What To Do When They Put "Paid In Full" And It's Not

People like to try cute things in hopes they can get away with them. One that some "smart" tenants will try is to mark their payment check to you "Paid In Full", when they know good and well it isn't. Most commonly, they'll pay late and not include the late fees. In essence they want you, by accepting the check, to enter into a new agreement declaring that they are current. They figure you will do this rather than return the check - tempting you with a bird in the hand so to speak. However, you have another, better, option.

The Uniform Commercial Code is something that every person involved in business transactions (which is nearly all of us) should become at least superficially familiar with. It was an effort by private organizations (the American Law Institute and the National Conference of Commissioners on Uniform State Laws) to create a basis for easier commerce between the states. It was the work of a number of legal scholars and was originally published in 1952. The UCC isn't itself law, just a suggestion of how states should establish business and contract laws. It becomes law when a state legislature adopts the UCC as such - which all 50 states have done to some degree (individual states have some variations, usually minor). § 1-308 of the UCC says this:

(a) A Party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as "without prejudice," "under protest," or the like are sufficient.

(b) Subsection (a) does not apply to an accord and satisfaction.

While that certainly sounds a bit complicated, what it says is that you don't just have to choose between returning the check or accepting a lesser amount than what you think is owed. By writing "without prejudice" with the deposit endorsement, you preserve your claim of more money owed under your agreement with the tenant. We simply had deposit stamps made that said "For Deposit Only - Without Prejudice" and use that for all deposits. Writing "Without Prejudice" doesn't guarantee you money, but it does preserve your right to claim that money is owed - which means you can take the tenant to court if necessary, or if you withhold that money from the tenant's deposit they'll need to prove to a judge that they don't owe it. If you don't preserve your claims with a phrase like "Without Prejudice", it's possible a court could find that you gave up that claim by accepting a check with "Paid in Full" marked on it. As an honest and straightforward landlord, your preference will be that irresolvable disputes with tenants be heard in court. If you've acted in accordance with the lease agreement, kept good records and evidence of what has occurred and preserved your claim, then your chances of success are very good. If you just keep going back and forth with an angry or spiteful tenant, you'll not get very far. A tenant might say "Ha ha, you deposited it marked 'Paid in Full' so now I don't have to pay you". You then can respond, "Please notice that I preserved my claim under the UCC with the 'Without Prejudice' endorsement". There's a good chance they won't know what that is and want to keep arguing back and forth with you. It would be a waste of your time at that point. Just tell the tenant they can tell their side to the judge.

The Vista Virus

Nearly everyone in business relies on computers, and real estate management is no exception. We operate a website, communicate with tenants and prospects via email, prepare statements and legal documents, etc. etc. So, while my focus is not primarily on technology, sometimes we have to look at it and how it affects us. So, I will occasionally pass along some of our experiences and suggestions. The first and most important suggestion I can give to PC users is this: stay as far, far away from Windows Vista as you can. While it is supposed to be the most secure version of Windows yet, it is – in effect – pre-loaded with a bunch of viruses and malware created by Microsoft which are guaranteed to waste many hours of your time and cause you frustration to no end. Of course, when I talk with the folks at Microsoft, they are offended at the suggestion that they put viruses in Windows, but just because the virus comes from them, that makes it no less a virus, which most would define as unwanted software which intentionally infects your computer causing it to have poor performance, data loss and even loss of functionality.

Understand also, that I’m not a Microsoft hater or Apple fanatic. I’ve used every version of Windows since 3.1 and was reasonably satisfied with XP, so these are not rantings from the fringe, but rather honest assessments from someone who simply depends on computers functioning properly in order to make a living. Here are a few of the lowlights (covering all of them would turn this into a book) of Vista:

Incompatibility: this massive bug is pretty well known, but a lot of folks thought that if they waited for the first service pack (where Microsoft supposedly patches bugs), maybe that would help. Forget it. If you change to Vista, you can count on having to waste money replacing perfectly good software and peripherals that simply will not now, nor ever, work with Vista – perhaps starting with your printer and going from there. Every change in Windows produces some incompatibility with older software and peripherals, but there has never been anything on this massive a scale. Even some very current software and peripherals will not work with Vista.

UAC: This stands for User Account Control, which is supposed to be the biggest security feature of Vista. Instead, it should stand for Under Alien Control, which is what you will think is happening to your computer. Most people get irritated at the UAC constantly asking stupid questions like whether you want to open or install a program when you just clicked to do so, but it goes much deeper. The UAC will literally lock you out of your own files at times for no reason, refusing to let you do simple things like rename them, or even refusing to let you open your own files, especially if you have brought these files over from another computer or hard drive. This will cause you to delve into an unbelievable labyrinth of administrative control level settings, trying everything, only to discover that nothing helps (occasionally rebooting will help with the renaming). Eventually most serious users and small businesses learn to turn off the UAC – which generates all kinds of warnings from Vista. Even that doesn’t help with all of the file lock-out problems caused by the Vista virus, though. All of my wife’s old files from her XP computer which died, and some files which I have even created under Vista are still beyond the reach of Vista and the most able of Microsoft technicians. Unfortunately, there are some legitimate security functions of the UAC, so turning it off makes your computer less secure than XP, but ultimately most find that they have to turn off the UAC to get any reasonable function from their machine.

