Resident (On-Site) Managers – Part 3

This article is the third of a 3-part series regarding resident managers, the first part having appeared in a March issue and the second part having appeared in a May issue of the Weekly Newsletter. Resources for detailed discussions of the subject are found at the end of this article.

Actions, Dress, and Grooming

The resident manager represents you and your property. Accordingly, you have a significant interest in ensuring that you and your property are well represented.
Actions – During the job interview, pay attention to the applicant’s language, tone of voice, and vocabulary. If you have concerns about the applicant’s speech and manner, the chances are that your tenants may have the same concerns. Appropriate actions are a part of good customer service to attract and retain good tenants.

Dress & Grooming

The first impression is an important impression. What you see may be what your tenants see. Is it the impression that you want for your business? Common sense and experience says we can tell something about people by the way they dress, or don’t dress.

Impressionable Tenants & Applicants

It is not just that a resident manager is considered a reflection of the owner or the management company, but the manager is also a reflection of the type of person who will occupy the project, maybe the neighbor in the adjacent unit.

Reports

Resident managers are on the premises for the operation of the property. The owner or property management company should closely monitor resident managers, but not try to perform the tasks assigned to them, as this will result in duplication of effort and a waste of time and money. 

Reords from on-site should provide the home office with a continuous and graphic record of exactly what was done each month and when it was done.  Rather than stand over the manager’s shoulder for specific tasks, let the records show how efficient the manager is and indicate what actions to take to improve efficiencies and provide warnings to take action in time to avoid serious problems.

Supervision
Protect Tenants & Others

Some of the negligent hiring issues discussed earlier are of particular concern regarding resident managers. Tenants and others can be harmed in many ways by a careless or dishonest resident manager including the following:

• Personal injury (including discrimination)

• Physical injury to other tenants or the general public

• Property damage or loss

Personal Injury – This is injury resulting from things such as slander or libel or from unfair discrimination.

Physical Injury – You have to ensure that the property manager does not cause physical injury either directly or indirectly.

Property Damage or Loss – Damage or loss can occur through careless or negligent action or through criminal activities on the part of the manager or individuals under the manager’s supervision.

Protect Your Money

There are a number of ways in which you can lose some of your money because of the resident manager including the following:

• Theft of rents

• Theft of property

• Personal use of accounts

• Damage to residence

Theft of Rents – It is possible that rents that are collected by the manager become “lost” prior to deposit in a bank account or delivery to the owner or the management company. In this case, it is not legal to require reimbursement by the manager unless so ordered by a judge after a successful prosecution for theft or conversion.

Even though cash rents are most at risk of being “lost,” it is possible for checks to be fraudulently converted after theft.

Theft of Property – Although property theft is usually not as much a problem in management as for many retail businesses, it can be an issue. Theft will most usually involve losses of maintenance equipment and supplies, office machines and supplies, or unit appliances or furnishings.

Personal Use of Accounts – If managers have use of property trade accounts or credit cards, receipts and invoices must be required and account statements must be carefully examined each month. Irregularities should be dealt with immediately upon discovery.

Damage to Residence – It is possible that an otherwise qualified manager is not a good tenant. This risk is minimized by following adequate screening procedures, the same procedures that should be utilized for any tenant. Occasional inspections of the manager’s unit, formal or informal, should be made.

Protect Your Applicants/Tenants

Resident managers, particularly if performing screening, have access to applicant information that could facilitate identity theft or other fraud against applicants or tenants. Even when the manager only collects submitted applications and forwards them to the owner or management company, a lot of each applicant’s personal information becomes available to the manager. You must ensure that federal, as well as any additional state requirements regarding safeguarding of personal data are rigorously followed. The least risk results when the manager only hands out the blank forms and information packages, with the completed applications being submitted directly to the owner or to the management company office.

Insurance

There are additional insurance issues that require consideration when a landlord employs a resident manager.
Workers’ Compensation Insurance – As was discussed in Part 1, resident managers must be classified as employees rather than independent contractors. Accordingly, landlords must provide workers’ compensation insurance coverage for the manager as for any other employee.

Liability Insurance

There are three important categories related to liability insurance. One is bodily injury, another is personal injury, and yet another is damage to property of others. Discussions of these and other risk issues were provided in Part 1.

Auto Insurance

Be sure that you require the manager to have motor vehicle insurance with at least the minimum coverages required by your state’s law, preferably much higher. Also, require that you be named as additional insured and are provided written proof thereof. You should also be sure that your landlord insurance includes non-owned auto coverage. This coverage is not in lieu of the resident manager having insurance on his/her vehicle, but it is back-up to his/her insurance.

Quitting & Firing

The old saying that “all good things must come to an end” is true for good resident managers. Good managers eventually leave because they find better opportunities elsewhere due to their abilities. Unfortunately, bad managers also come to an end, sometimes unexpectedly when they simply disappear or when one must be immediately terminated (fired) because of some serious problem.

The impact of any reason for termination of the relationship depends on both the law (federal and state) and the employment contract.

Q1

I have a situation where I let a friend stay in a home that I have up for sale. He was to help with the mortgage payment and pay the utilities since I don’t live in the home. He did not follow through with his part, leaving me with hefty winter utility bills so I told him he needed to find another place to live. I put his things into the garage and told him I’d done so, but he has not made efforts to remove them in almost a month. What can I do to get him to remove them?

A1

This might depend on how good a friend he really is and the terms of agreement you had with the friend. If you had a written agreement of any kind, it might be construed to be a lease or rental agreement even if not so titled. Even if you had no written lease agreement, it is possible that a court would consider him to be a tenant under an oral lease agreement where your agreement was that he pay certain amounts, with the amounts construed to be rent.
Understand that if your friend had claimed to have an oral agreement for any term up to one year you would have had to evict him through the court in order to regain possession of your property.
In most states a landlord cannot take possession of the rental premises unless the tenant has relinquished possession. If the friend has not recently occupied the property and did not indicate any objection when you informed him that you moved his things into the garage you are likely OK. Since he is no longer occupying the home, he must have somewhere other than your garage where his things can be stored. Accordingly, in order to maintain your friendship and to avoid any possible legal issues, you might consider asking him when you can deliver his things to his new place.

