Should You Refinance Now?

So, your current rental property loan has an interest rate of 8 percent and you think that you can now refinance your property at 7 percent. How do you decide whether you should refinance now, taking into account loan costs, the income tax considerations, and the time it will take? If it isn’t advisable to refinance at 7 percent, how low of an interest rate is required before you do refinance?

Introduction                                        

Although there can be different factors involved in refinancing your personal residence compared to a rental property, the following analyses apply to either case for most issues.

Is it advantageous to refinance when rates drop by one-percent as many “experts” claim or is some lesser reduction enough or some greater reduction required?

There are several things to keep in mind when hearing that one-percent is the point at which to refinance. First, many of these experts work for mortgage companies and anticipate refinancing income when making the pronouncement. Second, many of those giving such advice do not take into account the income tax ramifications and those affect everyone differently. Third, knowing the rate drop alone is inadequate for making a decision.

Other factors that must affect the decision include the following:

• The cost of refinancing (including your own time).
• Expected future rates and costs.
• Do you want to pull out cash?
• How long you plan to own the property?
• Long-term goals and objectives, such as:
  • Do you want to maintain high leverage for maximum return on investment?
  • Are you planning to retire in fifteen years and want a free and clear property by then?
  • Your marginal income tax bracket (federal, state, and local), both in the near term and in the long term.

Our brief discussion will be divided into two parts – the short-term and the long-term. For short-term we’re most interested in knowing how long it takes for the reduced interest rate to pay the cost of refinancing. 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 long-term, we’re interested in knowing the effect over a longer period of many years.

In order to do analyses one must be able to determine the values of various loan parameters for various points in the lives of loans having various interest rates and terms. This can be done by direct calculation, by utilizing printed amortization tables, or by using various computer calculators. The last method is the easiest and calculators are available on many web sites.

Short-Term

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 significantly greater than the refinance costs.

Today, when almost all loans have enforceable due-on-sale clauses, 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 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.

Long-Term

If you plan to own the property a long time, the number of months required to pay the costs of refinancing is usually of only secondary importance. Whether it requires 13 months or 33 months is not really as important as what the savings will be over a period of many years.

Summary

The analyses you undertake prior to deciding whether or not to refinance can be simple or complex. The complexity of the analyses depends on many factors. In future articles we will first look further at the basic principles involved in determining the time required to pay the costs of refinancing a property and work through an example analysis to demonstrate those principles.

Additional Information

For additional discussions regarding a wide variety of real estate investing and management issues see our eCourses and Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1                                  

My rental house was broken-into while the tenant was on a 2-week away vacation. She then moved out afterwards, 6 months ahead of the specified time in signed lease contract. I agree with her moving out, but asked her to pay all the costs (rent, repair etc) until the time I find a new tenant.

I have asked her to report to police if it was a burglary case. However, she didn’t do so. My questions are:

1. Can the break-in be an excuse for a tenant’s early exit? Do I still have a right to collect the other 6 months due?

2. If she didn’t report the case to police, can I? If I do, does it affect my future leasing? Does landlord have to disclose this break-in history to future tenant although the house is in a very good city?

A1

Usually, a break-in of a rental home is not the responsibility of the landlord and does not give a tenant an excuse to break the lease or require the landlord to let the tenant terminate the lease early. However, this general theory can be significantly modified by terms of the lease agreement, actions of the landlord, and/or the laws of a particular state.

Tenants must provide their own insurance for their belongings and landlords should include a clause in the lease agreement wherein the tenant acknowledges the issue.

Damages to your property resulting from the break-in should be covered by the landlord’s insurance policy.

Although entirely possible, it would be unusual for a lease agreement to purposely modify the general theory.

Marketing of the rental unit in ways that promise security or even imply that the property is safe and secure can result in a landlord becoming liable for damages, losses, or injury to a tenant if the promised or implied security is not provided. Such liability can be incurred by the words in an advertisement or brochure, even by things stated orally by a landlord or manager.

Some states have specific laws regarding security that must be provided by the landlord. For example, CA requires that locks be provided for doors and windows, with those locks meeting state defined specifications. Failure to meet the requirements of such a law would both give the tenant a potential cause for breaking the lease without penalty and/or put the landlord at risk for liability for damages, losses, and/or injury resulting from the criminal acts of third parties.

Furthermore, a landlord usually has a responsibility to provide a certain degree of security even when not required by a specific law. For example, the premises must be capable of being reasonably secured. As examples, there should be deadbolt locks on exterior doors and windows and patio doors should be lockable, shrubs around windows and doors should not provide hiding places for those who might attempt to break in, there should be adequate exterior lighting, and locks should always be re-keyed between tenants.

You may have had the right to collect the rent for the remaining lease term, but whether or not you do can’t be determined without knowing exactly what was agreed to and whether the agreement was in writing or otherwise probable. If you allowed her to terminate her tenancy without a provable agreement regarding additional rent you may have waived that right. Absence of such a written agreement would leave it up to a judge if the tenant takes the matter to court. The fact that the tenant refused to report the break-in would allow you to question in court whether there had really been a break-in, but you may have lost that argument by agreeing to her termination.

However, many states require that the landlord minimize damages by making reasonable effort to re-lease the premises as soon as possible and will not allow the landlord to receive rent from the old tenant when a new tenant begins paying rent.

You can probably report the break-in yourself, but this may depend on how long ago it occurred. Whether you should consider disclosing the break-in depends on a number of factors including previous crime history and whether a reasonable person would expect future crimes. You may have some protection against claim of failing to disclose it, as you can take the position that there was no break-in because the tenant refused to report it.

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Q2

Where can I get a lease option agreement?

A2                                                                

While there are certainly many sources of lease option agreement forms available in books, in office supply stores, and on the Web, I would be very careful about using a generic format agreement. There are a number of potential problems that must be considered and it is unlikely you will find most available forms cover all issues that are important to your particular circumstances. A few of the issues are as follows:

1. Obligations regarding inspection issues – It is usually best to require that all inspections that are a contingency be performed prior to move-in as a tenant. However, since the tenant can fail to exercise the option for no reason, this doesn’t guarantee that an inspection issue won’t in the future be the cause of no-sale.

2. Maintenance obligations should always be clearly defined in any lease agreement, but it is much more important that all details be covered when doing a lease option. Concerns include who is responsible for (1) high cost replacements or repairs, e.g., heating/cooling equipment and (2) costs to repair of major damage caused by acts-of-nature not covered by insurance, particularly the often not covered hazards of floods and earthquakes. Another issue is what happens in the event of total property destruction.

