7 Landlording Tips

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Bill: Hi, I’m attorney Bill Bronchick and I’m the host of the REI Classroom. And in this lesson, we’re going to talk about landlord legal issues, seven specific ones that you need to know about as a landlord.

Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.

Bill: Let’s jump right into them. Number one, the lease agreement. Wow, we could spend hours talking about lease agreements, but let’s just highlight a couple of things that should be in every lease agreement. First of all, the late fee. The late fee, in most leases, is 5% or 10% of the monthly rent, which is fine. But the problem is if they pay on the 10th, the 12th or the 20th, it’s still only that same 5% or 10%. So if they’re going to be three days late, they may as well be three weeks late. In addition to a flat 5% or 10%, you should add a per diem. That way, it stings the longer that they wait.

This additional fee should be called “additional rent.” In fact, any type of penalty that you put in your lease should be called “additional rent” and here’s why. Let’s say that a tenant pays late, and they owe $100 dollars in penalties and late fees one month. The next month they ignored it, and they just pay their $1,000 dollars a month rent.

Now, you could send out another notice for $100 dollars, but if your lease says those fees are additional rent, then you send them a letter saying, “I received your $1,000, I applied $100 of it to the late fees additional rent from previous month, you only gave me $900 thus, and you still owe $100 dollars rent. That’s the key language, additional rent.

One of the other things that I find, at least in my experience, is that having a clause that “the winner gets attorney’s fees” can actually work against you, particularly in low-income housing, where the tenant is so low income that they are probably going to get a free attorney appointed by the court or Legal Aid. So if you sue them and you win, and you get attorney’s fees, good luck collecting. If you sue them and they countersue you with some Legal Aid attorney and they win, you get attorney’s fees assessed against you, and you have to pay it. So I just take that right out of the lease. I don’t have anything in there that says the winner gets attorney’s fees. Those are two really good ones you are going to enjoy in your lease agreement. We have tons of others, but we have a lot of ground to cover still.

Number two, security deposit rules. You have to be aware of your state of security deposit rules. Typically, when a tenant moves out, you have a certain number of days to notify them in writing, maybe certified mail, check your statute, that you intend to withhold a portion of or all of their security deposit and why, specifically estimates, breakdowns, details. If you don’t notify them in writing and just withhold it within that 30 or whatever the state statute says, 30 or 60 days, and even if you’re entitled to withhold it, they’re going to send you a letter saying I want it back. And if you don’t give it back, you can get sued in court and they get not only attorney’s fees but they get three times the amount of the deposit they’re entitled to. Three times, treble damages.

Now, you could still sue them separately in a separate action for damages or back rent, but you’re going to get nailed if you don’t detail it in writing. Now, some states have the ability to extend that time period. So it may be 30 days, but your lease can say up to 60. Whatever it is, know what it is, make sure you detail why in writing that you’re withholding all or part of their security deposit. A lot of people get nailed on that one and it’s really a shame because most times, you’re right in withholding it, but you didn’t follow the rules.

Number three, discrimination. Be aware of protected classes. Those are people you can’t discriminate against. Now, protected classes are things like race, and religion and national origin, sex. Then there are state ones that are additional, and some examples might be familial status, whether you’re married or not, how many kids you have, the age of your kids, sexual orientation might be one of them.

But there’s no protected class called “jerks and idiots.” So if you meet someone at an open house that are showing a property to, and you just feel like they’re jerky or they’re just an idiot and you don’t want to do business with them, as long as they are not in one of those protected classes they can argue, you can bounce them for that. Except in one state, California prohibits random discrimination. I don’t know if that’s random, but you could find a way to bounce someone based upon the fact they didn’t fill out their lease application properly or they had a bad demeanor or whatever it is.

You should have a scoring system. So if they fill out the application completely, it’s plus X points, if they don’t, it’s minus. If they tell a story that isn’t true that you find out after you pull their credit report, minus 20 points. If their FICO score isn’t a minimum number, minus 20 points. And that way, you have a little checklist that you can check off and have in your file in case they later come back and say, “You discriminated against me.” You say, “No, you didn’t pass my test, you didn’t score high enough.” You should have a set of standards and keep that in your file for as long as you can.

Number four, landlord liability. A lot of landlords are worried about people getting injured on their property and it’s a realistic thing. The good news is you probably have insurance for that. Make sure you have enough. Most people only have $200,000 or $300,000 in liability coverage, which is woefully inadequate. You need at least $1 million. If someone dies in a property of yours, either a guest or a tenant, that’s way more than a $300,000 jury verdict. So make sure you have adequate insurance.

But more importantly, make sure you report a claim timely. Every insurance policy says if something happens, it’s called an incident, that might lead to a later lawsuit or claim, if you don’t tell us about that incident, we don’t cover it when the lawsuit comes. Very common. Someone gets injured, not a big deal, maybe you pay for their hospital bill, maybe you took responsibility for it. But you don’t want to tell your insurance company because you’re afraid they’re going to raise your rates. Then two or three years later you get sued, and then you call in for coverage, and they say, “Sorry, denied.” Make sure you report any incident where someone has been injured or property has been damaged, even if your rates might go up. That’s a very, very common mistake that landlords make.

Number five, animals. You shouldn’t allow exotic animals, things that can injure people. Dogs, let’s talk about dogs. There’s what is called a “one bite” rule, meaning if a dog is just a normal dog, and it bites someone, you’re not necessarily liable for that unless it is a dog that is prohibited by law, like a pitbull might be prohibited in your jurisdiction. But if it’s just an ordinary dog and it bites someone, you’re not necessarily liable for that as a landlord.

But once they do bite someone, and you are on notice of that, you don’t get a second bite. That means you have notice of a dog’s propensity to be aggressive and you have to tell the tenant to get rid of the dog. And by the way, that should be in your lease agreement, a separate pet deposit and a pet agreement that says, “If they bite someone, the dog has to go.” Okay. So they can’t argue that, “You can’t make my dog go. It’s part of my family,” and so forth.

Number six, drugs. Not permitted. Now, if you’re in a state like mine in Colorado, where you have medical marijuana and recreational marijuana, still we have a no smoking rule, period. That’s no smoking of any kind. Now what if they say, “It’s medical. I need it for my medical reasons”? Well, that could be covered under the Americans With Disabilities Act. They have a disability, they have an illness, they need to . . . but they don’t need to smoke it. Or they could smoke it outside, they can ingest it.

It is an unreasonable accommodation to request that a landlord has smoke in their house or people growing plants all over the place that causes moisture and gets in the walls and smells and ruins things. So you can ban growing, you can ban drug use, you can ban smoking of any kind or any kind of drug activities, selling, buying, storing, anything. Because remember, it still is illegal under federal law.

Lastly, number seven, a notice to terminate. A lot of people think that if you have a year lease that you have to give the tenant a notice that you’re going to terminate the lease at the end of the 12 months. You don’t. If it expires in 12 months, no notice is required. Now, if it’s month-to-month, either from the beginning or after it expired, you collected rent and it became a month-to-month, then you have to give 30 days’ notice prior to the period. So for example, if it is mid-April and you want them out by the end of April, you can’t do that. You would have had to have given notice before April 1st.

So you give them notice by the end of April to be out at the end of May. So it has to be 30 days before the pay period. Make sure you give that notice in writing, it’s clear that you serve it to them in writing, post it on their door or both. I hope you’ve enjoyed these seven tips and we’ll see you soon.

Mike: HomeVestors, the “We Buy Ugly Houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.

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