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Residents are very much a part of property management. They are the source of the property’s income, and consequently they must be regarded by the property manager as an important responsibility, perhaps the most important responsibility.
In the past, residents primarily leased apartments and paid rent; if they didn’t like things, they either moved out or were told to move by the owner. No one believed that residents had any rights other than the right to live in their apartments as long the rent was paid and they behaved themselves. All of this has changed because of the impact of consumerism.
Renters have demanded their rights, and these rights are being granted through legislation and the courts. When rights are slow to be granted, renters take matters into their own hands by forming unions, staging rent strikes, and setting up picket lines. Renters have become adept at confrontation. They have learned how to use the press to make their grievances known. All of this can exert extreme pressure on the property manager.
Just how far apartment residents have come in the fight for their rights is seen in the landlord and tenant legislation that has been enacted on the state and local level. These landlord and tenant bills may state that the owner must deliver and keep apartments in habitable condition; that security deposits must be put in escrow and interest paid to the renters; that the owner who does not intend to renew a lease must give specific notice; that a renter may make necessary repairs to an apartment and deduct these expenses from the rent; that residents may withhold rent in certain cases; that owners may not take retaliatory action against renters who complain; or that a system of housing Courts should be set up to handle complaints. This kind of legislation signals a major change in the balance of power between owner and resident. It is crucial to know the landlord and tenant code that exists in your municipality. Be aware that some states also appoint landlord and tenant commissions to monitor or interpret these laws.
Leases traditionally were written to protect the property owner and showed little regard for habitability. This practice was established in a by gone era under conditions that no longer exist. The world has changed. The old saying, “Let the buyer beware,” has changed to “Let the seller or, in our case, let the owner beware!” Property managers must recognize the resident as an equal partner in the relationship between the owner and those who live at the property. A manager who persists in the old ways will very likely weaken his or her property’s market appeal, antagonize residents to the point of high turnover, and reduce the property’s income.
By renting to the best qualified applicants at the beginning, half of all management problems can be avoided. A thorough job of screening applicants—encouraging the desirable ones, discouraging the less-desirable ones, and educating people about your property—results in a much higher percentage of residents who pay their rent on time, observe rules and regulations, and remain in your building year after year. At the start, it is wise to anticipate all of the key questions that sound rental policies should answer: What about pets? How many people can live in an apartment? What kind of security deposit will be required?
It should be emphasized that the law leaves few areas untouched when it comes to resident selection. Fair Housing Laws at all levels — federal, state, and local — exist to prevent discrimination. These laws are very clear and so are the penalties for establishing or following policies that effectively discriminate against people for such reasons as race, nationality, sex, religion, age, family status, or any physical or mental disability they might have. Local laws vary; some exist to prevent the discrimination of classifications of people other than those stated earlier (homosexual couples may be protected, for example) and these laws may also provide unique policies and penalties. Because these laws are constantly being expanded, it is extremely important to know what applies currently. Bear in mind that the Department of Housing and Urban Development tests to ensure that Fair Housing Laws are enforced. Trying to get around them will surely shorten your career in the rental business.
The color of a person’s skin or his or her choice of worship is not and should not he the determining factor in deciding whether that person will be a good resident. A number of other indicators will forecast the future of a prospective renter.
The Home Visit
The home visit is probably the least used and the most effective method of avoiding bad residents. The program involves hiring an interviewer to make an appointment to meet with the applicant in the applicant’s home. This process slows down the acceptance or rejection process and it certainly adds to the operating costs. Regardless, the benefits are many. Most of us have experienced the multiple problems generated by the “disaster resident,” including the cost of repairing damages, loss of other residents, and hours of frustration dealing with these cases.
The best person to do your home visits is someone who knows about our business. My company uses resident managers or assistant managers referred by our local Apartment Association. These people know a good resident from a bad one. If a manager hires an interviewer who is not a regular employee as an independent contractor, the interviewer can pro vide a more objective report. This may be helpful if the manager is challenged for not accepting a particular individual. As a rule you’ll need to allow some time for the completion of the interview. Usually they are handled on weekends when it is easier to find the applicant at home. It is best to avoid evening visits during those months when early evening darkness makes address hunting more difficult.
Be somewhat generous in the fee for such a service, and you will have a willing pool of interviewers ready to handle assignments. This is important because time will be a factor. The cost typically approaches 8 percent of the monthly rent, rounded to a convenient increment. It is recommended that this cost be passed on to the applicant.
A policy to visit the homes of prospective renters cannot be a selective one. I cannot emphasize this enough: Once you choose to do this, every applicant must go through the same procedure. You cannot restrict your home visits to applicants for your low-rent units only, nor can you visit just those you suspect of living below your standards. You can make overall exceptions however. For example, you could decide that you will not arrange home visits for applicants who live more than thirty-five miles from your office or the apartment development.
The home visit answers more questions than any other method of screening. It provides a look at the care prospects are giving to their cur rent unit. Frequently you’ll also witness the way prospects relate to their children and whether or not these children are under control.
Are you questioning this plan’s effectiveness? Perhaps you would guess that applicants would clean up their living space, knowing that someone is coming for a visit. In fact, most people do clean up in preparation for the visit. It’s interesting to note that the really bad residents do not or cannot make the effort. Some people do not know good from bad and others are living without normal furniture or in double or triple occupancy situations. You will witness conditions that are exactly like those that managers find when a less-desirable resident vacates and leaves a disaster.
The home visit is a way to identify those applicants who could create problems as residents in your complex before they occupy your property. It is important to establish guidelines to define what you are looking for; this is not a method that should result in the rejection of those prospects who have less money. Order and cleanliness are at issue here, not wealth and style. Here is a good rule of thumb: When conditions that would constitute grounds for eviction are observed on the home visit, then the application should be rejected.
Yes, some applicants withdraw their applications when they learn they must have a home visit. On the other hand, the most responsible prospects may at first object to such an invasion only to become very pleased when they understand the purpose of your extra effort. Virtually everyone has had an experience with bad neighbors. If you ever find yourself saying “I wish I had known,” the chances are good that you would have known after a home visit.
One of the quickest ways to separate people who are living on the edge from those who are abiding by the law is to investigate whether they have purchased automobile insurance. Let’s assume that most of the unsightly, derelict cars parked in an apartment complex are uninsured. The same people who observe the rules of normal civilized conduct will continue to do so when it comes to maintaining insurance coverage. This inquiry should probably be limited to general liability coverage, but that alone is an excellent indicator. If these autos are going to be driven on the grounds of the apartment development, a risk is present. It is not unreasonable to require proof of insurance.
Shaping Resident Mix
Unfurnished versus Furnished. Whenever there are prolonged downturns in the economy and unusual numbers of vacancies appear, managers begin considering the advisability of furnishing their apartment units. They do this in an effort to maximize the potential market, hoping to attract couples and families who lack the money to buy furniture and residents such as corporate trainees or transferees. Unquestionably, furnishing apartments brings an additional dimension to the market.
Nevertheless, renting furnished apartments can be a management bur den and a drag on net operating income. Those who rent furnished apartments may have little commitment to their residences. Even when paying larger security deposits, people are not likely to care for somebody else’s furniture as if it were their own. Consequently, furnished apartments need constant refurbishing. At the end of three years, a complex that had every unit furnished when it was new, might only have enough furniture to fill half of the units because of breakage, abuse, wear, and theft. Moreover, furnishing requires a substantial capital outlay, a cost that is seldom re covered through higher rent.
Under special market conditions, renting furnished apartments makes some sense. Student housing and residences for seasonal occupants in vacation areas are two such situations. Otherwise, people who want furnished apartments can easily satisfy their needs by renting furniture. The furnishings suit their tastes, and the burden of paying for and taking care of the furnishings is on them. If you’re managing a building that already has furnished apartments, you may want to consider selling the furniture. The best potential buyers usually are the current occupants of the apartments.
Corporate Units. Closely allied to furnished apartments are those units outfitted to serve the employees and visitors of corporate clients. There are countless situations in which businesses move their employees for a temporary assignment or a training session and decide against housing those employees in a hotel or motel. This may be a method of economizing or simply making life more homey than staying in a hotel room. Proximity to the business is an important criterion in selecting such housing, as is the unit’s actual size and layout.