3. There are numerous issues to consider in determining the option price as well as a number of related issues including the rent premium, the portion of rent to be credited toward purchase price, the security deposit, and the length of the option. It’s a matter of negotiating mutually acceptable terms that are legal under your state’s laws.

The bottom line is that one should seriously consider having a competent real estate attorney or a real estate broker with experience in lease options review the transaction documents. However, you must also consider all the issues yourself as they relate to your particular property and other circumstances and utilize the professionals as a check rather than depend on them to worry about every possible issue that might become important to your situation.

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Q3

We understand that new leases in California need to include Lead Disclosure and Pest Control Service language for buildings older than 1978. Our leases do not include either. But as far as we know, there are no known lead-based paint hazards. Also, the initial treatment for the pest control service started in 1988, way before some of the current tenants moved in and service continues monthly now. Do we still need to inform the tenants? If so, is it too late to do that now as an addendum to the lease and give the tenants the Lead Disclosure Pamphlet as well as a copy of the initial pest control contract?

A3

For many years now, federal law has required landlords of rental units built prior to 1978 to disclose to tenants any known lead-based paint or lead-based paint hazards in rental premises and to give them the EPA pamphlet titled “Protect Your Family From Lead in Your Home.” Both the landlord and the tenant must sign an EPA-approved form titled “Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards.” In most states, the disclosure information and form can be part of the lease agreement, but I’m not aware of any state requiring that and the disclosure and form are usually a separate document. However, you should check current CA law regarding the issue.

Owners who fail to comply with EPA regulations face penalties of up to $10,000 for each violation and treble damages if a tenant is injured by willful noncompliance.

Many states, including CA, have their own lead-based paint laws, with many states’ laws being more stringent than federal law.

I cannot advise you regarding whether you should now do the required lead-based paint disclosure if you didn’t do so before the current tenancies began. Although it may bring you into current compliance, it may also flag the fact that you violated the law when the tenants moved in, perhaps resulting in options for the current tenants. More detailed information than you provided would be required to make such a decision, including how many units, how old the tenancies, and how much is time left on the leases. I recommend that you consult a competent landlord-tenant law attorney regarding the matter.

California’s required notice of periodic pest control treatments is found in Cal. Civ. Code Section 1940.8. I believe it applies to all properties, not just to pre-1978 buildings. You should read the law yourself. You should also be aware that CA has potential disclosure requirements for about half-a-dozen other issues, most of which are found in Section 1940.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1

The carport of my rental house collapsed during a big wind storm and the tenant expects me to pay for repair of his two cars which were damaged. What are my responsibilities?

A1

There are several separate issues that I will discuss briefly.

In most states the landlord is responsible for repairing damages to the leased premises of the building which result from an act of God. If the premises are uninhabitable, the tenant has the right to immediately terminate his lease and find other housing. The landlord and tenant have the right to agree to a mutually agreeable plan to avoid termination. For example, the landlord might pay for hotel/motel accommodations if the repair is expected to occur within a short time because the cost for a week at a motel would be significantly less than a vacancy that might take one or more months to fill following completion of repairs.

If only part of the premises is unusable but the overall premises are still habitable, the landlord might have to reduce rent for the part that remains usable. For example, if a one bedroom of a 6-room house were unusable, the rent might be reduced by 10 or 15 percent. This would not usually be acceptable if the unusable room were the only bathroom or the kitchen. A judge would usually award a tenant a reduction if the matter went to court.

The discussion of the previous paragraph is probably relevant to your situation. The rent charged was almost certainly based partly on the availability of the carport. Accordingly, some reduction in rent should be made. The amount of reduction would depend on a variety of factors including the size of the living space and availability of on-site parking in spite of the damaged carport.

Regarding the damaged cars of the tenant, the landlord is generally not responsible for damage to property of a tenant that results from acts of God unless the tenant can show that the landlord’s negligence was somehow specifically responsible for the damage. For example, the carport did not survive a “not-unusual” storm because the landlord had built the structure himself and had not followed building codes. Tenants are responsible for providing their own insurance coverages for their own property. For your case, damages to the tenant’s cars should have been covered by the tenant’s auto policy and/or by a separate tenant insurance policy.

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Q2

I have a tenant who claims that 3 out of 4 jacks in the rental house don’t work. Is it my responsibility as the landlord to ensure they all work or does my responsibility end with ensuring jacks are in place in the house or the fact that at least one works? I actually don’t know if they’ve ever worked since he moved in.

A2

It may depend on clauses in the lease agreement and/or the adequacy of your move-in checklist. In general, problems regarding things that are not a habitability issue can be avoided by disclosing the problem with the selected applicant up front, listing the problem in the checklist, having a statement in the checklist that such discrepancies are accepted “as is,” and requiring that the tenant sign the checklist.

For problems unknown to the landlord and unacceptable to a tenant after discovery, it will depend on the nature of the problem. It may depend on either building codes in effect at the time the property was built and/or on what is usually expected by today’s standards. For example, building codes specify that there be a certain number of electrical outlets along each wall or outlets a certain distance apart along walls. Accordingly, all outlets should probably be operative. Landlords should consider that it is of benefit to them that all outlets work in order to reduce the use of extension cords which can create a potential fire danger. However, for a property built under an earlier less restrictive code or no code at all fewer outlets would have been required, fewer outlets would have likely be “grandfathered” and a landlord would not usually be expected to install additional ones.

Phone jacks are in a somewhat different category. Building codes do not require that there be very many jacks (perhaps only one) for even new construction and phone line extension cords do not normally create a fire hazard. There is no way to know whether a judge would require repair of one or more of the non-operational jacks or not unless you end up in court. A judge may take the position that a tenant is correct to assume that all installed jacks are operative, that modern living requires two or three jacks, or that one operating phone jack in a house is adequate.

The inoperative phone jack is a latent defect that the tenant had no practical way of knowing prior to having phone service turned on. Because of this fact, it may depend significantly on whether he reported the problem soon after moving in or not until months later. You would more likely be responsible for fixing it if the former than if the latter.

The cost of repairing an inoperative phone jack should be fairly minimal. The price will likely be much lower from an independent phone installer than from the phone company. I haven’t priced such a thing is some years now, but it would have cost $25-40 during the a decade ago using an independent. It would likely cost very little more to repair all three inoperative jacks than to repair only one. This is something that many nominally-priced handymen could handle and even many landlords would be capable of doing the repairs themselves.

