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Qualifying a Rental Prospect

December, 2019

Qualifying a rental prospect begins at the first point of contact between the landlord and a potential tenant. That initial contact could be as soon as the posting of a rental listing advertising a vacancy.

When posting the notice of vacancy, a landlord hopes to create interest in his rental unit that can be soon converted to a tenant in residence. Rental prospect response to the listing provides pre-screening opportunity to gather information, assess risk, and qualify the prospect to minimum rental standards.

The prospect’s answers to a few crucial screening questions can help determine if the prospect could qualify to the landlord’s rental standards and that an application should be pursued.  A few questions can be well worth the time spent to better protect the rental investment though risk assessment.

The prospect in turn may have questions to ask the potential landlord. The rental listing should have provided basic information about the rental unit – address, number of bedrooms and baths, monthly rental amount, and the required security deposit. During the conversation with the prospect, the landlord will have a chance to provide additional details on rental policies, qualification standards, rules and regulations, and expectations of every tenant.

Whether the initial contact is by phone or in person, it must not be used as a means to screen out prospects by asking leading questions or stereotyping prospects by language and speech patterns or by any other characteristic that is prohibited by federal, state, or local fair housing laws.

A landlord should have a standard set of questions to ask all prospective renters who contact them regarding a vacancy. Using a set of standardized questions will help avoid claims of discrimination.

What are some examples of questions? Some of the following questions may help determine the prospect’s rental situation. The answers can provide enough information for analysis and evaluation to advance a prospect.

“What questions do you have about the property?”

Allowing the prospect to go first with his questions provides a landlord an opportunity to listen to what the prospect feels is important, what needs clarification, or what requires confirmation.

“The anticipated move-in ready date for the unit is XXX. Does that fit your schedule?”

Typically a tenant is required to give a minimum of 30 days’ notice of move-out. If a prospect wants to move in immediately or within a very short time, it may signal a problem for any number of reasons. Responses that suggest poor planning on the prospect’s part, a pending eviction, past due rents or other lease violations at his current rental should be a red flag notice to the landlord. If the move-in date is greater than 90 days or indefinite, the prospect may not be a serious about moving and should usually not be considered as a candidate for tenancy.

“We offer a one year fixed-term lease. “How long do you plan to rent?”

Most landlords are looking for a stable, long-term tenancy, typically a one-year lease agreement. A response such as “it depends” may indicate a prospect isn’t committed to a firm decision for moving or has other issues that the prospect is unwilling to share with the landlord.

“Our standard application process is XXX. Will you have any problems completing the standard application process?”

The landlord should explain to interested prospects the landlord’s tenant screening process includes, as applicable, written application, credit report, background screening, and verifications for employment, rental housing history, and references.

If there is hesitation on the prospect’s part to agree to all or part of customary screenings, there could be any number of possible reasons including negative findings when screenings are conducted. If the prospect cannot agree to stated rental policies, the landlord may decline to go forward with the application process.

All adults living in the unit are expected to complete full tenant screenings and to sign the lease.

“Rent is XXX monthly. The security deposit is equal to one month’s rent. We collect first and last month rent plus the security deposit. The move-in funds total XXX, payable at lease signing.  Would that be a problem?”

The prospect should be made aware that possession of the rental unit will not be given unless all applicable fees, deposits, and rents are paid per terms and conditions of the lease agreement. If the prospect counters with alternative arrangements, such as payment installments, the landlord should be prepared to answer according to applicable landlord-tenant statutes for his state, and his previously stated business policies and practices. It may signal a red flag to the landlord if the prospect is not prepared to pay required move-in funds at signing.

“Why are you moving?” How long have you lived at your current address?

Typical responses are to get more/less space, be closer to work or school, changing jobs, or family responsibilities. If the prospect is evasive or offers vague reasons, there may be a problem with his current landlord or neighbors.  It can be a red flag and definitely something to consider if the prospect has a long list of complaints about his current landlord and neighbors.

Does the prospect have a history of moving frequently? What are the chances that the pattern will be repeated?

“How many people will be living in the rental property?”

Landlords set occupancy limits based on regulations and codes per local building, health, and safety standards as well as limitations set by property size and mechanical/system/utility constraints. A maximum number of occupants for square footage space may be specified by local ordinances. If the number of potential occupants exceeds recommended standards or the prospect indicates an uncertainty regarding the number of occupants (i.e., it varies), it could be a potential red flag for the landlord.

“Can you provide employment references and proof of income?”

A landlord must determine to the best of his ability that the prospect can prove a steady source of income sufficient for rent and living expenses. If a landlord requires an applicant to have a gross monthly income three times the monthly rental amount, a prospect needs to know that upfront.

“Can you provide previous landlord references?”

A landlord should require an applicant to provide rental housing history previous to his current landlord. Reference checking with previous landlords is an important part of tenant screening. The landlord will want to find out how well the former tenant paid his rent and generally performed according to the lease agreement.

If a prospect cannot supply satisfactory previous landlord references, it can signal problems. If a prospect asks this current landlord not be contacted, it could be for reasons such as lease violation warnings or notices.

“Have you ever had to break your lease?”

A landlord will want to know if a tenant sees a lease as a firm contract. A tenant who broke a lease because of job relocation is understandable. A tenant who broke a lease because they wanted a change of scenery is not.