These apartments are almost always furnished by the apartment development, and the furnishings often include cooking utensils and linens. Providing maid service a few days each week is also common. Rent for a fully equipped apartment with service is frequently twice that of the same apartment if it were unfurnished. Even at that doubled rent, the client company saves a great deal over the daily or weekly rate at a hotel or motel.
The quality of residents who use these units is generally good. Most long-term stays involve the company’s top talent, and these people rarely cause problems that would prompt complaints from other residents.
A final note: Hotel chains are going after this niche of the market with the increasingly popular “residence inn” concept. If apartment managers wish to remain in this arena, apartment complexes must offer better ser vice or more economical accommodations.
Pets. Pets have long been a source of contention between property managers and residents. With the pet population booming, the situation could become more troublesome.
Estimates place the pet dog and cat population at 110 million—and that doesn’t even include other types of pets (rodents, fish, birds, reptiles, etc.). An estimated 52 percent of the nation’s households, or 47 million, have a dog or a cat (or both).
While homeowners own more pets than renters, an estimated 35 to 40 percent of renters have pets. This means that if you have and enforce a ‘no pet” policy, you’re effectively cutting off more than one third of your rental market.
The wrong answer to the question of pets can slow a rental program and damage resident relations. So, establishing a workable pet policy is important for the smooth management of a residential rental property. The key word here is “workable.”
Do not make the mistake of thinking you can avoid the issue by not having a pet policy. That’s worse than having a policy that forbids pets. The absence of a policy is an invitation for pets to come in without control. The damage is done when the first dog or cat arrives. Decide on a policy early, ideally before the property opens. Even if the building has been in existence for a while, a workable pet policy still can be implemented.
Begin early by separating the dedicated pet owner from the casual owner. Dedicated pet owners consider pets a part of the household and will make sacrifices to meet the pet’s needs. The casual owner does not look upon the pet with as much seriousness and usually is not willing to sacrifice personal comfort and convenience for the pet. In these cases, the pet is a whim.
One way to separate the dedicated pet owner from the casual one is to charge the pet owner more. Some property managers charge a monthly pet rent of $10, $15, or $25, while others require a nonrefundable pet de posit of, say, $100 to $300. Both of these methods are ineffectual because once owners pay the surcharge, they think they have paid for whatever damage their pets may cause. They no longer are concerned with the harm their pets do to doors, carpets, and plants.
A better approach is to ask each pet owner for an additional amount to be held as a refundable pet deposit. This way, the pet owner has some hope of recouping the money if the pet behaves. If the pet causes damage, this additional deposit will probably cover it. It is even acceptable to make a portion of the pet deposit nonrefundable. For example, you might establish an additional deposit for pet owners of $200, of which $75 is non- refundable and is earmarked for charges to rid the apartment of fleas and pet odors when the resident leaves. Asking for the extra money is a good way of discouraging casual pet owners, who may decide that their pets are not worth the added cost. Those who do decide to keep their pets will probably be more careful with them.
Another way to distinguish the dedicated pet owner from the casual one is to ask who will take care of the pet when the owner is out of the apartment. This is especially important when dealing with working people. The dedicated pet owner will provide for the animal; the casual owner may not have thought about this problem nor care that a barking dog left alone can be a nuisance.
You can also set the dedicated pet owner apart from the casual owner by designating certain areas of the property for pets only. If there are several buildings on your property, take no more than 25 percent of them and reserve these buildings for pet-owning residents. The rest of the buildings are then pet-free.
This kind of physical separation is easiest to set up in a new property before the rental program starts. In existing buildings, you may not want to risk antagonizing long-standing, pet-owning residents; but over a period of time, you can restrict new residents who are pet owners to certain parts of the property. You can also tell present residents who are pet owners that when their pets die, they may not replace them unless they agree to move to the part of the property designated for pets. Practically speaking, it is most difficult to prevent a resident from replacing a dead pet (and Spot II may look exactly like Spot I). Converting a building with pets to a building that’s pet-free is a long slow process. You have to depend upon the residents’ honesty and the eventual turnover of residents who have pets.
Whether or not you establish this kind of separation, you should make the pet policy and rules known when a prospect applies for an apartment. By making the policy known early in the rental process and having the policy in writing, there can be no misunderstanding. These are some of the items that should be in the pet policy:
• Residents may have no more than one dog or cat; or two lovebirds, canaries, or parakeets; or one myna bird. No pet offspring are allowed.
• Dogs must be no taller than 14 inches and cannot weigh more than 25 pounds fully grown.
• Tropical fish limited to a 20-gallon tank are permitted.
• No other mammals, birds, fish, or reptiles are permitted (including monkeys, snakes, turtles, zoo animals, and rodents).
• When outside the apartment, dogs and cats must be kept on leashes at all times. They cannot be staked out or allowed to run loose. Birds must be caged at all times.
• Animals must be walked in designated areas only. If the pet leaves droppings in other areas, the owner is responsible for removal.
Although difficult to enforce, these rules are needed and should be spelled out along with any others in a pet agreement that the prospect signs along with the lease. The agreement amounts to a revocable license that applies to a specific pet. Ask the prospect to bring in the pet so you can see it and make sure it meets the limitations imposed. It’s also wise to keep a picture of the pet on file with the prospect’s application.
Besides giving the resident permission to keep the pet, the agreement should also state that: (1) the resident agrees to pay for all damages caused by the pet, and (2) if the agreement is violated or if the animal becomes objectionable, the manager may demand the removal of the pet without affecting the validity of the lease or the resident’s responsibility under it. A pet agreement is an important psychological tool in impressing pet owners with management’s seriousness. The pet owners will know what the rules are and that they will pay a penalty if the rules are broken. At the same time, pet owners are not ruled out of the rental market.
People without pets appreciate this kind of policy too, because they know they won’t come home one day to discover that their new neighbors have a Great Dane or a monkey. This protection is an incentive for them to rent in your building.
In short, you have the best of both worlds: A maximized market for your apartments and peaceful relations among your residents.
Policies Relating to Possessions. Pets are not the only potential disruption to the peaceful and orderly operation of an apartment building. Without being negative, the rental agent must try to learn if the prospect has any troublesome possessions, and the manager should have policies to deal with them. Here are some policies that may be considered:
Waterbeds violate most floor-loading regulations. They’re messy to fill and empty. If they rupture, waterbeds can damage the residents’ apartment and the one below. Arid even if they remain intact, the chemicals added to the water to keep it from souring can leach through in gaseous form and ruin the carpet. It should be noted that waterbed insurance is available, and you could consider making it a requirement.
• Electronic equipment such as ham and citizens’ band (GB) radios requiring special outdoor aerials should be discouraged. The resident who puts up an antenna on the roof may punch a hole in the flashing and break the water seal in the roof. Furthermore, a poorly installed antenna could blow off the roof, presenting a danger to people be low. Individual television antennas are much less of a problem now that cable is widely available.
• Noisy equipment includes drums, stereos played too loudly, hobby tools, and the like. Other residents will object to hearing these sounds through walls and floors.
• Flammable articles such as torches for glass blowing and welding equipment for metal sculpture are obvious dangers and should not be allowed.
Whether you will rent to unmarried couples or to those with unconventional lifestyles is generally a matter of choice, and such issues may be more pressing in some communities than in others. Individual owners — and some residents — also may have keen feelings about them. Unless local laws forbid such arrangements, you are refusing potential income if you decide against renting to such people in today’s liberated society, and it could be interpreted as discrimination. As I mentioned earlier in this section, some localities may have laws protecting these people.
It’s a fact of life that unmarried men and women will live together.
Even if you establish a policy prohibiting unmarried couples, you will undoubtedly end up with them living in your complex. One party will apply for and lease the apartment; in a short time, the second party will arrive.
You now have two people in residence with only one person responsible under the lease. You would be better advised to rent to the couple and have both parties responsible. The rental policy should not be to judge morality but to determine whether nontraditional residents can peacefully coexist with other residents and pay the rent.
As you will learn in a later section, a completed application form without an application deposit accomplishes very little. With the deposit comes a decision and a commitment; without a deposit, there’s a high probability of the manager expending a lot of effort and expense with no result.