Even if not legally required, one should consider the value of good landlord-tenant relations, i.e., keeping good tenants happy. If the tenant is month-to-month and you don’t care if the tenant stays, you could tell him/her that you will not repair it and that he/she is free to move in 30 days. You can then disclose the inoperative jack to future applicants who can decide not to rent the property if it matters to them. In this case you would be safer to replace cover plates of inoperative jacks with blank plates if the type. However, I would expect the cost of vacancy, including preparation, advertising, and downtime for rents would be much more costly than fixing all the jacks.

There are various other issues that could be considered, but those mentioned above must suffice. In deciding whether or not to repair the jack at your expense, you need to consider the nominal cost of repair compared to (1) the cost of going to court, (2) the very substantial cost of having a vacancy, and (3) at least the more likely cost of having an unhappy tenant.

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Q3

I want to put my Florida home up for sale. The home is occupied now by 4 tenants with a lease ending in 6 months.

What are the steps in notifying the tenants about the sale and showing of the home while occupied?

A3

First, the existing lease agreement is valid and enforceable until its expiration date.

Second, most lease agreements and the laws of most states require tenants to cooperate with any agents of the owner including real estate agents, appraisers, contractors, etc. If your lease does not contain such a clause, you need to check your state’s statutes. However, entry to the property must be preceded by a notice period as required in the lease agreement or by state law whichever is greater unless state law allows for a lesser time being specified in the lease. Although the period is 24 to 48 hours in most states, my reference says that Florida’s is only 12 hours. This would, however, be overridden by any longer period specified in the lease. However, the entry time must be at reasonable hours unless for an emergency. That is, they cannot require entry at lunchtime or midnight if not convenient for the tenants. As long as proper notice is provided by the landlord, the tenant cannot usually require that entry be made only when the tenant is present.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

Reasons (Excuses) for Not Doing a Thorough Tenant Screening

Without a doubt, the biggest headaches that a landlord can experience come from problem tenants. One bad tenant in a rental unit can cost much more than all costs associated with a typical vacancy. Inadequate tenant screening will likely result in having tenants who pay late, don’t pay at all, damage the property, and cause other problems for the landlord and/or neighboring tenants.

Of particular interest is the applicant’s history of credit use, evictions, and criminal activity. Past behavior tends to be indicative of future behavior, which is why the landlord must do adequate tenant screening. A prospective tenant that pays the majority of his or her bills late will likely pay the rent late.

With tenant screening, the landlord is helping himself to protect his investment. By doing everything he can in the first place to adequately screen applicants and select a good tenant, a landlord will save himself headaches, time, and money.

Knowing all this, why do landlords fail to follow through on tenant screenings? There are many reasons why landlords fail to perform adequate tenant screenings. As with many tasks in life, we too often find excuses for not doing what we know should be done.

The reason/excuse “I don’t have the time” is more likely “I don’t want to take the time.” Certainly there are multiple demands upon a landlord’s time, however, consider the adage “pay me now or pay me later.” Time spent upfront on screening and selection is more effective use of your time than later spending time battling bad tenant behaviors; processing evictions; and/or collecting judgments.

With today’s technologies, screenings can be conducted in less time than was possible even just a few years ago. If time is money, then the key is to use your minutes well. Determine your level of risk management, pick the screening options that make sense for your properties, pick the screening vendor that offers products to meet your needs and make the screening process a standard business practice. It is truly a mistake to short-cut your standard practices and thereby short-changes your business.

“It’s too complicated” is often used with “It takes too much time.” It may seem more difficult than it really is if you don’t understand the issues, processes, and products associated with tenant screening. Before finalizing on a vendor, ask customer service what to expect. What exactly do you need to do in order to become a tenant screening customer? Keep asking questions until you understand the requirements and timeframe to both sign up for the desired services and to conduct typical screenings.

“It costs too much” is another often used reason/excuse. If cash flow is in crisis, it is prudent to minimize cash expenditures. However, some screening items can be done by landlords themselves at the expense of only their time those items that require third-party vendors are available at relatively low cost. If money is the issue, poor decision making on tenant selection will only add to the cost.

It is important to differentiate between price and cost. What you pay now does have an immediate impact on your checkbook, but the cost of adequate screening is usually returned many fold by the benefits of a good tenancy.

“I don’t know how” or “I don’t know where to start” is a valid concern, but one that can easily be remedied. Landlord associations, landlord help Web sites, print publications, and seminars devoted to helping landlords succeed are numerous and varied. Landlord Web forums are great opportunities to learn from others. Fellow landlords freely share the wealth of their experiences and offer encouragement and advice.

There is no need to feel alone or that adequate screening cannot be accomplished. It will, however, take effort on your part to assess what you know, determine what you should know, and apply yourself to education. Of particular importance is becoming knowledgeable of all applicable federal, state, and local laws associated with tenant screening.

Take time to analyze what your true screening needs are. If you have made your process to be complicated in of itself you may want to step back and determine if you really need all of that. If you do get all of that, what are you going to do with it? Remember too that fair housing compliance will mean that each and every applicant is screened exactly the same. So any report you order for applicant A will need to be ordered for applicant B as well.

“I trust my gut instinct” is of course your prerogative, but are you really comfortable in turning over possession of your significant investment to just anyone who walks in off the street? If your gut is wrong, that’s exactly what you will be doing. Not to say your character assessment isn’t better than most others but why trust to luck. Most landlords would be reluctant to give the keys to their car to a passing stranger, even a nice stranger at that. Giving away the keys to a investment property even to a nice stranger is downright foolish.

 “I tried it once, but still got burned.” Although past experience does provide opportunity to teach us lessons, if we didn’t take the time to analyze what happened and adapt and adjust we haven’t learned. We probably learned the hard way more than once, but it took getting back in the saddle again to realize the benefits. No one size fits all in spite of what the label says. If you gave it your best shot, would do nothing different, and can handle inherent risks, then your decision is the decision that best fits your business.

“I just don’t want to be involved.” Landlords who might have this reason/excuse need to realize that they are involved by the fact that they own rental properties. Landlords who don’t want to be personally involved must pay others to perform the task. However, landlords must still first understand the issues, decide which screening items will be utilized, and make sure that screening and selection is performed in accordance with all applicable laws. Screening and selection should be undertaken as a critical task not just going through the motions.

“I leave screening up to my property manager” is another reason/excuse for those who utilize professional property managers. Many landlords are surprised to learn that they are responsible for the actions taken by the property manager, including those related to inadequate screening. A rental property owner can be held partially, even totally liable for tenant screening/selection actions by a property manager that violated fair housing laws. Accordingly, owners should understand fair housing and be familiar with policies and procedures utilized by their property managers.