Windows Genuine: Microsoft has loaded Vista with aggressive anti-piracy measures. The problem is it doesn’t work well, gets fooled all the time, and in some cases simply shuts your computer down (remember the definition of a virus). Vista checks for hardware changes to determine if it is genuine (which, when you think about it, makes no sense for the consumer). Say your motherboard goes bad and has to be replaced, for example. Vista will shut you down. It will force you to “prove” that it is “genuine” at their website, and then almost always incorrectly decide that your copy of Vista isn’t genuine, and insult you further by asking you to take a survey where they ask you questions like “how did it make you feel to find out you had an illegal copy of Windows?”. It will put you in a great mood for when you finally get that poor tech support person in India on the phone. Sometimes Vista just randomly decides that it isn’t “genuine”, even without hardware changes. Note: the Office 2007 suites of software are even more aggressive (and more malfunctioning) in this area than Vista itself is.

DRM: This stands for Digital Rights Management, which is fancy for software that is supposed to prevent you from playing pirated copies of movies and music on your computer. Of course, like the previous, it acts more as a virus. The DRM data link libraries are easily corrupted, and when that happens your Windows Media Player and Media Center will mysteriously start having strange malfunctions. And, of course, the DRM malfunctions regularly. Even when you are playing legitimate copies, the DMR can easily think they aren’t legitimate, in which case it will either shut you down, or force your sound and video cards to play back in a degraded level. Reading the specs on this software is really scary stuff. It’s beyond Big Brother.

Aero: Microsoft bragged and bragged about how wonderful all the new graphics features would be under Vista. It was apparently a red herring to distract from all the viruses they were loading it with. In fact, the graphics changes are very minor, yet are a tremendous resource hog that will noticeably slow down even dual core machines. Most everyone who hates waiting on their computer eventually gives up and turns the graphics enhancements off.

So, Vista is just about the worst thing to happen to PC’s in years. What are the options?

1) Stick with XP. Of course, Microsoft is fighting this by ending support for XP, and if you need a new computer it’s hard to find one that still has XP. However, the backlash against Vista has been so strong, and demand for new computers that still have XP so great, that most Manufacturers still offer it, though you probably have to special order it.
2) If you already have Vista, downgrade to XP. A lot of folks are doing it. The problem is that in some cases Microsoft will charge you money to return your machine to XP, and the downgrade can be complicated. However, consider what your time is worth, and how much of it Vista is wasting, and you may find it worthwhile to pay whatever it takes, hire a techie, etc. to get away from Vista.

3) Get an Apple. Apple can run various incarnations of Windows and PC software. This isn't a good solution if your hardware isn't in need of upgrading, but if it's about time for you to move up from your old PC, you'd be better off buying an Apple before buying anything with Vista on it (don't think, though, that Apple has a perfect OS either).
4) Move to Linux. Linux is an open-source operating system that is free. Really. I won’t go into the history behind Linux, but it is interesting and has always been there as an alternative to Windows. There are a number of issues with doing this, though. Linux isn’t supported by a company, so there isn’t a tech support line to call. It is supported by a community of users and authors. Often this isn’t so bad, because in my experience I’ve found most solutions to Windows problems not from Microsoft, which seems to often be clueless about common bugs experienced by wide numbers of users, but from the community of Windows users. However, expect a lot of driver and other issues with Linux, including the fact that not everything which runs under Windows will run successfully on Linux. Most will, but often with some tweaking required. If you aren’t at least a little technically oriented in using your computer, Linux may be something of a struggle. However, there are some real payoffs if you can make the switch. Linux doesn’t care about piracy issues (it’s free, after all), and while Microsoft deliberately writes Windows to be permanently attached to one machine, Linux doesn’t care what it boots on. This means you could back up your desktop to an external hard drive when you travel, then plug that hard drive into your laptop and have everything right there, booting up just like you were in front of the desktop. Linux also allows for multiple simultaneous users. In other words, Windows forces you to have a separate computer if there is someone else in your home or office who wants to work at the same time you do. With Linux they just need their own monitor and keyboard, not a whole computer. Support for Linux is growing, and has already been popular with some businesses. The Vista debacle is causing a lot of others to take a look at Linux. It is possible to set up a “dual boot” where you can have both Linux and Windows on the same machine (though Vista was intentionally designed by Microsoft to try and prevent this – there are work-arounds, but they aren’t simple). This would allow you to move what you can now to Linux, and then over time work on the rest, but still be able to run them under Windows as needed.