An effective application deposit can be as small as $25, but it should not exceed $100. A larger deposit will discourage many prospects. Here are three recommended conditions for the deposit:
1. If the application is accepted and the prospect takes the apartment, the deposit is applied toward the security deposit. It is important to first apply money received toward the security deposit and then to the first month’s rent. The lease agreement will give you rights and remedies to collect rent but seldom provides for collection of a security deposit that was agreed to but not paid.
2. If the application is not accepted, the entire deposit is refunded to the prospect.
3. If the application is accepted but the prospect withdraws, the de posit is retained to cover the administrative and processing costs. Avoid terms like “forfeit.” People can accept paying a fee for a ser vice, but they don’t like forfeiture. The result is the same; the terminology is easier to accept.
A rental application form focuses on two types of information: details concerning the prospect and details concerning his or her impending occupancy. The form can be completed by either the applicant or the rental agent; although it is recommended that the rental agent fill out the application form and then have the prospect sign it. By asking a prospect the form questions and listening to the answers, the agent can gain valuable insight. Also, the manner in which a prospect responds can indicate more than the answers themselves.
The document itself can take many forms, but certain information must be provided if a prospect is to be evaluated properly. Consider the needs and uses of this information:
1. The name of the applicant, spouse and all others who will reside in the apartment. All adults who will occupy the particular apartment must be identified to ensure responsibility for the lease. You need to know the total number of prospective occupants in order to prevent overcrowding, Overcrowding is hard on an apartment; too many overcrowded apartments are hard on a building. This condition creates problems in keeping the property clean and providing essential maintenance services. When move-out time arrives, damage to the apartment may be extensive.
In addition, overcrowding is usually objectionable to other residents. Nevertheless, this varies: There maybe no objections if a single person living in a studio takes in a roommate but expect complaints from neighbors if a family of six is crowded into a two-bedroom apartment.
It’s important to establish occupancy standards and adhere to them consistently—otherwise you may run the risk of being perceived as discriminatory. It is also critical to monitor the interpretations of the Fair Housing Amendments Act of 1988 that protects families with children because this may affect acceptable occupancy guidelines.
2. The prospect’s age. Check your state law to determine whether age is a protected classification and how old a person must be to sign a non-rescindable contract. If the prospect is underage, get a parent or guardian to sign. A minor can rescind a contract that does not involve one of the primary necessities of life; a person of majority cannot. A minor who is married or orphaned or for whom housing is a necessity is frequently emancipated from the restriction against minors and can execute a binding contract.
3. The prospect’s driver’s license number. This will help confirm identity. Most people don’t know their driver’s license number. When the prospect takes out the license to look at it, the rental agent can see if the name and address on the license are the same as the ones on the application. Also, the agent can check the birth date on the license to make certain the applicant is of age. The driver’s license number may be valuable later in tracking down an individual who leaves without paying rent.
4. The prospect’s social security number. The social security number is useful in assisting the credit bureau, should one be used, in its check of a prospect’s background. Credit bureaus maintain records of people by their social security numbers, so having a prospect’s social security number makes it easier for the bureau to look up information in their files.
Contrary to many managers’ beliefs, however, social security numbers have little value in tracking down residents who skip out. One reason is that people who do not receive benefit checks rarely report changes of address to the Social Security Administration because they’re not required to. In addition, the Social Security Administration will not reveal any information it may have about the person. So don’t expect any help from this source.
5. The applicant’s nearest living relative. Be sure to get this individual’s name, address, and telephone number. Not only is it helpful in emergency situations, the information can be invaluable when you’re tracking down a resident who skips out on you.
6. The prospect’s housing record. You need the name, address, and telephone number of the prospect’s present landlord or managing agent, together with the size of the apartment, rent paid, and length of stay. If the stay has been less than two years, you should obtain information on previous places of residence. Be wary of the applicant who has resided at more than three addresses in the past two years. You don’t need a new resident who will move in and then out in a matter of months. However, there may be good reasons for those housing changes, so take the time to ask. Also, when the rent being applied for is substantially more than the rent currently being paid, it might be an indicator of potential problems ahead. The applicants should be able to explain how they can handle a large jump in rent.
7. Information on the applicant’s employment record. The name, address, and telephone number of the prospect’s employer, together with the name of his or her immediate supervisor, should be included. You also want to know the applicant’s income, occupation, and number of years on the job. As in the case of residency, you need to know the prospect’s employment history for at least two years. If this includes more than three jobs in the past two years, be alert. Determine the reason, it could be quite legitimate. A highly skilled trim carpenter could very well have two or three employers in one year; skilled craftsmen often move from job to job with little or no loss of time. If the applicant doesn’t have this kind of job, you may wish to pass on the applicant rather than risk problems in collecting rent or regaining possession of the apartment.
The ratio of rent to gross monthly income is a very important factor in determining an applicant’s ability to meet rent obligations. Chances of rent collection problems increase proportionately when the rent exceeds 33 percent of the prospect’s gross monthly income. Only regular salary should be considered in this test and by law, you must take into account the full gross income of working couples. Do not include overtime pay—even though it may be very consistent—or income received from a second job. An applicant who needs such income to qualify for an apartment is stretching things and may become a collection problem.
When the total of rent plus monthly payments on installment purchases is greater than 50 percent of the applicants’ monthly gross income, do not rent to them. There simply will not be enough money left over to meet all normal living expenses.
8. Information on checking and savings accounts, including account numbers. This can be useful in judging the applicant’s financial situation and sense of responsibility.
9. Information on both open and closed loans or charge accounts completes the important credit information on your application.
The application should also provide information concerning the particular unit for which the prospect is applying and any policies that may be applicable. Commonly, the information contained in the application that is needed to draw up the lease document includes:
• Address and apartment number.
• Term of the lease, with beginning and ending dates.
• Monthly rent.
• Security deposit.
• Information on pets.
• List of any optional features or services.
• Special conditions, including promises of additional improvements, free rent, or special lease provisions.
All of these special conditions should be not only stated on the application but also explained to the prospect to avoid later mis understandings. A prospect becomes wary when these additional items are not stated in writing.
10. Other items to consider. You may want to ask the applicant for references even though the people listed as references will invariably be primed to give you a positive report. You should also make sure that you know the name, address, and phone number of the person who should be contacted in case of an emergency because that individual will not necessarily be the nearest living relative. Finally, you may want to seek information about the applicant’s car(s); asking the year, make, and license number of every vehicle that will be routinely driven or parked on the property is a good place to start.
A great many problems arise from a resident’s failure to insure personal belongings. Many people believe that the building’s insurance covers resident possessions. It doesn’t, of course. Including a space in the application form for prospects to indicate whether they have coverage for their personal belongings is one way to avoid this confusion. If the prospect is without insurance, you may wish to provide the names of two or three reliable agencies who can write renters’ policies. In any event, the applicant must understand that personal belongings are not covered by the building’s insurance.
The final step in the application process is to have the applicant(s) sign the form. Now, you can begin checking out the listed information in order to decide whether to accept the prospect as a resident.
The Credit Check
The credit of every applicant should be checked thoroughly. It’s foolish not to. Otherwise, you risk rent loss and costly eviction and collection procedures. Even the best-appearing applicant can turn out to be a poor credit risk, while the seediest-looking person can be as good as gold. A credit check will help tell the tale.
A credit check isn’t foolproof. It’s difficult to outsmart a professional who can rig credit references so you don’t find out until it is too late. You want protection against the casual poor credit risk, the person who isn’t deliberately seeking to bilk you but whose careless financial habits will make rent collection difficult.
The best way to run a credit check is to do it yourself. Don’t use a credit bureau at the start. It rarely will do more than ask the same questions you’ve already asked on the application form, checking for inconsistencies. Besides, federal laws govern the information that credit bureaus can provide.
The first step is to call the owner or agent of the property where the prospect currently lives; if you’re dealing with a first-time renter, obviously you’ll have to skip this. Warning: Owners and agents who are trying to evict a resident may give him or her a good send-off. This is a risk you take and it is to he hoped that honesty will prevail.