Landlording is management of the real property and of real people who become tenants there. In the course of every day management, there are situational decisions to be made. Sometimes landlords, even those who understand the issues and have adequate screening and selection policies and procedures in place, must consider reducing their standards in order to fill a vacancy. This is usually due to market conditions that result in fewer applicants, with none meeting the landlord’s standard criteria. Perhaps the applicant is desperately in need of immediate housing and the information supplied on the application meets the stated criteria. The applicant may be willing to provide a large security deposit to compensate for bad screening information. Will it hurt to bypass standard procedures or ignore certain screening results and accept the applicant for tenancy? The real answer is “it depends.” However, as a rule, if you ignore good business practices you will regret it. Even if this applicant is the only applicant and you feel that your cash flow demands immediately filling the vacancy, stop and reconsider. The costs of installing a bad tenant are potentially significantly greater than allowing the vacancy to remain unfilled for a while longer.

A Condo Ownership Concern

Many residential properties are governed by a Home Owner Association (HOA). This can vary from an association that only maintains a small greenbelt area to an association that is responsible for every detail of a development including even the exterior walls and roofs of the individual units.

While we will use the term “condo” (short for condominium) in this article, the discussion also applies to any other community which has CC&Rs or other legal documentation which might be used to restrict rental of a unit. In addition to true condos, this will include subdivisions of any other names, whether within multi-unit buildings or separate buildings (e.g., townhouses and planned unit developments) or even single-family homes.

Investors who might consider buying condos for rentals, current owners of rental condos, and even owner-occupants all need to be concerned about current and future restrictions, even associations’ prohibitions, against renting units.

These restrictions are not limited to the current housing market. For many years now, newer condo developments have been providing for rental restrictions, even prohibitions. Developers have created more restrictive CC&Rs regarding rentals and other issues in an attempt to provide homeowners with more protection of property values. The rental issue can also impact the financing for a property within a development.

In addition to investors who originally purchased condos for rentals, owners who had purchased condos for personal residences are now renting their properties, or at least trying to do so because some reason required them to move from the area and they were unable to sell their properties in today’s bad housing market.

Increasing numbers of rental units, or the potential therefore, and changing financing requirements are motivating HOAs of developments which did not originally restrict rentals to consider limiting or reducing the number of units that are not owner-occupied in order to maintain or improve property values for owners, at least as perceived by the Directors and by the necessary majority of owners.

If CC&Rs or Bylaws don’t already limit rentals, they would have to be amended, typically a lengthy process. Changes to CC&Rs and Bylaws will require approval of owners of a certain percentage of units in the development as specified in the association documents and/or state law, often two-thirds and always at least one-half of unit owners.

Restrictions and even outright prohibition of leasing arise for two different reasons. First, there is a perception that tenants do not maintain a property or otherwise follows the rules and regulations as well as do owner-occupants. It is also assumed that unit owners who lease units are less concerned about maintaining their properties and less likely to pay association fees in a timely manner. Both issues, if and when true, potentially result in lower property values. Second, there is the fact that for developments having a large percentage of tenant occupied units, loans may be more costly or may be available from significantly fewer sources. The second reason is based on the fact that lenders are concerned about the first reason.

Investors can, of course, determine before purchasing a unit whether a particular development prohibits or otherwise restricts rental use. Even when there is no outright prohibition against rentals, there can be restrictions that critically impact rental. For example, some communities that allow leasing involve the association in the tenant approval process. If prospective tenants must be approved by the association, investors need to be concerned about two issues. First, the rental applicant needs to be informed of the matter and the fact that it might result in delay. Second, it is not unknown for associations to violate fair housing laws in their approval criteria and this can create liability for the owner.

However, even when there are no current restrictions on leasing, investors should consider certain factors that might affect rental use in the future, particularly the percentage of owners required to change CC&Rs. Owners who already rent their condos should remain alert for potential changes that will restrict rentals.

Owner Associations usually have considerable control over (1) the physical condition in which a property must be maintained (2) uses of a property, and (3) how a property can be modified. Even though many condo owners may think that rules and regulations are overly dictatorial, Courts have, in general, upheld them because the CC&Rs and Bylaws were agreed to when the unit was purchased. Disallowing rental of units within a community would not in itself violate fair housing laws and such restrictions have been upheld by courts in some states.

In addition to rental restrictions, borrowers may find it more difficult to obtain government backed financing. Two issues for discussion are (1) percentage of units that are owner-occupied and (2) percentage of units for which association fees and assessments are delinquent.

The Federal Housing Administration, Fannie Mae, and Freddie Mac for a long time had rules setting limits on the number of units in an association that can be leased. For example, with an FHA-insured mortgage the property had to be at least 50% owner-occupied.

The Federal Housing Administration recently changed its policy and will no longer approve mortgages on a loan-by-loan basis on condominium units. Now, the entire project must be cleared by the agency before it will insure a mortgage on a unit in that community. Part of the approval process is making sure the percentage of non-owner-occupied units doesn’t violate the rules. Similarly government run Fannie Mae and Freddie Mac have changed their requirements for condo financing.

New condo financing policies of Fannie and Freddie require the evaluation of the condo association and operations. This is in addition to the usual evaluation of the credit qualifications of the borrower. The federal agencies now have requirements pertaining to the association’s financial statements, status of dues and assessments receivable from residents, insurance, and even the ownership breakdown of the units in the development.

Lenders are also less likely to approve a purchase or refinance loan for a condo if a significant number of owners in the development are past due on their dues or assessments. In particular, if dues or assessments are 30 or more days delinquent for more than 15% of the units in a condo development, the entire development earns a “non-warrantable designation” and loans insured by the above government entities are unavailable.

Even loans that are not government insured may be less available and/or more costly because of similar rules.

These requirements have an impact on obtaining purchase loans by prospective buyers and refinancing by existing owners, because loans that can’t be purchased or guaranteed by Fannie or Freddie are both more costly and harder to get.

There are a number of ways associations may try to encourage owner-occupancy and reduce rentals including the following:

• Require that no person or entity can own more than two units,
• Require that in order to own a second unit or lot require that the buyer must live in the first one,
• Limit the number of times a unit or lot may be leased or the length of time that it may be leased during each calendar year,
• Have a cap on the percentage of units or lots that can be rented. If the cap has been met, the homeowner goes on a waiting list.
• Charge the owner a fee each time a tenant moves in or out.