None of these four solutions is perfect, but for many of us there is almost no choice but to move away from Vista, even after many years of using Windows products. In our case, we’re trying a transition to Linux. If that doesn’t work, it will make my Apple dealer happy. I’ve had long conversations with managers at Microsoft about the problems with Vista. Initially they are trained to try and convince you that it’s just because you aren’t used to the “enhancements”. After a few minutes though, it finally gets through to them that I’m talking about serious systemic flaws in the operating system design and they will quit pretending. Some of them even get pretty honest about the huge blow-back they’ve had in response to Vista and promise that they are already working on the successor to Vista and things will get better. The problem is, though, that Microsoft has lost my trust. The design behind Vista and Office 2007 shows that they forgot who actually owns the hardware and operating systems that we pay our hard-earned money for, and they feel free to take great liberties with my property. That’s a violation that gets a little bit personal, and I’ve seen nothing out of Redmond yet which indicates remorse or a direction away from such invasive design. Microsoft has a right to try and prevent piracy, but they don’t have the right to do it by invading my machine and causing it to deliberately malfunction, especially when their systems for invoking these malfunctions malfunction themselves so regularly.

The Dirt Insurance Scam

Lenders require you to do a lot of things to protect them. They require title insurance - even if you're refinancing property you already purchased title insurance for (another scam), sometimes they require you to get mortgage insurance (yet another scam), they sometimes require you to escrow money for taxes and insurance, to make sure those are paid. If somehow you don't have property insurance, they will invoke "force placed" insurance, where they buy very expensive insurance and put a lien on your property to pay for it. Some of this is understandable - a mortgage holder has a big investment in your property and doesn't want it to be uninsured in case of fire. Much of it, though, is wasteful overkill. One of the most common, in these days of 90 to 100 percent loans, is what my insurance agent and I refer to as insuring dirt.

Land is something that is hard to damage; if you have a fire that burns your house to the ground, it still won't harm the ground to where you couldn't use it to build another house. Typically, the land is considered about 20% of the value of a property. This can vary, of course, and 15-25% is a range accepted pretty much without question. If you have a unique property (a high-rise apartment building, or a lot of acreage) then maybe the land is worth much less or more than this range, but we'll deal with the typical 20%. Insurance agents and mortgage companies know this very well. It's why your insurance agent (if they're honest) will tell you not to insure the dirt (land) against property damage. If you have a duplex property worth $150,000, then if 20% of that value is in the land, your building is worth about $120,000. There's little need for you to have more than $120,000 in property insurance. Even if it burns to the ground you've still got $30,000 of land that hasn't lost its value.

The problem has been coming from 90-100% loans, where the mortgage company is insisting that the property insurance amount be for the full amount of the loan. In many states, including my own, this isn't legal. There are laws against insuring dirt, so to speak (or thin air). I would imagine the main intent of the laws was to prevent overvaluing buildings with insurance, then burning them to collect, but it also should keep people from wasting money on insurance they simply don't need. However, mortgage companies by-and-large have gotten away with this. I'm sure, in the hot go-go real estate markets of the recent past, they felt like this would be workable since the property values were likely to rise. In a short time they could see all their loan value as insurable in just the value of the structures on the property. That didn't make it right, though, and now it really works against the borrower in the flat-to-down real estate markets in most of the country. Yet, the mortgage companies still insist you over-insure your properties on the 90-100% loans. There are three problems with this:

1) It may not be legal, and you may have a hard time finding an insurance agent who will do it.

2) It costs you wasted money insuring dirt.

3) It can cost you too much in property taxes.

The reason for number 3 is that your property tax assessor also knows that your land is worth something like 20% of your total property value. When you challenge the property value (and you should from time to time - that number they assign your property for taxing is just a number, not a hard fact), the first thing the tax assessor will look at is how much insurance you carry. If, from the above example, you are carrying $150,000 of insurance on a property where the land is worth about 20%, the assessor will say you've provided your own proof that the property is worth more like $187,500 and will want to tax you for that much. They will figure the $150,000 insurance is on the building only and add in some value for the land. You can appeal further, but you'd have to get current appraisals and other proofs to fight it. The tax assessor won't care that the mortgage company forced you to get too much insurance.

So, what to do? In spite of the fact that insuring dirt isn't right (and sometimes isn't legal), you're going to have little luck getting the mortgage companies to change their ways. Maybe eventually state attorney generals will take them on to stop this waste and abuse, but you aren't going to have much luck on your own. If you have to have the loan, then you have to have the loan, and you'll pay for a little more insurance, and you'll find an insurance agent who will look the other way on the dirt insurance (there are plenty who will - to a point). But, you're not stuck. Your mortgage note will have some requirement that you have adequate property insurance. This would be typical: "Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, and any other hazards for which the lender requires insurance. This insurance shall be maintained in the amounts and for the periods that the Lender requires."