Next, try to verify the applicant’s employment record and salary by telephone rather than in writing (correspondence can be slow). Be aware that an applicant may give you the name of a fellow worker and set things up so that this friend will give you a positive recommendation. This is a possibility, but often you can detect a problem by the person’s hesitant manner. If you are really suspicious, hang up and try again, only this time check with the personnel department. In any event, using the phone is better than writing to the personnel department because getting an answer may take weeks.
As an extra step, you might have a credit bureau check the public record for any evidence of bankruptcies, judgments, convictions, divorces, and so on, which can bear on an applicant’s ability to pay the rent. This limited service is generally very inexpensive and well worthwhile.
Many local apartment associations or groups of apartment owners and managers maintain a list of people who have given them problems. These difficulties may include a history of slow payments or evictions, trouble some living patterns, or a tendency to cause damage. Joining such a professional organization and sharing information about residents who have problems conforming to accepted lifestyle standards will surely pay dividends. One caveat is necessary: Make sure any exchange of information that you participate in is within the law. The legal ramifications of credit checks usually do not involve obtaining information; the distribution of information is of much greater concern.
Further investigation of an applicant’s background may be required, depending on the responses obtained by this limited checking. No matter how careful you are, you will occasionally make mistakes in judgment. Your best tactic is to pay close attention to both the renter’s living and payment habits and to act quickly when something goes awry.
Owners used to ask prospects to pay the first and the last months’ rent in advance. This was done to increase a prospect’s commitment to an apartment, weed out people with minimum cash, and provide a cushion in case a resident skipped out or left without paying the last month’s rent. How ever, the Internal Revenue Service has ruled that money collected as the last month’s rent is prepaid rent and, therefore, taxable as income in the year collected.
To avoid this tax, owners began to consider this payment as a security or escrow deposit to be held as a guarantee of faithful performance of the lease. In current practice, this means that if a renter leaves his or her apartment in good condition after fulfilling the lease requirements, the security deposit is returned. If there is damage, the owner deducts an amount from the security deposit to cover repairs. Meanwhile, for the period of the renter’s stay, the owner has had the free use of those funds to spend or invest.
The subject of security deposits invites opposing reactions. Owners usually regard a full month’s security deposit as a sacred right. Without it, they say, there is no protection against the resident who damages the apartment or violates a provision of the lease. The prospect, on the other hand, objects to the security deposit on the grounds that the owner has free use of a month’s rent for the full period of tenancy.
When a security deposit is requested from a prospect, fears are triggered about the fate of this deposit in the hands of an owner or agent. The prospect has doubts of ever seeing it again. Either from stories heard or through actual experience, residents expect a struggle when they leave the property and ask that the deposit be returned. The defense used by most residents is simply not to pay the last month’s rent. In doing this, they avoid the risk of their money being withheld, and, at the same time, they have the money for the advance payments required at their new apartment. A full month’s security deposit provokes residents and doesn’t pro vide the protection the owner or manager seeks. The resident who has breached the lease, damaged the property, or expects problems in getting the deposit back can simply withhold the last month’s rent and tell the manager to use the security deposit.
If the manager agrees to this arrangement, there may be a deficit. Say, for example, the apartment was rented when the monthly rent was $525 and the rent has gone up to $550. The $525 security deposit originally required will leave the manager $25 short on the rent, in addition to having nothing to cover any damage to the apartment.
Of course, the manager may not agree to apply the security deposit to the last month’s rent. Pressure may be exerted on the resident to pay or risk court action. Court action is expensive and takes time. The tenant probably will have vacated the apartment before the case comes to court. When it does, the manager will usually find that the court will order the security deposit applied as an offset to any rent owed, leaving the property in the same spot, without any money to cover damages.
Security deposits are in disfavor for another reason: Many states now have laws that require owners to pay interest on security deposits and to give an accounting to residents whose deposits they hold. Methods of accounting and the rates and frequency of interest payments vary among states. Some states forbid the property owner from using this money, requiring that it be held in escrow for its eventual return to the renter. Owners of property insured under various FHA titles are required to invest security deposits in government bonds or with institutions insured by the United States government. The laws of some states exempt interest payments on security deposits if the deposits are under a certain amount — usually $100 and others exempt interest payments on security deposits collected for student-occupied housing and furnished apartments. Security deposit laws vary from state to state and even city to city, but renters’ feelings on the subject don’t. Security deposit policies remain a sharp thorn in relationships between owners and residents. In fact, many surveys of resident opinion indicate that the security deposit is a major grievance.
The biggest reason security deposits are not what they used to be is that they place the property at a marketing disadvantage, particularly when a competing property is being rented without a deposit. If all competing properties require a one-month security deposit, you can gain a marketing advantage by reducing or eliminating yours. As an alternative, you might want to ask for a deposit of $100 or a figure substantially below one month’s rent.
Given the option, most people would actually prefer to pay more rent and a lower security deposit. We can interpret that as an extension of the American buying principle: How much down? How much a month? Take the example of a group of prospects given a choice of paying $500 monthly rent plus a $500 security deposit or $525 monthly rent plus a $100 security deposit. The prospects would probably compare the $1000 entry fee to the $625 entry fee and choose the latter, even though it would mean an annual increase in rent of $300 (the $25 per month difference in rent for 12 months). Obviously, this is preferred by the manager as well. The additional rent increases the property’s income, while a larger security deposit has little or no financial impact.
Most prospects, when they sign a lease for a new apartment, are also paying rent on their present one. In addition, they are now required to pay a full month’s advance rent on the new apartment plus a security de posit equal to another month’s rent. While people may be able to afford high monthly rents, not many have savings that will permit them to pay two months’ rent in advance in addition to all the other costs of moving. So, given a choice of two apartments with the same features and amenities, most people will take the apartment with the lower security deposit requirement — even if it has higher rent.
Resident ill-will, administrative costs, and marketing disadvantages render the traditional security deposit no longer useful. However, the reasons for requiring a security deposit — to assure the prospect’s commitment and to establish a reserve fund to pay for damages—are still valid. To resolve this issue, you may find it useful to adopt a policy of asking for a deposit of substantially less than one month’s rent. This accomplishes three things:
• It provides a marketing advantage over properties that continue to ask for a deposit equal to one month’s rent.
• If the rent and the deposit are not equal, prospects are less likely to consider the deposit as an advance payment of the last month’s rent.
Properties with this policy have reported a sharp improvement in the number of vacating residents who voluntarily pay their last month’s rent.
• If the deposit is minimal, it may be exempted from controls required by current legislation.
These advantages deserve consideration when you establish your security deposit policy, but we should make one qualification. The exception applies to the rental of single-family homes. In a building with many occupants, there are people close at hand to report disturbances, undue noise, or situations that appear out of the ordinary. This benefit does not exist in a single-family home and a great deal of damage can be done be fore you become aware of trouble. A security deposit of two months’ rent is recommended when you lease a single-family residence.
The issue of returning the deposit when the resident vacates also is important, but this will be discussed in the next section, Resident Relations.
THE LEASE AGREEMENT
Leases traditionally have been written to favor property owners. They are couched in language that is not only hard to understand, but also intimidating. Because many of their provisions are outmoded, leases are becoming harder and harder to enforce in the courts.
Nevertheless, leases are necessary. A written document is needed to serve as a contract and spell out terms and conditions. Owners and residents alike need the psychological value gained from the act of signing a formal agreement.
The lease document can be revised into a more acceptable and work able form, however. For one thing, it doesn’t have to be called a lease. The term occupancy agreement can be used. This lacks the sting of the word “lease,” conveys a more up-to-date approach, and is equally binding. You would be well-advised to work with your attorney on the development of a modern-day version of a lease or occupancy agreement for use in your properties. By eliminating provisions that are no longer applicable or enforceable and lightening the legal terminology, you can provide a more workable document; it will be valuable in resident relations and as a marketing tool.
Terms of Occupancy
Certain provisions are more or less standard. A brief outline of the important provisions is provided here for a better understanding.
Parties to the Agreement. An occupancy agreement should identify the name of the legal owner of the property; however, when the property is managed by an agent, it should identify the agent of the owner. This establishes that the manager is acting in the capacity of an agent. The owner can be referred to as the owner, lessor, or landlord. Whatever you choose, use it consistently to avoid confusion.