In order to win the approval for increasing restrictions on leasing from the necessary number of owners, the association board will usually have to show some flexibility to both those who already rent their units and to those who can think of reasons why they may wish to or even need to rent their units in the future. Ways to reduce the impact of restrictions for certain classes of owners including the following exemptions:

• Allow limited periods of rental for military or other transfers in which the owner intends to return, with maximum flexibility being given to military owners who have the least control over their destinies.
• Allow owners to rent their units for a limited period during difficult economic times, with determination of what constitutes hardship and who interprets the rules being well defined.
• Grandfather those who were owners when the rules were changed.

Parties on opposite sides of the issue – owners who wish to increase restrictions and those who want to oppose restrictions – should speak with an attorney who specializes in homeowner association law. Those for restrictions will need to ensure that the association doesn’t violate state law and those against restrictions will want to protect their rights.

Those who are renting units or who consider that they may want to do so in the future should probably consider the fact that long-term values of their units may actually be enhanced by reasonable restrictions.

Additional Information

For additional discussions regarding Associations and many other subjects see our “Buying Income Property” and “Managing Income Property eCourses.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1

My tenant is managing rental properties from my duplex where I occupy the other unit, resulting in the tenants visiting my property to pay their rents. Can I prohibit this activity?

A1

It may depend upon how much of an irritation this really is, your lease agreement, and/or other issues. Running a business in a residence can be prohibited by the lease for a rental home, by zoning laws, by business licensing requirements, by the landlord’s insurance, and/or by CC&Rs.

Whether the tenant receives compensation for management service or only manages his own rentals or does it for free as a favor to a relative or friend could be an issue. Managing one’s own rentals or doing it as a favor would usually not be prohibited by either zoning laws or CC&Rs. However, operating a property management business could be prohibited by either or both and/or by your lease agreement. In addition to possible zoning laws restrictions, most cities require a business license for operating any business, no matter where located.

Furthermore, managing real estate for compensation requires being licensed as a real estate broker in most, perhaps all states. Real estate brokers are also subject to other rules, including office location or signage in some states. You being aware of violation of licensing laws would probably provide leverage against the tenant for mutually agreeable early lease termination.

However, keep in mind that, even if the tenant is not doing something that is illegal or affected by any of the previously listed items, the landlord can increase the rent upon renewal or refuse to renew the lease. If month-to-month, he can raise the rent or terminate the tenancy with the minimum notice required by the law of your state (30 days in most states).

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Q2

My ex-tenants left damages costing about half of their security deposit to repair and did not provide a forwarding address. What do I do regarding returning what is due the tenants and an accounting of the unreturned amount?

A2

Send a check and the accounting to the address where the tenants lived at your property using one of the special addressing services called “ancillary service endorsements” that give the Postal Service specific instructions for how to handle the mail if it is undeliverable as addressed. Ancillary service endorsements include four basic phrases that are printed on the address side of your envelope:

    Address Service Requested

    Return Service Requested

    Change Service Requested

    Forwarding Service Requested

Undeliverable mail is handled differently depending on the class of mail, the endorsement you use, and how recently the addressee has moved. Some of these actions have fees associated with them. See the USPS Web site (http://usps.com) for details of the types of endorsements as they apply to different classes of mail and for the fees, if any, charged for the services.

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Q3

I am a rental property owner who has used a property manager to manage my property for some time, but now the property manager is requesting my Social Security Number in order to release the rent receipts paid to him by the tenant. At first the property manager’s reason was the new software needed my Social Security Number. Now the reason is the rent receipts cannot be issued without my Social Security Number. Is this legal? My Social Security Number is sensitive personal information. Is there a legal basic for requesting my Social Security Number? Please comment.

A3

Either or both reasons given could be entirely legitimate. The new software used by the property manager (PM) may indeed need the SSN information in order to print even if the old software didn’t. Many such programs cannot print until all data fields have info in them. Furthermore, although often ignored by PMs, a PM is required by law to file 1099s with the IRS and with state taxing authorities showing the gross rents collected on your behalf if they total more than $600. Failure to provide 1099s regarding collected rents can be very costly to the PM if caught.

This is almost certainly the reason for the software requirement. Accordingly, using a phony SSN to make the software print is not a solution. The fact that the software needs your SSN should not mean that your SSN is provided to the tenants and it wouldn’t hurt to get a guarantee of this from the PM. However, some states have rental related income tax credits for tenants and the law requires that the tenant be provided a taxpayer ID of some kind associated with the landlord in order to claim the credit.

Your SSN was probably not needed in the past because the PM was not obeying one or more laws and he was using software that did not force him to do so.

This should not be an issue for owners who are holding title to rental properties in the name of a limited liability entity such as a LLC. All real estate investors should absolutely be doing this, with a separate LLC for each individual property. Each such entity can and should obtain an Employer Identification Number (EIN) and that is what should be provided to the PM, governments, tenants, and anyone else requiring such information. Doing this avoids the need to provide a social security number to anyone for any reason related to the rental properties other than to a lender if/when financing or refinancing a property.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1                                                         

I received a deposit to hold a unit for a new tenant. The tenant then called a few days before scheduled move-in date to tell me he had changed his mind and wanted his deposit back. What are my rights.

A1

That might depend on details not provided in your posting. Although you call the person a tenant, you do not explicitly state that the lease has been fully executed. Also, you are not specific regarding whether the deposit was a security deposit under terms of the lease or was actually a separate “holding deposit” for which there should have some other written agreement.

If you and the person executed a written lease agreement, you can hold him to the terms of the lease. However, if the person chooses to break the lease, you can only hold him responsible for the rent until a new tenant begins paying rent and you must exert reasonable effort toward finding a new tenant. You can probably also hold the person responsible for paying extra expenses related to again having to market the property, including advertising and leasing commissions.

If it is an oral lease and there is no written lease agreement, it would be your word against his as to the exact terms of said agreement unless there were witnesses on one or both sides.

If the deposit was a holding deposit you must abide by the terms of the holding deposit agreement. Again, if there was no such written agreement, it could be difficult to prove the terms of the deal.

For additional discussion of the issues, please provide more details related to the issues mentioned above.

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Q2

I bought a 4-plex three years ago. It operated from the get-go with a significant negative cash flow that was not a problem until last month when I lost my job. Any ideas what I can do to avoid foreclosure? What are the ramifications of being foreclosed?

A2

Unfortunately, there may not be a simple solution. Unless you put a substantial amount down on the property, unlikely considering that you have a significant negative cash flow, you won’t be able to refinance at a lower interest rate even if you still had your job because it would not likely appraise high enough in today’s economy and you might not now qualify for a loan with tougher qualifying criteria than existed a few years ago.

