In most states the landlord has a obligation to the tenant to provide safe, clean and habitable conditions of the property.  This language is straight from the Indiana code.  If the tenant contacts the landlord and provides notice that they are not in compliance with these obligations, the tenant may take the landlord to court and if the landlord still refuses to make the requested correction, the tenant may be eligible to receive 1. actual damages and consequential damages, 2. Injunctive relief, 3. Any other remedy appropriate under the circumstances.   Your attorney would need to explain how each of these affect you but leave it to me to put this in layman terms…you are going to end up owing money to a tenant that has been given approval to walk away from your lease.

I found the following instructions provided to civil juries in California for liability lawsuits by a tenant against a landlord. These are factors the jury is to consider when deciding if a landlord was careful enough.   I think they offer a word of caution for the landlord who believes they may be able to avoid liability in a tenant relationship.

1. The location of the property – where is it?  Is having a working lock on the door important?
2. How likely is it that the tenant might be harmed in these circumstances?
3. Whether the landlord should have known about the aspect of the property that caused the harm.  Did the tenant tell the landlord that the lock was broken?  How long did it take for the tenant to inform the landlord?
4. How difficult it would have been for the defendant to protect against the risk of that harm? Would it have been easy to replace the lock?
5. The extent of the defendant’s control over the condition that caused the harm.  Was there enough time for the landlord to fix the lock?

I am not an attorney (nor do I play one on television).  As a property manager we provide common sense answers to landlord and tenant issues.  When needed, we share the law from a layman perspective.  When customers want to debate the law we bring in attorneys.  The bottom line for our owner was that he was leaving a wide path of potential liability if he continued to refuse to fix the door lockset.   Once he had a better understanding of the exposure he faced, we sent in a locksmith and removed that potential liability.

What Is A Landlord To Do?Rent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

But are they?

What will the holidays be like when Uncle Charlie and Aunt Jane show up owing you four months rent?  Or, lets say they keep pretty current on the rent but come to Christmas with a tale of a furnace that is chewing up every last dime they have just so they can keep warm.  Or Homecoming at the fraternity house and at the alumni gathering you have to come face to face with the brother you tried to help out, who ditched you, after never making a payment and trashing your home, to go live with his new trophy girlfriend?  Will all of these events be ruined for you because of the fateful decision to rent to family or friends?

Sure, there are probably plenty of stories of successful rental partnerships with family or friends.   These partnerships are riskier, much riskier, than you think or anticipate.  For the same reasons it is not great practice to go into business with family or friends, or loan money to the same groups, you have to do it with an acceptance of the risk.

In renting a home to family or friends, a perfect way to mitigate the personal damage, and the other problems as well, is to let a property manager handle all the details.  Step out of the way and let the manager send you the money.  Let them argue with the friend or family over the lease, and the pet deposit.  Let the manager handle collections as they would any tenant.  Let the manager be the bad guy who tells your Uncle to change the furnace filters so the furnace runs efficiently.  The manager does not have anything but a job to do..and they will do it much better than you ever could when your tenant is  somebody you know or love.

The benefits will far outweigh the costs.  Its OK to want to help people.  Just don’t let it become personal!

Renting To Family and FriendsRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

There are two tools we use as a guide for property owners for reference on the expectations of this relationship.  One is the actual management agreement.  The second is an owner manual that discuss procedures both parties should follow.  Using the written word, up front, in a relationship can help define and avoid later misunderstandings.

In the management of properties over the last 12 years, it seems that usually the same things cause a breakdown in a management relationship.  On our side, it is communication.  I have learned that our owners enjoy knowing that they have more than one person to discuss their questions and issues.   I make it know to all owners that in addition to their property manager, I am happy to be a part of any conversation.   We care about our owners, but saying those words are sometimes not enough.   Showing interest and finding solutions from throughout the company is important.