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Q2

Children sometimes play in the parking lot of my apartment complex. Can I enforce prohibition of them doing so if I post signs regarding it?

A2

You can post signs and you can enforce them, but you must be careful what the signs say. Having the signs say “Children are prohibited from playing in the parking lot” could be a violation of fair housing laws because it singles out children as the class being prohibited. Having the signs say “No one may play in the parking lot” or “Playing in the parking lot is prohibited” would be better. I would add that in order to avoid any claims of discrimination the prohibition must be enforced equally against everyone – children and adults alike.

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Q3

Then what about my “Fitness center users must be 12 or older” rule?

A3

There are activities for which persons below a certain age are more likely to injure themselves compared to older persons and those persons can be prohibited from putting themselves at risk. For such cases, the prohibition should usually be against those younger than the age recommended in writing by the manufacturer of the equipment. For activities such as swimming in a community pool, one can usually have a requirement such as “Swimmers younger than 12 must be supervised at all times by an adult resident of the community.” One must use care to avoid the appearance of attempting to subvert fair housing laws and be sure that the rules are uniformly enforced.

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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.

Effective April 22, 2010, federal law requires that contractors performing renovation, repair and painting projects that disturb more than six square feet of paint in homes, child care facilities, and schools built before 1978 must be certified and trained to follow specific work practices to prevent lead contamination. Lead safe practices include minimizing dust, containing the work area, and conducting a thorough cleanup to reduce the potential exposure associated with disturbing lead-based paint.

The new law is expected to limit the risks of lead poisoning that might result from renovations made to older buildings. Renovation is broadly defined as “any activity that disturbs painted surfaces.” It includes most repair, remodeling, and maintenance activities, including window replacement, weatherization, and demolition. Generally, minor repair and maintenance activities (less than 6 square feet per interior room or 20 square feet per exterior project) are exempt from the work practices requirements. However, this exemption does not apply to jobs involving window replacement or demolition, or that involve the use of any prohibited practices.

The rule covers any individual or firm that is paid to perform work that disturbs known or presumed lead-based paint in housing and child-occupied facilities built before 1978. This includes but is not limited to general contractors; specialty trade contractors including painters, plumbers, carpenters, and electricians; home renovation companies; window replacement contractors; maintenance workers; and to residential rental property owners and managers who perform repairs and renovations themselves.

The rule applies only to renovations performed for compensation. Accordingly, if a homeowner performs renovation, repair or painting work on his own home, the rules do not apply. However lead safe work practices should still be followed to protect home occupants and the value of the property.

There is no question that the new rule applies to renovation activities performed by landlords or employees of landlords. Landlords receive rental payments and maintenance personnel in rental property or child-occupied facilities receive wages or salaries derived from rent payments. The receipt of rent payments or salaries derived from rent payments is considered compensation under the RRP rule. Therefore, renovation and repair activities performed by landlords or employees of landlords are covered by the rule.

Those businesses and individuals affected by the rule are required to:

• Apply to EPA to be approved as a Certified Renovation Firm and receive the necessary training and certification from an EPA-accredited training provider for Lead Safe Work Practices.
• Assign a Certified Renovator to be present at each project and ensure that lead safe work practices are used throughout the project.
• Provide consumers or tenants with the EPA pamphlet “Renovate Right” prior to the start of each project and maintain records documenting that the required information has been provided at each project subject to the rule.

Those seeking to become certified and trained can find more information on the process and a list of accredited trainers at: http://www.epa.gov/lead/pubs/renovation.htm#contractors.

Hundreds of thousands of businesses including contractors, painters, and even neighborhood handymen are affected by the new rules on lead-based paint safety. Failure to comply can be costly, with fines up to $37,500 per violation per day. In addition those who fail to meet the new certification and training standards could potentially be subject to lawsuits from individuals whose health was endangered by the violations.

To date, EPA has certified 204 training providers who have conducted more than 6,900 courses, training an estimated 160,000 people in the construction and remodeling industries to use lead-safe work practices. EPA estimates that more than 200,000 contractors will apply for the new certification.

In addition to the rule becoming effective, the EPA has issued these additional actions:

• A notice of proposed rulemaking to require dust-wipe testing after most renovations and provide the results of the testing to the owners and occupants of the building. For some of these renovations, the proposal would require that lead dust levels after the renovation be below the regulatory hazard standards. EPA will take comment on the proposal for 60 days. The agency expects to finalize the rule by July 2011.
• An advance notice of proposed rulemaking to announce EPA’s intention to apply lead-safe work practices to renovations on public and commercial buildings. The advance notice also announces EPA’s investigation into lead-based paint hazards that may be created by renovations on the interior of these public and commercial buildings. If EPA determines that lead-based paint hazards are created by interior renovations, EPA will propose regulations to address the hazards.

Additional Information

For more information regarding the new rules visit www.epa.gov/lead or call the National Lead Information Center at 1-800-424-LEAD (1-800-424-5323).

Q1

Can I legally prohibit waterbeds in my rental units?

A1

That depends, mostly on the terms of your lease agreement. Most states will allow a landlord to prohibit waterbeds if the lease agreement so states. Unless there is a state or local law that says otherwise, a tenant would be allowed to have a waterbed unless prohibited in the lease. Some states specifically allow a landlord to require an additional deposit for waterbeds in addition to the maximum security deposit otherwise allowed by statute.

Landlords can also protect themselves without eliminating potential applicants, who are otherwise qualified, by requiring that such tenants carry renters insurance that includes waterbed coverage. In any case, a tenant would usually be responsible for any damage resulting from presence of his waterbed, but including a specific lease clause regarding this issue would give additional protection. Check the landlord-tenant law of your state to see if waterbeds are explicitly covered in any way.

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Q2

I’ll soon be closing escrow on my first rental property and when looking at several possible application forms, I see differences in info required. Can someone give any ideas of the most important info?

A2

You are right to be concerned about what is on your application form, as the first line of defense against bad tenants is having an adequate application form. An adequate form is one that requires the applicant to provide information that can be used to verify his identity, obtain a credit report, verify employment and wages, verify other sources of income, contact previous landlords regarding rental history, check eviction records, perform a criminal background check, verify bank accounts, and interview personal references. The form itself and the associated collected information are also useful if it ever becomes necessary to track down a tenant in order to collect a debt related to his/her tenancy. Each adult in any group of residents should complete and sign a separate form.