All adults and emancipated minors who are to occupy the apartment should he listed by name on the occupancy agreement and should sign it, so that all are held responsible for the performance of the agreement. The law generally holds that there is no such person as “Mrs. John Smith.” So, in the case of a married woman who uses her husband’s surname, have her sign using her given first name (e.g., Mary Smith).
If you rent an apartment to two or more people and only one person signs the occupancy agreement and that person later leaves, you may have a hard time collecting from the remaining occupants. This problem can be minimized if you list all adult occupants on the agreement and obtain their signatures. This policy will also protect you in the event of the death of one of the occupants. If a husband and wife occupy the apartment, have them both sign the lease. If one of them dies, the other is still obligated to the occupancy agreement terms. If the remaining resident doesn’t pay, you can pursue the remedies provided in the agreement. If the surviving spouse has not signed the occupancy agreement, you’ll certainly have more difficulty proving your rights.
If you require a guarantor or cosigner, this person should execute a guarantee that is either part of the occupancy agreement or on a separate form attached to and made a part of the document.
Identification of Premises. While many apartments are known b name, the occupancy agreement should identify the premises being rented by apartment number, common postal address, city and state.
Rent. For the most part, rent is in the form of a monthly charge. This is particularly true in unfurnished apartment buildings. Rents are generally due and payable, in advance, on the first day of each month. The occupancy agreement should state when and where rent is to be paid and re quire that the first month’s rent be paid when the occupancy agreement is executed and before the apartment is occupied. A few owners make the mistake of dividing the year into 12 periods of 30 days each and charging rent beginning on the day that occupancy takes place. This practice is con fusing, and complicates bookkeeping. If occupancy begins on any other date, prorate the rent for the first month, and be sure the lease term ends on the last day of a month to avoid difficulty and confusion at renewal time.
Other methods of rent payment are also used under certain circum stances. In some furnished units, rents are stated as monthly, weekly, or sometimes semimonthly rates. A discussion of additional types of rent follows.
• Aggregate rent. Many office and commercial lease agreements pro vide for an aggregate or gross term rent that is payable in monthly installments. For a time, this practice extended to residential units, but it has lost favor with both owners and residents. Its purpose is to obligate the renter for the rent amount for the entire lease term rather than for each monthly period only as it came due. This provision permits monthly installments of the rent payments as long as the tenant is not in default. The lease usually contains an acceleration clause that makes the entire sum due if any installment is late or missed. This arrangement saves the manager from having to sue each month as another rent payment becomes due.
Courts take varying stands on such provisions. For apartment leases, the courts tend to disclaim the acceleration provision and to rule on rent claims as if a standard lease with a fixed monthly rent were in effect.
If you use an aggregate rent lease, extra care should be exercised in its preparation. For example, if a lease is written for a two-year term, and an aggregate rent amount for only one year is inadvertently inserted, you have granted two years of occupancy in return for only one year’s payment of rent. It’s doubtful that the court will give you or the owner much sympathy.
• Graduated rent. Use of a graduated rent provision is common in leases, particularly when the term is longer than one year. To avoid confusion and possible later argument, make certain that the beginning and ending dates for each rent rate are stated clearly.
It is generally easy to negotiate a lease with a rent that steps up periodically. People are usually more concerned with the immediate future and will agree to higher charges at some distant date.
A different form of graduated rent is often found in apartments in college towns. Student housing frequently has two rates: one for the ten-month school term, and a much lower one for the two-month summer term. The two-rate system works better than averaging the rent for the entire twelve months. A resident is required to pay the first ten months’ rent at a higher rate, and then if he or she remains for the summer, those two months are discounted.
Head rent. In college towns and in developments trying to attract young single people, you may find rent being charged by the “head” rather than by the dwelling unit. This is used more frequently for furnished than for unfurnished units. In this type of housing, the owner or manager establishes a rent by first determining the number of people who could comfortably occupy the apartment. For ex ample, a two-bedroom, two-bath apartment might accommodate four adults. The apartment is then offered to four adults individually, each of whom would pay, say, $180 per month and sign his or her own occupancy agreement. The unit can then be rented to four per sons unrelated or unknown to each other at that $180 per month head rent. One of the roommates can leave without affecting the rent of the remaining three. While these renters enjoy the benefit of low individual rents, they also face the prospect of not knowing their new roommates. There is one thing to remember if you are developing policies for head rent: Don’t plan to have three occupants in a single unit, although units accommodating four or more may occasionally have only three residents. In my opinion, groups of three people are notorious for difficulties; invariably two people conspire against the third, who in turn leaves. Groups of five or seven are acceptable for a suitable space because additional people seem to de fuse the problems of “odd man out.”
Generally, when this type of rent program is in effect, the owner may agree to lease the unit to a family or smaller group of people who will accept responsibility for the entire rent payment for an amount that is less than the four individual rents.
This method of charging rent is unique and is not recommended unless you find yourself in a very difficult or specialized market condition. Bookkeeping and collection problems increase dramatically when head rent is used instead of the standard unit rent.
Seasonal rent. Seasonal rents are common in vacation areas, with the highest rents charged during the period of greatest demand. If you manage an apartment building in Aspen, Colorado, or Palm Beach, Florida, it will be necessary to collect about 80 percent of all rent dollars during a three- or four-month period of the year. During the off-season, demand for these rental units decreases substantially due to the much smaller number of year-round residents.
Seasonal rents are, for the most part, paid in advance. For ex ample, a person who rents housing for a season that normally lasts six months can be expected to pay as much as 50 percent of the total season’s rent before taking occupancy. The resident then would be expected to pay the remaining rent on the first of each month for the first three months, with the advance payments applied to the last three payments. There are a variety of systems for collecting seasonal rents, but most involve substantial advance payments.
For both seasonal and student housing, owners adjust rental rates to produce the required gross rental income. Most operating costs go on whether residents are present or not, so rents are adjusted to recover these costs during times of heaviest market demand. In addition, the rent must reflect the higher incidence of turnover which of course increases the operating costs overall. Turnover is high in seasonal and student housing, perhaps twice that found in normal unfurnished apartments. The level of apartment abuse by transient residents is also higher than normal.
Other rent. If rent covers more than just the apartment—let’s say a garage is included—the lease should separate the rent for the apartment from the rent for the garage. Defining what the rent does not cover—for example, cable TV, use of recreational facilities, or what ever is paid by special fees—is critical, too.
Escalator Clause. Leases can be modified so that the rent will increase as the cost of living rises or operating expenses increase. This is accomplished with escalator clauses like those used widely in office buildings. Office buildings typically establish a base year for both real estate taxes and operating expenses. As these costs increase, they are billed to the tenant as additional rent. Because office leases are written for longer terms (three to ten years), the rent adjustment protection provided by escalator clauses is necessary.
The same strategy can be applied to apartment rentals, even though their leases are written for only one- or two-year terms at most. The problem is one of applying an automatic device that will let the apartment manager and resident know that a rent adjustment is necessary to keep pace with changing costs. We need an index that reflects price increases, is readily available, and is accepted as reliable. Utility charges and real estate taxes come to mind because of their alarming increases in recent years, but they probably are too erratic and too political to meet the test of sustained reliability. Both of these expense items, as well as all other expenses incurred in the operation of multifamily housing, are incorporated in one index—the Consumer Price Index (CPI). This index is published monthly by the U.S. Department of Labor, Bureau of Labor Statistics. It reflects changes in the cost of living not only nationally but in most major cities as well. The CPI receives front-page attention in most newspapers every month. Property owners and residents can receive these statistics through a monthly subscription that’s free for the asking.
Adopting this type of lease provision will allow the owner to preserve a margin of profit in an inflationary economy. Its purpose is not to turn a losing investment into a winner, but simply to maintain the status quo.
At first glance, you may think that the concept of a clause providing for automatic rent adjustments would have a negative marketing appeal and people would resist. Just the opposite can be expected. Because rent increases are tied to an impartial, well-known government index, apartment renters are likely to accept the escalator clause and complain less about so-called rent gouging.