The challenge from our end with a property owner lies with an owner who is not communicating, or makes promises that are not kept.  This usually involves maintaining their property in a way that keeps it in rent-able or habitable condition.  Since we are compensated from a percentage of gross rental collections and rental fees,  having our owners agreement to allow us to maintain habitability and marketability is important to a healthy relationship.  Our management agreement addresses this issue and it does allow us to provide 30 days notice of termination when we are not able to maintain these standards.

As much as we hate to use that clause, it is important to our business.  Last year, a property we manage was cited by the city for safety issues.  The tenant had repeatedly mentioned electrical issues and we were not able to receive permission from the owner to invest the significant dollars needed in upgrades.  The city code enforcement was called by the tenant and happily decided to move the process along by citing the owner, and our management company, for this issue.  The owner stopped responding to our phone calls,  The tenant surprisingly continued to live in the home, and we were in the middle.  The final outcome was our invoking the “Early Termination” clause of the management agreement and notifying the city we were no longer involved.  At that point the tenant chose to move also.  I suspect that home has many dollars of fines and postings on it today.

We do everything we can to avoid these issues.  By starting at the beginning of the relationship to explain the importance of communications we hope to create a foundation of cooperation.   We sandwich these discussions with the presentation of a management agreement and an owner handbook that further explains in details our relationship.  We want to avoid ever needing an early termination and the sadness of goodbye.

Avoiding GoodbyeRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

Why?  Have you ever received a certified letter?  Unless you are home (or chose to answer the door for the mail person) a little slip of paper is left in your mailbox notifying you that a parcel is waiting to be picked up at the post office.  It also shows the sender.  Do you think the tenant behind on rent will take the time to go pick up this parcel?  How many tenants wishing to avoid their landlord or manager are going to hop over to the post office to officially go on record that they have signed for receipt of this letter?  Exactly.

Depending on the notice, we might originally send a regular letter to the tenant.  In my years such a letter works as well to get a response from the tenant who will be responding no matter how they receive notice.  Understand, certified mail is an offensive strategy for you as the owner or landlord.  If you are fortunate enough to get back one of those signed receipts, it was worth it and will provide some additional evidence if you end up in front of a Judge.

The notice though that usually works, is one we combine with sending a certified letter.  If a few days after sending the letter it has not been delivered or picked up (you can check with the post office on this) just take this follow through step.  Go to the door and personally deliver the notice!  Take some tape and an envelope and when nobody answers,  tape the notice with the tenants name and the words CONFIDENTIAL to the door.  Pull a camera out and take a picture of the notice sealed, and posted, on the door.

We all know that the tenant who wants to cooperate will respond.   The ones who are a problem won’t.  Proving that you bent over backwards to provide them notice of the issue will be important if they decide to fight legally.  The most common tenant defense?  “Your honor, I did not know.”

Make it impossible for your tenant to make that claim.

Getting Noticed By Your TenantsRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

In this case, our field manager came back and reported that somebody walking down the street stopped him to ask what was going on with the house.  Did we know what happened there?  Our manager proceeded to hear a rather disturbing story lacking in many facts such as even a timeline.  Nevertheless, with no history, and neighbors with great stories, how does that affect the owner’s attempts to rent the home?

First lets start with the basic fact we really do not know anything.  This is somebody who for all we know has the property confused or is reporting a rumor heard at a late night social gathering.   Who really knows?  The interior tells no tale of any issues, though the walls are painted in the last few years and the carpet replaced- does that really mean anything?

Do we as a property manager have an obligation to research the reputed history of a home?  Does the owner who has never lived in the home?  Lets start with these questions.   Fortunately, in Indiana and Florida (the two states where we are licensed) we do not have a legal obligation to research the validity of this person’s claims.  So, in the case of this home we can end our story and leave it that we just need to get the home leased.  Or do you, the reader, feel we should dig deeper into the accusation so we know if there is some sordid past to the home?  If we learn the walker’s story has merit, what do we do then?