At a minimum, landlords should require that:

Each applicant is of legal age (or emancipated minor),

Each applicant sign an authorization of release of personal information form for credit reports, employment, rental history, eviction report, and criminal history, for both at the time of application and in the future, and

Each applicant should be required to present at least two forms of personal identification, with at least one being a government-issued photo ID and you should make copies of the IDs.

We suggest that the following information be requested on an application: 

First, last, middle name of applicant, including other names previously or currently used;

Social Security number;

Current residence address;

Telephone numbers, including current home, cell, and work;

Employment history (name, address, telephone number of current employer, supervisor’s name and telephone number, dates of employment, job title);

Monthly gross employment income and/or other income amounts applicant wants considered;

Driver license number – make a photocopy of the driver license;

Vehicle information including make, model, year, color, license plate number for each vehicle;

Date of birth (for identification purposes only, so only of those filling out applications);

Debt obligations (including loans, credit accounts, and spousal or child support);

Financial institution accounts, including name, address, account numbers;

Past rental history (property address, dates at the address, landlord name, landlord telephone number, reason for leaving);

Personal references;

List of additional occupants (include everyone who will live in the rental property);

Emergency contact information, names, addresses, telephone numbers, relationship to applicant (can be useful for tracing a skipped tenant);

If pets allowed, what types and, for dogs, the breeds and sizes;

Describe any water filled furniture;

Has tenant ever filed bankruptcy? If so, which chapter, when, and why?

Has applicant ever been evicted? If so, when and why?

Has applicant ever been convicted of a felony crime? If so, for what and when?

Avoid asking for information regarding age (except as above), birthplace, religion, marital status, relationships among occupants, physical or mental conditions, arrests that did not lead to a conviction, or any other item that might be prohibited by federal, state, or local fair housing laws.

A social security number is important for verifying identity and obtaining various tenant screening reports. It is permissible for an applicant to be asked to divulge their Social Security number as part of the application screening process and it is legal to refuse consideration of an application or to deny an applicant simply because the applicant refuses to provide the number.

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Q3

Can I limit the number of vehicles that a tenant may have?

A3

You cannot limit the number of vehicles a tenant may own, but you can limit the number that are simultaneously allowed to be parked on the rental property when there is not unlimited parking available. The tenant would then be required to park any additional vehicles elsewhere, for example, on nearby local streets. To avoid any tenant charges of favoritism or even possible claims of fair housing discrimination, it is important that you treat all tenants equally regarding the parking issue. In any case, as with most issues, it is always best to cover the parking issue adequately in lease agreements.

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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.

Entering Rental Units

Some landlords mistakenly assume that they can enter their rental units whenever they wish – after all, it is their property. Many who realize that their state requires advance notice of entry do not fully understand the potential risks associated with entering under various specific scenarios. Even entering for an “in case of emergency” situation is not without risk.

Improperly entering can result in damage to landlord-tenant relations. In the worst case, the landlord can be subject to lawsuits over damaged or missing tenant property, even criminal prosecution.

The Law

The reasons for which a landlord may enter are listed in statutes of the majority of states. Those states that do list acceptable reasons for entry usually include one, several, or all of the following reasons:

• To deal with an emergency
• To make repairs, alterations, or improvements
• To inspect the premises
• To show the premises to prospective tenants or buyers
• To check the premises during the tenants extended absence

Currently, the statutes of about one-quarter of states do not explicitly cover the issue of entry. For those states whose statutes do not even mention the issue of entry, landlords should still use discretion when making entry, as conflicts regarding entry can still arise in those states under various legal principles including invasion of privacy and criminal trespass.

Most states’ landlord-tenant laws include provisions regarding advance notice prior to access, with notice periods most often being 24 to 48 hours. However, some states require “reasonable” notice, whatever that means. Even when a specific period is defined by statute, the manner of notice may not be defined nor does the statute usually mention whether or not any response need be received from the tenant.

The Lease

No matter what state law says about entry, your lease agreement should cover the issue in detail. The lease should specify the advance notice period as equal to or greater than state law and provide a specific notice period if your state’s law says “reasonable” or doesn’t cover the issue. In either of these two cases, “reasonable” should be at least 24 hours for non-emergency situations, as most judges would likely consider that sufficient notice.

It is also advisable that the lease cover the schedule of regular safety and maintenance inspections; the method(s) by which notice will be given (i.e., phone, email, or written notice); whether or not a response by the tenant is required; what the landlord will do if the tenant fails to respond; what must be done if the tenant specifically denies the entry; and what type of events will be considered an emergency. Be sure that the lease clauses do not in any way contradict state law.

Advance Preparation

Landlords should always provide some level of orientation with new tenants prior to lease signing wherein lease clauses are reviewed and general information is provided to the new tenants. Discussion of landlord entry issues, including both statute and lease provisions, should be one of the matters discussed during this orientation.

Minimizing Risks

To minimize the risk of accusation of damage to or theft of tenant property, it is best that the tenant or someone else over the age of 18, either another household member or other tenant representative, be present when the accessing the premises. Entering when no one is home should be reserved for situations when there is absolutely no alternative. Even then, permission to do so should be obtained if possible, preferably in writing or as otherwise verifiable. At a minimum, the landlord should consider being accompanied by another person who could testify regarding the entry.

The privacy of tenants should be respected. Visits should be kept to a minimum and landlords should be willing to negotiate a mutually agreeable schedule for access. As for many management issues, communication is often key to minimizing conflict.

Emergencies

Most states specifically exempt emergency access from the need for notice. However, one must use care in defining “emergency,” particularly when the scenario might not be a clear-cut emergency. While entering to put out a fire is almost certainly acceptable, entering to do a cosmetic repair would likely not be. Other situations may be grayer. In general, the landlord is usually safe when entering to protect and preserve his property. There is probably no way to make showing the premises to a prospective buyer into an emergency in the eyes of a judge.