It is important, though, that renters be told about the escalator clause at the outset. Managers and owners cannot assume that the clause has been read and understood just because a resident has signed a lease containing it. Courts no longer assume that everyone reads and understands lease provisions, so you must call the escalator clause to the prospect’s attention. One way to do this is to include a legend on the title page of the lease: “This lease contains a rent escalator clause; please read it carefully.” Another way is to affix a sticker with similar wording on the lease. It also helps if you personally inform the prospect of the escalator clause. In other words, do all you can to assure that the renter cannot complain later that he or she didn’t know about the clause and assumed the lease form was conventional.
Lease Term. Set down the specific dates on which the lease begins and ends. The lease period can be any term acceptable to you and the resident. You can set a term that benefits your re-rental needs. In most areas of the country, any month-ending date from March 31 to October 31 is a good expiration time. Should you have to re-rent, the market is active in these months. Some managers believe that it is usually best to avoid leases that terminate in cold weather months because fewer replacement residents will be out looking for apartments at those times.
In a new property, set up your leases so they expire at staggered times rather than all at once. This will minimize re-renting problems. If you’re managing an existing complex with a tradition of having all the leases come up for renewal at once, begin staggering their expiration dates gradually as they are renewed.
Normally, you are under no obligation to renew a lease. You can re new by including the terms of renewal in the current lease or by submit ting a new lease document or a lease extension rider.
Be aware of the holdover tenant. Suppose you don’t renew the lease.
The resident remains and remits another month’s rent. If you accept this rent, he or she may become a holdover and be entitled to remain in the apartment at the same rent for another year! Local laws vary on this point. You can avoid a lot of trouble and guard against the possibility of holdovers by having your leases run for a specific period “and month-to- month thereafter.” Then, if a new lease is not signed and the resident re mains on a monthly basis, you can terminate occupancy at the end of any month with thirty days’ notice.
Security Deposit. In the body of the lease document, it is advisable to acknowledge receipt of the security deposit and to provide for its escrow, use, and return. This not only helps avoid misunderstandings, but also alerts a prospective buyer of the property that security deposits exist and should be credited to his or her account in any sale prorations. When purchasing an apartment building, an investor is buying both the benefits and burdens accruing from the existing leases—as well as the property itself—and is responsible for performing the landlord’s part of all lease obligations. This includes returning security deposits. Unless the security deposit is noted in each lease, a new owner may be unaware of this obligation or its extent.
Special Provisions. Up to now, all of the information given in the lease sets out the terms as stated in the application form. In addition, you should include any special provisions appropriate to the circumstances. These include escape clauses; some examples follow.
Transfer clauses permit residents to cancel leases when they produce written evidence from their employers that they are being transferred to other cities. Anyone can get a letter from a supervisor; it could even be forged. Permitting cancellation this easily is foolish. The resident cancels at no cost, and you’re stuck with an empty apartment.
• Home purchase clauses should be excluded in general. They fall into the same category as transfer clauses. It’s easy to get a cooperative real estate broker to write a letter saying that the renter has purchased a home. But why should you be penalized?
• Death clauses may be written for older people who are concerned that leases may be involved in the settlement of their estates. This clause provides for cancellation, generally thirty to sixty days after the resident’s death, allowing time to settle estate matters and vacate the premises. If you refuse to grant this cancellation privilege, most prospects won’t press the matter.
Of course, you can write a lease with no escape clauses and then try to enforce it. That means if the resident moves out before the lease is up, you can go to court to collect rent as it becomes due. However, the law in most jurisdictions requires you to mitigate or reduce the resident’s liability. You can’t just let the apartment remain vacant and sue for what the original resident owes. You must try to rent the apartment to someone else. If you Incur expenses in renting it again, usually you can include these Costs along with what the resident owes you.
Trying to collect on broken leases in court is time consuming and costly. You need a policy that will be fair to all residents, give residents the flexibility to move if relocation is required, and at the same time protect you and the owner against rent loss and extra expense.
We recommend that you and the resident cancel the lease by mutual agreement according to one of the following two sets of terms:
1. You both agree to look for a suitable replacement. When one is found and approved by the manager, a new lease is issued, the old one canceled, and the former resident pays a fee for administration and advertising.
2. The resident agrees to pay a set amount, upon receipt of which the manager cancels the old lease and seeks a new resident on his or her own. The set amount could include a forfeit of part or all of the security deposit.
Other possible special lease provisions include these:
Renewal options. Granting a renewal option gives a tenant the right to continue occupancy for one or more periods at rent level(s) that are usually preset. As an example, someone might be offered a one- year lease at $675 per month with the right to extend that term for an additional year at $700, followed by another one-year extension at $725 per month. The resident will take advantage of this provision if it represents a good value at the time the option must be exercised. If the market has softened, however, and the resident believes that a better deal can be negotiated, the resident will probably forego the option. In contracts, terms and conditions should enjoy mutuality. There is little mutuality in an option, and therefore owners and managers should resist including them in leases.
Renewal options make sense when market conditions give the landlord few alternatives or when the tenant is making a considerable investment and the option provision helps ensure the tenant’s ability to continue in occupancy. If the option period extends much beyond one year, it is recommended that the rent be tied to the market rent being charged at the time the option is exercised. This way the rent increase does not trail the market in times of high inflation.
• Promises of improvements. If you made any promises in the application, they should be inserted in the lease document to reassure residents and to avoid future misunderstandings.
• Pet clauses. These might be included as special lease provisions. As stated earlier, however, a separate pet agreement or license is preferred.
• Condition of the premises. Some printed lease forms state that by signing the lease the prospect acknowledges that the apartment is in a clean and safe condition, even when it may not be; hut things are changing. In many localities, there are ordinances stipulating that the execution of a lease by the owner is a form of guarantee that the apartment is in a clean and safe condition and that it conforms to all local codes. An owner can be held liable if an apartment does not conform to these standards.
• Limitations. A good lease will specify certain restrictions regarding the apartment’s use and occupancy. It should list all the people who will live there, with a provision for additions only through birth and adoption. This permits the agent to take action against violators, such as a single person who rents an apartment and then has three or four friends move in later.
The lease should specify who is responsible for repairs and breakdowns. If damage is caused by resident neglect, the lease should explain how the owner will recover damages. The lease should also state how the premises can be used. Apartments are for private residential use, not for commercial or illegal purposes.
Right of re-entry. The lease should provide for the owner’s right of access and entry. The owner or manager should be permitted to enter an apartment for periodic inspections, repairs, and modernization. The owner should also have the right to show an apartment for re-rental during the last sixty days of the lease term, at reason able hours—which have generally been established to be between 9:00 AM, and 6:00 P.M. Similarly, the owner should have the right to exhibit the units in the event the building is offered for sale.
Again, your familiarity with local laws is a necessity. Some laws specify that residents must be provided with a written notice before anyone enters the apartment. The period of notice is also prescribed in such laws.
Repossession. Included in the lease should be a provision that the owner has the right to repossess the apartment, that the resident loses the right to possession when he or she fails to pay rent, abandons the apartment, or violates the lease terms. According to the law there is a significant difference between the resident’s losing his or her right to possession and your right to seize the possession. Aware ness of state and local laws on these issues is imperative.
Abandonment. Be careful about this one. Each jurisdiction has its own definition of abandonment. If you violate it, you may be trespassing.
Check the local law with an attorney, then specify what constitutes abandonment in each lease. Generally, if a resident has paid the rent, the apartment is not abandoned—even if the renter does not live there. Payment of rent usually gives someone the right to use the apartment; nonpayment of rent is often part of the test for abandonment.
Formal abandonment may have to be declared before you can do anything about any personal property that may be left in the apartment. Know your local laws before invoking your rights in the case of an apparent abandonment.
If you decide to enter the apartment and remove possessions that have been left there, it is advisable to document the appearance of the apartment and to inventory all of its contents in detail. Many managers photograph or videotape the entire apartment to show its condition and contents before removing any articles. Items of value should be stored for a period of time. The length of time depends on the value of the articles and, in many jurisdictions, the law. The risk of a claim is great and the advice of the owner’s attorney is highly recommended.
Finally, it is critical that staff members do not take items left in an apartment. If such a practice is permitted (or not expressly prohibited), the staff may begin to take items that may later be claimed for possession. If left with apartment contents, the manager might decide to donate them to a charitable organization that will provide a receipt and perhaps even indicate a value of the items donated. If the residents do return sometime later to claim their possessions, give them the receipt and description of the donated items to use for tax purposes. People are often more understanding when they learn that the items were donated to a charity.