Other Rental Policies

A landlord may want to provide information on other rental policies, such as pets, parking and vehicle registration. If the rental unit and property are smoke-free, a prospective tenant should be aware of such restrictions.

Last Question

After a landlord and prospect have discussed the rental terms and conditions, policies and practices, the landlord should ask the prospect if he has any other questions.  A landlord wants a prospect to be satisfied as a tenant living in the rental unit.  Although much information was already provided, the prospect may have thought of other issues that need clarification or should be discussed regarding his rental situation.

Pre-screening a rental prospect is a risk management practice that reduces the risk of installing a problematic tenant.

What about hoarding? I’ve heard that seniors hold onto everything. I don’t want to have nuisance on my property.

December, 2019

It isn’t only seniors that suffer from hoarding disorders. Studies have projected that one out of twenty Americans suffer from hoarding disabilities. The exact number of hoarders is difficult to determine since hoarding behaviors can remain undetected for months or years. It is often only discovered when a complaint is received from a neighboring tenant or a maintenance request for entry is refused by the tenant that hoarding behaviors can become evident to property managers.

Any tenant who suffers from hoarding disorder can cause serious problems in property management. As examples, hoarding behaviors can cause:

  • Risk of injury to others or to themselves,
  • Damage to the rental unit, other units, or common grounds,
  • Fire hazards,
  • Blocked emergency exits,
  • Pest infestations,
  • Unsanitary living conditions, and
  • Other habitability issues.

If you are concerned about nuisance, be sure to follow your rental policies and practices for regular property inspections for health and safety, maintenance inspections, and respond to tenant requests and complaints in a timely and appropriate manner.

You could consider adding language to your lease agreement that is covered with all tenants that clearly states your housekeeping standards, the tenant’s obligation to keep the rental unit in a clean and sanitary condition as provided at move-in, and the provisions for landlord entry for regular inspections for health and safety.

Fair Housing Act

Hoarding is a disability protected by the federal Fair Housing Act. Landlords must comply with the Fair Housing Act provisions for reasonable accommodations to try to help tenants with their disability. While reasonable accommodation is customarily requested by a tenant, a landlord or property manager should proceed with caution in dealing with a tenant hoarding situation. If the landlord or manager knew or should have known about the hoarding disability, there is a fair housing case to be made for the landlord/manager’s duty to accommodate the tenant to help resolve the issue. Care should also be taken to not extend special or extraordinary help that would not also be extended to other tenants as protected by the Fair Housing Act or your lease agreement. Legal advice may be appropriate before taking any action.

I recently bought a property that I think will be attractive to senior renters. What are some considerations for that market?

December, 2019

If you are considering marketing your property as senior living, age-restricted housing, usually referred to as 55+ living or a 62 + community, there are several issues to consider.

The federal Department of Housing and Urban Development (HUD) regulates senior communities to ensure their compliance with the Housing for Older Persons Act of 1995 (HOPA).

HOPA amended the requirements for qualification for the housing of persons who are 55 years of age or older portion of the housing for older persons exemption established in the Fair Housing Act.  However, a housing community is not exempt from the provisions of the Fair Housing Act that prohibits discrimination against any resident or potential resident on the basis of race, color, religion, national origin, sex, or disability.

If the housing community is intended and operated for occupancy by persons 55 years or older, the following requirements must be met in order to qualify for the HOPA exemption:

  • at least 80 percent of the community’s occupied units must be occupied by at least one person 55 years of age or older per unit;
  • the owner or management of the housing community must publish and adhere to policies and procedures that demonstrate an intent to provide housing for persons 55 years or older; and
  • the community must comply with rules for verification of occupancy through reliable surveys and affidavits.

Additionally the housing community must demonstrate an intent to provide housing for persons 55 years of age or older in policies and procedures that includes:

  1. a) the written rules, regulations, lease provisions, deed or other restrictions;
  2. b) the actual practices of the owner/management of the housing community used in the enforcement of the rules;
  3. c) the kind of advertising used to attract prospective residents to the housing community as well as the manner in which the community is described to prospective residents;
  4. d) the housing community’s age verification procedures, and its ability to produce, in response to a familial status complaint, verification of required occupancy.

Once a community meets the HOPA exemption requirements, housing communities can define their own rules on age restrictions that could be more restrictive than the federal law as long as the community is in compliance with state laws.

Due diligence should be conducted to clarify community rules and HOPA exceptions, particularly in the case that a resident has a spouse younger than 55 years.  Since typically only one person in the unit must be at least 55 years or older, there should be no issue for a younger spouse to occupy the unit. Clarification may still be needed in the case of children or grandchildren needing to reside in the unit but are under the community age requirement.

For senior living at a 62+ community, everyone in the household must be at least 62 years old. The only exceptions to the age requirement would be live-in aides, or healthcare providers.

If you are thinking in general about marketing your property to a specific applicant pool, such as seniors, be sure you understand fair housing requirements for marketing and advertising, and follow fair housing provisions against discrimination of the protected classes. You may inadvertently violate fair housing laws if you are not familiar with federal, state, and local requirements. Be mindful that senior tenants can be members of a protected class, such as a physical or mental disability. You cannot ask them if they require reasonable accommodations. If the tenant does make a reasonable accommodation request you are required to make the accommodation at your expense. Senior tenants will need to qualify to your rental standards as applicants in their own right.