Additional Information

For additional discussions regarding the above issues, related topics, and many other subjects of importance to landlords see our “Managing Income Property” eCourse

In the matter of fair housing, the difference between “fair” and “unfair” housing can be a matter of perception. If your words, actions, or attitude cause a prospect, applicant, or tenant to question whether he is receiving different or unequal treatment from that accorded to another individual you may find yourself defending against a charge of housing discrimination. If the prospect’s complaint is found to be valid, you as a landlord that violated fair housing laws, will incur costly fines and other penalties to remedy that complaint.

In review, the federal Fair Housing Act covers most housing. In some circumstances the Act exempts owner-occupied buildings with no more than four units, single-family housing sold or rented without the use of a broker, and housing operated by organizations and private clubs that limit occupancy to members. However, great care must be taken when utilizing such exemptions, including determining whether or not the same exemption is provided under state and local law.

The Fair Housing Act as amended prohibits discriminatory actions in the sale and rental of housing based on the protected classes of race, color, national origin, religion, sex, familial status or handicap. Prohibited actions are:

• Refusal to rent or sell housing,
• Refusal to negotiate for housing,
• Making housing unavailable,
• Denying a dwelling,
• Setting different terms, conditions or privileges for sale or rental of a dwelling
• Providing different housing services or facilities,
• Falsely denying that housing is available for inspection, sale, or rental,
• Persuading (for profit) owners to sell or rent (blockbusting), or
• Denying anyone access to or membership in a facility or service (such as a multiple listing service) related to the sale or rental of housing.

In rental housing operations this means the landlord is not only unfair but illegal if he sets his rental policies to exclude prospects, provides different or false information about vacancies, limits use of rental facilities or amenities, engages in activities that steer prospects toward certain rental units or locations, or sets different lease terms, lease clauses or house rules for different prospects, applicants, or tenants.

Even trying to be fair (by saying or doing something that you consider beneficial – i.e. giving someone a break because you perceive they’re down on their luck) can get you into trouble. By trying to be fair to one, you become unfair to others.  Perhaps the better course of action is not to try to be fair but to be fair.

State and local fair housing laws can be more restrictive or grant more rights (but not less) than federal law. You must understand all laws regarding fair housing and protected classes. It’s a good idea to further your understanding by networking with other landlords, consulting with a local landlord tenant law attorney, or taking continuing education classes in real estate and property management. You can know the law but knowing how the law is applied (by reviewing case studies) is a better way to help protect yourself against claims of housing discrimination.

Many violations of fair housing rights are due to ignorance of the law, failing to understand the laws, or misinterpreting the application of the law. However, knowingly or unknowingly, be it intentional disregard or well-meaning suggestions, if what you say or do is discriminatory, you have broken the law. Fair housing compliance is not optional or selective – it is mandated by federal, state, and local laws.

Our best advice for landlords is to remember that every aspect of rental operations is governed by fair housing laws. Because fair housing is such an important issue, the government and fair housing agencies employ testers to call or visit rental properties as prospective applicants to determine if a landlord or property manager is complying with fair housing laws.

Testers are most commonly employed when there is probable cause to believe that an owner or manager has engaged in practices that may violate federal fair housing laws. The courts have repeatedly upheld the use of testers as a valid enforcement mechanism when agencies use “testing” under the appropriate guidelines. If you treat all prospects as testers and your rental policies are non-discriminatory, you or your employees will not have to try to be fair housing compliant.

Fair Housing and Advertising

Understanding federal, state and local fair housing laws is also important for advertising and marketing your vacancy. While you may be exempt from federal fair housing provisions (see above for fair housing exemptions) you are not exempt from provisions of the Act that bans discriminatory advertising.

You want to market your vacancy to a diverse group of prospects to attract as many applicants as you can in order to minimize the length of vacancy. There are however specific advertising guidelines to follow for fair housing compliance. The language you use and those words in context can influence prospects positively or negatively. You should use words that describe the attributes of the property, not the people that could live there.  Caution should also be used in the description of the property amenities to be sure that exaggeration (puffing) does not occur. Any advertising plan that indicates a preference or limitation or that discriminates against protected classes violates the Fair Housing Act.

In all advertising or promotional materials and your statement of rental policies or other written formal communication with prospects, applicants, and tenants, include the statement that you/your company does not discriminate on the basis of race, color, national origin, religion, sex, familial status, or disability. Include the fair housing logo as appropriate. While you cannot eliminate all risk or protect against all claims of discrimination, use of such statements and the logo will help emphasize your commitment to fair housing.

There are many ways a prospect may contact you for more information or showing of the unit. Prospects may call, email, or use mobile devices to gather information about the location, rental amount, deposits, lease terms, or rental policies to determine suitability to their wants and needs. You should respond promptly to all requests for information. Using linguistics to profile a caller from his speech, grammar or writing is a violation of fair housing laws. You must focus on qualifying prospects to your business plan, not preselecting them according to personal preferences. If you deviate from your rental plan, you incur additional risk.

Fair Housing and Disabilities

Fair housing laws also afford additional protection in rental housing to individuals with a physical or mental disability. Disability includes hearing, mobility and visual impairments; chronic alcoholism; chronic mental illness; AIDS or AIDS Related Complex; and mental retardation that substantially limits one or more major life activities. Individuals with a record of such disability or are regarded as having such a disability are also protected under fair housing laws.

Under fair housing law, you may not refuse to let a disabled tenant make reasonable modifications to the dwelling or common use areas at his expense if necessary for him to use the housing. Where reasonable, you may permit changes only if the tenant agrees to restore the property to its original condition when he moves.

You may not refuse to make reasonable accommodations in rules, policies, practices, or services if necessary for the disabled person to use the housing. However, housing need not be made available to a person who is a direct threat to the health or safety of others or who currently uses illegal drugs.

Fair Housing and Familial Status

Unless a building or community qualifies as housing for older persons, it may not discriminate based on familial status. That is, it may not discriminate against families in which one or more children under age 18 live with a parent, a person who has legal custody of the child or children, or the designee of the parent or legal custodian who has written permission from the parent or custodian.

Familial status protection also applies to pregnant women and anyone securing legal custody of a child under 18.

Right to Choose

While the above regulations may seem to increase the burdens placed on landlords, in effect, they do not. Such laws do not eliminate the rights of the landlord to attract and select tenants based on valid business principles.

