I get a lot of questions about tenant evictions.  I suppose it is like any job, it is the one thing that landlords have in common across all investment properties.  Here is a recent note I received:

I have a renter who’s lease expired in September so she is on a month-to-month lease currently. She has not paid November and Decembers rent. I spoke with her in November [2 weeks after she was late on her rent] and she told me she would pay and I said apparently you cannot afford to live there and maybe you should move out. Then I gave her [on November 27] an ‘unofficial” eviction letter telling her she needed to be out by today Dec 28th. Do I have the right to lock the doors tomorrow if she has all or her stuff or most of her stuff moved out??? I was in the property yesterday and there is damage to the property so I really don’t want anymore damage at this point. Just want to know what my options are.

This is a very common scenario.  Here are some thoughts about what she did right and wrong:

• This landlord did a good job of proactively getting in to speak to the tenant and assessing the situation.  Many times landlords want to quarterback from their cell phone and just leave messages.  She also succeeded by not waiting another 30 days to ask the tenant to move out.  She dealt with it in the same month.
• Despite that, I would have recommended that she proceed with an eviction instead of a letter to move out.  This landlord runs the risk of that tenant not being out by December 28.  Ultimately the tenant did move by December 28, but if she did not, the landlord would have then been forced to start the eviction process, which would have taken until mid-January before this tenant was out.  Starting the eviction on November 27, would have had this tenant gone by December 15th or so.
• In response to her question “Do I have the right to lock the doors tomorrow if she has all or her stuff or most of her stuff moved out??” That is a judgement call.  If you truly believe that the tenant has vacated the property by either giving you verbal confirmation or by removing all their stuff and leaving the keys, then yes, change the locks.  Alternatively, if there is a lot of stuff in the apartment, you may want to change the locks, post a notice on the door, and wait a week to see if the tenant returns looking for their stuff, just to be safe.

There is no right answer when dealing with evictions and non-paying tenants.  My best recommendation is to move quickly and decisively as every day they stay  is one more day without income.

Tax Court Case favors the IRS-Taxpayer did not meet real estate professional 750-hour requirement

If you are claiming to be a Real Estate Professional here is another case that points out that taxpayers needs to be documenting their time when performing real estate activities. A recent tax court case held against the taxpayer claiming that he did not qualify as a real estate professional. The Tax Court held that being “on-call” does not count towards the 750 hour requirement (Moss, 135 TC No 18).

SITUATION: The taxpayer was employed full time. The taxpayer and his wife owned a number of rental properties, including four apartments and three single-family homes. The taxpayer was directly involved in the rental properties performing rent collection, repairs/maintenance, and screening/evicting the tenants. For record keeping purposes the taxpayer kept a log detailing the dates he spent performing these activities. The taxpayer neglected to include the time spent but later was allowed to go back and prepare a time summary. The taxpayer’s total hours were 646 and did not meet the 750 hour test (as required to be a real estate professional). NOTE: Not to mention the fact that over 50% of his service must be in the real estate profession.

The taxpayer also argued that he was on-call during his employee time to handle rental issues. The Tax Court took the position that service time must be actual performance of such service. The tax court also rejected the taxpayer’s claim that his calendar reflected only 75% to 85% of his time- failure to provide proof.

CONCLUSION: The Tax Court ruled in favor the IRS and the taxpayer was subject to additional income taxes and accuracy-related penalties.

TAKE AWAY: Taxpayers claiming to be real estate professional need to keep detailed records of their time and services when working on their properties.

Greg Nelson, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com/blog

So everyone knows what a high maintenance person is.  In fact, some of us have dated (or are married to ) some (not you honey)!  These are people that just can’t seem to be satisfied with anything despite how good it is.  When you get one of these as a tenant, watch out.  They can be very frustrating as they are often not making problems themselves, but they want to complain about everything.  Often also, their complaints or requests are legit, but maybe they are a little oversensitive about things.

I had a new tenant in one of my townhouses.  This empty nester couple were a relocation from Memphis and had lots of cash in the bank from selling their home.  She liked the unit, but she said she smelled cigarette smoke.  I am pretty sure the current tenants did not smoke in the house, but out on the back patio.  No doubt that some of that smoke came in the house and I am sure it was on their clothes and other belongings.    They were going to be great tenants, but she insisted that I not only shampoo the carpet, but I have the ducts cleaned.  This unit was only 2 years old, but I agreed.  I paid the $250 to have the duct cleaned.  She was satisfied.  I go over there a month after they move in only to find out that she is a smoker.  Huh?