You should offer your property to all rental prospects according to your rental policies and practices. If your property is maintained to habitability standards, has comparable amenities, market rents, and probably most important, a good location, you will find the property attractive to many prospective tenants.

Can I choose not to rent to older tenants?

December, 2019

When you choose to selectively offer tenancy to some individuals and not to others you have violated Fair Housing Acts. Title VIII of the Civil Rights Act of 1968 (the Fair Housing Act), as amended, prohibits discrimination in housing and housing related transactions based on race, color, religion, sex, national origin, disability or familial status. While the Act does not expressly ban discrimination based on age, age discrimination is prohibited under the broader discrimination protections afforded familial status and disability.

Additionally, many states and some cities have fair housing laws that provide additional anti-discrimination protections for age.  You cannot refuse to rent to older tenants or require additional terms and conditions for tenancy solely because of age. Your rental standards apply to all prospects, applicant, and tenants. If an older individual applies for a vacancy and qualifies under your rental standards, you must give the applicant fair consideration for tenancy when all other factors are equal.

Hiring Seasonal Employees

December, 2019

Businesses may need to hire employees as seasonal help during peak business periods. The holiday season is often the busiest time of year for many companies when demand is high for their goods and services. Seasonal hiring, such as retail sales and customer service positions, can be cost-effective for the employer by allowing greater flexibility in work scheduling, more responsive handling of customer and client needs, and increased productivity.

While some employers may choose to use outside staffing agencies to source applicants, handle placement, payroll, and termination of seasonal workers, the employers preferring to direct hire and manage seasonal employees have duties and responsibilities in the hiring and placement process.

The employers’ duties and responsibilities for seasonal help are no different than their duties and responsibilities for permanent staffing. The organization’s stated business policies and practices in the employment process apply to all types of employee categorizations. By firmly adhering to the organization’s standard employment policies, the employer can help reduce risks of claims of negligent hiring, liability, and discrimination. Seasonal hiring is not casual hiring, conducted informally, and bypassing customary application and screening processes. The formal hiring process as defined in company policies is required to fully support the business and comply with applicable legal requirements.

A good hire begins with good preparation for additional staffing. Time is of the essence to fully realize the employer’s return on investment for seasonal hiring. Employees must be hired, trained, and ready to go before the peak season gets underway. While it can be tempting to utilize a practice of just in time hiring, waiting too late in the busy season to engage seasonal employees could be costly in terms of the size and availability of the applicant pool, less time to adequately train employees to satisfactorily meet customer demands, and reduced productivity. Additionally when there is an urgency to fill a job vacancy, the rush to hire and bypass the company’s hiring policies and standards creates great risk to the organization. Not only does an employer risk non-compliance with legal requirements by not following standard practices but such actions subjects the organization to claims of negligent hiring. The harm done by a bad hiring, even if the employment period was of short duration, affects the organization’s bottom line, its brand and reputation. There are additional costs in the lost time required to recruit, hire and train a new employee.

There is no shortcut to a good hire. The length of the employment term does not change how business policies are implemented.  Job positions should be based on business needs and built upon detailed job descriptions for duties, responsibilities, and standards. The employer must allow sufficient time to hire to fulfill duties for sourcing, engagement, onboarding, and training. An employer should commit resources for supervision and evaluation of seasonal employees as are required for permanent employees.

Screening Practices

Interview

Although there can be many important issues to cover during a job interview with a potential employee, as examples, job requirements and the nature and scope of job duties, key issues for recruitment of seasonal workers include accurate, current job descriptions to attract and advance interested candidates and the express acknowledgment by the candidate that the offered employment is seasonal and will be terminated at a specified time period. There should be no promises made regarding transition to permanent employee status.

Seasonal type of work may attract more interest from entry level job seekers. An interview conducted to fill seasonal positions should use standardized, basic questions that can quickly determine an applicant’s interest, experience and skills.

When seasonal employees suddenly quit before the end of the employment period, all too often the employees did not understand the actual job duties and requirements, required work schedules, had too little training on critical items, and lacked commitment to the organization’s needs.  The initial interview should cover the employment expectations, standards, and code of conduct issues required for the position and as well as job requirements that are non-negotiable such as availability for week-end work.

Background Checks

Applicants for seasonal employment must be qualified and screened to the standards set by the company employment policies. Most employment screenings include candidate interviews, written applications, verification of identity, social security verification, past employment history and references. If applicable under state laws and local ordinances, or as a bona fide job requirement, applicants may be screened for credit history, driving record history, education, credentialing or professional licensure, or other legally allowed background reports. At a minimum the employer should conduct adequate screenings to help reduce risk of negligent hiring or potential risk to the organization. The type and timing of background screenings must be compliant with applicable laws.

Employers who use consumer reports for employment purposes have specific obligations under the federal Fair Credit Reporting Act (FCRA). An employer is required to disclose to an applicant that the employer may obtain the applicant’s consumer report for employment purposes. The employer must obtain the applicant’s written consent prior to obtaining the report. The FCRA disclosure notification must consist solely of disclosure and cannot contain any extraneous information that might confuse the consumer or detract from the notice of disclosure.