Landlords do not have to accept unqualified applicants, uncooperative applicants, or applicants who give false or misleading information. Landlords can reject and should reject those applicants who pose a direct threat to property and the welfare of others. Accepting applicants because of fear of reprisal if the landlord rejects their applications is discriminatory because of giving preferential treatment to some and not others.

Having a “reasonable person” standard for fair housing compliance – that is, exercising judgment and conduct that could be expected of an average individual – serves as an objective test to determine if a breach of duty has occurred. Such a standard does not exist independently of other circumstances which could affect an individual’s judgment.

The bottom line is that fair housing compliance should be the backbone of your rental operations plan, including advertising, marketing, applicant screening and selection, and tenant relations.

If “the first line of defense against bad tenants is having an adequate application form,” how strong is your defense? Are you confident your application form asks the right questions? Are there enough questions to provide sufficient information to begin screening? Are all the questions legal?

Your application form is a key document in filling your vacancies. Through the questions you ask and the information you receive, you begin the process of screening and selection of your next tenant. How well both wants and needs of a landlord and an applicant are matched can indicate the likelihood of a good tenant. If your rental application does not ask all the questions needed to qualify applicants under your rental policies you increase your business risk and your vacancy costs.

As prospective tenants begin their search for a rental unit they rely upon the landlord to market the property in good faith, providing enough information about the property features and rental policies to guide them in their decision to submit an application. The telephone call, open house, and/or drive-by offer an opportunity for both parties to preliminarily screen each other. From the prospect’s side, does it seem likely that this property could become home? From the landlord’s side, does it seem that this prospect could meet rental qualifications and take good care of the landlord’s valuable property?

All interaction between landlord and prospective applicant, formal or informal, is a part of tenant screening. Experienced landlords know that the more information provided upfront regarding application procedures, rental policies, house rules, and deposits, the better the chance that an applicant will meet those requirements. Those prospects that do submit an application have taken the next step in their rental search. They want to be your next tenant. Your job is to decide which applicant is most likely to be a good tenant.
Take a fresh look at your application form. Is your form a “boilerplate special” straight from the office supply store? Is it a borrowed copy of another landlord’s application form? Is it a downloaded copy from the Internet? All forms are not created equal and one size does not fit all. Accordingly, you should customize all your rental forms – particularly your application form and lease agreement – to fit your specific property type and business needs and to meet federal, state, and local laws.

Read through your form carefully and proof it for grammar and spelling. Make sure your copies are clean and legible and that blanks provide enough space for the expected information. Attention paid to such small details can work to your advantage, particularly in competitive markets. For some prospects it might be a deciding factor in their decision to submit an application. They may be just the kind of applicant/tenants that you want in your rental unit.

The best way to test your form is to complete it yourself. Answer the questions on your application form as they are written. Although you know what you mean, will applicants know what you mean? If applicants have to guess at what you want you probably aren’t getting the information you really need to adequately screen them for tenancy. You need to make sure that the questions are understandable to a significant majority of applicants. You can deal with a few exceptions as they arise.

Think back to the last several applications you received. Did you have to clarify questions? Find that you didn’t get enough information the first time and had to ask for more? A good form will lead the applicant to complete the application in an organized manner by having the questions grouped by category with a logical flow.

Keep in mind that if you don’t ask, they don’t tell. That doesn’t mean you can’t find out, but your time is money and extending the period of screening and selection wastes valuable resources.
On the other hand, you can ask for the moon, but you might not get it, it might not be legal, and/or you may not really need it. The rule is not to collect more than you need, but to collect enough information so that you can adequately screen for risk. While it is true that it is your business and you have the right to collect certain information, be sure to understand all applicable laws including fair housing, landlord-tenant, and consumer protection laws, including federal, state, and local fair credit reporting laws. There is a fine line between wanting the applicant to disclose all details of his personal and professional life and the responsibilities associated with collecting sensitive personal identifying information.

The information you collect imposes the responsibility not only to use it in accordance with all laws, but to also safeguard that information throughout the length of the tenancy and the necessary document retention period and to properly dispose of it when no longer needed.

The questions that you ask should be pertinent to qualifying for rental housing and should be universal to all applicants. That is, the same questions will be asked of anyone that applies, the same consideration given to responses received, and the same type of screening will be conducted of anyone that applies. The entire tenant screening process should be conducted in a non-discriminatory manner and in accordance with applicable laws.

An adequate form is one that requires the applicant to provide information that can be used to verify his identity, obtain a credit report, verify employment and wages, verify other sources of income, contact previous landlords regarding rental history, check eviction records, perform a criminal background check, verify bank accounts, and interview personal references. A good form in itself and the associated collected information are also useful even after a tenant has departed from your property if it becomes necessary to track the tenant in order to collect a debt related to his/her tenancy.

Some prospects take the position that an application form infringes on the individual’s right to privacy. However, information that confirms suitability as a tenant – such as credit record, employment, and rental histories – Is a legitimate business purpose as defined under the Federal Fair Credit Reporting Act. Landlords must determine the most cost effective means to obtain information needed to safeguard the income property and the safety of others. The application form satisfactorily performs that function.
The prospect should also be advised that two forms of personal identification, with at least one being a government-issued photo ID, should be required for review prior to submission of the application. The end result of screening a fraudulent applicant can be worse than having done no screening at all. A photo copy of the identification forms presented should be kept in the applicant’s rental file.

A social security number is important for verifying identity and obtaining various tenant screening reports. It is permissible for an applicant to be asked to divulge their Social Security number as part of the application screening process and it is legal to refuse consideration of an application or to deny an applicant simply because the applicant refuses to provide the number.

The application should also warn that failure to provide all items of information being requested (unless not applicable) or providing incomplete or inaccurate information are in themselves grounds for not considering the application or for denying the applicant.

Each adult (18 and over or emancipated minor) applicant should be required to complete an application. This policy should include both spouses in family household or each roommate in a group living arrangement.
The application form itself or a separate “consent to release information” form must contain statements that authorize the landlord to verify credit, employment, and any other information, including that contained on the application, from a credit bureau, from the creditors directly, from employers, financial institutions, and previous landlords, and from providers of eviction and criminal records. Included should be a statement that the permission includes obtaining updated reports, survives the expiration of tenancy, and can be used for any legal purpose associated with the tenancy.