While it sounds rather iron-clad, no contract can force you to do something illegal, and I doubt many courts allowing the mortgage holder to force you to insure beyond their interest. A court would apply standards of reasonableness to this apparently unlimited requirement. In short, no one can force the mortgage company to give you a loan (so you play along if you want it), but in the long run the mortgage company can't force you to carry illegal insurance. Laws overide what is in a contract. You can sign a contract selling yourself into slavery, but slavery is illegal so the contract would be void, for example. So, after you've settled in to your new loan, some time before you go down to discuss with the property tax assessor what your property is worth, call your insurance agent and reduce your coverage to a correct amount (it wouldn't hurt to consult with a Realtor or appraisor to get their ballpark idea of a number). Within a few days you'll receive a new "dec sheet" or declarations page, showing the coverage from the insurance company. That is what you take to show the tax assessor. Doing this also lowers your insurance costs to what they should be.

What happens after that? Maybe nothing. The mortgage company may not react at all. However, often you might get a letter saying you need more coverage. You just write one back explaining that you've discussed this with your insurance agent, and they felt you had the property over-insured. In fact (in states where it applies), you have discovered that carrying that much insurance isn't legal (your insurance agent will know, but most state laws can be searched on the internet now). Chances are, that will be the last you'll hear from the mortgage company. They know they shouldn't require more insurance than is necessary, and fighting with you, possibly in court about it wouldn't be worth it. I suppose it's possible a mortgage company could try to play hardball and try additional force place insurance, leaving you with the choice of whether to take them to court, but I've not seen it happen. If they do try to be hard about it, try negotiating - maybe there is a number a little higher than yours and a little lower than theirs that you can agree on.

To my knowledge, no one has tried to measure how much money is wasted on extra insurance and taxes by mortgage companies requiring too much insurance, but it has to be a very large number - and it is all money that could have been used to pay on the mortgage itself; no small matter in these days of high foreclosure rates. It's always a good idea, though, to see if you are paying for insurance you don't need.

A Hidden Enemy: Dryer Lint

Don't laugh. Dryer lint. It causes more problems than you think. If you have rental units with washer/dryer hookups, or you provide washer and dryer, there are some cautions for you to be aware of. This week a fire in Birmingham, Alabama that destroyed 23 apartment units was caused by a clogged dyer vent (clogged with lint, of course). This was not an isolated incident. A study from 2000-2004 by the National Fire Prevention Association showed that there were 8,900 dryer fires a year (nearly all caused by lint buildup) in the U.S. There are other problems that cost you money, though, from dryer lint.

One very nasty one is when there is a break in the vent line and lint is sent directly under the house. The problem is that your furnace intake is likely nearby and will suck that lint right in. Then it gets into the fan and the coils and you've got another big problem. Your unit will work too hard and may shut down from overheating. This can also cause your tenant's heating/cooling bill to rise and leave them in a pinch to pay the rent. Cleaning the lint out of the fan and coils is costly and time-consuming. Not doing this, though, will shorten the life-span of your furnace. Now we're talking serious dollars.

Another odd problem we've seen from lint back ups: defrost lines on refrigerators. We have some small apartments where we supply the washer and dryer. Of course the tenants take full advantage, and often don't clean the lint every time they use the dryer. We then started getting calls about refrigerators not working properly, such as water forming inside the refrigerator or them not cooling. What we found was the defrost drain lines were getting clogged. Modern refrigerators will briefly heat the freezer section in order to melt the frost and ice buildup up. Long ago, you just had to take everything out every so often and let it melt. There is a drain line to take this water to a location where it can simply evaporate, usually a pan below the refrigerator. When the drain lines clog, that water has no where to go and will either pour into the refrigerator from the freezer or refreeze in the line, backing everything up. Water in the air (measured by humidity) will condense on objects when cooled (notice what happens to the outside of a glass of ice water). Raindrops form around dust particles in the atmosphere. Dryer lint is perfect for this. At the end of the line that goes into the freezer, the water will condense and then freeze around lint particles and block the line.

We've also seen the problem in the condensation lines for air conditioning. Poor design caused the drain line and the dryer to be next to each other. Lint gets in the line until it blocked up completely and the water that condenses around the cool parts of the central air unit has no where to drain. Then the tenant calls saying water is coming from their utility closet - often thinking they have a leak in the washing machine.

Sending someone to unclog these lines won't necessarily bankrupt you, but it's one more cost, aggravation and danger you can live without. What you can do:

1) Emphasize to tenants how important it is they clean the lint from the dryer filter every single time they use it. Write it into the lease, put signs on the dryer reminding them (if you own the dryers), when you change the furnace filters and it seems the filter is gathering a lot of lint, ask the tenant if they've been cleaning the lint filter on the dryer as they should. Be firm on this and if they don't understand why, explain the dangers and problems to them.

