Archive for the ‘Responsibilities’ Category

Foreclosure-Out of the Frying Pan (and Into The Fire)

Wednesday, September 1st, 2010

It’s Friday evening and I am just about to wind down when the phone rings from one of our tenants.  Apparently, the Sheriff has just posted a notice on their door with several documents.  The tenant understands one part…the word “foreclosure”.  Immediately I realize that our owner has not been making mortgage payments and now the lives of their tenant is about to be turned upside down.

I understand every foreclosure has its own unique reasons.  It still seems wrong to take a tenant’s rent money and not make sure the obligations concerning the mortgage are kept current.  In fact, over a year ago we added language to our management contract to specifically address mortgage payment default as a term of cancellation.  Within this term of the agreement, the owner permits us to immediately locate a new home for the tenant.  I understand the foreclosure process well enough to not want to gamble with how long a tenant may be able to live in a property when this legal action has been taken.

What about the owner though?  I wonder if the owner has considered the cost of foreclosure?  For that matter, the cost of a short sale?  This is a complicated tax matter, better left to be addressed considering each person’s individual circumstances, but the IRS is likely to still demand payment of taxes on the recapture of depreciation deduction (approximately 25% of the amount previously depreciated), capital gains (state and federal), and the cancellation of debt (assuming the court does not provide the lender a judgement to pursue the owner for a deficiency).  Please note the Mortgage Forgiveness Debt Relief Act does not apply to investors renting a property.  An investor might be able to take advantage of some of the protections of this law if they can prove they actually lived in the home for two of the past five years.  Again, these are matters for your tax professional.  If you do not have one, now is the time to get one on your team. 

In addition to the potential tax hits, a foreclosure will destroy your credit.  I have read certain people think that somehow when the housing market recovers lenders are going to look at this period of time with more lattitude given to those who experienced a foreclosure.  I find that hard to believe, particularly when every event in the credit market has made it harder to get any kind of financing.  Assume that you will be excluded from the traditional housing finance market for 5-7 years.  This also is just the affect on borrowing for housing.  Expect issues with car loans, credit cards, and any other situation requiring a credit report. 

Lets return to the property where the tenant was making their rent payments on time.  In this case I learned the owner had a monthly deficiency of $250 (rent was not covering his payment).  Additionally, he did not wish to make some needed repairs to the structure based on an estimated drop in value.  Yet, assuming a forgiveness of the debt and depreciation recapture, he was going to assume a new obligation with Uncle Sam that exceeded the next two years of rent deficiency!  Nobody had discussed the tax side of the foreclosure coin with him.  He just knew that he did not want to keep losing money every month.

Losing money every month or having the IRS breathing down your throat for their taxes?  It is your decision to make.  I just want our clients to understand the potential ramifications if they decide to “let their property go.”

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Family Dinner Time, Your Phone Rings..Do You Take The Call?

Friday, July 23rd, 2010

After months of getting your investment property prepared, the first call comes right as you sit down with your family for dinner.  You are not sure who is calling, but from now on every unrecognized number may be a tenant…a source of revenue to offset the payment and expenses you have incurred.

You ask your family to excuse you as you slip off into another room.  Sure enough, it is somebody calling to find out about the three bedroom home for rent.  As your heart skips a beat, you describe all the personal touches, along with the not so personal touches.  All the fresh paint, and efficient windows, and the extra storage.  The caller sounds nice enough and now they ask if they can see the property!

“This is going to be easy” that little voice in your head tells you.  The caller says they are free after work tomorrow.  You say great, forgetting for the moment that tomorrow is Jimmy’s playoff soccer game.  Remember, you need to get this home rented.   After confirming the time, you hang up and realize that you do not have the caller’s number.  Maybe it is on caller ID…but no…they must have used a blocked number.  You return to dinner as the table is being cleared.

That night your wife reminds you about Jimmy’s soccer game tomorrow night.  Immediately, you realize the conflict and wonder how you can find these callers to reschedule.  That fails, so you hope your best buddy can show it to them tomorrow.  He has plans.  So, you are stuck.  Maybe a quick showing and race across town and still catch the second half.  

The thought hits you, maybe you really should have budgeted for help with this hobby.

The showing time arrives.  You bring two rental applications found on line..just in case.  Not sure how you will get the background checks or credit pulled but you  will figure that out once you have the applications completed. 

