Question             

I am a new landlord and want to have an attorney do an eviction for me. How should I go about finding such an attorney?

Answer

I will first mention a couple of way how not to select an attorney.  First, do not select an attorney based on the size of the Yellow Page ad, billboard, or newspaper advertisement.

Second, one cannot depend on any type of public referral service, even one operated by the local Bar Association. For example, Bar Association referral systems simply rotate through all members and the referral received is simply like playing Russian roulette. While all bar association members should be licensed attorneys who are in good standing, one isn’t necessarily referred to someone who is well versed in the specialty of interest. Any attorney can legally provide service on any legal matter even if they haven’t even thought of the subject since law school years earlier and have never been to court regarding the type of matter at hand. This can result in either inadequate advice or paying for their time to educate themselves.

In particular, most Web referral lists are particularly unreliable, as most such lists allow attorneys to list themselves for any service they wish to claim expertise in. There is absolutely no vetting of those who simply complete a Web form to add themselves to a list.

As for choosing any professional service – whether doctor, dentist, attorney, or accountant – the best way to pick an attorney is to get a referral from someone personally known to you and who you know has personally used an attorney for the particular type of matter for which you need one. Accordingly, I suggest you talk with other landlords who you know and/or a management company that appears to be competent (management of a large number of properties is often a good indication of competence) who use an attorney for their evictions and get a two or more names of attorneys who they use. Then, check out those attorneys regarding their time-in-practice and specialization.

Many attorneys do a lot of evictions. Some deal almost exclusively with evictions and other landlord-tenant matters. Such an attorney is likely to be much better than one whom, although a good attorney, does an eviction only occasionally. This is both because of more experience in eviction law and because such an attorney more likely has had experience with the different judges who handle evictions within a particular court jurisdiction, meaning the attorney knows better how to try a case before a particular judge, maybe which one to avoid, if possible, because the judge is pro-tenant.

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Some Foreclosure Issues – Part 2

In Part 1, we briefly discussed some issues related to foreclosures, including the effect on the foreclosed owner’s credit record and two possible ways to avoid completing a foreclosure; a short sale and a deed in lieu of foreclosure. In this Part 2 we will cover some issues related to delayed completion of the foreclosure process.

One must also be concerned regarding what happens to a property when the foreclosed owner moves out or otherwise relinquishes control of the property during the term of the foreclosure process, and the completion of the foreclosure process is delayed.

In such a case the property can become a “zombie” property. A foreclosed owner does himself/herself a disservice by not trying to avoid having a zombie property and not attempting to reverse a developing zombie property.

The owner must understand that he/she is still legally responsible for the foreclosed property during the period of the foreclosure process and is liable for ongoing costs such as:

Property taxes

HOA monthly fees and any violation penalties from failing to properly maintain the property

Fines for building code or municipal property maintenance violations

Judgments resulting from lawsuits for injuries occurring on the property

The owner can also be plagued by other problems such as mosquito-infested swimming pools, natural gas leaks, and squatters.

While mosquitos can result in complaints from neighbors and actions by municipal agencies and gas leaks can result in serious property damage and even injury if gas service is not formally discontinued, squatters can be even more troublesome. This is because squatters may engage in criminal and/or dangerous activities, some of which can be detrimental to the owner and/or lender. For example, a meth lab could result in explosion or fire damage or in chemical contamination, or quite likely both damage and contamination.

Accordingly, owners in foreclosure should continue both hazard and liability insurance during the foreclosure period, as certain events could result in lawsuits ending with liability for injury or death. There is a risk that the insurance company will cancel the existing policy if the owner hasn’t arranged for a rider covering a permanently vacant property (if such coverage is available). Cancellation of the policy will result in the lender obtaining hazard insurance. Such coverage will likely only provide hazard coverage equal to the loan value rather than replacement value and not provide liability coverage that protects the foreclosed owner. The policy premium, usually from a lender related company at a significantly higher premium, will be added to what the owner owes the lender.

There are possible other events that would significantly reduce the price at which the lender can later sell the property, potentially resulting in a larger deficiency judgment against the owner being awarded to the lender.

Lenders typically aren’t required to notify the property owner when completion of a foreclosure is significantly delayed. That’s problematic for the owner, as he/she might not realize that he is still responsible for a property while the title is still in his/her name.

Foreclosed owners may not even know that they are still owners, but the public records are very clear that they still own the property. Although they are unaware that they still own the property, they can still be held responsible for numerous types of expenses related to that property. Accordingly it is important that the owner in foreclosure not ignore a property during the foreclosure process.

While the lender will likely send various notices to the owner at the last provided address, the owner should not expect the lender to try to find him/her if the owner has moved during the foreclosure period and left no forwarding address. Even if the owner is easily found, the lender might not make the effort. This means that foreclosed owners shouldn’t just call it quits.

Owners must both stay in contact with the lender and personally follow the status of the foreclosure until it is completed. Owners can and should research public records via the county recorder’s website to monitor the home’s ownership status.

Foreclosed owners who have moved since the commencement of foreclosure should be proactive and make sure they’re going to get information from the lender and anybody else who might want to contact them regarding the foreclosure by providing the information directly to those parties.

