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.

I got an email from another member of my team today that was asking for some suggestions on how his customer should handle a tenant issue.  Here is his opening email:

I have a client that is very green in the rental business. He signed a lease with a tenant for 6 months.  The tenant moved in but hasn’t paid him a dime.  No month in advance, deposit, rent etc.  What can be done to get this person out?

Ouch!  Now, I suspect that 90% of new landlords have made the mistake of not getting a security deposit prior to move in, at least once in their career.  In my experience (and I have made this mistake before), you will get that deposit only about 10% of the time.  Once they move in, you have zero leverage to get that deposit.  That tenant has no fear of you actually doing anything to them.  In fact, you can’t!  No eviction in the world is going to work to get that deposit paid.

When the tenant signs the lease, you should get the damage deposit.  And before they move in, you should get the first month’s rent.  Worst case, if the time is short, get all of it prior to move in.  If the time is long between lease signing and move in, always get a deposit as the tenant can simply walk away from the lease.  While you could try to sue them for lost rent, good luck.  Actually, you could get into a wierd situation where legally you need to evict them to break the lease even if they never lived there.  Worst case, hold the keys until they give you the security deposit and first month’s rent.  This is the last leverage you have.

Another mistake that I am sure happens, but I made only once in my earlier landlord years was to accept a personal check for the deposit and/or first month’s rent.  I am sure you can guess what happens next; the check bounces.  Now you have a tenant living in your investment property that has not paid anything to be there.  Much like the guy above.  If you have several weeks prior to move-in, you have time for a personal check to clear.  Also, if the check is drawn on a local bank, drive it over there and have it cashed immediately so you get the funds directly instead of depositing in your bank, they send it to the tenant’s bank and then it gets returned 14 days later NSF.

A slight twist on this mistake is when you are dealing with a tenant that get’s a rental subsidy like Section 8.  The tenant talks the talk like they know exactly how it all works, saying they have talked to this person or that agency and you are going to get your money.  Never take the tenant’s word for it.  Call the agency or have the tenant provide written proof of the subsidy.  Just because they say they are getting emergency assistance to pay the security deposit, doesn’t mean they qualify for it.

Taking some precautions and holding the keys ransom for the money is the best option.  By they way, I told this agent to file the eviction immediately (since they also owed the first month’s rent).