The Scam

February 3rd, 2012

CraigsList makes it seem easy for anybody to rent their own home.  Placing an ad is free and you can hide your contact information when people respond.  It is so easy, that many people now post ads on CraigsList.  Many tenants realize this is also a nice free way to seek a rental property.  Turns out that CraigsList produces a lot of activity for a price that is hard to beat.

Markets that are so free and open of course attract people who spend most of their time figuring out ways to separate people from their money in ways that are considered illegal and prosecutable, if they could ever be caught.  Rentals is where one of the simpler scams plays itself out it regularly.

When posting your home for rent, you provide enough information to give interested parties what they need to consider the home.  The address is often one of the key components, along with pictures.  You will start getting responses, lots of them.  Of course, if you are a Do-It-Yourselfer (DIY) then you will have to figure out how to screen all of these interested parties.  That is fodder for another post.  Today, lets just review how a typical CraigsList scam unfolds.

If you take a look at CraigsList ads, there are lots of them by date posted.  Most interested renters check it daily or every other day.  After about a week your ad has dropped pretty far down the page and much less likely to receive a view.  This is where I have seen the scammers step in.  New ad, using a lot of your information..except the street address.  The renter sees a home that sounds just like yours, no address, and lower rent by several hundred a month.  They respond to the ad.  From here things can go several directions usually depending on the location of the scammer.  Probably the worst case is a local scammer who finds out how to access your rental and proceeds to show it to the prospect representing their association with the owner or manager.  What I commonly see though is a simple giving of the address, scheduling an appointment, going to look but person does not show for access (stating there is confusion on the time or some other excuse).  Oh, and by the way there are several interested parties so if you think this home will work then you better submit a holding fee.  At that point if the prospect sends money they will not see their funds again and will likely learn they have been scammed pretty quickly.

Clearly, the interested tenant must take responsibility for falling prey to this scam.  The best action an owner or manager can take is placing a sign in the home that describes or identifies the owner or leasing entity.  Even a “no trespassing” sing with contact information in the window can accomplish the same purpose.  When the interested tenant drives by they will be confused as to the difference in names on the signs versus who they are contacting.  I usually get a phone call at this point and the prospect thanks me for saving them a grand or so.  Signs are your best public service weapon.

Of course you can peruse CraigsList daily for ads that seem suspicious.  Respond to the ad and see what you find out.  CraigsList does offer a reporting mechanism for fraudulent ads.  Reporting these people knock the fake ad and the scammer off Craigslist until they create another account with a new email.

Ultimately, both actions are necessary.  Please don’t think that as an owner  this is not an important issue for you.  Here are some examples of true stories taken from reports of other property owners and managers.

“The victim paid $1900, with no key, was told by the scammer to break a small window for access.  They moved in on Sunday evening, and we went by to check the property on Monday and found their stuff in the property.  The Police were involved in getting the then trespasser out of the property, who continued to argue that they had a legitimate lease.” 

“New tenants we screened and approved moved in on a Sunday.  The following Saturday they called us to say a moving van was sitting outside the home with people at the door who are upset that people are living in the home.  These folks are claiming that they have a security deposit held by the owner and a lease in the moving truck.  They are assuming now that the owner rented it twice in order to protect himself.  Actually the owner only rented to the people who occupied the home.  The people in the moving van had come 500 miles but never checked out the property other than pictures on line.  They wired a $3000 deposit to hold the home.”

As an owner..should you care?  I think we all should not want to see the criminals be able to ruin a marketplace with so much attraction.  Lets all take an active roll in stopping the scammers so our potential tenants are not lost when they lose their hard earned money.  Not to mention that often the suspicions remain that somehow the owner was involved in the scam.

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Professional Management Is Best Option For Accidental Landlords

January 26th, 2012

Today’s economy has provided us with two types of clients.  Professional investors and accidental landlords.  I have written about accidental landlords before but basically these are the people who wanted to sell their home, could not get the money for it they needed, had to move, and decided to rent the home for cash flow.  Unfortunately, there is often a lack of resources available to handle surprises with these homes since the Accidental Landlord is now living in another home and has expenses associated with the new home.  It is also likely that there is a very small differential between outflows and inflows for the accidental landlord.