The address of the rental property, rental term, and any amounts due at signing should also be shown on the application form or an attached sheet. With the applicant’s signature, this serves as confirmation of any oral discussion regarding those issues that might have occurred prior to the application date.

Finally, some rental applications include a section to be completed by the landlord to show date and time the application was received and any processing fees collected at time of application. Many experts advise the landlords select the first qualified applicant rather than the most qualified applicant to reduce the risk of a discrimination claim, so showing when the application was received provides some protection when following this advice.

Document Control

Landlords and property managers utilize a large number of different documents. Some are used regularly, others only occasionally, and many landlords may never have need for certain ones. Use of adequate documentation is important for selecting good tenants, minimizing misunderstandings and the conflicts that often result from misunderstandings, meeting requirements of laws, and providing paper trails that provide proof of what really happened in case an applicant or a tenant wishes to dispute a matter.

Control of all documentation related to rental property is very important. Fair housing is often the most mentioned documentation issue, particularly regarding tenant screening and selection issues, however, adequate control can also be important for a variety of other issues.

Tenant screening documents are arguably the most important because they typically contain a considerable amount of detailed personal information that, if it falls into the wrong hands, can result in serious damage to an applicant’s, tenant’s, or employee’s finances, reputation, or privacy.

Of particular importance are those documents that contain identifying information such as date of birth, past and current residence, spouse name, Social Security number, bank account and/or credit account information, and other information of possible interest to an identity thief. Application forms and credit reports are usually the documents that contain the largest number of personal information items and are of obvious concern. However, other documents can also contain items of personal information. Screening information other than credit reports are in this class.

There is also the risk of incorrect information creating problems. Incorrect information can appear in any type of screening report. This is why an applicant should usually have a chance to explain derogatory information on a credit report or other screening item and one of the reasons why the FCRA requires an adverse action letter be provided to applicants when rejection occurs as a result of credit information. Also, it is possible for a criminal report to show the record of someone with the same name as an applicant, but is not the applicant.

The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission, was designed to promote accuracy and ensure the privacy of the information used in consumer reports. The term ”consumer report” as used in the FCRA means any written, oral, or other communication about an individual’s personal credit worthiness, character, and general reputation. Enacted in 1970 and substantially amended in the late 1990s and again in 2003, the FCRA regulates how credit reporting agencies use credit information, restricts access to that information, and regulates the manner in which that information can be used. The amended Fair and Accurate Credit Transactions Act (FACTA), passed in December 2003, added new regulations for identity theft protection, credit report access, and data privacy.

Although most documents not related to screening do not normally contain personal information that is likely of concern, such is not always true. If important personal information such as Social Security number or date of birth appears on any document, the same care should be taken as for an application form or credit report.

In the worst case, information contained in documentation can result in identity theft. Identity theft can result in a landlord having to defend against potential claims, lawsuits, and/or governmental prosecutions related to failure to adequately safeguard the documentation of applicants, current tenants, and past tenants. When the problem is due to improper control of documentation, a judge or jury may award significant damages.

There are a few other documents related to screening that, while not likely a concern regarding ID theft, could be a source of embarrassment to individuals and could result in litigation against a landlord, particularly if the information is erroneous.
Document control can be divided into three parts:

o Security – how documents must be stored and who may access them
o Retention – what documents must be retained and for how long
o Disposal – when and how documents should be destroyed

Security

Landlords must protect the privacy of consumer information and reduce risks of fraud and identity theft. Sensitive information obtained directly from applicants, tenants, or employees; consumer reports; and information from employers or previous landlords must be properly secured and access restricted.

Landlords, property managers, and employers must safeguard all documentation containing information regarding applicants, tenants, and employees. This includes both paper files and computer files.

Paper records must be secured inside a well-built cabinet under lock and located in a secure area. Information and computer programs that can access that information stored on a computer or portable devices must be secured by password protection to prevent unauthorized access. It is recommended that access to online systems be restricted to a designated terminal which is located in a secured area. Backup diskettes, flash drives, and hard drives should be located in a secure area. Preferably, such items should be locked up with the paper records.

In all cases, access to records must be limited to trusted individuals and only on a need-to-know basis. In other words, even trusted personnel should not have access to the records unless access to the records is necessary for performance of their job tasks.

Procedures should be established to restrict access and adequately protect all sensitive information after normal business hours.

When those having access to critical documentation are no longer associated with the business or even are no longer employed in a capacity requiring access, key locks should be rekeyed, combination locks changed, and computer passwords changed.

Failure to follow appropriate procedures regarding security of personal information of applicants and tenants can expose landlords to lawsuits by those parties and to penalties under the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Transactions Act of 2003 (FACTA), which requires certain security procedures when storing or disposing of information about applicants and tenants.

Retention

Landlords need to keep records on all inquirers, applicants, current tenants, and past tenants. Although fair housing is often the most important issue, retention can also be important for security deposit disputes, maintenance matters, and a variety of potential health, safety, and security issues.

Documentation related to all marketing, applications (whether withdrawn, rejected, or accepted), and occupancy, should be retained. In other words, absolutely everything related to every inquiry, application, and tenancy should be kept. The best defense against a Fair Housing or any other type of claim is being able to produce a set of records that shows consistent nondiscriminatory application of written screening and selection criteria.

While the retention period will usually be in the range of 2 to 5 years, it can depend on the type of document, the statutes of the particular state, and when the plaintiff discovers he has been damaged.

Disposal

Landlords and employers must also eventually destroy all documentation containing personal information regarding applicants, tenants, and employees when it is no longer needed.

When there is no longer a legitimate business need to retain an applicant’s, tenant’s, or employee’s credit report, FACTA requires disposal of the credit report along with any information taken from such report in a manner that guarantees destruction of the information.

The level of document destruction should be reasonable within the context of the business. This usually means the burning or shredding of paper documents. For computer documents, it is not sufficient to only delete files by sending them to the computer’s recycle bin. Although permanently deleting the files from the bin is better than not, it is best that a computer utility program be used to erase the data completely by deleting the directory and text files.