 At the agreed time…no prospective tenant.  Fifteen minutes late, they pull up in a 20 year old van falling apart and very dirty.  It is exhuming exhaust.  The prospects both grind out their cigarettes on the driveway as they get out.   Both possible tenants begin to unload children from the rear.  First one, then two, then three and finally four and five.  Lets see, 7 occupants in a 3 bedroom 1000 square foot home.   Your heart sinks a little.

You show off your pride and joy and learn that there are some mysterious circumstances about where these people currently live.  A reference to how nice it will be to actually live in a home instead of the van by one of the kids catches your attention.  At that moment, you decide to ask what they do for a living.   One is unemployed..the other just got a job after months of unemployment.  The job involves selling magazines and appears to not really be as an employee but as a contractor.

Of course, they love the house and request the applications.  You hand them out and ask them to fax or email them back as you really need to run.  They do not have fax or email and want to fill them out now.  You are screwed.  Jimmy scores the winning goal..you miss it.  You waste an hour with a family that you are not even sure how to screen to officially reject.

Why is it again that you are doing this yourself?

Mistakes you learn by and the next time you will be smarter.  No answering the phone during dinner…but what if?  More pre-screening on the phone…but what if they call during dinner and you are in a hurry?  At least get a phone number…that one you can do every time!  How many more summer evenings meeting tenants before you find one?  Then, won’t it be fun to increase the return on this hobby by being there to service the leaky faucets and the oven that does not work on Thanksgiving?  Oh, and collect late fees when rent is late.

Leasing and property management sure sounds like fun when you have a life and a career..doesn’t it?  Most people actually have to enjoy experiences like this to decide that they understand why management and leasing companies exist. 

Save yourself the headaches.

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Posted in Best Practices, Owners, Qualifications, Rent Preparation, Responsibilities, Screening, Selecting A Manager, Tenants, Uncategorized | No Comments »

What Happens To The Security Deposit When Changing Property Managers?

Wednesday, July 7th, 2010

Recently, one of our owners lost their investment property (that we were managing) to foreclosure.  In the new day we currently live in, this change in ownership (from individual to bank) will mean little to the tenant.  Unlike just two years ago, the banks are honoring leases under the Protecting Tenants In Foreclosure law passed in 2009. 

Where a bank is not traditionally handling property management, they have had to go out and find companies to handle this task for them.  Unfortunately, the banks have chosen to handle tenants and management the same way they handle property services…wholesale.  The banks are hiring large companies to serve the property management function.  These “wholesalers” are providing nothing more than a back room and a local person with little or no property management experience.  Without going into too much more depth as to the ramifications of this approach, having an inexperienced field person working the transition of a property to a new manager created some issues when it came to the handling of the security deposit.

This issue is relevant to both a tenant and owner.  We hold every dollar of deposits in state regulated escrow accounts.  This money belongs to the tenant unless they violate their lease in a way that creates a need to reimburse the owner.  So, just because Wells Fargo is knocking at the door demanding we hand over the security deposit, we don’t just write a check.

Likewise, if you, as an owner, are transferring property managers, we expect all parties to handle their fiduciary responsibilities as to the security deposit in a manner that honors the tenant’s interests.  Tenants have the right to be made aware that a property manager is changing.  The correct way to handle a change in managers is to:

Utilize a letter explaining the transition.  This letter should be generated by the new property manager and ideally also signed by the owner and tenant.

Issue a check for the security deposit to both the tenant and the new property manager. 

We will usually take this check to the tenant for endorsement with the letter.  In this way we are able to introduce ourselves as the new manager, answer any questions, and have a written record of receipt of the transfer letter and endorsement of the security deposit funds into our escrow account.

Needless to say, the field person hired by the wholesale property management company hired by the bank had no connection to any procedures like this.  Basically, stating that they had the full power of the US government supporting their actions, they insisted that we hand over our lease and write them a check for the security deposit.  The resulting conflict took a few days and a call with the wholesale property manager.  We gave them a check made payable to the wholesale manager and the tenant.  I wonder what happened after that?

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Posted in Best Practices, Owners, Procedures, Property Manager, Responsibilities, Security Deposits, Tenants | No Comments »

Jump In..The Water Is Perfect…I Hope!