The first thing we need the owner to do is to change hats.  The house is no longer their home.  It is an investment.  Investments have two elements of return.  One is income, the other is appreciation.  Other than covering the majority of the owner’s expenses, the typical accidental landlord’s former “home” is not going to likely provide an income return.  With the exception of principal reduction and tax considerations, their former home is a long term appreciation investment.  And there is nothing wrong with that!  In fact, many accidental landlords  hold onto these properties, having the majority of expenses paid, while paying off their mortgage.  The goal is a property that is a retirement savings plan..available to be sold in the future debt free when the owner likely really needs the income!

A common reaction from the accidental landlord is they can’t afford professional management.  The first question is are you an investor or still a home owner?  Investors utilize professionals to maximize their investments value.  A great property manager will pay for themselves in many ways…actually helping you to increase your income and appreciation!

Here is a list of some of the ways professional management pays for itself and why the accidental landlord should not decide to also be the accidental manager.

  • Leasing the home through channels successful for your home and location.  Each day the home sits vacant is costing you money.  Advertising the home for rent also costs lots of money.  Not to mention needing to show the home to all interested parties.  What is your time worth?
  • Taking an application and then screening it will cost you more time and money.  Will you know how to assess factors such as income to rent ratios, and issues with FICO scores?  Most applicants do not have great FICO scores.  A lot of subjective professional judgement, based on years of experience,  goes into the tenant selection decision.
  • Interestingly enough, I have had our professional investor clients tell me that we pay our fee by simply being able to rent their property for more than they could as an owner.   Two reasons this likely occurs.  One is we have a lot of rental information that allows us to assess the market as of the current time.  Not the  dated rumors from a year ago when you heard your neighbor was able to rent their home for x dollars.  Second, tenants seems to want to negotiate leases when dealing directly with the owner.  When dealing with a manager, the stated lease is the amount we can accept.  If the applicant needs less they probably need to go on to another property…or so we tell them.  They usually stick around.

There are other ways professional management will pay for itself even when you are an accidental landlord.  I will provide more in part two of this post next week.

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The Late Fee Incentive

January 17th, 2012

Our lease states rent is due on the 5th of the month.  Late fees of 10% of the rent payment are added to the tenant ledger after that.  Pretty simple stuff.

Tenants seem to think that the late fee can be ignored.  They pay the regular rent on the 8th of the month and ignore the follow up requests for the late fee.  Most owners do not start an eviction over an unpaid late fee.

Each month though that the cycle continues, the deficit grows.  The payments received from the tenant are applied to the oldest charges first.   The late fee from the previous month is paid and then 90% of the rent gets covered with the remainder of the late fee.  So, another late fee is charged and now the tenant is behind the 10% of the rent payment that did not get covered in the current month and the new 10% late fee.   The reality is their lease is in a default status.  Eviction could start at any time!

As the manager, we give the tenant notice both electronically and by mail delivery.   As the balance grows the tenant usually starts to argue about the late fee.   Usually after reluctantly deciding they have no argument, the tenant will make the payment required to bring the tenant ledger current.  It is the tenants that decide these charges are just not right and refuse to pay them that cause a dilemma.

As an owner or manager, it is not recommended that this cycle is allowed to repeat itself month after month.  As the outstanding balance grows with no collection efforts, your case to eventually crack down or receive judgement in an eviction is weakened.  I would not advise anyone to try an eviction based on unpaid late fees unless aggressive collection methods have been attempted every month.   I believe that the communications to the tenant need to include a clear indication that they legally owe this amount and if they continue to ignore it, a judgement will be obtained making it much more difficult in the future to lease a home.

In practice, that usually seems to resolve the situation.  The tenant may complain, but they make the payment.   Like a child who has learned to clean their room when asked in order to avoid  the punishment of also cleaning their brother’s room;   tenants make their payments before the fifth to avoid ever having to encounter the ugly late fees again.

