad case of deferred maintenance.  Even new construction must be of concern. In fact, it can actually be more important to be concerned about some issues for new construction, partly because a property that hasn’t been used hasn’t been tested.

Design Issues

Design issues such as number of levels, the floor plan itself (including number of bedrooms and baths) and whether there is a carport or a garage can significantly affect value, although buyers of a personal residence may accept certain design defects because they do not bother them enough to overcome their desire for certain features or amenities. For a rental, such items affect the rent obtainable and ease of filling vacancies. Although some design deficiencies can be corrected, most cannot. Accordingly, investors should consider the wants and needs of their likely target pool of tenants.

Natural Hazards

Natural hazards such as wildfires, soil stability, and extreme weather affect the value of the property, the availability/cost of financing the property and the availability/cost of insurance. For a property that is to be rented, natural hazards can also affect the level of rents and the vacancy factor.

Environmental Issues

Environmental issues related to the property can relate to either the location – e.g., radon, groundwater/ soil contamination – or to the structure and its components – e.g., asbestos, carbon monoxide sources, lead-based paint, mold, or, due to construction methods, susceptibility to radon.

Financial Issues

Money is a primary concern whether purchasing for a personal residence or a rental property. Whether considering the purchase price, obtaining a loan, necessary fix-up costs, potential market rents, operating expenses, or future sale price, as well as income tax benefits at end and during the period of ownership, financing is critical. Accordingly, buyers must understand and adequately utilize the various analysis procedures.

Interaction Among Categories

Items in the various categories often interact with one another. As examples, (1) natural hazards and a variety of potential environmental issues (e.g., radon and soil/groundwater contamination) are physical issues that are usually related to location; (2) legal issues of zoning, building codes, permits, and existing leases are related to physical issues because they affect the current value of the property improvements and what can and cannot be done to increase the value; and (3) the condition of the property and costs of correcting problems directly affects the financial viability of the property as an investment and to the availability and costs of a loan.

Initial Look

The first viewing is usually a drive-by for a “look-see” to evaluate the neighborhood and the candidate property. A lot of information can be gained in a short time during the first viewing of the property. First impressions do count and an investor will quickly learn to spot both favorable and unfavorable conditions.

Even though buyers don’t usually have access to the property, especially the interiors of the structures during the initial look, a visual inspection of the exterior of the structure and its grounds from outside the property line can often yield valuable information and clues as to rehab costs and maintenance expenses. Walking around the property exterior can help spot problems with the foundation, the main structure, porches and decks, roofs, detached garage or other out-buildings, drive-ways and walks, drainage, and fences or walls.

Pre-Offer Inspections

Many investors don’t think about inspections until they already have a fully executed contract. Unfortunately, this can result in a lot of wasted time for all parties concerned when it becomes obvious that there are problems with the property that are not obvious without significant investigation and cannot be resolved. Those problems may have been obvious if more effort had been put into evaluating the property prior to writing the offer. In such a case, a lot of time would have been wasted in analysis that was based on incomplete or erroneous information.

It is important to obtain as much information as possible about the physical condition before submitting a purchase offer because the value of any property is dependent the various issues previously listed. This means that you should go beyond the “initial look” inspection to the greatest degree possible.

Buyers should push as hard as is reasonable to obtain access prior to writing the offer. Even a short inspection of interiors can be valuable in deciding whether to make an offer and, if so, how much to offer and what contingencies are important. Access is often not easily available for tenant occupied properties, but even compromising by accessing only a few or just one unit of a multi-unit property is worth insisting on.

Question

Many apartment building owners in my area have converted their apartment properties to condos and I am interested in perhaps doing so for my 24-unit property. How do I do it?

Answer

You will have to subdivide the property. Whether a particular property qualifies for subdivision and the procedure for obtaining approval depends on state and local laws where the property is located.

Among the dozens of factors that may be relevant are zoning, building codes, floor plans, sizes of units and rooms, separate metering for all utilities, sound proofing between units, parking, and in-unit laundry. All units will almost certainly have to meet all current building codes and all improvements having been done with required permits. Additional expense may result from needing to meet certain building code requirements for new construction that were not in effect when the property was originally built. As examples, fire sprinklers and/or handicap construction items may be required when converting.

An attorney experienced in conversions and licensed engineers and architects will almost certainly have to be involved. Before incurring the high costs of engaging these necessary professionals you should talk with those agencies who will have jurisdiction for approving condo conversion plans in order to reduce the risk of spending a lot of money and finding conversion is not possible or not economically feasible.

Conversion of existing apartment complexes is often not economically feasible. Larger properties are more likely to make sense than smaller properties, partly because cost per unit for many items becomes cheaper the more units involved. For example, the costs of legal work won’t be much higher whether there are 10 units or 100 or more units.

Unless you are doing the project with cash, you also need to discuss the project with potential lenders. This is important both to determine if conversion financing is even available and the total costs of the financing.

Finally, it is always possible that you will need to rent up some or all of the condo units even though immediate sale of all units was planned because the market changed during the time it took to do the conversion. Accordingly, you should determine ahead of time how conversion will affect cash flow of the property as rentals because loan interest, property taxes, and insurance may be higher than currently being paid.

Question

Can you provide advice regarding the type of carpet to use in an apartment unit? I need something durable that hides spills. Thanks.

Answer

When I managed rental units I usually used about the lowest priced carpet (maybe second up from bottom) I could get from a reputable company. I did this because there was no way to know when it might become damaged to the extent of again needing replacement whatever its price. For serious problems, the highest priced carpet doesn’t survive any better than the lowest.

I always preferred to use lower grade carpet and re-carpet a year or two earlier (lower grade carpeting doesn’t usually wear as long) because the cost per year of $15 per yard that lasts 6 years is the same as $20 per yard that lasts 8 years and having new carpet more often between tenants has at least two advantages. First, it is a selling point, usually with higher rent, to the new tenant coming into the new carpet. Second, there is no question as to the initial condition of that carpet for purposes of assessing damage when that tenant leaves. As to color, there are not usually as many choices for the lower priced carpet, so pick one that is closest in color to coffee and/or the dirt around the premises.