The background report contains consumer information obtained from various reporting sources. Information in the report could potentially qualify or disqualify an applicant from a proposed employment action. The process of dealing with potentially disqualifying information in a background report as part of an employment decision is referred to as adverse action under the FCRA.

The adverse action process requires three steps: a pre-adverse action notification, a reasonable period of time for consumer review and response to the consumer report, and a final adverse action decision notification.

If criminal background information may potentially exclude an applicant, the employer should review adverse action requirements including Equal Employment Opportunity Commission guidelines for individualized assessments of the circumstances of the event. Applicants/employees may only excluded on the basis of a criminal background report for reasons that are relevant to the job in question and for which the employer has a legitimate business necessity to exclude them.

It is important that employers and their consumer reporting partners are compliant to federal FCRA requirements and applicable state and local legal requirements for employment actions. State and local jurisdictions may have additional regulations regarding the use of consumer reports for employment purposes including employer adverse action requirements.

Returning Seasonal Employees

Many companies have former employees hired for previous seasonal employment who return each season to help out. Some employers have questioned the need to screen/rescreen returning seasonal employees. Since it’s only for holiday help and the employees are already familiar with the company, products and services, and customer base, are trained, and now experienced, employers feel they can reduce costs and gain time by immediately putting the returning seasonal employees to work. This works against the employer many times, instead of gaining a ready work force, they have increased their risks of liability.

While returning seasonal employees may have been trustworthy during the previous engagement, significant time may have elapsed since that employment. Circumstances in the former employee’s life may have changed considerably that could have caused financial difficulties. This could lead to inappropriate behaviors or criminal actions of theft or damage.

An employer does not disrespect a former employee’s contribution to the company by conducting employee screening. Instead by screening the employer is conducting his best practices in a non-discriminatory manner according to his business policies. The employer does not differentiate between permanent and seasonal employment status.

A returning seasonal employee may be moving into a more responsible job position and require certain screening by industry standards and regulations.

Onboarding

A critical component to a good hire is new hire training on the company, its brand, marketplace, policies, products, and services. Seasonal new hires should receive the same company training furnished to permanent employees.  With a shortened employment period, training should focus on the critical items needed to start performing at day one. Too much information at one time however can overwhelm a seasonal employee. It is a better business practice to schedule training as an ongoing part of the work routine and have employee supervision available to monitor and reinforce the employee’s learning and application of information on the job.

Continuation of the Employment Process

Once the initial phases of the hiring process have transitioned the seasonal employee through orientation and training to active on-job status, the employer follows his standard employment/personnel policies and practices until the employee separates from the company.

It is the employer’s duty to protect his company, brand, and reputation by due diligence measures, particularly seasonal employee screenings to protect his entire workforce, customers, clients, and general public from harm from negligent hiring.

Rental References

November, 2019

A typical rental application asks the applicant for information regarding his rental history, employment history, income, financial accounts, credit card accounts, loans, other debt obligations, and references.

References in this context usually refer to personal references, those who would provide a character reference for the applicant.

Rental references are risk assessment tools. As such, to protect his business, a landlord should consider a broader definition of rental references to include landlord references to evaluate past rental history and credit references to evaluate the applicant’s credit worthiness.

Most landlords consider background checks, credit reports, and eviction history the most important screening tools. However landlords should not discount the value of screening rental references to fully analyze and evaluate the applicant’s potential for financial risk to the landlord or possible problematic tenancy.

Previous Landlords Referrals

Most experienced landlords recommend asking the applicant to provide rental history for the past three years. Usually that timeframe will provide one or two prior landlord references in addition to the most recent landlord reference. Checking with fellow landlords provides a way to further qualify the applicant. The purpose of landlord reference checking is to find out whether the applicant as a former tenant 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. With factual information about the applicant’s past rental behaviors, a landlord can assess whether the applicant is likely to be a future good tenant.

However there are some applicants who have limited rental history, no recent rental history, or no previous rental history at all. Refusing to consider such applicants may significantly extend the vacancy period. For any of these applicants a landlord should consider contacting personal references as a qualification tool in the screening process.

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 of little value, 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 can be indicative of future behavior.

Credit References

A credit reference is an entity or individual that has extended credit or otherwise established a financial relationship with the applicant.

An applicant can be asked to provide a credit reference who will vouch for the applicant’s credit worthiness. A rental application when approved has financial obligations. A landlord in offering tenancy is extending credit to the selected tenant for the term of the lease. The landlord wants to ensure the applicant is not a financial risk and has the ability and willingness to fulfill terms of the lease in full and timely rent payments. A credit reference furnished by the applicant should provide details of the loan amount, the terms of the loan, and the payment history.

Some landlords may not realize that credit references are already a part of their tenant screening practices. A credit report obtained from a national credit reporting agency is a credit reference. Landlords have traditionally used the credit report as a cornerstone of tenant screening. A credit report provides the landlord with the reported history to date of the applicant’s credit usage and credit management. A consumer credit report will list open and closed accounts, the type of credit, the total amount of loans, balances due, and payment history. Additionally the report will list any accounts sent for collection. A landlord considers this credit data in factoring the risk of rent default, delinquencies, or collection or requiring additional security such the full security deposit amount as allowed by statute, or a co-signer or guarantor for the lease.

A bank financial statement showing available account balances could be considered another type of credit reference. Utility providers, telephone service providers, or local businesses extending payment terms may also provide credit references.