What if the owner knows that something happened that involved an untimely death (where did this phrase come from?  Are any deaths timely?).   These properties are called “psychologically affected properties” and it really depends on where the home is located as to the burden of disclosure required when selling or renting.   In Indiana and Florida the law does not require disclosure of a stigmatized property.  The responsibility is on the prospective buyer or tenant to ask very specific questions.  In providing answers the owner or agent may not intentionally misrepresent their knowledge.  Sort of the real estate version of “Don’t ask, don’t tell,” except this one is “Don’t tell unless asked.”

In practice I have always highly recommended owners disclose the stigmatized history of a home.  Buyers and renters will find out from a neighbor or some other way.  Plus it will just give a tenant an excuse to complain about everything wrong with the home.  If the owner knows about it, disclose it.  There is no burden to find out if the walker knows what they are talking about.  An optional decision for all parties as to what to do with this unsolicited claim.

What do you think?  Is there ever a reason an owner should not disclose a stigmatized property?  Does our company as a manager have a responsibility to now research this property further to find out if it has a past that could cause the home to be labeled “stigmatized”?  There are no right answers, but will be interested if any strong opinions.

What Happened Here?Rent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

Reality
yeah, sometimes life ain’t all that it’s cracked up to be 
So let’s take a chance and live this fantasy 
‘ Cause everybody needs to break free 
From reality -

Full, comprehensive, background screening is a wonderful tool to identify tenants that have taken Kenny Chesney’s latest hit song to heart and believe these lyrics were written about more than sitting on a beach with a cool one in your hand!  Our goal is to shake up their reality.  The volumes of information available today on people, while often criticized, is actually a great thing for those of us that rent properties.  In the last year, here are some examples of how our screening identified what I call the tenant mirage-the application that looks good but the truth in reality is just not there.  The application is a deception.

Fake social security numbers- We have seen people using other people’s identity and people giving one number off on the social security question.  The former usually catches up when we also request a copy of a picture ID, but the later seems even sillier.  Does the applicant think we are just going to skip over credit since the report did not pull?  I have no idea, but we had this happen twice and both times they could not get us their correct social..insisting what we had was correct.  Good luck with getting help anywhere if you don’t know your social security number!

Self Employed Income- Such a common issue that we will request a copy of the most recent tax return in order to verify it.  Otherwise, if that claimed income is what you need to make the rent, you are taking a huge gamble.   I hate to make huge gereralizations, but rarely do we ever find that claimed self income is anythng more than the goal the person has for the coming year.  It usually is much more than the amount they have ever made.  Prove it is the simple request…is that income claim reality or a mirage?

Bad Credit Not Their Fault – It seems everybody who has bad joint credit, with a person they are no longer associated with, want you to know it is their “ex’s” fault.  The bad credit littering their report is something they did not even know about in some cases.  We tell the applicants, work it out then come see us.  The Judge who approves judgements and garnishments will do so to both debtors and they will not really care whose fault it may be.

We see applicants creating all kinds of mirages to distract us from rejecting their applications.  These are just a quick few examples, but as long as people are creative, there will be many attempts at creating a mirage.   By forcing comprehensive background screening on prospective tenants, reality is much easier to find and good decisions about applications are much easier to make.

The Tenant MirageRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

It was at the point when my wife and I obtained our first rental that, while doing our taxes even using one of the software programs that turn the return into a much simpler questionnaire, that I decided would be the last year for being a do-it-yourself-er.  This is a very personal decision dictated by your own circumstances.  The combination of owning a couple of businesses and rental property, really took me past my own comfort level.  Yet, having a professional prepare your return does not mean you turn in a big folder and walk away.  The Preparer actually insist that you submit information to them in an organized format…you just do not have to understand any tax consequences of why they are asking for the information!  Tax professionals also keep track of things like depreciation and basis for you year to year…and if you know what I am talking about then you might want to consider using one!

Owning a rental property opens up a new world of tax opportunity.  It is truly one of the benefits of owning rental properties.  Tax benefits should not be the reason to own rentals.  There are too many leasing and management related issues to ignore for the sake of taxes.