Foreclosed owners should also put some effort into preventing the property from falling into disrepair, particularly regarding things visible from the outside such as landscaping. Even if not increasing the chance of a sale during the foreclosure period, certain maintenance may reduce chances of damages or theft of components when the property is obviously abandoned. This will in turn reduce the size of the potential judgment awarded the lender from a lender lawsuit.

Why do lenders decline to complete foreclosures? One reason is that because they’re not on title and don’t want to be.

For the lender, foreclosure usually isn’t making a profit; it’s about minimizing a loss. It’s hard to get the (investors) who own the notes excited about spending more money to execute a foreclosure. Lenders have to navigate the maze of rules and regulations in each state. This results in there being other reasons why a lender may drag its feet such as:

One lender may need to raise cash to meet regulatory guidelines, while another may have too much inventory of unsold real estate on its books.

Corporate cultures and high staff turnover contribute to slow decision-making.

Lenders don’t want to take on the legal and financial responsibilities of owning more properties. As soon as the foreclosure is completed, the lender immediately assumes liability and carrying costs, such as property taxes, casualty insurance, repairs and maintenance, and homeowner association dues.

Lenders are loath to write off losses on unpaid loans.

The process can take a year or longer. By then, the house might have little value. So the lender doesn’t complete the foreclosure, keeping the title in the owner’s hands and creating a zombie house.

By the time the lender is able to get close to having a foreclosure sale done and might actually be able to get the property, the house is worth almost nothing, and the lender may not want it, If the property is in disrepair, it will cost more to get it up to code and otherwise make it saleable than the lender will ever make off it.

Some cities have set up registries of foreclosed or abandoned properties or enacted local laws that require lenders to perform basic maintenance, but enforcement may be minimal or ineffective, leaving the homeowner with few options.

Lenders can take a very long time to complete the foreclosure process on some properties. The entire foreclosure process can take many months, even more than a year. Why do foreclosures take so long?

There are many factors, some the fault of the lender and others the fault of various non-lender parties.

First, delays that are controlled by the lender include not wanting to sell the property in the current market because there are a lot of foreclosures in the area.

Lenders don’t want to overwhelm the market in a particular area with numerous foreclosure sales because foreclosed properties generally sell for less than the current market value. By letting fewer properties go in a certain area at one time, the lender can sell each property for a little more.

Second, the lenders still have a large inventory of foreclosed properties. The lender must handle each property from the default to the foreclosure stage. There are only so many employees and hours in the day to process each and every property.

Third, sometimes properties just get ignored. The paperwork disappears; the lenders weren’t set up for the foreclosure crisis. In some cases, a property was originally funded by a bank or finance company that doesn’t exist anymore. If paperwork gets lost, it can take months or even years for the current lender to learn of the property.

Delays not controlled by the lender can include:

The Courts – Some states use a judicial process. The causes of delays in judicial foreclosure states include backlogged courts due to antiquated systems and judges’ schedules. Or when the foreclosed owner first appears in court for the scheduled hearing, the judge might say that the case is being moved to a different judge and that the earliest hearing date he has is months in the future.

Other Government Agencies – Government officials and agencies cause delays through temporary moratoriums, mandatory mediation sessions, and loan modification or assistance programs for which the owner or the property may not qualify after time has been wasted trying.

The Mortgage Servicers – The foreclosed loan may be serviced by a company unrelated to the lender, adding further to delay. The servicing company that processes monthly payments may be ill-equipped to handle the large volume of foreclosures.

Eventually, the county will receive a deed with the new owner’s name on it and the foreclosed owner will no longer appear in county records as owner of the property.

While foreclosed owners can’t force the lender or any other party that might be causing delays to speed up the foreclosure process on a property, foreclosed owners can and should monitor the process to make sure their names eventually come off the deeds.

Deposits & Fees, a Review – Part 1

The failure of some landlords to establish clear and fair systems of setting, collecting, and accounting for deposits and fees has contributed significantly to the negative landlord image. Especially grievous has been failure to refund deposit amounts not applied to unpaid rent and/or physical damages caused by the tenant. Unfair handling of deposits has resulted in legislation in most states over the past decades that now regulates almost every aspect of rental housing deposits.

Part 1 will discuss a variety of deposit and fee issues. Security deposits, most often a problem issue, will be covered in a future Part 2.

Fees vs. Deposits

A deposit by definition is refundable as long as the tenant adheres to the terms of his/her lease agreement. Some landlords try to get around statutory requirements for security deposit limits by assessing separate so-called non-refundable deposits for cleaning, pet damage, etc. Therefore a “non-refundable deposit” is nothing more than a “fee” and it may be considered unfair dealing to refer to something that is non-refundable as a “deposit.” In some states, landlords are specifically prohibited from charging any amount that is non-refundable except if it is rent. Furthermore, when a non-refundable “fee” is collected, the tenant will consider the money as being already forfeited and not worry about the matter for which the fee is collected. For example, if a “cleaning fee” is collected by the landlord, why should the tenant leave a clean unit at the end of the lease term? A judge will likely not allow deduction of cleaning costs from a security deposit if a cleaning fee was collected up front. For that reason and because fees collected up front are more of a burden to applicants than paying a little more rent each month, it is usually best to charge a higher rent rather than collect fees.