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The Biggest Mistake

January 9th, 2012

What is usually the biggest mistake an owner can make with their rental?  Despite our strong suggestions otherwise, in a hurry to re-lease a property the owner insists on starting to allow prospective tenants to see the home prior to the existing tenant completing a move-out, or funding a trash/clean out.  One of two things occur..potential tenants are actually lost due to the condition of the home, or promises are made that cleaning, maintenance and painting will be completed..and the tenant’s expectations are established at a level that may not meet what the owner will complete or is possible.  Why? Often, the owner approves the items but wants to accommodate a tenant moving in, and promises are made to repair something.  Unfortunately, after the tenant moves in it is much more complicated to make the repair and for whatever reason it does not get made completely.  The best practice is to show a property, and enter a lease, in a ready-to-move in condition with no list of repairs of maintenance promised.

Ultimately, losing a new tenant due to a bad showing appearance is costly.  At any one time there exists a market for potential renters.  They jump on any new property for rent.  The first few days of a new listing are often some of the busiest.  A bad impression will never bring those prospects back.

More importantly, really good tenants (you know the ones you want living in your property) expect to move into a clean, well maintained home and often can’t imagine what your property will look like once it meets their standards.  Moving on to the next property is easier than imagining.  I always use the first week of vacancy in a property to complete a full inspection of all maintenance items that might have been a tenants responsibility, but is usually not done to my level of expectation.  Items such as gutters cleaned out, furnace filters changed, and most importantly a cleaning that is just not possible when a home is occupied.

Making the best first impression with potential new tenants establishes what type of owner and management company we are and what we will expect from our tenants.  What kind of tenant rents a home that is dirty or needs repairs?  Often it is a tenant that has set their standards lower.  Is that really who you want renting your home?

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Concerns About Reserves

December 12th, 2011

I recently received an email from a prospective new client.  In the email, the property owner asked about reserves and the concept of reserves.  It seems like he must have had a bad experience on this issue.  Here is part of  his message.

“One of my main concerns in looking into property management is the common stipulation that the property management company can come into the home for any maintenance issue under $250 without the consent of the owner.  While I understand maintenance is essential, there is no protection for the owner that the management company will not take advantage of this clause and make unnecessary alterations that the owner is then billed for, and forced to pay.  What sorts of maintenance issues are customarily performed and how often?” 
This is a really great question.  When hiring a manager, I too want to know how a reserve will be utilized.
Lets start with the language used in our management agreement:

OWNER agrees to submit to MANAGER an initial RESERVE of $250 per unit managed.  OWNER agrees to maintain a $250 balance in this RESERVE.  RESERVE is only to be used for emergencies, minor maintenance requests, and other incidentals.

Then our agreement states:

Without the prior written consent of the OWNER, MANAGER may also make ordinary repairs and alterations (provided the expenditures for any one item of repair or alteration shall not exceed the sum of $250.00) unless they are made under circumstances that the MANAGER shall reasonably consider to constitute an emergency. 

The first thing I want all owners to know is our practice is to contact you before we spend your money.  The exception is emergencies that require immediate decisions to protect the value of the property or the health and occupancy of your tenant.  Otherwise, you will receive a request for approval for repairs or maintenance.   The actual reason a Reserve account exists does not address the ultimate concern from this owner.  The concern is a manager who just spends the reserve in ways not approved by the owner.  Defining an emergency will be something your manager will have to be trusted to judge.  There are also laws protecting tenants and if a owner is non-responsive, the owner and manager will both be facing potential liabilities if issues are not addressed.  But there are also incidentals that can occur as part of the management of the property and an owner should not expect the manager to fully front the payment to the contractors or purchase of materials.  The reserve provides us the ability to not request a contribution from the owner every time a door knob needs to be replaced.  In our agreement, the reserve amount actually serves as a control point that provides us permission to make ordinary repairs to the property as needed.  In practice, unless it is an emergency, the owner knows about these repairs.

