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.”

From this point on we are in pre-eviction mode.   Once in a while when a tenant who has never been late is late, and we think there may be an issue unrelated to finances, we may give a courtesy call as well to serve as a reminder.  The late fee is still accrued but this provides them a chance to settle quickly before we move into posting for eviction. 

Our schedule of notices is as follows: 

• Rent is DUE on or before the first of each month; and late if received after the close of business on the 1st
• Late Fees per the contract are automatically added to the tenant’s account on the 6th.  All tenants receive an email notice when this charge is posted.
• A current statement is available on the Tenant’s web site showing the amount owed.  This is explained to all tenants and is available until the end of the lease or the Tenant is evicted.
• Pay or Quit notices are posted around the 10th day (depending on Holidays/Weekends)
• Eviction is filed around the 15th (Evictions can be stopped at any time up to the hearing and order from the court)

 We stress to all tenants that just because there is a grace period  for Late Charges to accrue - the rent is still DUE on the first of the month.  Therefore, it becomes “Late” if paid after the first (which is why we are owed a LATE charge is it is allowed to stay late for five days).

One other issue is tenants who “short pay” or do not pay the full lease amount.  They too are considered late as the balance was not paid in full.  All the above rules and time lines also apply.  If an owner chooses to accept something different, we will follow their direction.  Short pays still accrue full late fees and the probability of an eviction notice.

When he contacted me to say xyz owner has a question about her owner statement, he could not really elaborate.  He knew it had to do with funds advanced by the owner but did not understand the exact nature of the question…partly I assume because he was driving a car when cornered with the unfamiliar question.  I subsequently offered to contact the owner and try and get some elaboration.

I chose to send my question to the owner with email.  A lot of people are still not comfortable with writing down questions, or communicating in this manner.  I suspect that just speaking is easier for most people. At the same time, writing allows one to re-read and make sure the communication is accurate.  It also provides an archive for future reference.  I also find that written communications involving issues, like a bookkeeping question for instance, provides an excellent tool for future training.

My point?  We prefer to use email to serve you better and more efficiently.  We also understand that some matters need to be communicated verbally.  Emergencies for one.  Yet, the majority of the communication we do with owners can best be handled in writing.  The bookkeeping question was easily answered when I discovered that a term was being used by the owner that we call something else.   It was obvious when written.  Not so obvious when a Manager, not a trained accountant, answers your call while driving to rent your property.

I always add….we do not want any of our clients to feel we are not available.  So phone away!  Maybe this will help you understand our reasons for prefering the written word as we serve you in many of our functions as your property manager.

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.

Security deposit funds are reserved for damages caused by a tenant, whether accidental or intentional.  The fine line is the one between normal wear and tear that even the most careful tenant could incur on a property, and that which would be considered excessive.  The degree of soiling and wear on floor coverings often comes to mind.  Carpets, in particular, show the degree of wear when the furniture that was sitting on top of them are removed.  If a normal carpet cleaning brings the carpets back to life, this would be considered normal wear and tear.  If a large stain takes a $100 extra charge to be removed, or can’t be removed at all, this would be considered excessive and worthy of a deduction to the security deposit to pay for the eventual repair.

A couple of other common areas of confusion.  Paint will incur scuffs and dings in normal living.  Small holes for wall hangings are also to be expected.  Excessive amounts of either (drywall damage or large mollys pounded into the drywall every five feet) would likely be considered damage.

As I have stated in other posts, we mitigate the relative amount of change to a unit with a before and after walk-through to include pictures.  This allows us the greatest leverage if a security deposit deduction is required.  For more information, here is a link to a table posted at WilmothGroup.com with more examples of Wear and Tear versus Damages.

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?

We have an owner who lives overseas.  In the old, old, days we would have used snail mail to get a contract or lease executed.   We would have worked on a telephone authorization (risky and not going to hold up in court!) and wait 2-3 weeks to receive a signed document.   Then, in the 1980′s we had this amazing device that cost $1000 called a fax machine.  (Am I dating myself?)  We had documents that were printed on this thermal paper that curled and faded!  Powerful stuff when a year later you could not read a document!  So, we still needed snail mail to get a original copy.  Faxes improved and in the 1990′s you could get a “plain paper” fax.  No more fading, but often very poor resolution.  So, we still used mail to have an original copy, but by then we had options that sped up the delivery of documents such as Fed Ex and UPS.   Then email became popular and all we had to do was figure out a way to make it easy for clients to return a nice looking document from their email, with their signature.  There are two options, printing and scanning, or faxing the returned document.  Faxing works pretty good unless their fax machine is dated or the telephone connection is bad (overseas connections).  We still like to have the documents in case the resolution is poor.   There is often enough savings that visiting an office store is cheaper than using a delivery service.   Printing, scanning, and emailing the documents back to us is the preferred method. 