Holding Deposits

Sometimes, when the rental market is tight, applicants may offer a holding deposit to take the rental unit off the market until the applicant’s screening and verification is complete. Other times, a holding deposit is appropriate when an applicant has committed to the rental, but must make arrangements for the move-in funds.

In any case, the landlord should restrict the length of time he/she is willing to hold the rental, taking into account the size of the deposit and other qualifying information. If the landlord chooses to use a holding deposit arrangement, it is recommended to draw up a written agreement detailing what each party understands.

Some landlords routinely require that multiple applicants each provide a deposit to hold a rental unit until their application and credit is approved. As it should be, in most cases the deposit is returned if the applicant is denied and the deposit is applied against rent and security deposit if the applicant is successful. There is no legitimate reason for a landlord to keep the deposits from unsuccessful applicants and a judge would not likely allow such a thing to stand. Whatever the policy, be sure that it is clearly stated in the application form or other document that is signed by each applicant.

When the landlord holds the rental unit for a deposit from only one applicant, it is off the market and unavailable to other qualified prospective tenants who may have to be turned away. If the applicant later changes his/her mind, the property owner may have suffered financial harm in the form of a lost business opportunity. In such a case, the landlord is justified in retaining all or part of the holding deposit. However, be sure that this scenario is discussed in a signed agreement.

Verifications of qualifications can usually be done within a relatively short time utilizing today’s technology. Accordingly, there is little reason to collect any holding deposit until you have selected a qualified tenant who still wants the property.

In any case, landlords and agents should use good judgment and be fair in their holding deposit policy. An applicant whose holding deposit is retained without adequate justification may well have a cause of action for damages against the property owner. Accordingly, unreasonable retaining can create more trouble than it’s worth.

If you do collect a holding deposit, you should have a written agreement that unambiguously defines the terms of the deposit. Some possible terms are:

• Upon move-in, the Holding Deposit shall be applied to the first month’s rent.
• The Holding Deposit is not a security deposit, but is to compensate Landlord for damages suffered for holding a unit off the market in the event that applicant rescinds his/her agreement to rent the unit.
• If applicant decides not to rent the unit before being notified that his/her application has been verified and accepted, applicant is entitled to the full refund of Holding Deposit.
• If applicant’s application has been rejected, he/she is entitled to the full refund of the Holding Deposit.
• After applicant has been notified that his/her application has been verified and accepted and applicant rescinds the agreement to rent the unit for whatever reason, then the amount of damages to be deducted from his/her Holding Deposit shall be $________________ per day from the date he/she agreed to rent the unit (the day the unit was taken off the market) until the day he/she gives notice of his/her rescission plus an equal number of additional days to compensate for lost marketing time and additional advertising expenses incurred. If the landlord’s damages exceed the amount of the Holding Deposit, then he/she agrees to pay the difference within five calendar days of request.
• The applicant must acknowledge that calculating damages suffered for holding a unit off the market includes many variables which are sometimes difficult to identify precisely and therefore agrees that the formula presented above is a reasonable method of establishing such damages.
• In the event landlord re-rents the unit within the time frame for which deductions have been made from the Holding Deposit, then applicant shall be credited an amount equal to the daily rent stated above for each day that rent was collected for the unit.

Processing Fees

Landlords can charge a fee for processing each application and for the specific screening services purchased from vendors. How much can be charged depends upon several factors.

First, whether your state is one that regulates the amount by statute and, if so, what the law says.

Second, what amount do you think you could convince a Judge was “reasonable” if your state’s statutes either use that term in its law or if the state does not cover the issue at all.

Third, how much time will be spent on processing and verification? Both the amount of time and the amount paid to vendors will vary greatly, depending on how much verification you do. Obtaining more reports means more paid to vendors and more time spent on analysis. Verifying employment, references, and previous landlords takes a significant amount of time.

However, no matter how much work is involved, you must consider that the amount of money required up front by a tenant will affect the number of potential tenants who apply. This is particularly true regarding non-refundable fees.

Running all possible reports on two adults in an applicant family will require an unacceptable expenditure unless the costs-per-applicant is kept fairly low. Even if your state doesn’t regulate fees and you’re not worried about whether a Judge calls them reasonable, you won’t get nearly as many application submissions if you charge $40 for processing and try to make an additional $5 profit on each of four $5 vendor reports ($10 for each of the four reports), a total of $160 per family. Although an acceptable total fee will vary greatly, depending on the location and type of property, in most cases, you will have to be satisfied with a relatively small processing fee plus only the actual cost of vendor reports in order to avoid the fees seriously reducing the number of applicants.

Typical total fees might consist of a payment of a non-refundable application fee of $20 plus a non-refundable charge of $15 for credit report and eviction record check on each adult applicant. This probably means that you would be absorbing some costs if you also do criminal record checks. The total of $35 is, of course, required at the time that the application is submitted. This still totals $70 for two adults, a significant amount when they may also have to apply for other vacancies if not selected for yours.