Whatever the type of documented credit reference, the reference should point to the applicant’s credit ability and reliability in making payments as agreed.

However there can be situations where a consumer’s credit file does not contain sufficient credit usage data to generate or score a credit report.

The credit information reported to national credit reporting agencies (NCRAs) is the consumer’s visible credit activity. There are consumers who don’t have visible credit history and consequently no credit score. To the major credit reporting systems they are credit invisible.

As an industry standard, a credit report/credit score is visible evidence of the degree of financial risk and brings into play the applicant’s credit management, i.e., his ability and reliability to pay according to terms. Without a documented pattern of credit behavior, the end result is most likely to be an application denied.

Credit invisibility can occur through consumer lifestyle choices. Some consumers voluntarily choose to not use credit. Other consumers are limited in personal options or by their utilization of services that do not report to the major credit bureaus. If there is no report of credit, there is no credit report.

Some consumers have a credit record at one of the NCRAs but the record is considered unscorable, sometimes referred to as a thin file. These consumer credit records have insufficient information to generate a score because there are too few accounts in the credit history or accounts are too new to calculate a reliable score. An unscorable credit record may also be as a result of outdated or stale information in the file, usually a lack of reported credit activity within the past two years.

A credit profile is usually built from information about the consumer’s mortgage loan, auto loan, consumer credit cards, and other types of loans, such as student loans. If the consumer rents from a non-reporting independent landlord, did not finance his car, does not use credit cards, and did not have a student loan, there is very little information that could be sent to the NCRAs. The consumer may have actively used credit responsibly in the past but has since closed or stopped using his accounts. Those inactive accounts eventually drop from the consumer credit file.

Credit reports function as a centralized source of information. An information void creates a problem. The creditor knows nothing about the credit invisible consumer and has only rudimentary information about a thin file consumer. A landlord has no way to know whether the applicant will turn out to be a good pay, a slow pay, or a no pay.

A consumer deemed credit invisible may actually have a strong history of debt repayment according to terms and conditions of non-reporting creditors. Being invisible does not mean the consumer is not credit worthy. An applicant whose credit report comes back as thin is not automatically a person who has made poor credit decisions and missed payments. In some ways a thin file applicant is credit neutral. Some consumers, visible, invisible, or thin are credit worthy, some are not.

An applicant knowing that he has a thin file or chooses not to use credit may want to provide the landlord with credit references as an alternative to the traditional credit reporting model.

Checking References

References of any type are of little or no value unless the landlord puts some effort into checking them and evaluating the information in an objective manner. Landlords can cross-check applicant information with information obtained from the reference to help determine the truthfulness of the applicant’s statements. All adults who will sign the lease agreement should be tenant screened, including the landlord’s requirements for rental references.

Documentation

All contact with rental references, oral and written, should be documented in detail, with date of contact verified reference source, and discussion items. In some states, there may be a requirement for disclosure of all screenings that will be conducted in the application process to screen and qualify rental applicants.

Applicant Consent to References Screenings

A landlord should conduct due diligence for applicable laws for permissible purpose to conduct screenings qualifying a rental applicant. Written signed consent by the applicant to conduct tenant screenings may be required by state statute or local ordinance. There could also be requirements as to the timeframe when screenings could be conducted.

Rental references are only a part of a comprehensive policy and practice for tenant screening and selection. Good references alone cannot guarantee a good tenant. With good tenant screening practices, there is less chance of installing a problem tenant.

What about buying tenant occupied properties? If I’m interested in “buy and hold” wouldn’t that make more sense?

November, 2019

For an investor, buying rental properties with existing tenants can have many advantages. Due diligence by the prospective buyer is required to accurately assess the property’s performance, property condition, tenant lease agreements, tenant security deposits, and other existing terms and conditions that could have a material effect on the sale. You want to be able to write a purchase offer that protects you through escrow closing and beyond.

A benefit of purchasing an occupied property is that the sale is a package deal. The property comes with installed tenants; there is no rent-up time for units that are currently leased; and there could be instant cash flow. You may be able to more easily obtain lender financing since the true income for the property is known.

While existing tenants can be of considerable value to an incoming buyer/landlord, inheriting existing tenants can mean more liability for you unless adequate steps are taken to reduce risks. You must assess the risk from the perspective that existing tenants were qualified and selected under the seller/landlord’s rental standards. Those standards may be less stringent than what you will utilize for tenant screening after close of escrow. The potential exists for possible material lease defaults by a tenant that have not yet been disclosed or that could occur before close of escrow.

A change in ownership of the property does not negate the tenant’s lease agreement and its terms and conditions. You must honor the tenant’s existing lease agreement. Until the lease term ends or there is a negotiated modification of a lease term or condition with consent of all parties, the tenant’s existing lease remains in effect.

You should require certain written information from the seller before a purchase contract is drafted. In writing a good purchase contract that protects your interest, you should include adequate contingency clauses for disclosures and inspections. The seller should provide information regarding occupancy, vacancy rates, current rents, the terms of all of leases, termination dates of existing leases, and options for lease extensions and renewals of existing tenants. The documentation could be material factors in your decision to own the property for the price you will offer. You would in theory have legal recourse against the seller if the seller provides false or misleading information or does not provide you required information material to a sale.