There are many ramifications from suffering a foreclosure. In addition to long-term damage to your credit rating, you may have to pay federal and state income tax on the amount of the loan that is “forgiven” upon foreclosure which the government usually considers to be income. Depending on both the size of the loan and your marginal tax bracket in the year of foreclosure, the tax could be substantial. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence only and does not apply to rentals.

Of further concern is that, unless you live in one of the few states that have anti-deficiency statutes that might apply to this type of  property, if the lender sells the property for less than the loan amount (plus late charges, attorney fees, and other costs) you may be sued for the amount of the lender’s loss.

Your best bet is to find new employment in order to avoid foreclosure and to do so as soon as possible in order to minimize damage to your credit rating and the other potential problems. Another possibility is to see if the lender is willing to reduce the monthly payments, but this would itself be easier if you are employed.

Yet another idea is to see if you can find one or more relatives and/or friends interested in becoming a partner, with the investor(s) putting in capital as needed to keep the property afloat and his share of the property depending on the amount of capital contributed. You do, however, have to be careful not to trigger any alienation clause in your note by transferring an interest without the lender’s permission. I would expect that the lender might be willing to allow you to take on a partner since most lenders currently have more than enough owned properties from foreclosures and will not likely want to own your property if it can be avoided.

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Q3

I have a 27 unit building with a common lobby entrance. A few weeks ago, on a Saturday when the manager was away from the property for much of the day, a tenant’s key became stuck in the lock on that entrance door, apparently rendering the lock inoperative. The tenant removed the lock, but was still unable to remove his key. The tenant then left the lock out because no one would have been able to gain access unless the door was left propped open. Upon return, the manager had a locksmith make a Sunday service call to deal with the problem and he installed a new lock. I sent the tenant a bill for the $258 service call because it was my opinion that my handyman could have repaired the old lock on Monday if given the chance to do so. The tenant claims that inadequate maintenance was the cause of the problem, making it my problem.

A3

Based on my understanding of the matter, there are at least a couple of reasons why the tenant should not be considered liable for the locksmith bill.

First, I think that your manager did the right thing by immediately calling for the locksmith when she was not able to herself fix the lock. Not having a lockable entry door for a couple of days/nights would have left you exposed to serious liability had it resulted in theft of a tenant’s property or injury to a tenant by someone who would not normally have had access to the building.

Second, it was probably not the tenant’s fault that his key could not be removed from the lock. It is likely that the problem was indeed due to the lock being old and worn or not having adequate preventive maintenance. The fact that it cost $258 rather than a few dollars for regular maintenance or less than a hundred dollars for your handyman to have replaced the lock at an earlier date was not the tenant’s fault. I think it likely that a judge would look at it the same way

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

Just Say No

In filling vacancies, there are times when the best business decision you can make is to say NO. Saying “no” can be a difficult decision for some landlords either because they desperately need to fill the vacancy or they get caught in the emotion of the applicant’s situation.

There are also those landlords who believe they cannot say no without risking a violation of fair housing laws. While it is true that fair housing laws offer protection to certain classes of individuals, it is not true that you cannot legally discriminate.

As the landlord, you should set your rental policies based on sound business criteria. Those business criteria, if developed and implemented correctly, give you the right to say no to unqualified applicants.

The key is to understand that filling vacancies is a business decision. The decision you make will either make you money or cost you money. Is this applicant worth the risk? You need to make sure your no is reasonable and justifiable. If you say no to everyone you won’t be able to fill your vacancy, whereas, if you say yes with even the slightest doubt, you need to be sure you can accept the risk.

Screening is a way to evaluate the degree of risk that the applicant represents. Too often we think that screening only starts with ordering a credit report. However, with the first response to your marketing efforts, you make the first decision, yes or no. The caller asks if pets are allowed. Your rental policy says no. The open house visitor has a rent budget of $500. Your unit at fair market rent is $650. You say no. The applicant hands you an application that is obviously incomplete. Should you accept it? The business decision should say no.

What are the reasons you can legally reject an applicant? It is usually not illegal to reject an applicant under the following circumstances:

Personal Identification – If the applicant cannot furnish proof of his identity, do not accept his application. It is reasonable to require that an applicant furnish at least two forms of personal identification, with one being a current photo identification document.

Social Security Number – While it may be possible to conduct various tenant screenings without the applicant’s Social Security number, do not make exceptions. Require that all applicants furnish a Social Security number or other taxpayer identification number in order to run applicable screenings.

Refusal to Sign Application or Consent – While unlikely that an individual applying for housing will refuse to sign the application, it can happen. If the individual signs the application, but refuses to sign the consent for screening, you probably can conduct screenings, but why take the risk that later the applicant/tenant contests your right to gather information. If the applicant refuses permission for screening, you should say no.

False or Misleading Information – Your rental policies should contain a statement that any false information given or discovered during the course of application and screening would be grounds for rejection of the application. If you determine that the applicant has provided false or misleading information on his application or through his references you should say no.

Cannot Meet Deposit Requirements – If the applicant’s income is apparently sufficient, but he requests an accommodation of the deposit amount or a deferred deposit payment schedule, you may want to rethink this applicant. If you say yes to this, be very sure it is a business decision and not a preferential or discriminatory reason. The best decision is to say no if the deposit amounts cannot be made before lease signing.

Is Not of Legal Age – You cannot have a valid lease agreement if your applicant is not of legal age or considered an emancipated minor according to your state’s law.

Exceeding Occupancy Limits – If there is a valid reason to limit occupancy, such as for health and safety reasons or due to limitations of the unit’s mechanical systems, you can say no. However, be careful that your occupancy limit can be supported.

No Employment – You want the applicant to be able to meet rent payments. Without employment or some other verifiable source of income, there is no reason to assume the applicant can make the rent.

Insufficient Income – You want a tenant who has enough income to pay the rent and his other living expenses.

Cannot Meet Terms of Lease – Your rental policies state your lease terms and conditions. You should also re-state them when you accept an application. If the applicant requests negotiation of certain terms, or cannot meet the lease terms, think again of the risk and claims of possible discrimination if you alter such terms.

Insufficient Rental History – Are you willing to accept first time renters, students and others with a limited history, or former homeowners now re-entering the market? If they don’t meet the requirements of your policies, say no.

Guarantor or Co-signer – A co-signer or other conditional acceptance requires more time, effort and money to process and monitor throughout the tenancy. Do you really want to offer this option? Once the policy is set, stick to it.