2) Check the vent and lines yourself every year or so. If you see lint/dust accumulating in the crawl space, you likely have a break in the line. Also, if you have a flexible line, look for sags and repair those (lint will gather in the low spots and clog the line).

3) If you have the type of flexible line that looks like it's a foil but when you touch it, it feels crinkly like dry plastic, replace it. Even though it was nearly a standard just a few years ago, it really is plastic, and easily gets breaks or catches on fire. Many areas have changed their building codes to make this stuff illegal, and it voids the warranties on new dryers to hook them up to it.

4) The most critical point is the place where the vent plate meets the vent line at the floor. If you get a clog here then it's close to the dryer, where the vented air is the hottest. This point takes a lot of heat/abuse, so replace the plate if there is damage, even if there isn't a clog yet. We've seen a lot of clogs at this point.

5) If you want a very simple test, just have the dryer turned on and check to see if there is good air flow out of the vent outside. If it's weak, you've got blockage somewhere. Another thing, you can ask your tenants if it's taking a long time for their clothes to dry; it's a symptom of clogging.

6) If you have concerns, the lines can be cleaned, either by professional or you can purchase the brushes and run them yourself.

Living units are supposed to be designed so that the distance from the dryer to the exterior is short and straight - the longer the line and the more turns it makes the more potential problems - but home designers have gotten away from that standard. If you have units with long lines or ones with multiple turns, be more vigilant. While only about 2% of residential fires are cause by dryer vent blockages, it's one of the more preventable fire causes for a landlord, and the other maintenance headaches that lint can cause make a few minutes of checking the lines a good investment.

The One "Utility" You Want To Pay Yourself

If your properties are in communities where the government provides garbage pickup (and therefore you pay for it through your property taxes), or you're only dealing with complexes where you already provide dumpsters for the tenants, then you can skip this post. However, if you are like me and have properties like houses and duplexes where people pay for a garbage service, you need to keep reading.

In general, you want to avoid properties where the landlord pays the utilities - energy and water costs are probably going to be rising faster than general inflation for some time to come, and when you're paying the utility cost your tenants are going to never even think about conserving. In the case of garbage pickup, though, you should pay it. We pay it and then have the tenant agree in the lease to add an amount to what they pay each month to reimburse us. Why do this?

You know there is actually garbage pickup. Sure, leases require tenants to have garbage pickup, but you will be surprised at how many tenants won't get it. They will try to pawn their garbage off at work, or in random dumpsters, or worse let it pile up. Most cities in which the government doesn't handle trash have laws requiring residents to have (pay for) garbage pickup. Eventually the cities figure out that tenants won't do this, and will change the laws to require the property owner to make sure there is garbage pickup. They realize that a tenant who doesn't have the wherewithal to pay for garbage pickup is going to be difficult to levy and collect fines against, but you - the property owner - can't hide. They'll put a lien on your property if nothing else. So, are you willing to risk fines and more, trusting that your tenants will pay their garbage bill? That's not a bet I want to take.

In my town, in fact just down the street, there was a small fire in a rental house last week. According to the paper, "I've never walked into anything like that," said one captain with the police department. Just what had he walked into? "Garbage," said the deputy fire chief, "Floor to ceiling, 20 foot wide, 16 feet deep - garbage."

The mayor was called in, and ordered the garbage removed by a hazmat team. The tenant admitted to not paying her garbage bill for over a year.

The kicker, though, is a paragraph further into the story: "The bill for the cleanup, which took about five hours with heavy equipment, will be charged to the owner of the property..." and then they published his name. The tenant was the one who broke the law (and likely the lease) by not paying for garbage pickup, the tenant was the one who piled garbage until it completely filled the house, but the owner is going to be stuck with the bill - which you can figure will be enormous. The city government isn't dumb; they know there is little chance they would be able to collect anything from the tenant, so they go after the owner.

While not experiencing anything this bad, we had seen a pattern with tenants not paying their garbage bills, especially, of course, the ones who end up skipping out on rent. So naturally they left quite a bit of trash for us to deal with, which we couldn't always get to right away because it can take a week or two to get a herbie delivered and pickup service started. Several years ago we decided that paying the garbage and getting the tenants to pay us was the way to go, and haven't regretted it at all. It puts us on very good terms with the garbage company and the city as well.

There's also a lesson here in doing periodic inspections, but that's a topic for another day.

The Free Month Syndrome Part II

So you've researched your market, things are dead, and you feel you have no choice but to offer a rent special, typically the "free month" deal. You are still not completely vulnerable. There are things you can do.

The first thing you must do is be extra vigilant on your screening process. By advertising free rent, you are putting something of a bullseye on you that tells some unscrupulous souls to try and take advantage of you. Free rent also sounds great to people who don't pay their rent like they are supposed to. Dig hard on the background check. Don't forget to require a full month's rent for the deposit (and never, never take checks for the initial rent and deposit - cash, cashier's check or money order only - trust me).