Contingency clauses for inspections should include a physical inspection of the exterior building and related structural and mechanical systems. Inspection of the interior of rental unit(s) should be scheduled early in the due diligence period to determine the general physical condition of the unit(s). Existing conditions should be noted for damage, repair, or replacement. A copy of the tenant’s move-in checklist can confirm the condition of the unit at time of move-in. You will want to determine that the condition of the rental unit, if damaged, will be covered by the tenant’s security deposit upon the tenant’s move-out.

Your offer should require the seller to confirm that there are no lawsuits, regulatory agency actions, or other claims pending against the property related to previous or current tenants not previously disclosed in writing. You should require a warranty that the seller has complied with federal and state lead laws and other potential contaminants. The seller should be required to provide copies of required disclosure documents for existing tenants under federal, state, and local laws and any inspection reports related to possible contaminants. The contract should require that the seller provide copies of documentation related to complaints by other tenants, neighbors, and government agencies regarding any tenant.

The most important documentation regarding existing tenants includes the lease agreements; rental rules and regulations or other policy statements issued by the seller to tenants; rent payment histories; and application forms, screening reports, and move-in checklists. If the property currently has a resident manager, the employment contract and associated lease agreement as well as instructions and policy statements related to management should be requested. You should also require copies of leases and related documents and verify that the leases agree with information previously provided and contain adequate legal clauses and no illegal ones.

To help avoid potential after-closing problems, you should require Estoppel Certificates and make execution by all tenants a contingency in the purchase offer. The Estoppel Certificates should include information regarding current rents and the amount of the security deposit currently held by the seller.

Since you will be responsible for the accounting and return of tenant security deposits upon existing tenant move-out, the purchase offer contract and any subsequent escrow instructions should explicitly state that you as the buyer are to be credited with security deposits at closing. The seller should also be required to provide a signed letter at close of escrow notifying the tenants that the property has been sold to the named buyer.

We bought a single family rental property last year with a tenant already in place. Now the tenant has moved out, and we’ve completed repairs and cleaning. However there has been no interest in the property since we posted the vacancy. It is now going on three weeks and we need to get this rented up soon. What are some suggestions that might help?

November, 2019

When a unit stays vacant for a long period of time, it can be due to a number of reasons. You might want to review your marketing strategies. Are you advertising on multiple sites and using a variety of media to advertise the vacancy? If your advertising isn’t reaching the right market segment, no one knows about your vacancy. You should make sure the rental listing is compliant with fair housing laws by focusing on the property features and amenities. The posting could include the property address or neighborhood location; the number of bedrooms and bathrooms; monthly rent amount; security deposit fee; move-in fees; pet policy; or other information that is relevant to a prospective renter in his decision making process. You may want to hold an open house to encourage prospects to visit the property.  The curb appeal of a property is critical to a positive first impression by a prospect. Make sure your property is clean and inviting both inside and out. Open house visitors could be asked to comment on what they liked or didn’t like about the property features and amenities.

Location of the rental property might be another factor in attracting rental prospects. The unit may have been acceptable to the former tenant but potential prospects may have different criteria. Property size and design layout may also be factors in renting decisions. The number of bedrooms and bathrooms can limit interest in a rental unit or exclude it from consideration. Rental policies for qualification and screening may be important to some potential tenants. Many renters have family pets and a no-pets policy for your property will limit the size of the applicant pool.

However, in general, the most common reason for a property not renting is the rent is too high. Assuming your vacancy posting was sufficiently descriptive and the property is located in a decent neighborhood, the fact that there has been no interest in your property, e.g., no calls, requests for showing, or applications is an indication that the property may be priced incorrectly. Setting a market rent or slightly below market rent could make the property more attractive to potential renters.

You should document your current policies, rents, deposits, and advertising efforts to serve as a baseline for future property management decisions. When you revise your policies and practices, be sure to document those changes, the business necessity for change and the response received from the revised advertising or policies. With time you can gain a better understanding of your local market and how it affects your business.

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Q2

What should I consider in buying income property?

A2

The right investment strategy is the key to making an informed investment decision. For those investors who want to buy and hold, buying a property that will be easy to rent may be an important factor in the buying decision.

Location is the most important factor in selecting a property to buy for income. When you invest in income property, you are actually investing in a neighborhood. To get good tenants you must own decent, safe and affordable housing in areas where people want to live. The employment opportunities, schools, transportation, and retail businesses in the local rental market are among the factors that can affect the amount of rent a tenant will be willing to pay to live in your property. That determines the price you can pay for a rental property.

Due diligence is required for an informed buying decision. Becoming too interested in a property without running the numbers and analyzing market data can result in overpaying for a property. Don’t underestimate the costs of repairs and costs of small maintenance issues when performing your cost analysis. You will need to include a cash reserve for vacancies, unexpected rental expenses, repairs, and replacements.

You should begin your opportunity search with a defined investment strategy. That in turn will guide you where to look and what to look for. Have your financing options in place so that when an opportunity arises, you will be ready to conduct due diligence, make an offer, and close in a timely manner.

Landlord-Tenant Responsibility for Repairs and Maintenance

November, 2019

 

Responsibility for rental property repairs and maintenance can be governed by state landlord-tenant statutes; state and local building and safety codes; the landlord’s lease agreement; and any oral or written promises (express or implied) made to the tenant regarding rental property conditions, amenities, services, or other rental offerings.