The question above opens up an entirely different issue in my mind.  Who can you trust?  It seems to me that this owner may have had a bad experience with a manager using their reserve.  Lets face it, $250 is not going to go a long way in making repairs or handling maintenance.   But there needs to be a control point, and it is reasonable that a property manager knows that the funds are available to pay a contractor or to run to the hardware store to buy supplies for the home.  It is also reasonable that an owner should be involved in providing a timely approval to proceed with the repair.

I might add that in my experience there are two types of management companies.  One manager does insist upon being provided total discretion over the leasing and management decisions.  This type of manager might be right for you if you are really busy and do not wish to be troubled with the day to day operations.  The second choice is to function in more of a partnership with the owner.  It is much easier to establish management operations that proceed from a partnership approach, and then moves to a independent operation approach, than it is for the independent (total discretion) company to work with an owner who wants to be a partner.  Maybe this owner was working with the wrong type of manager.

So, the answer to this owner is that he is right.  The entire definition of the reserve concept does not protect an owner from a manager who makes decisions routinely without communicating to the owner.  The reserve does provide an agreed cap where the manager can’t continue without risking their own funds and their client relationship.  But also look at what kind of manager you hired.  Does the manager approve the tenants?   You are probably then in a independent arrangement.  Maybe that is not what you need.

If the utilization of the reserve is an issue, then frankly it seems there is an issue with the type of manager you are using.  This needs to be addressed to decide if they can adjust their practice to more of a partnership model.  The relationship you maintain with your manager should be one that also includes trust.  With us, we believe in the partnership model so we communicate and document.  Keep it transparent.  Don’t use the reserve unless the owner agrees or it is an emergency.  Do unto others as you would have done unto you.

 

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Residential Purposes

November 29th, 2011

Our lease limits the use of a rental property to that of a residence.  It was quite a surprize recently when our plumber followed up on a repair of a leaking drain line with a simple statement.  “She must have 10 kids she is taking care of.”  What?

Turns out our tenant was running an in-home day care in our rental.  Easy enough to advertise for kids and pretty soon the home is full all day.  Simple issues like being licensed or certified are not part of her agenda.  I am certain she is good with the kids and hate to rain on this parade….but this is a business, not just watching a few kids for friends.

What to do?  She always pays her rent on time and has never been a problem.  Yet, what happens if something tragic should occur with one of these children?  I decided to first contact the owner and share my concerns.  The owner does not like his properties to sit vacant long so I find he typically gives lots of leeway for tenants as long as they do not fall more than 30 days behind on rent.   In this case, he was more concerned about damage to the property that could possibly occur with all of these pre-schoolers running around.  I shared the liability concerns and a decision was made.  In this case, the child care business needed to cease and if it required a transition for the tenant, we would allow 30 days.

Thirty days is a long time for a lot of damage to occur.  But it also was humane to the tenants and all of those parents who depended on this child care arrangement.  Maybe too kind.  The decision might have been different if it was not for the quality of the tenant.  Call it a business decision, she just needed to find a new location.

The ensuing conversation and official letters involved a lot of debate about what determines residential purposes.  I think the line in the sand is the difference in a hobby and a profit.  This tenant was not caring for a couple of kids for friends a couple days a week.  She was operating a child care that allowed her to pay the bills.  She had lost her job that had been her position when she applied.  She determined a plan involving child care, when accounting for her own pre-schooler, covered all of her personal needs.  A worthy plan.  One that should not work in a rental for all the reasons cited.

Interestingly enough, she found another home to rent and they agreed to the child care activities.  Maybe it is easier if you know about it up front?  I do not think so, but it might be easier for a cash  hungry owner needed cash flow.  If this is you, just make sure you have assessed the whole risk and start by insisting that your tenant has business liability insurance, that you are an additional insured, and take that certificate to your insurer and see if they feel like you might need to adjust your coverages.

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Holding Fees-No Thank You!