Next, consider whether you have to give away a full month. Try advertising a half month free if you think that might do the trick. There are usually a few days from the time you approve the tenant to when the lease is signed anyway. We allow seven days as a matter of course ("one week free rent" the ad could say, I suppose). Reduce the seven days to one day from approval to sign the lease in this case and then giving away half a month isn't quite as much pain as it sounds.

If that doesn't work and you have to give away a whole month, remember that you are giving something in a business transaction - it's fair for you to ask for something in return. What we ask for is that the tenant guarantee they will fulfill the entire term of the lease. We have a clause written into the lease (as an addendum) which spells this out. If the tenant doesn't stay for the whole lease, they have to pay back the free month they took. It's only fair, really. Initially we tried a prorated formula, where if they stayed, say, for half of the lease then they only had to pay half of the free month back. Eventually I had to ask myself why we even bothered with that, and now it is the simple deal: stay or pay. If it's a 12-month lease and you stay 9 months, then you have to pay the free month back. Period. You will appreciate it when you get some difficult tenant who drives you crazy then and skips out. It also makes life a little harder on the serial tenants who love to skip from free month deal to free month deal every two to four months. So far we have never had an applicant balk at this offer, but we sure have benefited on a few that turned out to be less than desirable (it's a bad feeling when you look back and think "we gave them a free month?" after they've skipped and left the place a mess). Yes, you have to actually find a way to collect the money they owe on the free month when they skip, but that is a subject for other posts.

There is one more thing that can help when you are forced to offer free rent, and have multiple units vacant. The free month's rent doesn't always have to be the first month (in fact it's better if it's not the first month). It can be any month of the lease. So, what we do is list the units included in the offer, and then let people know that the first one to rent gets their first full month free, the second one to rent gets their second month free, and so forth. This tends to get the first unit or two rented pretty quickly as they realize it is "first come, first served". It's also a big help when someone who has the fourth month free skips out after two months - you've not given away the free rent yet. There is one other thing we add to the free rent addendum for these folks as well, which is that the free rent is void if any monthly payments due before it are late. You want to give free rent to good tenants, not late payers. You'll get your rent on time for three months if the fourth month is free in most cases.

Taking these approaches allows us to put our "free month" ad in there to compete with the rest, but it doesn't leave us giving away as much rent to deadbeats, and that's a big deal.

Tenant Application Epilogue

After recently writing the two pieces on the importance of and what to put in the tenant application, the following headline appeared in a local newspaper this past week: "Rentals prompt federal charges: tenants said to be illegal immigrants". If, even after reading my prior posts, you still aren't thoroughly vetting your applicants with a good application process, maybe this will encourage you. The article starts, "A father and son who own two large Lexington apartment complexes have been ordered to appear in U.S. District Court Friday to answer charges that they rented to at least 60 illegal immigrants..."

Going after landlords who rent to illegal immigrants is a shift in policy by Immigration and Customs Enforcement officials that you need to be aware of. A spokesman for ICE said "It's a priority". Doing a little internet searching confirms this; for example, Arizona is considering a bill that will make it illegal for landlords to rent to anyone without papers proving they are in the country legally. Since the government can't control the border, apparently there will be more push to make landlords pick up the slack.

One paragraph in particular in the Lexington article stands out: "The indictment alleges that once the (defendants) began renting to illegal immigrants, they changed their rental policies and quit requiring credit checks, proof of identification and Social Security numbers." So, having a solid application process in place not only protects you from bad tenants, it helps protect you from accusations like this. It's no small matter. The penalties in this case are up to 30 years in prison, $750,000 in fines and the forfeiture of the buildings. Don't let it happen to you.

The Free Month Syndrome

If your town paper isn't filled with rental offers of a free month's rent (or more) to new tenants, consider yourself lucky. This bane of the rental business flourishes like pizza coupons in many communities. The question is whether this is a game you have to play, and if you have to play it, how do you play it smart?

The free month offer is, of course, something to avoid if at all possible. It's throwing away money if you don't have to do it, but there are other downsides. We have found, consistently, that the quality of tenant is lower overall with those who respond to free month offers. In fact, the worst tenants in town will be among the first to respond to your free month deal. These are often the serial tenants - ones who move every few months - who figure that free month looks like it's just the thing for them (since they're a month behind where they're at anyway). These folks will take that free month, maybe pay a month or two, then quit paying while they plan their next move. If you do offer a free month's rent, prepare to look extra hard at the applicants.

Going to a free month seems an easy out to many landlords - they know the tenants often can't come up with both deposit and first month's rent, so this helps lower the hurdle. It can be even more extreme; right now there is an apartment complex near me that advertises "$89 Gets You In", and I have tracked quite a number of my former deadbeats down to this complex later. They'll take anyone, don't do background checks, and they are in court all they time with evictions of these folks they never should have rented to in the first place. Even keeping the $89 deposit (whoopee), the losses in cleanup and damage alone make these tenants typically big money-losers (people who don't take care of their finances well tend not to take care of your property very well either).