Failure to comply with the law can result in costly fines and damages by the FTC and/or state agencies as well as tenants’ or employees’ lawsuits for actual and punitive damages and attorney fees for each violation. Inadequate security or improper disposal can be costly in both time and dollars related to enforcement by the FTC and/or state counterparts. Liability can include actual damages – e.g., charges against an individual’s credit card – and/or damages of $100 to $1,000 per violation, attorney fees, and costs.

Licensees

For property managers, who are regulated by a state licensing agency, the records which must retained and the period of time for which various records must be retained are defined by state statutes and/or regulatory agency regulations and the periods may be different than for landlords managing their own properties. Penalties for licensees are almost always significantly greater than for non-licensees, particularly as it can affect their continuing in the business. Licensed managers must know the laws and regulations for their states and follow them closely in order to avoid potentially serious penalties including license suspension or revocation.

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The Most Valuable Screening Tool

The biggest cost in the landlord business is the cost of vacancies. This includes the amount of time necessary to get the property ready, advertise the rental property, arrange showings of the property, and screen applicants. During this period of time there is usually no income from the property. Selecting good tenants usually offsets a part of those costs. In the extreme, failing to select a good tenant can cost much more than all costs of the vacancy put together.

A credit report is the single most valuable tool for evaluation of rental applicants. A credit report provides the landlord with information regarding the applicant’s credit history. Past behavior tends to be indicative of future behavior. A prospective tenant that pays many of his or her bills late will likely pay the rent late. The applicant’s pattern of credit management coupled with employment verification, previous rental housing history, and reference checking allows the landlord to make an informed tenant selection.

Credit reports should be utilized in screening no matter what other screening procedures might be used. The recommendation is to run credit reports as soon as possible after receiving the applications. However, it is usually best to run reports only after reviewing the applications to determine if the applicants meet your minimum income-to-rent ratio. A separate credit report should always be run on each adult of any group that will occupy the unit.

The cost of a credit report is minimal compared to the wealth of information obtained from the report. Furthermore, in most states applicants may be charged a fee to run credit checks. In some states there are specific requirements regarding procedures for collection, the amount that can be charged, and return of collected fees if a credit report is not run. A landlord should always consult his state’s landlord tenant laws regarding such requirements. As for all screening procedures, the fees must not be selectively charged but must be applicable to all applicants.

The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission, was designed to promote accuracy and ensure the privacy of the information used in consumer reports. Enacted in 1970 and substantially amended in the late 1990s and again in 2003, the FCRA regulates how credit reporting agencies use credit information, restricts access to that information, and regulates the manner in which that information can be used. The amended Fair and Accurate Credit Transactions Act (FACTA), passed in December 2003, added new regulations for identity theft protection, credit report access, and data privacy.

The term ”consumer report” as used in the FCRA means any written, oral, or other communication about an individual’s personal credit worthiness, character, and general reputation. Permissible purpose is a prerequisite to requesting credit reports. Permissible purpose guidelines are defined in the FCRA. Landlords may obtain credit reports under the guidelines of the Fair Credit Reporting Act (FCRA).

A consumer credit report is prepared from buying and payment histories as reported from credit grantors such as banks, savings and loans, credit unions or other commercial lenders; charge card issuers; and merchants who provide credit. In this credit snapshot a landlord will see the consumer’s bill payment history – that is, whether payments have been on-time, late, or are delinquent.

In addition, the report contains personal information such as employment data and other identifying information such as date of birth, past and current residence, spouse name, and Social Security number. Public records information for local, state, and federal court filings, such as court judgments and liens, foreclosures, bankruptcy filings, tax liens, and criminal convictions, is contained in a separate section of the report.

Some landlords find credit reports hard to read and understand. This issue can be remedied with the help readily available from the credit reporting agencies (credit bureaus) and the tenant screening companies offering credit services.

Each credit reporting agency has its own reporting format and to aid in understanding line items provides a sample report on its web site. Most tenant screening companies also offer help and support in understanding credit reports through customer service and sample reports. Once familiar with the reporting format it will become apparent what items need clarification or, possibly more important, what information is not there and must be investigated.

It is important to understand that information contained in a consumer credit report can be inaccurate, incomplete, or outdated. While some landlords may consider this a limitation of credit reports, this in itself does not negate the value of using credit reports to evaluate applicants. It does mean, however, that landlords remain cognizant of this possibility and take steps to ask questions of the applicant or verify through additional sources any information that requires clarification. With millions of data being reported, it is very possible that data could be misapplied, particularly with common surnames or typographical errors. Despite the possibility of errors, the credit report remains the “gold mine” of information that can be obtained with reasonable costs and timely accessibility.

The issue of outdated information is easily resolved with verifications and applicant interviews. If a consumer does not have credit activity, the consumer file may not be updated. Those applicants who choose to minimize their credit exposure by limited credit card usage, have no installment contracts, change jobs infrequently, and do not have outstanding debts or liens will not only have an outdated credit report, but even a file that is essentially blank. With no monthly activity, the report will be static and very old credit information will eventually drop off their reports. A blank file could also be true for those persons just beginning their credit history. A landlord will need to take this into account and use additional screening tools to evaluate the applicants.

The currency of a credit report is good through the time when last updated. Keep in mind that, with monthly reporting of credit data, the consumer may have significantly changed his financial obligations since that report was updated. For example, the applicant could have lost his job, been served with divorce papers, or diagnosed with a life-threatening medical condition just prior to his application submission. There may be no reason to assume that any of these events should be a cause to reject an application, but any of these events could have financial significance. Here again, with applicant interviews and with additional screenings and verifications, a landlord can better determine credit risk.

For those applicants who have placed a hold on their credit file (a credit freeze) and fail to authorize permission for the landlord to run a credit report, the landlord will not be able to run a report. Accordingly, the application can be considered incomplete and the landlord can (and usually should) reject the application.

It is customary and advisable to include in your application documentation a form requesting the applicant/tenant’s consent to run a credit report. Although some rental applications incorporate a consent statement within the application, most landlords find that a separate consent form is a better option. If it becomes necessary to provide written documentation of the applicant’s consent, it is much easier to send just the form.

An important point for written authorization of credit checking, sometimes overlooked by landlords, is that the wording of the consent should be such that the consent can be used to update the tenant’s file at a later date. A landlord should reserve the right to run a report to determine if the tenant is still qualified before allowing a lease extension or renewal or periodically if the tenant is on a month-to-month lease. The consent form should also allow the landlord to run a report even after termination of the tenancy if related to the tenancy. This can be particularly important if the landlord must locate a skipped tenant or file court papers.