November 23rd, 2011

It is always obvious when we have a popular rental.  The phone rings off the hook, emails fly in from multiple websites, and sight unseen-we are asked if we take holding fees.  A holding fee is a concept more commonly utilized in large multi-family buildings where there are similar units and a rental office.  They work as a commitment device so that the apartment owner is not showing the unit you want while you get your security deposit and schedule an appointment to sign a lease.  There are other reasons they are used but the main point is they are non-refundable..often converting toward the security deposit.

When we have a popular home for rent, it seems inevitable that we will be asked if we will accept a holding fee.  The interesting part of this is sometimes it is requested because a person can’t get there to see the property immediately.  More commonly, it is  due to delay that the prospective tenant might have before their spouse or even children can come see the home.  Basically, they do not want to lose the right to rent the home.  They wish to take control of the process.  Taking control means keeping the home off the market also while the background check is being completed.

When taken, a Holding Fee must be non-refundable.  I have an agreement for this purpose that is called a “Rental Binder Agreement.”  It identifies the parties, the deposit, the last date the lease must be executed and balance of a security deposit and rent payments made, and some other terms that will be a part of the lease.  I have used this a handful of times and I really do not like it.  In fact, I won’t offer this arrangement unless it is at an Owner’s instructions for somebody they wish to be the tenant.

Why?  I truly believe it best to not take a home off the market until there is a fully paid security deposit and executed lease.  That way the risk that a person paying a holding fee does not perform is eliminated.  We have not lost any time having the home off the market.  Prospective tenants  go to our website immediately and make application.  If approved, they have 24 hours to sign a lease and bring us the necessary funds.  If they do not perform, we have never taken the home off the market and possibly have another applicant ready to go.

I also learned the hard way once that a holding fee provides a prospective tenant negotiating room and time to dissect the lease.  A tenant, under threat of the landlord moving on to the next tenant, is more likely to sign your lease with little or no discussion.  A holding fee buys time..and puts the owner at a risk of losing other tenants while the one with the reservation utilizes every day possible.

I continue to ask other managers what is the benefit obtained by offering a “holding fee” arrangement.  Other than the idea that a tenant feels committed (which I do not buy) there seems to be none.  If you have a story of how such a fee helped in the rental of a property, please share.  For now though, when left up to me, I say “no thank you..we do not offer such an arrangement.”

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The Bankrupt Applicant

November 21st, 2011

I use to be a banker many years ago.  In my credit training, I learned the applicant, or borrower, with a recently discharged bankruptcy was a better risk than one who was struggling to avoid bankruptcy.  Makes no sense..right?  The reason is that a discharged bankruptcy means no further obligations..they have been charged off!  If you are still standing on the debtor’s obligation list, you are no longer fighting for the limited resources of the borrower with lots of other creditors.  In fact, you might be dealing with the best borrower you will face in a month..except for that stinky bankruptcy.

In approving tenants applications, I have placed this training high in determining whether a tenant should be approved or not.   Most people will pay their rent first in order to preserve their home for their family and self’s.  Eliminate other obligations and as long as their rent to income ratio fit my model of comfort, there was something to be said for the lack of other obligations (in the case of a Chapter 7) or a set payment plan (Chapter 13) to assess the likelihood of their being cash issues for the tenant.

The other day, when presenting a tenant fresh out of a Chapter 13 I had a new owner say to me that they were not comfortable with the applicant despite my explanation of their strong income ratio and lack of other obligations.  As I drilled into this issue, I saw it in a new light.  This owner also has a banking background.  He simply explained his reluctance as due to his belief that somebody who has found the ease of bankruptcy for discharging their obligations, may not see paying their rent as an obligation as noble as others.  In other words (putting his concern into laymen terms) an applicant who freely decides to walk away from their obligations, no longer has a fear of having their credit destroyed by a new creditor.  The applicants credit is already messed up.  They also may not care as much about just letting new obligations go if faced with difficult times again.