Fees collected to run credit reports and other screening reports should be used only for those reports, including the time required to process them, and the fee should be returned to the applicant if reports are not run. It should be made clear to applicants that the fees are not to be considered a holding deposit.

Many landlords with high-end property and many property management companies hire a tenant screening service to check evictions, credit, employment, and/or references. Those costs usually range from $25 to $100 per person, depending mostly on what reports will be included. Landlords of low-end property will not usually receive applications if charging $100 per person for screening, so must usually do much of the work themselves.

Cleaning & Redecorating Deposits/Fees

Some states allow landlords to collect cleaning and/or decorating fees. Although they are often called deposits, that is improper because in almost all cases, such fees are nonrefundable. Such fees are not legal in other states.

Question

I need to know my recourse for drugs in the house. I found water pouring out under the house. I made emergency entry to a door that says “KEEP OUT.” Upon opening the door, there was a very strong smell of pot smoke. I had the overflowing toilet repaired and now I want to give notice. What form do I use for Oregon?

Answer

You do not say anything regarding the terms of the lease agreement. If the tenants are month-to-month, it would be simplest to give notice of termination in accordance with OR law and avoid possible issues that I’ll mention briefly below. Similarly, if they are on a fixed term lease that is nearing its end, it would be simplest to notify them that you will not be extending or renewing the lease.

I assume you know something about potential issues related to illegal drug use in rental units, including the matter of possible property forfeiture under federal or state laws if a landlord doesn’t deal with the problem when the landlord is aware of it. While personal use by a tenant would likely not become a major problem for the landlord, landlords need to realize that where there is use there may also be dealing and dealing is usually considered a more serious issue.  I won’t provide further discussion of this issue here.

However, use of pot has become a significantly more complicated issue in recent years, as states have passed laws providing for medical marijuana use. As you probably know, OR is one of the states now allowing medical marijuana use. Knowing whether a landlord can proceed against a tenant using pot may depend on being able to determine if the tenant (1) has the right to possess and use medical marijuana in accordance with state law, (2) is only using what has been purchased in accordance with state law, and (3) is not sharing it with other tenants of the property or visitors to the property, as well as other possible issues. Furthermore, in a state that allows medical pot or in a state that allows recreational use of pot, it is still a fact that use is illegal under federal law even though usually not prosecuted under the current Administration’s Attorney General against medical use under state laws.

Whenever accusing someone of anything, particularly of an illegal activity, one must be sure that he/she can prove the claim, preferably by having another disinterested party as a witness. Would you be able to testify as to how you know that it was pot smoke? If you hired an independent plumber to fix the toilet, did the plumber notice the pot odor?

Tenants may also claim that smoking pot is part of their religion and so they are protected by anti-discrimination laws. I’ve not heard of such a claim being given approval by any court.

If your lease agreement contains a prohibition against smoking inside the property, you could consider including that violation in addition to or instead of their use of possibly illegal drugs. If you need information regarding issues related to prohibition of smoking, let me know.

I am not an attorney and cannot give you legal advice. I can only mention procedures that I used or considered using during my many years’ experience as a landlord and as a licensed property manager. Because of the complexities of the pot smoking issue and the fact that there are vast differences in laws and opinions among different jurisdictions, I am unwilling to suggest what I would do if I myself ran into this particular situation.

If you are unable to wait until the end of the particular lease term or find another reason to terminate the lease other than considering it as illegal drug use without certainty that it is such, I advise you to consult a competent experienced attorney who specializes in representing landlords, is knowledgeable about OR pot laws, and, if possible, has knowledge regarding the judges in the court where any case would be held related to the matter if the tenants decided to fight termination of their lease.

You may have a responsibility to report illegal activity to the law enforcement agency of jurisdiction. Using an attorney when an illegal activity is a problem may also reduce the chances of retaliatory actions against the landlord by the tenants.

The forms available on the site that are specific to OR and may relate to terminating the lease include:

Notice of Breach of Specific Provisions of Written Lease with Right to Cure Residential Lease

Notice of Breach of Specific Provisions of Written Lease with No Right to Cure Residential Lease

Notice of Termination of Residential Lease

Question    

A current tenant has an unregistered car parked on the rental property. The tenant has been told numerous times to remove vehicle and failed to act. How can I get car removed?

Answer

What you can do and what you should do depends on a number of issues. First, what your lease says regarding the matter. Second what do statutes of the state where the property is located and local ordinances, or, if governed by a HOA, what do HOA documents say about the issue? Third, does “told” mean you served a written notice regarding it being a lease default and the notice period required by law has already passed or did you only give oral notice which possibly doesn’t even count?

Having an unregistered vehicle parked on private property in appropriate locations – e.g., in a designated parking area or in the driveway – would not usually in itself be a violation of a statute, ordinance, or even a HOA rule. Government only cares when an unregistered vehicle is on public streets and roads. If it’s up on blocks with wheels off for a long time, it might be a different matter, particularly regarding a local ordinance or HOA rule, although if only for a short time while repairs are underway, it might not.