Bad Landlord References – Did the applicant gave sufficient notice before moving and generally adhere to the terms of the lease? Would they rent to this individual again? Rent payment history, property damage, and whether full deposit was returned provide clues for future rental performance. If the landlord who knew your applicant doesn’t give a positive endorsement, you should say no.

Bad Employment References – If possible, ask the supervisor if the applicant is considered a good employee. Is there a history of tardiness? Behaviors at the work place can also be indicative of actions taken outside of work.

Bad Credit History – Credit management history is clearly shown in credit reports. With a history of late payments, missed payments, or debt obligations that burden the ability of the applicant to meet current or future debt, you should say no. You should say no if public records indicate the individual has uncollected items, liens, judgments.

Credit Score – While there is no magic number, there is indeed a range that indicates potential trouble. Become familiar with credit scoring models and set your rental policies so that the minimum acceptable score is consistent with the location and condition of your property.

Evictions – Most landlords do not want a tenant who has been evicted. Some landlords think of this condition as a make or break deciding factor. Other landlords place less of an emphasis on evictions if the eviction occurred in the distant past.

Bankruptcy – You have the right to say no to an applicant who has filed bankruptcy. However remember that once discharged, applicants cannot file again for a certain number of years, the number depending on the chapter filed. Past problems may have taught the applicant a valuable lesson.

Criminal Record – A criminal conviction can be reason to say no if the nature of the crime presents a future threat to the safety of others or damage to property. Ex-convicts are not a protected class with one exception – individuals with convictions for past drug use. Past drug addiction is considered a disability under fair housing laws. Individuals with convictions for sale or manufacture of drugs or who currently use illegal substances are not protected under fair housing laws.

Sex Offender – Megan’s Law requires persons convicted of violent sexual offenses and sexual offenses against children to register with law enforcement officials in the state where the person lives. While most states have online databases where such information can be searched by the general public, you should be aware that in some states there are restrictions on whether this information can be used to deny rental housing. If your state’s law does not prohibit such actions and you are reasonably certain that the person poses a current, direct threat to your other tenants, you can say no. You may also wish to consult a competent attorney regarding the matter.

Pets – If your rental policy is “no pets,” then you can say no to an applicant who also wants his dog to move in. However, be aware that in the case of service animals you must accommodate the tenant’s request.

Smoking – Since smokers are not a protected class, you may prohibit smoking in your unit or on your property.

Has Water-Filled Furniture – If your rental policies say no water-beds, then say no to applicants who have one.

Has Home-Based Business – Many individuals are self-employed and do work from home. Be sure you know your local regulations regarding zoning, know any HOA restrictions, and understand related insurance issues before saying yes.

As a final note, do not assume you can legally discriminate for any reason that is not mentioned by name in federal, state, or local fair housing laws. Courts in some states have ruled that discrimination on the basis of personal characteristics constitutes arbitrary discrimination and is illegal. You may think you can say no to an applicant because of his occupation (e.g. attorney). If the applicant was otherwise qualified, you could find yourself defending a fair housing claim based on your arbitrary decision not to rent to attorneys. Be very thorough in your evaluation of applicants and base any decision on facts that can be supported based on business principles.

If there is a business reason to say no, you can legally say no. However do not use a business excuse to disguise illegal discrimination.

Single-Member LLC Risk

With every state having adopted the LLC as a limited liability business entity over the past couple of decades, the LLC has become the entity of choice not only for operating a business but also for ownership of real estate. However, although once considered a nearly bullet proof shield against lawsuit judgments reaching personal assets of business and real property owners, LLCs, particularly single-member LLCs, are coming under attack in courts around the country.

The primary advantage of an LLC is that owners are not personally liable for claims against the LLC, whereas, for sole proprietorships and partnerships all personal assets of a proprietor or general partners are at risk when a claim is made against the business. For a rental property owned by individuals or by a partnership (either general or limited types), a substantial judgment obtained by a tenant of one property can potentially result in loss of that particular property, all other real property, and all other assets of individual owners or general partners.

However, when each property is owned by a separate LLC, a judgment in favor of a tenant of one property may result in loss of that property but the tenant cannot attack the personal assets such as homes, bank and brokerage accounts, or other rental properties or businesses held by other LLCs.

Of further benefit is the fact that the statutes of most states do not allow a judgment creditor to obtain any ownership or operational control over a LLC. The creditor only obtains a “charging order” against the interests of the member. A charging order is a court order granting the creditor the right to garnish distribution from the LLC to the member. Accordingly, a member who does not depend on cash flow from the LLC can indefinitely delay distributions. This can force the creditor to agree to a settlement acceptable to the member.

Charging orders were carried over to LLCs from partnership law where they originated for the purpose of preventing the interest of other partners being jeopardized by a judgment against one partner. However, in recent years some courts in the country have taken the position that for a single-member LLC there are no partners to protect and single-member LLCs have lost some protection.

Example 1 (Littriello v. United States) – Frank Littriello was the sole owner of several Kentucky limited LLCs that did not make elections on Forms 8832 to be treated as corporations, and therefore were treated as disregarded entities by the IRS, pursuant to the default classifications under Treasury Regulations. The IRS assessed employment taxes on the LLCs, which flowed up to Littriello as the sole owner of the disregarded entities. The IRS won this one when the Sixth Circuit Court in 2007 affirmed the WD Kentucky District Court’s 2005 holding.

Example 2 (Olmstead v. Federal Trade Commission) – More recently (June 2010), the Florida Supreme Court issued a ruling for a $10 million judgment against Shawn and Judy Olmstead, allowing their creditors access to all their assets held in single-member LLCs.

Note that this case might have been decided differently in a different state. Some states allow foreclosure of an LLC interest, others provide that a charging order is the exclusive remedy of a creditor, and yet others are silent on the issue. The court reasoned that because the Florida LLC charging order statute does not expressly provide that a charging order is the exclusive remedy (general and limited partnership statutes do provide so), the LLC charging order is not the exclusive remedy and, thus, a creditor may levy on the LLC interest.

There are some ways to protect single-member LLC assets.

• Don’t commit negligence, fraud, or illegal acts – this will avoid liabilities whether or not the assets are protected.
• Follow the first advice item as well as possible, maintain high ethical standards, show respect and kindness to all, avoid careless decision making, and don’t be greedy.
• Understand the LLC statutes of your specific state.
• Form and operate your LLCs legally and in accordance with the operating agreements.
• Add another member to any single-member LLCs.
• Obtain business liability insurance and an umbrella policy having limits as high as possible.