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Fair Housing Laws and Tenant Screening

Management of rental properties requires knowledge and understanding of many federal, state, and local laws. Failure to adhere to applicable statutes can result in increased liabilities and being subject to fines and penalties. Fair Housing laws are of particular importance and a large percentage of fair housing claims are related to the tenant screening process.

Fair Housing laws promote equal opportunity to seek, obtain, and hold housing without discrimination. Such laws prohibit discriminatory practices that can unfairly limit the housing choices of individuals. Understanding fair housing laws and setting your rental policies for fair housing compliance is the best protection against claims of rental housing discrimination. In short, you must know what you can do and what you cannot do in rental practices.

Regardless of whether your title is owner/landlord, property manager, real estate agent/broker, or company employee, you are responsible for fair housing practices under the law.

Federal Fair Housing

Title VIII of the Civil Rights Act of 1968 (Fair Housing Act), as amended, prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on the protected classes of race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and handicap (disability). Since every individual could potentially be a member of some protected class, it is advisable to base rental selection criteria on sound business policies rather than exclusion of certain group characteristics.

Covered Housing

The federal Fair Housing Act covers most housing. In some circumstances, the Act exempts owner-occupied buildings with no more than four units, single-family housing sold or rented without the use of a broker, and housing operated by organizations and private clubs that limit occupancy to members.

Landlords should also verify their state’s statutes for definition of covered dwellings and application of state fair housing laws and exemptions.

Screening and Rental Procedures

As stated above, under federal law it is illegal to screen housing applicants on the basis of race, color, religion, sex, national origin, disability, or familial status. There are certain other characteristics that, although not specified by federal law, may be considered protected classes covered under various state and local laws.

For instance, federal law does not prohibit discrimination based solely on an individual’s citizenship status. Accordingly, but with at least two notable exceptions, landlords may require rental applicants to provide documented proof of their citizenship or immigration status during the screening process. Such a request would not violate the Fair Housing Act if that requirement was uniformly applied to all applicants.

HUD regulations for federally assisted housing programs have for many years defined what documents are acceptable proofs of citizenship or eligible immigration status. General information on U. S. citizenship and immigration documents can be researched using various sources including government agency websites.

As of this writing there are two notable exceptions to landlords requiring proof of citizenship or immigration status. The California Civil Code prohibits landlords from inquiring as to tenants’ and rental applicants’ immigration and citizenship status. The New York City administrative code also prohibits landlords from inquiring about tenants’ citizenship status.

Age is another characteristic that while not specifically protected under federal law can be a protected class in many states. Landlords cannot reject an applicant solely on account of age although, again, some exceptions apply. There are regulatory guidelines for renting seniors-only multi-family housing. Landlords can refuse to rent to minors who are not emancipated or otherwise of legal age to authorize a contract.

Some states have protected classes for characteristics such as source of income, sexual orientation, or marital status. Some state courts have also interpreted fair housing laws to mean that protected class categories serve as examples of illegal discrimination or harassment practices and that any arbitrary discrimination based on an individual’s characteristics or traits is also a violation of fair housing laws.

Rules and Privileges of Tenancy

Fair housing laws also have implications during tenancy. The rules of tenancy must be enforced in a nondiscriminatory manner. A landlord’s response to a violation of the rules must not differ based on the person’s race, religion, or national origin. While landlords must be responsive to complaints from tenants, they should be careful to take action against residents only on the basis of legitimate property management concerns. Landlords should consider whether a complaint could be motivated by race, religion, or national origin.

Landlords must also give all tenants the same privileges. A landlord cannot limit the use of building amenities such as community rooms, gyms, etc. based on a person’s race, religion, or national origin.

Responding to Problem Tenants

The Fair Housing Act does not protect tenants who are unruly, who create a nuisance, or who pose a danger to other residents. Landlords are allowed to take action against tenants whose behavior is disruptive to the neighborhood, including evicting such persons from the property. The same eviction procedures must be applied to all tenants. Any disciplinary action taken must be on the basis of a person’s behavior or other violations of property management rules, and not on race, national origin, religion, sex, color, disability, or familial status.

Landlords also do not have to rent to persons who do not financially qualify for the housing and may evict tenants who are delinquent in their payments. As long as the landlord uses the same standards to determine if an applicant is financially suitable and takes the same action against all persons who are delinquent in rents, the landlord’s actions would not violate the Fair Housing Act.

State & Local Fair Housing Laws

State and local fair housing laws can be more restrictive than federal laws. For example, the New York City Human Rights Law prohibits housing discrimination based on a person’s real or perceived race, color, national origin, gender (including gender identity and sexual harassment), creed, disability, sexual orientation, marital status, partnership status, alienage or citizenship status, age, lawful occupation or because children may be or will be residing with the tenant.

As another example, California protects against housing discrimination through the Fair Employment and Housing Act (FEHA) and the Unruh Civil Rights Act. The Unruh Civil Rights Act, prohibits discrimination in “all business establishments of every kind whatsoever “and has been interpreted to include businesses and persons engaged in the sale or rental of housing accommodations. Not only does the California Civil Code prohibit landlords from inquiring as to tenants’ and rental applicants’ immigration and citizenship status, as previously mentioned, the Code also forbids any municipality from passing laws that direct landlords to make such inquiries. The FEHA and the Unruh Civil Rights Act can be enforced against any owner, lessor, sublessor, assignor, managing agent, real estate broker, salesperson, or any person having any legal or equitable right of ownership or possession or the right to rent a housing accommodation.

What’s a Landlord to Do?

Know and understand applicable landlord-tenant laws – federal, state, and local.

Develop written rental policies detailing the rental criteria, application process, screening and selection practices, “house rules,” and communication and customer service practices.

Enforce rental policies consistently and equally among applicants and tenants

Keep thorough, complete, accurate documentation of all interactions (including oral conversations) with rental prospects, applicants, and tenants, even if a prospect does not visit the property. Failure to keep adequate documentation can weaken a landlord’s defense against claims of housing discrimination.

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