So what do you do if you have a tenant that seems to call you over every little repair and/or every little neighbor problem?  Are you spending 80% of your management/maintenance time on this one tenant?  Unfortunately, because their requests are often reasonable and legitimate, it may take you a while to identify that this is a high maintenance tenant.  So what do you do once you identify this?

• Start pushing back on their requests.  Question if it really needs to be done.  At first this may be difficult to do, because you know the work may need to be done or the place is not perfect.  Most rental units are not perfect and were probably never represented as perfect.  They have to live with some defects.
• Ask the tenant to put together a punch list and then agree that you are going to go in and do all the work one time and you are not coming back except for an emergency for 6 months.  While this may be difficult, it could get them to see that the property is just fine.
• Harder still, but I know many landlords do this, is to simply tell them that  you are not fixing it.  Period.
• Lastly, move them out.  If they continue to be a thorn in your side, tell them:  “Look, it sounds like you are just not satisfied with this property.  I don’t believe I will ever be able to get it to the level of maintenance/repair/beauty you want.  Maybe we should just break the lease at the end of next month and you should find another place that you are more satisfied with”.  This statement right there may be enough to shut them down.  Many people when presented with an ultimatum or take away will back down.

Having a high maintenance building is tough enough to deal with if you are a part-time landlord.  I would say that high maintenance tenants are probably worse as the building is not calling you on the phone at 7pm saying the door handle is loose!

I was thinking about using some cliche’ to start this post off with like:  “You can’t teach old dogs new tricks” or “you are never too old to learn”, but I just couldn’t bring myself to do it!  I was invited to a training course about a month ago that was sold as landlord training.  The cost was $45 but the speaker wanted me to attend to see if it was something that I could recommend to my investors and blog readers.

I attended this seminar last week.  I was very skeptical that this wasn’t going to be much more than a very basic landlord class.  Boy was I wrong!  This class was informative and interesting, even for me (a guy that has owned lots of rental properties and helps investors get started as landlords almost daily).  This class is actually taught by an attorney from the Home Line Tenant Hotline.  They provide free legal advices to tenants and will even help them in court in certain situations.

The speaker was one of the attorneys from Home Line.  He was engaging and interesting, but what I found fascinating was how he and his peers looked at different situations that we as landlords encounter every day.  He was able to show how they defend the tenants by using the landlord’s ignorance of the laws and statutes.  A couple quick examples were:

• They are often able to have leases invalidated because the landlord has a PO Box as the mailing address (when the state statute requires a physical address).  I realized that I was taught as a landlord to use a PO Box to get your checks.  I am sure there are many other landlords out there that are breaking this rule.
• If your lease converts to a month to month lease for a tenant, you legally must send them a written notification 75-90 days prior to the expiration of the lease telling them about the automatic renewal. This notification can only be sent during that 75-90 window and must be sent via certified mail or personal service.  How many landlords do you think actually do all those steps?
• If you have  tenant that stays on past the end of the lease, they are a hold-over tenant.  If you accept money from them, you have entered into a new oral lease and you can not evict them.
• We also discussed many other legal issues such as fair housing and discrimination.

These and many more gaps/problems in landlord procedures were pointed out to us in class.  I was writing furiously because I could see places that I needed to shore up my processes to keep myself protected.  Not only could this information help you be a better landlord, it may help you stay out of court!  I recommend that every landlord take this class.  It was invaluable.

I attended a landlord seminar today that was hosted by an attorney that represents tenants.  It was a fascinating look at landlord issues, but with a tenant advocate teaching it.  He spoke about many of the loopholes and other places that landlords have a tendency to not follow the law or the letter of their leases and how the tenants can win lawsuits or defend against evictions.

There was quite a discussion about security deposits and I thought it made sense to lay out some of the gotchas and give you some reminders on how the process is supposed to work.