Monday, May 3rd, 2010

Spring has sprung and pools are opening everywhere.  An owner of a home with a pool, has a host of additional liability and maintenance issues to  be addressed.   My best advise to pool owners is to plow it under!  OK..joking..sort of.  A pool might increase the desirability of your rental but in general, if you own a pool it is very important that potential tenants are screened even more as to their ability to maintain a residence and follow logical safety standards.  The tragedy with pools are the number of very concientious people who have experienced a tragedy because they momentarily became distracted.   Owners of pools must hold out for the highest standards with their tenants.

There are also maintenance issues that must be addressed.  We utilize a Pool/Spa Addendum that does not leave a question as to responsibility.  This addendum covers two basic areas:

Maintenance

Indemnification of the Owner from Liability Issues

Maintenance puts the burden of keeping water levels proper with the tenant.  It also causes the tenant to agree to utilize all pool and spa covers when they are not in use.  The maintenance issues such as chemicals, cleaning and maintenance can be either the owner or tenants responsibility.  In general, I recommend an owner hire a pool company and pay the company for ensuring maintenace and also reporting back  any hazards or conditions of concern.  What better way to avoid costly repairs or an avoidable accident than having an independent company inspect the pool every week?

Indemnification in this addendum clearly places the tenant on notice of a list of un-safe practices and places the tenant clearly responsible for the actions of their family and guests.  It also strongly suggests tenants carry liability insurance.  Most tenants do not have any liability coverage (other than on their automobile policies) so this is actually a great suggestion on properties that have potential concerns.  Often, I will just suggest to an owner we require liability coverage naming the owner as additional insured.  This has to be decided case by case but, in return for the owner handling pool maintenace, the tenant can obtain liability coverage and feel they are getting a savings. 

It is important that you look at your property for risk.  Pools are an obvious one.  We all enjoy them and it is our goal to make sure the pool remains an attractive feature of your rental.

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Posted in Best Practices, Responsibilities, Risk | 1 Comment »

The Home Break-In-Who Pays For What?

Thursday, March 11th, 2010

Lets use the following example to discuss a scenario that actually has  different variations.  Your home is managed by us and the tenant we have placed calls to tell us there has been a break in.  The door is kicked in, cabinet doors ripped off the hinges, torn screens, electronics removed, and a big hole punched in a wall.  The owner is upset and the tenant is scared.  How do we sort this mess out?

Lets start with the first, primary issue.  The home is not secure due to the break-in.  I have seen owner’s stall in wanting to deal with this situation.  There is almost always an assumption that somehow the tenant brought it on themselves.  Maybe… but it does seem in most cases this is not realistic.  The basic fact is that the owner is obligated to provide a safe, secure, habitable property as part of the lease.  So, without delay, Wilmoth Property Services will resecure the home as needed and bill the owner for the cost of these repairs.

Next, we have the issues of the damaged interior items (cabinet doors and a hole in the drywall).  Again, the natural reaction is for an owner to want to avoid these repairs.  The thought is often this is possibly damage that already existed and was caused by the tenant.  We are going to recommend the owner make these repairs immediately, as they affect the value of their property.  If later information is obtained that leads us to believe the tenant might be responsible, we can look to the security deposit for repayment. 

I believe it is important in these situations that we operate with empathy toward the tenant.  If you have ever experienced a break-in, there is a lot of feeling of violation and the resulting trauma of the next few days when you return home wondering if the intruder has returned. For an owner to try and avoid returning a leased property to it’s previous condition is not the way WPS does business. 

As to the tenant, their Renters Insurance will cover the loss of the electronics.  In addition, we require a copy of the police report and any additional updates from law enforement.  In this manner, if a connection is made to the tenant as to any of the circumstances associated with the break-in, we can determine with the owner how to proceed.   The place I can recall a tenant potentially inviting a break-in involved an illegal activity taking place in the property.  By the police determining that the illegal activity was a potential cause of the break-in, a decision ensued to invite the tenants to relocate (with a threat of eviction).

At this point, it is a case by case analyis.  The simple fact for our owners to accept is we must operate with the benefit of the doubt, and immediately provide our tenants safety and security.  For the good of all parties, and the property value, immediate repair of all damages will be strongly recommended.

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What Happens When The Owner Of A Property Under Management Defaults Their Mortgage?

Tuesday, February 16th, 2010

Unfortunately, an issue that use to be an occassional rare one, has today become a frequent problem.  In almost all cases, owners choose to make their own mortgage payments.  We do offer a service to do so, but most owners I believe wish to control their cash flow on a rental.  So, until the day a tenant is actually served a notice (sometimes it is the Notice of Defaul; sometimes they get nothing until an Eviction notice arrives)  the management company  has no way to know this event is occurring. 