Absent a statute, ordinance, or HOA rule, there would likely be nothing you could do if the issue is not adequately covered in the lease agreement. If it is so covered and you have given the written notice required by law regarding termination for a lease violation, then upon expiration of the required notice period (different for a “cure or quit” vs an “unconditional quit” notice) you could consider proceeding with eviction and this would likely get the tenant’s attention. If the tenant is on a month-to-month lease, you could simply terminate his lease with the required advance notice whether or not it is covered by the lease, statutes, ordinances, or HOA rules; assuming there is no statute or ordinance which somehow prevents termination for certain reasons or except for certain reasons.

Depending on what the lease says you may be able to instead have the vehicle removed in accordance with the procedure required for having a vehicle towed in the jurisdiction where the property is located. The exact procedure varies significantly among states and among local jurisdictions. For example, some jurisdictions require that a sign must have been posted regarding possible towing for a parking violation and the sign must provide the name and phone number of the towing company that will do any towing so that the vehicle owner can retrieve his vehicle.

You should be able to determine the specific rules regarding towing by contacting the municipal or county government offices or the office of the law enforcement agency having jurisdiction for the location of the property.

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Question

In CT what is time limit for objection by departing tenant to the withholding of all or part of the security deposit for cost of repairs beyond fair wear and tear and other fees?

Answer

Assuming a written lease agreement, the worst case theoretical time limit is probably 6 years, as that is the statute of limitations for filing a lawsuit regarding a written contract in CT. For an oral contract, the time is 3 years. However, for the amount involved in a part of a security deposit the landlord is probably relatively safe after a month or so because departed tenants are most likely to be concerned about a few hundred dollars at the time when they are moving into different rental housing because of the costs related to the move.

However, the risk would be higher if you failed to meet CT law in some way – e.g., failure to provide a detailed account of amounts deducted from the security deposit (plus accrued interest required for CT) and return of the balance to the ex-tenant within 30 days. CT law appears to provide for a penalty of money damages equal to double the deposit amount (including the interest) for this failure. This, of course, would provide more incentive for an ex-tenant who is aware of the law or his attorney to file a lawsuit. If the matter went to court, a judge might consider other landlord failures related to the deposit – e.g., failure to have kept the deposit in the required type of bank account and/or failure to properly calculate the interest owed the tenant.

Once again, however, assuming you did provide an adequate accounting in a timely manner for the amount of money involved and the possibility that the ex-tenant is not even aware of the above and other possible legal issues, the chances are that you will not hear from the ex-tenant, particularly if you provided adequately detailed accounting of each item deducted from the deposit, including invoices of items and, if some amount was returned it included the interest on the total deposit for time of tenancy. Finally, be sure to keep all documentation regarding the matter for a long time, even up to the 6 years statute of limitations period.

I am not an attorney and cannot provide legal advice, only my thoughts regarding the matter based on my experience as a landlord and property manager.

If you are sued and have little or no court experience, you should consider being represented by an experienced attorney who specializes in representing landlords and, if possible, has experience with the judge who would hear the case.

Some Foreclosure Issues – Part 1

Ownership of real estate can result in having a property foreclosed on, whether a personal residence or a rental property. Foreclosure of any property can result from a variety of events including loss of employment, catastrophic illness, or divorce. For rental properties, foreclosure can result from deterioration of the rental market due to changes in the local neighborhood or in the overall economy. The risk of foreclosure can be aggravated by government policies, as was the case for the most recent serious recession, an event from which the country is still not fully recovered.

A lot of owners of real estate lost their properties through foreclosure during the recent recession. While we can hope that the country will never again experience such an event, there is little certainty that future politicians will remember the reasons for the recent financial debacle or be willing to take the actions necessary to avoid a repeat. Accordingly, it is worthwhile to review some issues related to being an owner who is being foreclosed upon.

When financial conditions occur that will likely result in loss of a property to foreclosure, an owner may have to decide whether to go through a foreclosure or simply walking away and mailing the keys to the bank. The lending industry has even coined a term for the latter of those choices. It’s called jingle mail, because of those sets of keys that jingle around in their incoming mail.

Those who choose to mail the keys to the lender will still face the foreclosure process. And, as the lender’s foreclosure processing proceeds, an increasing number of delinquent payments, late fees, attorney fees and other costs will be layered onto the owner’s credit report because he/she is still technically the owner of the property, even if the keys were mailed to the lender.

For income properties that were originally purchased as such, loan documents will usually have clauses that allow the lender to take control of the property upon commencement of foreclosure and collect all rents. This prevents the owner from using the rents for personal expenses, to keep other real estate afloat, or other uses besides making payments, maintaining the property, or otherwise benefitting the foreclosing lender.

Furthermore, unless the property is in one of the very few states that have anti-deficiency statutes, all those pre-foreclosure costs plus various post-foreclosure costs will be included in the complaint likely filed by the lender in a lawsuit for collection of the loan principal balance amount plus all costs. From that total will be subtracted what the lender can recover from sale of the foreclosed property, potentially significantly less than the price paid for it if the market is low at the time of the sale.