• If possible, take pictures of the unit prior to the tenant moving in and store them on your computer.  The attorney explained that often the “move-in” form is simply filled in with OK and a line through the entire column for each room.  He stated it was easy to defeat this in court as meaningless.  Pictures before the move-in will give you considerable ammunition if you get pulled into court by the tenant for the amount withheld from the security deposit.
• A landlord has 3 weeks from the date that the tenant moves out or the receipt of the tenant’s new address, whichever is later, to get the security deposit or security deposit disposition letter in the mail.  That is the law, but the attorney recommended that even if you do not know the new address of the tenant, you should still put the letter in the mail to the old address.  If that letter forwards to the new address, great.  If it is returned, put that in your file so you can show you tried.
• Even if at the end of the lease or tenant’s occupancy, there is nothing left of the security deposit, you must still send a written disposition letter.  Even if the tenant owes you 3 months of rent, do not neglect this.
• If you fail to send the letter or security deposit within 21 days, the tenant can take you to court.  If they win, you owe them double the entire security deposit, plus interest (without any deductions for missed rent or damages), plus $500 as  a penalty.  For example, if the damage deposit was $1000 and the tenant lived there 1 year, the amount would be $1000 + $5 + $1000 + $5 + $500 = $2510.  That is a lot of money!
• You can only deduct for physical damages beyond “ordinary wear and tear”.  So what is wear and tear?  Although that is somewhat subjective, repainting and cleaning carpets is NOT considered excessive, normally.  If they are really worn or dirty, you could make a case that it is excessive damage (and I have seen excessive).  Make sure to document this fully.
• When you put amounts on the security deposit disposition letter, make sure to use real numbers.  A friend of mine was sued by a tenant for the damage deposit money withheld.  The tenant won the case.  The judge said that if my friend would have had receipts he would have easily won.  Do not put round numbers for supplies and repairs.  Did you really spend $20 on cleaning supplies?  Was the carpet cleaner really $60?  Use the exact figure.  It may help convince the tenant that you have receipts and you may not end up in court.  Use a time sheet if possible to account for your time if you do the work.  Do not round the hours.
• Before you start any work or cleaning, take pictures of all the problems.  Then you can use those pictures to compare to the before photos if you get to court.  As a side note, if your tenant leaves the property a mess and they are on rental subsidies, like Section 8, send the after pictures to their case worker.  It may help the next guy (and you can get some secret pleasure out of getting the tenant in trouble).
• Do not always assume you are keeping the security deposit.  I know some landlords that are keeping the deposit despite having a good tenant.  They find anything they can not to give it back.  Be honest and fair.  Otherwise you may end up in court.
• Effective August 1, 2010, the time you as a landlord are required to store your tenant’s left over stuff has been reduced to 28 days.

Following the letter of the state law and the details in your lease is the proper way to keep yourself out of court fighting over the disposition of security deposits.

Most of us are so used to buying REO properties in the last couple years, we forget all the details of buying a home with tenants in it!  I know I do.  In fact, I am so used to showing vacant houses that I recently showed up 2 hours late to a house (assuming it was vacant and not a big deal to be late), only to walk up the sidewalk and find the lights and TV are on!  Oops.

Writing offers on tenant occupied properties needs a little more attention to ensure that you get what you think you are getting when the closing is over.  If you miss something or simply assume everything will be fine, you may get a rude awakening after closing.

Here is one example:  my client put in an offer on a short sale in February and the seller accepted our offer.  During that process, we got copies of the lease and confirmed the rent amount.  We showed up at the closing today to find out that the landlord had signed a new lease with the tenant in March, dropped her rent by $300 and let her use the damage deposit to cover the March rent when she was out of work.  Now we received a much smaller amount of cash at closing, no damage deposit, and need to have a delicate conversation with the tenant that we’ll be raising the rent $300 (and she needs to pay a new damage deposit). I can see I need to update my boilerplate rental addendum.

Here are some tips on how to craft your purchase agreement when buying investment properties with tenants in them.  Most of these will take the form of an additional addendum on the purchase agreement.

• Write into the purchase agreement that the seller is not allowed to sign any new agreements with the existing tenants without written approval from the buyer. This would have fixed our problem today or at least have given us more notice than 1 hour before closing.
• In the purchase agreement addendum, write in the amount of the security deposit and language that effectively says:  “Seller will provide the buyer the security deposit in the amount of $xxxx at the closing in certified funds, regardless of the disposition of those funds between the tenant and seller, as long as tenant remains in the property”.
• Do not allow the old landlord and his bad rent collection skills to start you off in the hole.  Add language that the rents will be prorated at the time of closing between seller and buyer, again regardless of the collection status of the rents.
• Also, make sure the seller understands that you want to be notified instantly of any tenant issues at the property, such as rent collection, notice to move out, or other problems.  This can be especially important when dealing with short sales that can take months to close after you offer on the property.
• Do not allow the landlord to sign any lease extensions as it is a good idea to let them roll month to month so you can see how the tenant perform with everything prior to signing a new lease.  Worst case, if you don’t like them, give them the 60 days notice and move them out.

Buying an investment property that has tenants in it takes some additional due diligence and purchase agreement language to insure that you get what you think you are getting.