An interesting perspective that has merit.  It is the other side of the coin when reviewing this type of applicant.  The question for owners is, does this concern outweigh the likelihood that you would extend a lease to such an applicant?  Or does my long time position ultimately increase the likelihood of approving this tenant?

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Have that Dog Fill Out An Application Also

November 7th, 2011

Last week I walked into a Indianapolis area property under our management by gaining access in the garage.   I noticed a 40 lb bag of large dog chow and a large cedar bed.  I thought that was a little strange as the request for pet approval was a Maltese breed.  As I entered the property,  I noticed one of those large rawhide chew bones and a large food and water dish.  Yet, no sign of a dog.  The tenant knew I was coming on this day so they had apparently removed the dog assuming I would not catch on to the other clues?  I am not sure..but there is a big difference in a Maltese and a German Shepherd (which I later found out by asking the tenant).  According to the tenant the Maltese had met its demise and they had gotten a new dog..with no thought of there being a need to contact the manager since they already had a pet deposit and an approval for a dog.

Obviously, these are two different types of dogs with two different types of personalities.  I have learned through the years that even little dogs can be quite a challenge to a property.  In fact, I am hard pressed to ever remember a pet deposit refunded in full.  As a owner though, in single family residential leasing you are eliminating a large percentage of applicants by not permitting dogs or cats.  We had a process for addressing initial approval…but nothing other than a required notice for a pet addition or replacement mid-lease.  An owner needs to have the ability to review the pet deposit in place and adjust it for the new animal, while also considering if an approval will be granted at all.

With this event last week, we have created a new “Pet Application” form that we will use with all new tenants and also any animals brought into a property after the move-in date.  This application covers breed, weight, age, training and a list of rules for the owner to follow.  It addresses the deposit and other miscellaneous charges that the approval of this application could include.  It is truly a application for Fido and as we build this into our new leases, will be a clear violation of the terms of the lease if it is not completed with any change in the animals approved for the property.  We will also use this application for new applicants.  

So many lessons in property management are learned as actual circumstances present themselves.  This was a situation that actually allowed us to improve our existing procedures.  I will never say we can’t keep learning.

 

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Don’t Tell Your Tenant!

November 1st, 2011

When you are leasing and managing your property yourself, one of the regular events will be direct communications with your tenant.  These communications need to be guarded.  When I speak to owners considering adding a property manager, the most common reason why is they realize how difficult it is to be both owner and landlord/manager.  In the process they often want to act like a “good guy” to the tenant.  This results in “open mouth-insert foot” moments.

Here are a few owner statements I have learned about after assuming management.  It is really not a good idea to say these things.

Don’t give the tenant your home address.  Meet them at the home and have the rent mailed to your office.

In the process of getting the lease signed, don’t tell a tenant when they have questions to not worry about what the lease says as you will work it out with them.

Whatever you do, do not violate the Fair Housing Act.  While there are some exclusions for single family owners renting their own properties, the cost to defend yourself from a claim of discrimination will put you in bankruptcy.   Certain questions are just not to be asked.  You do not care if they are a same sex couple.  You will rent to people married and not married as long as they qualify.  Same goes for all the ethnicity you will run into.  All have a right to rent from you.  They also have a right to make your life miserable if you discriminate against them by denying rental based on those factors, or treat them differently once in a lease.

Don’t tell stories about what happened with the last tenant.  That is a private matter and you have no business sharing the fact that you evicted them.  Even if they are nameless, the new tenant may end up with their mail one day and find out who they are.  Let the natural sequence of things provide your new tenant the clues about the last tenant.

Don’t make promises to get somebody on a lease unless you will fully honor them.  The most common one we hear when taking over management of a property?  Owner Joel promised me that we would get our security deposit back.  Really, even if you put a hole in the wall when you are moving out? 

There are many other examples but this gives you the flavor that it is best you have a straight business relationship with a tenant.  I have also seen quite a few people later sorry they rented to a friend of a friend.  Business is business, and your rental property is business with laws and protections for your tenants, and care that you need to take as a owner/manager.

 

 

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