Landlord Responsibilities

Implied Warranty of Habitability

In almost all states, a landlord is required to provide housing that meets basic structural, health, and safety standards. Under the legal doctrine of implied warranty of habitability, landlords are responsible to maintain and repair the rental property during the lease term. The basis for the implied warranty comes from either local building codes which specify minimum requirements for essential services or widely held common-law beliefs of what constitutes decent housing. The source of the warranty determines the landlord’s responsibilities and the legal remedies available to the tenant. In states that use common law definitions for habitability, implied warranty is independent of building codes. Landlords may be responsible for repairs and maintenance under building codes and responsible for repairs and maintenance under the common law approach.

Since some states have more stringent requirements than others, it is important for a landlord to know the specific standards under his state’s law and to use those standards as a minimum standard for his properties to fulfill his legal responsibilities and protect his financial interests.

A tenant in most states cannot waive his rights to habitable housing even if the tenant is willing to accept sub-standard housing conditions.

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. The landlord is not required to correct conditions caused by misuse or inappropriate use of the premises by the tenant, the tenant’s family, or invited guests.

Fit and Habitable Housing

In most jurisdictions a landlord has a duty to:

  • Maintain the premises in a fit and habitable condition.
  • Maintain the common areas of buildings and grounds in safe and sanitary condition.
  • Comply with building, housing, health, and safety codes.
  • Keep all electrical, plumbing, heating, and ventilation systems and fixtures in good working order.
  • Maintain all appliances and equipment supplied or required to be supplied by the landlord.
  • 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.
  • 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.
  • Give notice as required by statute, unless it is an emergency, before entering a tenant’s unit, and enter only at reasonable times and in a reasonable manner.

Additional responsibilities to ensure habitable conditions may be imposed in some states or by local jurisdictions. Requirements can include climate-related responsibilities such as weather-proofing protections for heat, cold, water conditions, or severe weather; exterior lighting, security locks or other safety measures for protections against neighborhood conditions that pose a high crime risk; or environmental protections against hazards such as lead-based paint, mold, and asbestos building materials; and health and safety protections against pest infestations.

Tenant Rights and Responsibilities

Covenant of Quiet Enjoyment

A tenant has the right to quiet enjoyment of leased premises. The covenant of quiet enjoyment ensures the tenant that during his tenancy, his use and enjoyment of the dwelling unit will not be disturbed by others 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 landlord allows the premises to deteriorate causing the premises to become uninhabitable, the landlord has breached the tenant right to quiet enjoyment.

While the landlord has the responsibility to provide and maintain housing in a safe and sanitary condition, the tenant has the responsibility to ensure the property stays in clean condition and in good repair. The tenant is held responsible to notify the landlord of any health and safety issues in a timely manner. Failing to do so may make the tenant liable for additional damages that would not have occurred had the tenant reported the matter as soon as it was discovered.

Additionally, in most jurisdictions a tenant has a duty to:

  • Dispose of garbage, trash, and other waste in a safe and sanitary manner.
  • Keep the plumbing fixtures as clean as their condition permits.
  • Use electrical, plumbing, sanitary, heating, ventilating, air-conditioning, and other systems properly.
  • Comply with housing, health, and safety codes applicable to tenants.
  • Refrain from damaging the premises and keep guests from causing damage.
  • Maintain in good working order appliances supplied by the landlord.
  • Conduct himself in a manner that does not disturb any neighbors and require guests to do the same.
  • Permit landlord to enter the dwelling unit if the request is reasonable and proper notice is given.
  • Be responsible for items that break or are damaged by tenant misuse or negligence.

In summary, the landlord is held financially responsible to keep the rental premises habitable throughout the tenancy including repairs resulting from normal wear and tear or from actions of a third party such as vandalism. However if the tenant’s actions result in the rental premises becoming unfit, the tenant is held responsible and therefore financially responsible for repair costs.

Lease Agreement

The landlord’s lease agreement is the defining document of rental duties and responsibilities. If an issue arises, the first look back will be to the lease agreement for specifics of landlord and tenant duties and remedies for contract violations.

The issue of property maintenance and repair should always be clearly defined in the landlord-tenant lease agreement. The lease should incorporate the repair and maintenance issues that are specifically addressed by state landlord-tenant statutes and municipal codes as well as the landlord’s rental policy and practices for repairs and maintenance. There should be no discrepancy between landlord policy and practices and legal compliances.

Before setting his maintenance-repair policy and practices, a landlord’s due diligence in researching state landlord-tenant statutes and local code requirements will help determine what maintenance and repair responsibilities may be legally assigned to the tenant and what responsibilities can be assigned to the tenant as a practical matter.

Failure to adequately address these issues within the lease agreement can lead to erroneous assumptions as to which party is responsible for specific maintenance and repair issues. This can result in landlord-tenant conflicts and/or damages to the landlord’s property due to failure of the tenant to perform certain maintenance tasks. Without adequate definition of responsibilities, tenant failure to perform maintenance, for which the tenant can legally be made responsible and for which the landlord had assumed the tenant had been made responsible, could result in claims of non-habitability being filed against the landlord with government agencies or in court despite the fact that the tenant had accepted the responsibility. Although the landlord may prevail in defending against such claims, it can require significant time and money to deal with them.