The first thing when looking at all the "free month" competition is not to panic. It doesn't mean that you won't be able to rent your properties without giving in. There are many factors that go into a tenant's decision - location, condition, monthly price, etc. Better tenants will tend to focus on these factors a little more than someone who is financially desperate. People will also tend to figure out over time that the complex with the ridiculous special isn't always a nice place to live - you're going to have neighbors that are less than desirable since most serial renters also have constant scrapes with the law. Next, try to gauge how you stand in relation to your market on vacancies and rates. Ask around, call some of the ads (often there is a gimmick or catch to ones that advertise specials), drive around looking at the "for rent" signs. If your vacancy rate is higher than average, it is time to consider action. However, there are still things you can do before giving away free months. Consider investing some money in more aggressive advertising. How much more can you do with that money you would simply give to the tenants? A bigger sign (maybe a large vinyl banner on the side of the building if it faces a well-traveled road), a larger ad in the paper (or maybe put the ad in more than one place), put fliers up on bulletin boards, get a good website going, etc. Sometimes a simple sign in the yard is enough, but when times get tough you can generate more inquiries with better advertising. Also consider a "bird-dog" program, where you reward current tenants with money off ($50, $100) their next month's rent if you lease to someone they recommend you to. When tenants recommend you to friends, you've got a high chance of a) making the sale and b) getting a decent tenant, since your current tenant isn't likely to want to bring in someone they know will be bad neighbor. Finally, before going to free months, take a look at your monthly rent. This amount has a bigger psychological impact on tenants per dollar than the free month does. For example, many will consider renting something at $25 a month less to be a big deal, and yet if you're talking about a $600-a-month rental, it would take two years for that $25 to add up to the amount you'd give away with one free month. Even if you offered a special where you lowered the rent by $50 a month, it takes a year before the tenant is saving more than the free month would have. This is a much better long-term investment for you, especially compared to someone who takes the free month and is gone a few months later.

Next time, we'll look at how to handle the free month program if you just can't avoid doing it.

Painting Your Rentals Part IV

Normally painting goes like this 1) Prep (and repair if needed) 2) Cutting in and trimming 3) Rolling. We've spent the first three sections covering #1, and are now looking at cutting in and trimming. This is a very time-consuming part of the painting, and we are going to look hard for exceptions time savers.

Cutting in is basically just hand painting with a brush those areas you can't get to with a roller (which is much faster). I tend to prefer a tapered edge brush about 3 inches wide. Your preference may vary, but the tapered edge I find better for making a tight cut - say around a door knob - than with a regular straight edged brush. Find your own comfort level in this area. To cut the area where the wall meets the ceiling, you'll need a step stool or small step ladder. Cutting is simply slow and tedious, especially if you get a critical line like having different colors next to each other (avoid!). Then you'll likely have to use painter's tape and still be very careful. There are two things you can do to help with cutting in:

1) Use the same color on the walls and ceiling. Ceiling paint is thinner than "regular" latex paints, and dries quickly to an ultra flat finish. However, the shades (and they are usually limited to one) available of ceiling paint seldom if ever match the standard whites that are from the same manufacturer. The result is you get two slightly different shades of white, and if you roll up too far on the wall and touch the ceiling you'll get spots that have to be taken care of. Ceilings don't need to be painted nearly as often as walls, but it does happen - if you have a heavy smoker, gas furnace, etc. a dingy film can build up on the ceiling that requires painting in order to look good. When you do, skip the ceiling paint and just use the same flat white you're using on the walls. Yes, you might have to be a little more careful of drips (drop cloth recommended for sure in this case), but we've found that to be no real problem with Kilz and other brands we've tried. Once you have ceiling and walls the same paint, when you do have to cut in there's no need to be as cautious about getting paint on the ceiling and can move along faster. Life is also simpler with one less type of paint to deal with.

2) Break the rules. If you are repainting a room that you have already painted your standard flat white, chances are that it's due to smudges and damages from eye level down, and not things that need to be repainted in the 4 to 5 inches at the top of the wall where you have to cut in. In this case, roll the room first, and then seen if any of the cut-in area needs touch up. You might be able to avoid cutting altogether (though usually there are scuffs at the bottom of the wall the require touch-up, but still much less time than a full cut-in).