Since, depending on all facts of the specific case, the judgment received by the lender can be quite large, the owner can end up with seizure of many of his/her remaining assets, garnishment of wages, and a seriously damaged credit rating for years to come. Filing bankruptcy may be the only solution to the problem but it is almost certainly only a partial solution for two reasons.

First, there is no guarantee that bankruptcy court will allow Chapter 7 bankruptcy whereby the debt is wiped out. The court may only approve a Chapter 13 bankruptcy whereby a plan is approved that requires payments to at least some creditors over a period of years.  Second, the borrower’s credit rating will be a problem for many years.

Accordingly, it is far better to attempt to avoid completion of a foreclosure. An owner in foreclosure should ask the lender if it will accept a short sale or accept a “deed in lieu foreclosure.”

A short sale or a deed in lieu of foreclosure is usually less toxic to your credit rating than a standard foreclosure because it is listed as “settled debt” on credit reports. However, you must get the lender’s approval to sell the home for less (or “short”) of what you owe, and that approval won’t always be granted because the lender takes the loss for the balance owed in this scenario.

In attempting to get approval for a short sale, hardship must be proven to the lender. Additionally, in some states the lender can still technically go after you following the sale to collect the difference, but generally does not because of the legal costs involved and the fact that there is usually little or nothing to be recovered. Many short-sale attempts fail and that puts you back to square one.

The deed in lieu of foreclosure approach is faster than a short sale with about the same possibility in some states of being pursued by the lender for the difference. However, in a deed in lieu of foreclosure, you are contacting the lender and officially stating that you can’t make the payments and believe foreclosure is imminent, so you are volunteering to legally handing over ownership to the bank. This saves the bank the time and expense of foreclosing on you.

However, while accepting a deed in lieu of foreclosure may avoid certain potential future losses for the lender, the lender could end up with certain liabilities that are avoided when completing a foreclosure. This risk may prevent the lender from considering a deed in lieu of foreclosure. Also, previous, current, and expected future market conditions and the financial condition of the borrower along with, if the property is in a state that allow deficiency judgments, lender expectations regarding collection of a deficiency judgment, will influence a lender because the lender doesn’t want to own more foreclosed properties than already held. Sometimes the desire to avoid owning more properties will result in a bank to consider renegotiating mortgage terms rather than adding yet another home to the already-bloated inventories of real estate owned by the bank if they are convinced the owner can solve his problems by having better loan terms.

An offer of a deed in lieu of foreclosure is most likely to be acceptable to a lender who was a seller who carried the financing at the time of sale or who is a lender not in first position, for example, one who provided second mortgage or deed of trust loan. This is particularly true if the lender that is in first position is about to foreclose or has already begun foreclosure on the senior loan. The reason is that the second position lender loses the entire amount owed him/her when the senior loan foreclosure is completed, but would have hope of recouping at least some of his/her loan if he/she becomes the owner. The junior lender would, of course, have to have permission of the senior lender in order to avoid the risk of that lender enforcing the acceleration clause that will be included in any loan made within the past few decades and bring the senior loan current.

Accordingly, there are numerous variables that affect whether the junior lender would try to salvage the loan amount, including the current and expected future values of the property, the current and future rental markets in the area, and whether the foreclosed owner has adequately maintained the property. In other words, the junior lender must decide whether or not it is best to write off his loan or to spend time and energy, as well as possible cash, in order to attempt a save.

Many owners file for bankruptcy after falling into foreclosure when the lender doesn’t consent to a short sale or deed in lieu of foreclosure. This is often because the problems associated with the subject property are not the only financial problems. Also, a bankruptcy may be necessary because the property doesn’t qualify under a state’s anti-deficiency statute or is in a state that has none.

Part 2 of this series will cover some issues related to delayed completion of the foreclosure process, delays being all too common for a variety of reasons.

Deciding If Refinancing Is Beneficial – Part 2

In Part 1 of this series we covered some basic issues regarding the decision of whether or not to refinance a property. We stated that Discussions can be divided into two parts – the short-term and the long-term. For the short-term, we’re usually most interested in knowing how long it takes for the reduced interest rate to pay the costs of refinancing, including the time and trouble required to obtain the new loan. This is particularly important when the property might be sold in the near future, as there is usually no advantage to reducing interest costs for less time than it takes to recoup the costs of refinancing. For the long-term, we’re usually more interested in knowing the effect over a period of many years. It can often be of benefit to pay some additional cost up front in order to obtain significant savings over a number of years.

In this article we’ll consider the basics of determining how long it takes for the reduced interest rate to repay the costs of refinancing.

In the “old days” when loans could be transferred to a buyer without the lender’s permission, it was usually advantageous to refinance at even a slightly lower interest rate when one planned to sell the property in the near future, particularly if (1) the remaining term of the existing loan was relatively short and/or (2) interest rates were expected to rise by the time the property might be sold. There was the added advantage that it would open the market for your property to those whose financial statement and/or credit rating was significantly worse than your own. This was because the buyer could assume the existing loan or buy the property subject to that loan without the lender’s permission, without qualifying himself, and at little or no cost. The increased value and marketability of a property with the longer term and/or lower interest rate was almost always significantly greater than the refinance costs.