Fire and casualty. The lease should state what happens if the apartment becomes uninhabitable as a result of fire, flood, or other disaster. As a rule, the rent stops at that point, and the resident is credited or refunded any unused rent for that month. The owner then has a period of time—90 to 180 days is customary, but the lease should he specific on this—to decide whether to restore the apartment and continue the lease or cancel it.
Assignment. Most leases should and do forbid the resident from as signing the lease to someone else without the property owner’s writ ten consent. The reason is obvious: The owner or agent must know and approve of the occupants in the property. When this control is lost, serious problems will result.
Waivers and exculpation. Most leases state that the residents will hold the owner harmless in the event of any property damage and personal injury occurring on the premises. A great many courts have held these clauses null and void (or at least as they apply to bodily injury). A resident can sue—and generally collect—for damages arising from a personal injury that occurs on the property. While you may want to include this kind of exculpatory clause for it psychological value, be aware that it may not hold up in court.
Also common are clauses in which residents waive their rights concerning legal notices, remedies, and procedures. The legality of contract provisions in which the parties waive or lose some of their rights is being questioned and challenged. Remember, you can’t en force contract provisions that are against the law.
Subordination. This is a common feature in many commercial leases but is much less common in residential leases. A lease gives a tenant a leasehold interest in the property. The subordination clause simply states that the owner can sign on behalf of the renters and handle certain legal formalities without seeking their approval or acquiescence, so long as these actions do not affect the renter’s right to possession.
• Condemnation or eminent domain. This clause generally provides that if an empowered authority takes the property through condemnation proceedings, the lease is automatically cancelled without any compensation to the renter (who is required to leave), but with adequate notice (usually sixty to ninety days).
• Bankruptcy. The lease should provide for the eventualities of resident bankruptcy, insolvency, assignment for the benefit of creditors, reorganization, and even insanity. If any of these problems occur, you may be restrained from pursuing financial claims for monies due prior to the filing date. Your claim might have to wait for a settlement with all of the other creditors.
Bankruptcy law grants the debtor the right to choose whether to reconfirm the lease. The decision, as the law stands now, belongs to the renter and not to the property owner. This is contrary to the language of many residential leases which read that the owner has the right to terminate the lease in the event of a bankruptcy. This clause should be drafted by an attorney familiar with bankruptcy law.
• Rules and regulations. The property’s most important rules and regulations should be listed, along with your rights to change them. The more reasonable and up-to-date these rules are, the better chance you have to enforce them.
• Signatures and delivery. Finally, the lease must be signed by all the parties and copies delivered to them. The validity of a lease is questionable if a resident does not receive a copy even though all parties have signed it. The lease endorsement should include the owner ship title as first indicated on the lease and the capacity of the person executing the lease on behalf of the owner.
With the lease signed, copies delivered, and the first month’s rent and Security deposit paid, the new renter is ready to take possession. The next section will discuss the policies that should be considered to help govern the resident’s stay.
Establishing rent payment policies encompasses aspects of apartment management that should be carefully thought out and thoroughly understood. The main issues concern where, when, and how rents are to be paid.
A Matter of Habit
Traditionally, and by contract, rent is due on the first day of each month. Payment of rent is a matter of training and habit. If you don’t establish this policy, you will not enjoy prompt or complete payment. Count on some residents testing you and delaying payments as long as they can.
Many renters spend what they have each month. Most workers are paid twice a month on average, and the average renter uses most of one paycheck to pay his or her rent obligation.
Once a resident falls behind in paying rent, it is most difficult to catch up. Skilled managers know this and constantly apply pressure to keep each rent account current. They know that the best catch-up months are May and June because expected income tax refunds usually arrive about then. Most rent collection problems begin because the manager was slow to act.
Make the Policy Known
Your policy on rent collection should be spelled out when the prospect first completes the lease application. It will not affect your sales presentation, because people expect rent to be due on the first. This policy should be stated again when the renter signs the lease. In doing this, you firmly establish the collection policy and eliminate many future problems.
Should a resident be billed for rent each month? This is a commonly asked question, and the answer is “no.” Rent is usually a fixed amount. The precise amount is known by the resident, who also knows that it is due on or before the first of each month. What, then, is the reason for billing? In a luxury building with variable charges added to the rent, or in a condominium with owners, not renters, a monthly billing might be useful. For the most part, however, rental property does not need the extra cost and problems associated with the billing of rent. If the mails are delayed or there is an error in your billing, you have provided an easy excuse for the resident to be late.
Paying at the Site Office
You gain maximum control over rent payments when they are collected at an on-site office. Granted, from an efficiency standpoint, more rents can be collected and posted in a single day when they are received by mail at a central location. The loss of control that mailing rather than hand- delivering payments will cause, however, is more than enough to offset this advantage. Convenience to the resident and the benefit of personal contact each month are additional advantages that result from on-site collections.
Some companies and complexes have incorporated a central cashier or bank lock box system for the collection of rent. These systems often pro vide the resident with an excuse. The delay in processing information back to the manager is called the “blackout period.” During this time, site personnel do not have an up-to-the-minute listing of residents who have and have not paid. Depending on the system, this period can extend to as long as fifteen days. The renter, when approached about overdue rent, learns to reply: “I have sent in my rent payment.”
Some banks offer an arrangement in which they automatically deduct the resident’s rent payment from his or her checking account on the first of each month. The benefits to the user are simplified bookkeeping and one less check to write each month. The benefit to the property manager is punctual receipt of rent.
My company experimented with such a program and in fact offered our residents free checking accounts at a local bank that included the direct transfer feature. The problems were numerous. Many people write checks knowing that the check clearing process allows some time that amounts to a short grace period. Checks sent through the mail clear more slowly compared to automatic transfers which are instantaneous. Our residents did not like the program once they found their accounts overdrawn; in fact, more than half of the people in the program withdrew within one year.
Forms of Payment
Rent payments can take many forms: money orders, cash, personal checks, and even third-party checks. You need a firm policy with regard to the form in which rent is paid.
• Money orders and cashier’s checks are the best method of payment from an owner’s and manager’s standpoint. They are convenient to process, recoverable if lost or stolen, and safe in terms of cash-ability. To a resident, they lack convenience and involve additional expense because they must be purchased. Your policy should be to accept them gladly but not to require them.
• Cash should be, but isn’t, a welcome form of payment. Managers are often reluctant to accept cash. When large amounts of cash are known to be kept on the premises, you run a risk of theft that can compromise the safety of your site staff. Many managers their discourage cash or refuse to accept cash rent payments (even HUD’s policy endorses this). Cash collections require frequent trips to the bank or a cash station; checks, on the other hand, can be deposited through the mail. Use caution in establishing a “no cash” policy. Cash is legal tender in this country. Refusal to accept cash payments of rent may void your right to collection. You certainly can ask residents to pay by check or money order, and most will accommodate you. Most major thefts of rent money result from a failure to make daily hank deposits. With the extra work volume around the first of the month, several days’ build-up of deposits makes a robbery an even greater loss. The solution is to make bank deposits daily.
• Personal checks account for the vast majority of monthly rent payments. They offer convenience to both the resident and manager and generally can be replaced if lost or stolen. The problem arises with NSF (not sufficient funds) checks, which frequently are delayed several weeks in being returned.
In my experience, people who write checks when there are not sufficient funds in the bank to cover the amount do not seem to be affected by the charge that the bank levies or the service charge that we impose. Limit your residents to two NSF checks. After that, you should insist on money orders or cashier’s checks.
Postdated checks are another favorite of people with money problems. The best advice is to refuse a postdated check. We’ll address this issue in more detail during our discussion of The Fair Debt Col lection Act.
• Third-party checks should be avoided. Even though these may be company payroll or social security checks and can he termed ‘good as gold,” they present problems. To cash these checks, you may need to make change for the resident if the check exceeds the rent amount. Also, when a third-party check is returned as NSF, it causes enormous problems in identifying the resident, making bookkeeping adjustments, and obtaining a replacement check.