Major Repairs and Maintenance

It is generally held that the responsibility for major maintenance of essential services, structural items, and common areas should be retained by the landlord. In some jurisdictions, courts have held that responsibility for major repairs and maintenance cannot be delegated to tenants due to concerns of tenants’ means and abilities to perform required repairs and maintenance. There is greater potential liability to the landlord regarding claims of injuries or damage to people and property for careless or faulty repair work. While in some states a landlord has a legal right to delegate major repairs, a landlord still retains the responsibility for providing habitable housing.

Minor Repairs and Maintenance

Repairing or replacing items that fail due to normal wear and tear is assumed by the landlord as the cost of being business.

Tenant Assignment of Maintenance Tasks

Although the lease agreement may hold the tenant responsible for certain maintenance and repair duties, the tenant may not have the expertise and experience to correctly complete the task. Transfer of maintenance responsibility to the tenant does not relieve the landlord of a duty to monitor the tenant’s work performance and quality standards and, as necessary, take control to ensure compliance with habitability standards. In general, allowing tenants to do repairs is not a good idea.

Appliance Repairs and Maintenance

Appliances furnished with the rental unit must be maintained by the landlord. If the rental unit is advertised as being equipped with named appliances and the lease agreement covers appliances furnished for use by a tenant during the lease term, a landlord is obligated to take appropriate action to repair or replace the failed appliance. A landlord does not have the option to decline the service request. It is the landlord’s option to decide whether the appliance should be repaired or replaced.

Tenant Damage

As a general rule, if the tenant or his family or guests cause damage to the rental property, either through misuse, inappropriate use, or negligence, the tenant is responsible to pay for repairs or replacement.

Tenant Unauthorized Repairs

The landlord may not be aware that the tenant is making repairs for which the tenant hasn’t the skills and experience to do them correctly and safely. A tenant may repair items on his own because the tenant caused damage and doesn’t want the landlord to find out about it. If tenant repairs are not properly done, it can cost more to correct the damage/repair than it would have cost for the work to have been done by a qualified vendor. Regular property inspections can help discover repair and maintenance issues that should be done or need to be redone.

Maintenance and Repair Documentation

It is important to maintain a detailed up-to-date maintenance/repair log which provides detailed information about tenant requests for maintenance service, repair and replacement work by the landlord or authorized vendor, results of property inspections, and corrective actions taken. Keeping a maintenance/repair log is evidence of the landlord’s compliance to provide safe and sanitary housing.

I’m considering using a property management company for my multi-family properties. How do I choose the right company?

November, 2019

You may want to start your search by talking with your fellow landlords who currently use property management companies. Are they willing to recommend their management company? How satisfied is the landlord with the company’s performance? Are the landlord’s tenants satisfied with the customer service and maintenance responses from the management company?

You will need to research property management companies in your area and prepare a list of potential companies to interview.

Before proceeding to interview each candidate management company, you should verify that the company is properly licensed and whether any complaints have been filed or disciplinary actions have been taken against the company. For each management company interview you should ask questions specific to these qualifying issues.

  • Property Type Qualified – Is the company qualified to manage the type of property you have? How many units do they manage? Although the number of units is one preliminary indication of the firm’s qualifications, the number of units managed is usually not more important than the firm managing properties of a type similar to yours.
  • Services Offerings – Consider each kind of service you want the company to perform for you. This will usually include: finding, screening, and selecting tenants; executing leases; holding and accounting for deposits; collecting rents; handling tenant complaints; performing property inspections; handling evictions; attending to tenant and property emergencies; supervising routine maintenance and repair; and providing financial accounting and reporting.
  • Staffing – Are the property managers licensed? Highly experienced? How many accounts are assigned to each manager? Will the company have adequate qualified staff if your properties are added to their current management load?
  • Management Contract – What are their management contract terms and conditions? Are the terms and conditions legal? How willing are they to negotiate? What are the costs of essential services? What other services are available; at what cost? What is the termination procedure? Can you delete a clause that gives them a listing if you decide to sell the property, as this is considered an unacceptable clause by many, perhaps most owners of rental properties?
  • Screening & Selection Procedures – How does the management company handle tenant screening? Will they make the tenant selection? How will they incorporate your business requirements for tenants into their practices?
  • Documentation – Legal and adequate documentation is extremely important for minimizing management problems and dealing with problems. You will want to obtain copies of all documentation used by a candidate manager and ensure they are legally compliant and in accord with your business policies.
  • Management issues – Does the company have adequate operational and management procedures in place? Does the company employ technology that results in efficient and cost-effective management and that provides adequate reporting? How will they work with you for your best business interests?
  • Tenant Services – How is maintenance and repair handled by the management company? How is tenant customer service handled regarding questions, concerns, and complaints? Is tenant service provided 24/7 or during business hours only? Does the management company use an online tenant portal for rents, deposits, fees collection, and general tenant services?

Keep in mind that the use of a property management company does not eliminate owner liabilities related to business ownership and operation. The property management company becomes the owner’s legal agent who essentially controls the rental investment through the management’s representation with tenants and governmental agencies, enforcement of rental policies, and handling of rents and deposits. The owner is liable for all acts performed by the owner’s agent in exercise of the authority given the agent by the owner.