Today, following various court decisions and legislation almost all loans have enforceable due-on-sale clauses. Thus, a buyer assuming an existing loan can expect that the lender will want to adjust the interest rate as well as require loan fees, qualification of the buyer, and maybe even require a new appraisal. In the case of certain commercial properties, the lender may even require at least a Phase 1 study. In other words, transferring an existing loan to the new buyer is sometimes just as hard and costly, or more so, as the buyer obtaining a new loan. Accordingly, the advantage of a lower rate existing loan is usually negligible or none at all.

So, now the only reason to refinance is because it will save you money during the period of ownership.

Unless interest rates have fallen quite substantially below the rate of your current loan, a first consideration is how long you expect to own the property. This is because you want the savings in interest paid during the remaining period of ownership to at least cover the costs of refinancing. In fact, you probably wouldn’t bother to refinance unless you were going to be significantly ahead of the game, since there is time and effort involved.

We will first look at the basic principles involved in determining the time required to pay the costs of refinancing a property without consideration for tax consequences.

As an example, let’s suppose that (1) the original principal balance was $100,000, (2) you have had your existing loan for nearly 10 years now, (3) it is a 30-year amortized loan, and (4) it has a fixed interest rate of 8 percent. Amortization calculations show that (1) the monthly payment of principal and interest (P & I) throughout the loan term is $733.77, or $8,805 annually, and (2) the principal balance after the 120 payment (12th month of 10th year) is approximately $87,724.

Now suppose that you can refinance the $87,724 loan balance at the end of 10 years for 30 years at a fixed interest rate of 7 percent. Amortization calculations show that the monthly payment of principal and interest (P&I) throughout the loan term is $583.64 or $7,004 annually.

It appears that you will be ahead of the game in one year or less if refinance costs are equal to or less than the difference between the $8,805 and $7,004, or $1,801.

Now, assume that you must pay a 1 point loan fee plus appraisal fee, title insurance premium, and miscellaneous other costs that bring the total refinance costs to approximately $2,000. Since the difference in payments for the first 12 months is $1,801, the monthly savings is $150. Thus, it appears that it will take less than 14 months to pay for the refinance costs. After that time, the average monthly savings of $150 must be yours, right?

Not really! A proper analysis must look separately at the principal and interest paid during that eleventh year for the old loan and the first year of the new loan. Amortization calculations show that if the loan were not refinanced, then for the entire eleventh year of the old loan the payment will consist of $1,854 in principal and $6,951 in interest. Calculations show that for the entire 1st year of the new loan the payment will consist of $892 in principal and $6,112 in interest. In both cases, principal repayment is the same as putting money in your own pocket because debt is being reduced, so it is really only the interest difference of only $839, or about $70 per month, that can be applied against the $2,000 cost of refinancing.

So, again assuming that this amount remains constant, it appears to take approximately 28.6 months to pay for the costs. In our example, we have assumed that the interest savings was the same each year. This is not really true because for both the old and new loans, the interest portion of the monthly payment decreases each month, but not at the same rate. It turns out for our case that the interest savings difference also decreases each month. While we could make exact calculations using the exact numbers for each month, we won’t bother to do so. We can instead use the fact that the annual interest savings decrease by about $100 per year, meaning that for the less than 3 years of interest, the average monthly savings is about $62. Accordingly, we see that it will take approximately 32 months’ worth of interest savings to pay the costs of refinancing.

Unfortunately, even this last analysis fails to tell the real story because we must also consider the income tax consequences, unless the borrower is in the zero marginal tax bracket, in which case the last analysis does apply.

As with everything in life that involves money, it is necessary to take income tax implications into consideration. The most basic thing is that something that can be deducted from taxable income doesn’t really cost as much as the check written to pay for it. This is certainly true for interest on loans secured by real estate, where interest is a deduction for not only income property, but also for a personal residence and even a vacation home.

Accordingly, whenever analyzing the benefit of a lower rate loan, you must consider the after-tax numbers rather than the amount of interest included in your payment. To varying degrees, other loan costs must also be analyzed for tax affects. We’ll take a look at some of the tax issues in Part 3.

Question

A partner and I purchased a 6-plex in Wisconsin a couple of years ago. The investment has lost a significant amount of money since its purchase, totaling almost $12,000 during the past 12 months. My partner has been unwilling to continue contributing his share of the negative cash flow and I’m unable to continue carrying the negative for much longer. There are 3 main problems. First, the variable rate loan interest rate, fixed for the first two years, just increased, meaning that the monthly payment will now increase and further increase our problems. Second, heating is provided by a central oil fueled system and oil prices have increased since we bought the property. Third, we can’t seem to keep the units fully rented. When does one call it quits and sell?

Answer

Unfortunately, investors, particularly new ones, often underestimate operating expenses and vacancy rates and fail to adequately take into account that a variable interest rate may significantly increase.