Our clients and Associates are recommended to install a free program on their computer for creating pdf documents.  There are a number of ways to send back an executed copy to us via email.  After printing and executing  the document, our client can scan or fax to make an electronic version.   We really prefer not to receive the fax because the phone line issues can often cause resolution problems.  Most of the simplest printers today also offer scanners and copiers for pennies additional.  A document can be scanned with the signature and saved to a computer.  If the scanner does not offer a pdf converter, and makes photograph type faxes, these need to be converted to a pdf.  In fact,a free pdf converter program is a wonderful addition for many different uses.  Check out pdffactory or cutepdf.  

Today we actually have electronic signatures making their way into the popular mainstream.  We have not gone this far but I suspect it won’t be long until we offer this service.  Of all the improvements over the last 30 years, this one may take the most getting use to.  An electronic signature does not actually provide a signature in the traditional sense.  It provides a verification that the person who executed the document on a computer, can be traced to a computer.  In some cases there are verification processes associated with a person but most I have seen go back to an IP address and involve a check box or initials typed.   The most popular service in real estate for this is called Docusign. 

Be warned though, the future is in electronic documents.  The improvements in speed, resolution, and legal enforceability have been made.   We are really just trying to decide which vendors and how to implement.  For now though, the suggestions above should cut your delivery costs substantially and provide all parties a faster turnaround on document execution.

Wilmoth Property Services Owner Reports

I wanted to share a screenshot of what it looks like for our owners who log in to their management portal and click on reports.  A plethora of information is available for each property.  An owner with multiple properties or units can also combine information to see a total snapshot of their portfolio.  To see the screen shot in full, click on the image and then just use your browser back button to return to this post.

A quick review:

The Residential Lead-Based Paint Hazard Reduction Act of 1992 was passed to protect families from the hazards of lead based paint.   This law requires the disclosure of known information on lead-based paint and lead-based paint hazards before the sale OR LEASE of most housing built before 1978.   I know it seems that this law may have out-lived its usefulness, since paint manufacturers stopped using lead in paint in the 1970′s and by now it has been removed from most homes, but there is still a small percentage of homes that has not been touched and they could still present this hazard.  Therefore, the law lives on.

As it pertains to your pre-1978 built rental property the law requires prior to execution of a lease:

The tenant be provided an EPA pamphlet titled “Protect Your Family From Lead In Your Home.”   There are six language versions and your tenant needs to be given the ones that apply to any language they speak.  Here are links to these brochures:

• English
• Spanish
• Vietnamese
• Russian
• Arabic
• Somali

The landlord must disclose any knowledge of lead based paint including location and sources.

Provide any records and reports on lead based paint or hazards associated with the paint that are available to the landlord.

The Landlord, Tenant and all Leasing Agents must execute a Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards form.   The language on this form must be in the same language as the lease.   This is the only one posted on the HUD site so you may have to dig deeper if you need it in another language to match your lease.   This disclosure must be retained for three years from the date the lease began.  

Something else professional leasing agents can help you keep track of!

1. What is the condition of the property as compared to when the tenant began their occupancy?  I feel like this is a indicator of not only the possibility of further deterioration without the correct compensation for rent, but also often an indicator of personal problems.  I am not talking holes in the wall, dogs using the carpet condition.  Even minor things like dirty conditions and any pride of residency (fresh flowers or cut lawns) can provide an indicator that this delinquency could become expensive.

2. How easy will it be to re-lease the property?  What is the market like?  What is the history of how long it takes to rent the subject property?

3. What is the tenant’s issue with paying on time?  Do they earn enough money?  Is the situation temporary or long term?

4. Is the tenant communicating and discussing openly their challenges and requesting assistance?

5. If it is determined that we wish to try and work with the tenant, the next issue is how much can they pay and how long will it take to get caught up?  Can they get caught up prior to the end of the lease?

If a decision is made to work with the tenant, then the payment workout plan needs to be documented.  We have a Agreement that is executed by the tenant and basically states if the payments are not made on time as agreed, then the entire past due amount is immediately due or eviction will proceed.  Payments need to be scheduled to match the tenant’s scheduled pay day so that the agreement is paid before other choices are made for their money.   The required payments also need to be in an amount that makes sense as a percentage of the tenant’s income. 

If a tenant will not agree to a workout schedule in writing..I think the owner has the answer they need to move forward.  I have rarely ever seen much good result from a situation where an owner allows a tenant to stay and make payments “when they can”.  Those situations usually find the tenant falling further and further behind , the property falling into more disrepair and the increased potential for an eviction argument (“the owner told me he would work with me”) from the tenant to the court.

Determine if you want to work with the tenant and if so..document it.  Then enforce the document.  That is what your Property Manager is hired to do.  Use their expertise and experience to navigate through these events.