Here are some of the tax benefits you will incur with your rental:

Straight from the rental income you will be able to deduct mortgage interest, insurance premiums, real estate taxes, marketing costs, management fees, utilities, travel to and from the property, and other maintenance related expenses.  An additional significant deduction is depreciation of the home.  Depreciation is a nifty non-cash expense, that equals the purchase price of the structure only, divided by 27.5 years.   Be sure and get an understanding of how this deduction works as the total amount deducted over the years of ownership will be recaptured when calculating the gain after you sell the home.  Improvements to the home are added into the value that can be depreciated.

If after applying all of these deductions from the rental income, you find a loss, you can actually apply this loss to other income up to $25,000 annually.  Caution: this is where you need a tax advisor.  This net loss against other income deduction is phased out for taxpayers with income over $100,000 unless you qualify to call yourself a real estate professional.  Don’t worry- you might!

Understanding the path you are on is better than walking it blindly.  If you are like me, I would rather sit back and enjoy the conclusion of the college basketball season rather than lose my patience trying to figure all of this out.  My advise…if you own a rental get a tax preparer and just organize your data in the morning before the tournament begins!

Taxes and the Art of Rental OwnershipRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

Occasionally we are asked to serve as a sales agent from the property management side.  We are able to provide those services.  They are basically the backbone of our licensing.  But over the years, we expanded our knowledge and capabilities by investing in the property management business.  A niche within the real estate business that I believe is not something you can just throw into your toolbox as a Realtor and start offering as a service.  First, it requires a team from bookkeeping to maintenance to 24/7 service for tenants.  It requires leasing agents and knowledge of how to find tenants and how to screen them.  It requires proprietary software that goes deep into providing owners and tenants details, documents and methods to send and receive payment.   The software needs to be smart enough to address specific accounting in a way that matches the owner’s tax expectations.  On and on…my point is it is a uniquely specialized field.  It is not like a sales agent deciding they will expand their offerings by selling condominiums, for example.

Since the housing market tanked, licensed sales agents have desperately sought other ways to use their license.  In the process they are holding themselves out to the public as knowledgeable experts in new fields hoping something will stick.  We have been through this for years in the foreclosure business for the banks.  Something we spent 20 years developing expertise and systems, agents starting getting interested in when they needed new business.  A long time ago we decided to be a niche real estate organization serving primarily the owners of real estate who do not live in the real estate.  We became experts at property management and default servicing.  This started in 1996.

As the foreclosure opportunity has slowed down, agents are again seeking what else they can do as there is still not enough of a housing market to provide success for the number of agents.  The Realtor press is offering what they are calling  “the next big thing” for agents to service.  Published last week by a respected real estate publication, “Realty Times”:

Has your market weakened in the aftermath of the 2009 recession? If so, you’re not alone. Many agents are facing the need to expand their business in the coming year. What can you do to ensure your business survives even when times are lean?

Expanding the scope of your business, however, may mean more than the simple tips mentioned above. It may mean taking on new types of revenue, such a property management.  

Property management can be a great way to tap into another market segment. Many would-be buyers have decided to instead rent until they’re sure the market has hit bottom or that their job is steady.  

As a manager your goal is to make the landlord’s job easier. You can help find renters, work leases, and handle payments. If there are issues with maintenance or repairs you get to tap into your already extensive contact list of contractors and servicers. You want your renters to be happy, so be sure to check in from time to time to see if they need anything and be sure to address all issues quickly.

I am not knocking people from expanding their business.  Just understand the naivety of many people who may now be calling themselves property managers.  It is a new option for their services with little to no investment.  It is something you can easily switch into and offer as a service..or so they are being told.

Or, you can stick with the people who offer the experience to know it is a lot more.

The Rush to Be Called A Property ManagerRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

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.

The ScamRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager

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.

Professional Management Is Best Option For Accidental LandlordsRent and Manage Your Home - Common Questions In Working With Wilmoth Property Services, Property Manager