Whether or not a negative cash flow of the approximately $167 per month per unit calculated from your information is unusually bad depends on the terms of the purchase including the price paid, the loan to value ratio, the interest rate, the level of current rents and of market rents, and local vacancy rates for the type of property purchased. Many combinations of these items can result in significant negative cash flows, even more than you are experiencing, particularly during the first years of ownership.

Depending on the income levels and tax brackets of you and your partner, tax benefits of ownership, including depreciation, would often cover much of such a negative cash flow, assuming you each qualify to utilize your shares of the loss.

Regarding your specific 3 problems:

1. You should determine whether or not better financing is currently available and whether or not you can qualify for it. If the two of you have access to the necessary capital, you could also consider refinancing with a smaller loan with better terms by contributing additional capital of your own to the partnership or, possibly bringing in other partners to provide the capital.

2. While heating oil prices have varied greatly over the past decades (from around $1 during most of the 1990s to around $4 for the recent two-year period of 2012-13 in some areas), it should probably be assumed that prices are more likely to go up than to go down over the long-term future. Accordingly, your choices are to (a) raise rents to better cover the oil expense, (b) convert to a heating system that uses a cheaper energy source, and/or (c) convert to a system that allows individual tenants to pay for their own heating bills. The first option may not be possible in a competitive market and the other options may not be physically or economically feasible. Unfortunately, when the landlord pays energy costs most tenants see no reason to minimize usage, making option (c) the best solution if physically possible and economically feasible.

3. There are ways to minimize vacancies, including providing better quality for the price than the competition and doing better marketing. The former may require either lowering rents or adding amenities, but should be based on a comprehensive market survey. Either approach will, of course, cost money. Your options regarding the latter depend on what you are already doing and what other marketing tools are available in your area. Retaining existing good tenants should always be a priority, far ahead of increasing rents. The cost of a vacancy, including both fix-up expenses and loss of rents, is often never recovered even with reasonable increased rents.

Whether or not you should sell depends on a number of factors including (1) what price you can get, particularly whether you can sell for more than you owe or how much you can afford to put into a sale in order to close escrow, (2) how much higher you think the loan payments and oil costs might go, and (3) what your expectations are for future appreciation.

Finally, if the property cannot be sold because the current loan balance plus selling costs is greater than the value and funds to make up the difference are not available from the partners, there is also the option of letting the lender have the property. Of course, unless the loan is non-recourse (unlikely) or your particular state has an anti-deficiency statute that covers such properties (few if any states do) you will likely be at risk for a deficiency judgment in addition to credit record damage.

The bottom line is that you may have no options for avoiding catastrophe. However, I advise you and your partner to start by discussing the matter with the lender. You could see if they might be willing to take the property via a deed in lieu of foreclosure or if they have any flexibility regarding changing loan terms in ways that might help make the investment more viable for you and your partner. You should also discuss with your partner the possible implications of failing to meet his responsibility for his share of contributions needed to carry the negative cash flow. The implications include damage to credit records from a foreclosure and the likelihood of a lawsuit for the probable deficiency if the property is sold for sold after the lender forecloses for a price less than the loan principal balance plus ongoing interest and late charges plus the lender’s administrative and legal costs.

Question

I need a joint tenancy with right of survivorship form that I can file myself. Is it true that the two persons must take title at the time the property is purchased? I bought the property myself, so can I still change to joint tenancy?

Answer

There are no specific restrictions on transfer of title regarding when it can be done as long as the parties are legally competent to do so at the time the document is executed by the parties. However, the act can in itself have ramifications including some that might relate to timing. Possible legal and financial implications can relate to loan, income tax, and estate planning issues. As examples, transfers of an ownership interest may trigger the acceleration clause found in most loan documents, may impact future tax liabilities, and may have unintended consequences upon death of a party.

It is important that you use the correct type of deed form for what you wish to accomplish and that the form meets the requirements of both the state and, possibly, of the particular recording office in the jurisdiction where the property is located. One can obtain deed forms from various sources. Sometimes a free form can be obtained from a local title insurance company or escrow company, with forms from these sources probably more certain to be correct under current law than something purchased from a local office supply store. Under some circumstances it is best that the deed be drawn up by a qualified attorney.

As already mentioned above, just as important as the form, often more so, is whether joint tenancy is the proper form of ownership for a person’s situation. Joint tenancy is usually chosen for reasons related to estate planning but it is not always a substitute for other more sophisticated methods. Unless you have already done so, you should carefully study the subject yourself or consult an attorney.

Question

We are new landlords and want to know how much notice we have to give a tenant before we can enter the apartment for repairs.

Answer

It depends on which state the property is in, which you didn’t mention, and what the lease agreement might say about the issue. In general, reasons for landlord entry include: (1) to deal with an emergency, (2) to inspect the premises, (3) to make repairs, alterations and improvements, or (4) to show property to prospective tenants, buyers, or various owner agents. For non-emergency situations, the notice period is 24 hours in many states, or such longer period as specified in the lease. The period may be different for specific circumstances such as an initial move-out inspection. While the lease agreement cannot allow a period shorter than state law requires, if the lease agreement provides for a long period than does state law, the lease agreement prevails.