Occasionally, a resident will offer to pay rent for a number of months or even a year in advance in return for a discount on the rent. Advance payments may be fine; discounts are not. Even though the additional cash would be helpful in meeting current bills, you would be ill-advised to accept this money if it means discounting the rent.
Collecting rent is almost as painful as raising rents. We are not speaking of rents that show up in your office voluntarily, but rather the ones that don’t. A manager’s ability to collect all rent that is due is an important measure of job performance. A poor manager rarely will have a good collection record. Long, hard experience suggests that your rent collection policy should contain very little flexibility.
Many managers prefer a more liberal policy regarding rent collections. They quickly point out special circumstances that might be involved along with the fact that most local laws require a lengthy procedure to dispossess a renter from a unit. Most managers, however, when asked to name the residents whose rent payment will he outstanding on the tenth of the following month can do so with uncanny accuracy. The point is this:
If those residents are so well known, why isn’t the manager doing some thing about them?
Enforce on the First
If the rent fails to arrive in your office during the very first few days of the month, you must begin enforcement, preferably in person. A telephone call or even a hard-hitting letter is not as effective as a personal visit. Reminder notices and final notices are not worth their paper value, much less the stamp required to mail them. It doesn’t take residents long to discover your complete rent-collecting procedure. They quickly learn the steps you follow: reminder notice, final notice, five-day notice, letter, phone call, attorney. They will make their payments just before the nasty personal letter or phone call. Knowing this, why waste time with the preliminaries?
One thing you have to be mindful of is the Fair Debt Collection Act. This federal law that has been on the books for some time, is beginning to find enforcement in rental housing. Challenges and varying interpretations can be expected to go on for years. The primary points of the law that affect those in the apartment rental business are:
• Direct collection efforts to the debtor. Collection techniques in the past have included advising the employer or the parents of a late- paying resident. While this practice often brought quick results, the rights of the particular consumer were probably violated.
• Announce the purpose of communications. The Fair Debt Collection Act would have you clearly announce that the purpose of a telephone call or letter was primarily for the purpose of collecting a debt. This allows the debtor the option to continue listening or reading once you have stated your purpose. Most landlord communiqués are very direct, so this provision should not change your typical collection method.
• Always not the resident when a postdated check is cashed. The way to eliminate this step is to not accept postdated checks. Most apartment operators insist that all checks carry the current date. In certain situations you may agree to hold the check for a few days before depositing it, but be sure the check carries the date it was written so that it can’t be construed as postdated.
• The debtor has a thirty-day period in which to disclaim the debt. This provision is subject to a number of varying interpretations. Some say that landlord-tenant law effectively provides the debtor with an opportunity to object. Others argue that the contractual agreement of an ongoing lease is different from a consumer debt obligation, and that this provision in the law gives a resident an automatic one- month grace period. Property managers should be familiar with this law and with its interpretations locally.
Some simple rules will help in spotting potential rent collection problems. When the rent exceeds 33 percent of a renter’s gross income, pay attention. The risk of having a collection problem increases dramatically with each rental dollar over that 33 percent mark. Another warning signal should go off when the combination of the rent plus monthly installment payments reaches 50 percent of the renter’s gross income. When these two situations occur, there won’t be enough income to go around, and somebody will come up short — probably you.
Another early sign of trouble is the NSF (not sufficient funds) check that has been returned. When the first check comes back, that is the time for a personal visit. Have the resident replace the NSF check with either cash or a certified check. Make it clear that after two NSF checks, all payment will have to be in the form of money orders or cashier’s checks.
When residents become delinquent in rent payments, some managers like to impose a late or penalty charge. This is a poor practice. First, it implies that rent can be late as long as a late fee is paid. Residents who pay their rent late and accept the penalty assume they have paid for the privilege of paying as late as the last day of that month. Such a policy bends what should be an inflexible rule—that rent is due on the first. Second, courts usually do not lend a hand enforcing penalties. However, by calling the late charge a “service charge,” you may be able to collect it; but you will be required to demonstrate how your costs increased because a particular renter was late. While this is preferable to a “penalty,” you should not regard it as an alternative to prompt payment.
If you insist on providing flexibility in your rent payment policy, consider this suggestion: Increase rents by the amount you would set as a late or service charge, then allow a discount of that same amount on rents paid before the first of the month. Your claim will be for the gross rent once the new month begins. This is both acceptable and enforceable. The advantage of using this system is that you appear to be rewarding residents for doing something above and beyond what they have already agreed to do—paying the rent on the first day of each and every month.
Some managers dream up contests or incentives to entice residents to live up to their commitment to pay rent on the first of each month. Don’t do it! When you offer a prize drawing to residents who have paid their rent promptly, or some other incentive, you are effectively saying that a considerable number of residents are late with their rent. That admission gives support to the late-paying residents and signals to them that they are not alone—and makes the job of collecting rent even more difficult.
When a resident who is behind in rent is confronted by management, he or she usually has a variety of excuses. Seldom will you hear the real reason: “I don’t have the money.” You will often be told about the deficiencies in the apartment with the explanation that payment is being withheld until the defects are corrected. Never trade repairs or improvements for rent. If repairs are needed, they should be made in the normal manner, and you can reiterate your standard procedures for requesting such work. The resident is using this ploy to buy time and save face. After a year or two, most managers have heard many of these resident tales and realize that they are merely flimsy excuses.
Once residents admit to being short of the money needed to pay the rent, they may try to negotiate a payment plan. This is something else to avoid. The great majority of these plans fail. The very reason residents are be hind is because their expenses exceed their income. If this is true, how can they get ahead again? Usually, they report the promise of a Christmas bonus or an expected tax refund. The question is, how many more creditors are waiting for that same check? Remember, there is a new rent charge each month. There are also businesses whose existence depends on people who need money temporarily. They are called banks and loan companies. Property managers are not in the business of lending money, and, therefore, should not.
Some will argue that it is better to receive a partial payment than to have an empty unit and no rental income. That theory is totally wrong. You are far better advised to enforce your policy on rent payments rigidly. A vacant apartment is far superior to one occupied by someone who hasn’t paid for it. At least you have the potential of leasing it to someone who can and will pay the rent on time. If word gets out that you are “soft” about collecting rent, your problems will increase with each passing month. The weaker the market, the stronger your policy on rent collection should be.
Settle in Court
It is interesting that some residents will not pay their rent even when threatened with eviction notices, subpoenas, a court date in front of a judge, and the final humiliation of the eviction process. Then, on the court date, sometimes even after the judge has ordered their eviction, they will decide that they want to stay and are willing to pay all back rent plus your legal fees and all court costs. You might be tempted to accept, especially if the market is weak and one additional resident can make the difference between profit and loss. The advice of this writer is: “pass up the offer.” Let them go. My years of experience have shown that you can almost guarantee a recurrence within the year. Use your energy to find a renter who will pay; let some other landlord waste time chasing the chronic delinquent every month.
Throughout this book, many policies and procedures are recommended. Of all of these, the rent collection policy should be the most in flexible. Failure to adhere to this principle can cost thousands of dollars each year.
Occasionally, a resident may send in the rent, minus deductions for so- called damages: the oven is unreliable, the refrigerator broke and $100 worth of food spoiled, the air conditioner didn’t work and the family slept in a hotel. Don’t allow such deductions. Your policies should insist that payments for damages are a separate matter and rent is always to be paid in full. If you are responsible for a delay in repairing the stove or refrigerator, pay for the damages separately—not as an offset against the rent. Of course, if repairs are made promptly, such situations will not occur often.
In the apartment rental business, you will inevitably lose some money due to delinquencies. People lose jobs; the economy can falter; families get into trouble; and you can misjudge applicants. Just how much rent loss is too much? According to the accepted standard, you are within bounds if you have less than 1 percent of your total monthly rent outstanding at the end of the month. That is not to say that you should accept 1 percent as a goal. Many managers achieve a 100 percent rate of collection. We’re saying that if your total rent roll is $40,000 per month, you might have as much as $400 remaining to be collected. Outstanding rent between 1 and 2 percent signals trouble. The problem may he a softening economy and shorter• work hours or layoffs, or it could be the result of a softening rental market. When delinquencies go over the 2 percent mark at the end of the month, major problems exist; and this indicates the need for an immediate change in management.