The question today is should we?  Are we owed an obligation that an owner, under a property management agreement, should advise us if his property is entering foreclosure?

The answer is yes!  The reason is that the owner needs to be communicating with us to manage the property with an eye that this event is occurring and decisions should be made with it in mind.  The first issue is the tenant and their lease.  The second issue is maintenance.

In the not so long ago days of last year, a tenant would be faced with a potentially devastating one week notice to move presented by a bank representative after a foreclosure.  This could come as a total surprize.  Despite the many ways a foreclosure could get posted, I have seen many owners be served papers throughout the default and not a single notice posted at the subject property.   Today, the 2009 Protecting Tenants In Foreclosure Act  allows tenants to have rights that at worst case will give them a 90 day notice to move.   This topic deserves a whole separate post but the way this act is being enforced is wide open because much of it was written in a way left to interpretation either at a later date by the courts, or in action by the banks.  Nevertheless, the tenants do have some protection that did not exist before.

One of the processes that is very uncomfortable for me is the knowledge an owner is in default (likely not making their mortgage payments) yet still collecting rent from a tenant.  The law actually permits this up until the date of foreclosure.  It may not seem right, but the two issues are entirely separate..a lease between an owner and a tenant versus a debt between the owner and bank.  It is really more of an ethical issue. 

When  it comes to maintenance, I need to be making decisions based on the knowledge that the owner is likely not in a position to fund those repairs.  This creates an awkward position when it comes to emergency repairs as a decision needs to be made regarding the ability to collect repayment.

Why do I write all of this when it seems there is not really a good reason to continue in a management agreement when an owner has walked away from a property?  Because communication is key to working through the situation.  An owner that does not wish to communicate with the management company is also likely to not be willing to work with a tenant or deal with emergency repairs.  For this reason, our 2010 Property Management Agreement has added language obligating an owner to notify us as manager when they receive a Notice of Default.  This notice then allows us to terminate the agreement.  It would not be our intent to terminate unless we find out about the default from a third party-indicating the owner was not going to tell us.   Assuming we are told by the owner, we can start the process, in consultation with the owner, of managingthe property toward the outcome of a foreclosure in the months to follow.

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Posted in Owners, Responsibilities | 1 Comment »

How To Choose A Property Manager-Owner Responsibilities

Thursday, January 21st, 2010

What are your responsibilities as the property owner once you select a property manager?

About the only responsibilities you’d have as a property owner once you hire a property manager are to make the mortgage, property tax and insurance payments. Even so, some property management companies will do that for you (for a price). But, of course, those payments would remain your responsibility. If the property manager didn’t make them, the excuse that “he was supposed to pay you but didn’t” won’t work very well.

Of course, you always have the ultimate responsibility for the maintenance and repair of the property, even with a property manager. You certainly wouldn’t want to leave the responsibility totally in his or her hands. Two things could happen, neither good. One, he or she might not take as good care of the property as you would prefer, thus driving down your rents and creating deferred maintenance, both costing you more money in the future than they would if they had been taken care of in a timely manner. Two, your property manager might spend too much on repairs and maintenance, thus eating into your profits.

You could also undertake some responsibilities, depending on how much you wanted or were able to do. For example, you could approve tenants. And that is something you might definitely want to consider. I hear horror stories occasionally about property managers not being as careful as they should in selecting tenants. One way to combat that is to create for the property manager a list of rental criteria (possibly even with his or her help and consultation on what is reasonable for the property and the area). Then you could make the final selection from those who meet the criteria.
That involves a much longer and more complicated procedure than I am explaining here, and has many considerations regarding the Fair Housing Law. However, your property manager should be well versed in Fair Housing compliance. If he or she is not, find another property manager in a hurry: it could be a lawsuit waiting to happen.

Your responsibilities would also include approving any repairs or capital improvements over an agreed-upon amount. Obviously the property manager should not have to call you to approve having someone fix a running toilet or broken window, but should get your approval for an exterior paint job, a new roof, new carpeting and such.

Finally, it will be your responsibility to pay the legal bill involved in any eviction process. Many times your manager can handle parts of this process. If an attorney is required there will a charge to the owner for the attorney’s time. The good news (and bad news) is that this type of filing is so common it is a rather inexpensive procedure…assuming the tenant does not try to dispute the eviction to the Judge.

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