An LLC is the only business structure that can choose how it wants to be taxed. However, the LLC must make a choice by filing the appropriate election with the IRS (Form 8831) unless the default entity is the entity of choice. Otherwise, the IRS will automatically assign a default tax status, based on the number of owners – a partnership if two or more owners or “single-member disregarded” status if only one owner (member). The latter can mean that the LLC is no different from a sole proprietorship as far as the IRS is concerned.

While, for an operating business the problem can be avoided by operating as either an S Corporation or C Corporation, with one of these actually often being tax-wise advantageous for an “active” business, an LLC taxed as a partnership is usually tax-wise preferable for the “passive” business of owning rental properties.

In order to maximize the protection provided by LLCs, there are other things that must be kept in mind no matter how many members. It is very important that individual LLCs be operated as separate independent entities, separate from one another and separate from the owner. Important issues include the following:

• Follow the operating agreement regarding any required meetings and other formalities and be sure to generate related documentation.
• Maintain separate LLC checking and other bank accounts rather than use your personal accounts for the property, preferably separate accounts for each LLC.
• Avoid commingling of personal assets with LLC assets and commingling of one LLC’s assets with another LLC’s. Do not write checks between LLCs unless as formal documented loans. Never pay for personal expenses from a LLC checking account.
• Maintain adequate reserve funds within each LLC to minimize the risk of commingling.
• Maintain utility, vendor, and other accounts in the name of the individual LLCs.
• File a fictitious name statement if you want to do business under a name other than that of the LLC.
• Always properly document any changes in ownership or management of the LLC.
• Use LLC-specific letterheads, envelopes, tenant notices, etc.
• File LLC tax returns.
• Execute documents on behalf of the LLC rather than as an individual.

LLCs still provide the best asset protection for most real estate investors. However, you should stay alert for future changes in LLC law and tax law, including law arising from statutes, regulations, and court decisions.

Additional Information

For additional discussions regarding LLCs in considerably more detail than is provided by this series see our “Buying Income Property” and “Managing Income Property eCourses.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1

I have 3 full-time student applicants for my rental property. They currently have no jobs but parents are co-signing for them. Question: Do I have to have co-signers sign the rental agreement as well? I am thinking I should but I am not really sure about it.

A1

What the parents should sign depends on what status you wish them to have. That is, do you want them to be co-tenants, with all the rights associated with tenancy, or do you want them to only guarantee the lease. If they become co-tenants, you would have to evict both the students and the parents and there are potential significant disadvantages to having to do this. Whether titled “co-signer agreement” or “guaranty agreement” is not important. What is important is what the agreement says.

There are a number of issues important to an adequate guaranty agreement, including that (1) it is clear the co-signers/guarantors are not being given any tenancy rights, (2) the co-signers/guarantors are made responsible for all financial aspects of the lease including both rents and damages, (3) it allows the landlord to proceed for collection directly from the co-signers/guarantors without pursuing the tenants, (4) both husband and wife of a married couple be required to execute the guarantee, and (5) when co-signers/guarantors are not able to appear in person to prove identity, their signatures be notarized. I always used a separate guaranty document, but the guaranty could be within the lease agreement as long as it is properly worded.

You should consider consulting a competent landlord-tenant law attorney for your state the first time, so that you have an adequate agreement that is fully consistent with the laws of your specific state.

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Q2

I recently purchased a house and when I put my “for rent” sign in the yard was quickly called by the HOA informing me that rentals are not allowed by the HOA. I checked and sure enough there is a declaration in their bylaws that describes the ban on rental property. Is this legal? Any ideas on what I can do about this? I will be calling a lawyer tomorrow for his opinion, but I was wondering if anybody else has had this problem.

A2                                                                

The basic framework of an association is set up through the CC&Rs and the Bylaws. These documents usually give the board the authority to draft, implement, and enforce any other rules that will preserve the values of the units, enhance the quality of life for residents of the community, or improve their convenience or safety.

Even though owners may think that such restrictions are overly dictatorial, courts have, in general, upheld them because the CC&Rs and Bylaws were agreed to when the unit was purchased.

If buying a property that is governed by an association, one must always be sure to make approval of various association documents a contingency. This should include the CC&Rs, Bylaws, the Rules & Regulations, the current Annual Budget, and other financial information, as well as disclosures regarding any pending or expected litigation.

Some states have laws that require that certain information (typically including the items listed above) be provided to a buyer even if not required by the purchase contract. These states would also likely make real estate agents responsible for ensuring that buyers are provided such information. This may be an area where you have some recourse.

If you were not provided information required by law you might have recourse against the seller, the escrow agent, or the association. If there was one or more real estate agents involved who did not meet his/her responsibilities, you may have some recourse against an agent.

If you were provided the opportunity to read the CC&Rs and Bylaws prior to purchasing the property, then your only option might be to live in it yourself or sell it.

The reason associations prohibit rentals is that there is a general belief that tenants do not behave as well as owner-occupants and that landlords do not maintain properties as well as owner-occupants, resulting in potential lowering of values for properties within the community. Many lenders believe this to be so and have limits on the percentage of rentals within a community where they will make loans. Loans insured by FHA and VA will have such requirements.

While you should certainly be consulting an attorney, one who is knowledgeable and experienced about your specific problem, you should also do your own research ahead of time. The real estate department or commission in your state should be able to provide information regarding the issues on its official Web site and/or via telephone.

There should also be a local real estate broker or property manager who knows what courts have had to say about the legality of a rental prohibition by an association in your state if there has been such a case.

One other thing that might be of value is to determine whether any other owner is renting a property in the community with or without knowledge of the association. The failure of the association to previously enforce the restriction against owners might prohibit them from enforcing it against you.

Again, you should consult an attorney, but the above should give you some things to research and to discuss with the attorney.

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Q3

What happens if the tenant refuses to move out after being given a thirty day notice? I am on a month-to-month lease with the tenant.

A3

It depends a lot on the laws of the particular state as well as on other issues.

First, the landlord must have given notice in accordance with the law of his/her state. This means at least the minimum time required (30 days in most states, but it varies) and “legal” service of the notice.

Second, the landlord should not accept rent for any period beyond the effective termination date. Doing so will extend tenancy another 30 days in most states. This means that rent for the final month should not be collected in most states if the tenant had paid a last month’s rent instead of or in addition to a security deposit.

Third, if the tenant fails to leave, start the eviction procedure. The tenant will be liable for the rent until they do leave.

Finally, the landlord must be sure to return the security deposit and/or provide a detailed accounting for any part of the deposit not being returned within the period required by your state’s law. Many states have serious penalties for failing to do so.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.