Trim is what you have left; wood trim around the doors, along the baseboards, the doors themselves, etc. Trim areas tend to get touched a lot, so we typically use the satin finish rather than the flat on these. Painting trim is another, very time-consuming aspect of painting. Most people do it by hand. Along the baseboards, hand painting is almost unavoidable. You scoot along the floor doing a bit at a time (using a plastic paint guard that you nudge under the baseboard or quarter-round). You just have to tough it out. On other trim, though, there is a time-saver. There are now available foam roller brushes, typically available in three and six inch lengths. These are smaller around than standard rollers, and the big trick is that the foam will cover one end of the roller, allowing you to turn it on end and squish paint into tricky spots like the recesses on typical "cross and bible" doors. These rollers have their own, small, paint trays that are easy to hold in one hand while you paint with the other, keeping you moving along more quickly as well. You'll find that they cut your time painting doors by about half.

Two other notes:

When painting with a hand brush, a little paint goes a long way - you don't need to drag the whole paint can around with you. This is where the well-designed tops of Kilz paint come in so handy. Just put some paint in the top and you're ready to move faster. When you're through, the design causes extra paint in the top to drain back down into the container.

Get rid of quarter-round whenever you can. Quarter-round is the round trim (one-quarter of a circle) that is often put at the bottom of baseboard trim. It is placed to seal the visual "gap" that can occur between the baseboard and the flooring. It serves no physical function, it is just visual. In some cases there is such a gap that you might want it, but we've found in most cases it can be done without. Quarter-round is expensive (for what it is - which is low-grade thin pine strips), very labor intensive to put in (miter cuts in the corners), often has to be replaced when you replace carpet (because it is flush against the carpet and breaks when removed), and is very slow to paint. It also tends to pick up dirt and lint in the seam where it meets the baseboard. Without the quarter-round, that small gap means you don't have to paint so carefully on the baseboard.

The Lease II

Your lease contract, to use a little legal jargon, is an express, parol, commutative agreement. Express simply means that it has been specified, hopefully in writing, and agreed to, as opposed to an implied contract. Parol means that it was a voluntary agreement to do or not do things. Commutative means that the consideration of each party is equal - the money you receive is equal to the rental value of the property. You don't need to be a lawyer, or dig too far into reciprocal, principal, and other descriptions of contracts - they are usually specifications of what common sense understands by whatever name. But do understand that the courts have been dealing with contracts and their requirements since the first time a judge ever sat down before two conflicted parties. A lot of thought has gone into what constitutes a valid contract, types of contracts, what is reasonable vs "unreasonable" or "unconscionable", etc. This body of thought is available to you (and your attorney) in putting together a good lease contract if you need it.

You need to understand that a contract is an agreement between two or more competent parties. A lot goes into the word "competent". A minor is not competent - you cannot rent to 17-year-olds. A person also needs to be considered mentally competent to enter a contract; the threshold for mental competence is low, but if you are concerned you need to assure yourself of the mental competence of the other party. I once had a situation where a couple signed a promissory note (as option money on a lease-option) and didn't pay. The lease ended poorly, so we ended up in court. The judge was treating it as pretty cut-and-dried until the defendants starting raising whether they were competent to sign. That was a huge red light for the judge; she stopped in her tracks and began immediately pursing the competence question - as it would trump anything else. Some questioning revealed they based that defense on the husband claiming to be mildly bi-polar. As soon as that became clear, the judge waived her hand dismissively to stop them, and went back to just looking at what was written within the "four corners" of the contract. A judge would have to find a person unable make or carry out important decisions regarding his or her affairs, starkly incapable of maintaining awareness of and responsibility for their actions - and mild to moderate bi-polar doesn't qualify. However, if you believe you are dealing with a person who may not be competent, seek legal counsel before entering into a contract.

A lease contract must contain the basics, of course: names of the parties, rental amount, dates due, and length of term (other terms will take many other postings).

Names of parties: we have every competent adult who is going to be living in the unit sign on the contract. Use their full names (and it doesn't hurt to include any aliases, with a.k.a. - also known as). If you are acting as corporation, LLC, or other entity, you need to be correctly identified in the contract. If you operate as such a separate entity, then the contract is with the entity, and you are a principal. If you are unincorporated but using a business name, you are "doing business as" (d.b.a.) and that should be included. Make sure of where you really stand as a party to the contract. For example, if you are operating as a separate entity, then many courts will not allow you individually to file suits (like eviction, small claims, etc.) later. As an individual you can file suits (it's called pro se or pro per), but if the property is in a corporation, then the court may rule that only an attorney can file the suit - if you file the suit the court may consider you would be practicing law without a license.

Among the reasons that we have every adult sign the lease is so that they are all responsible for anything owed under the lease. The legal term is "jointly and severally", which means that any or all of them can be held accountable for any or all of the rent. For example, two roommates rent from you; it goes bad and one of them leaves. The other one says they'll pay their half of the rent, but you have to collect the other half from the ex-roommate. Nope; you want your contract to where they are all responsible for all of it. What if the one who left is a bum who just lost their job, and the one who stayed has a good-paying job. Why do you want to waste your time on two when you can just collect from one who is likely able to pay (and then let them collect from the other).

The term of the lease often gets no thought either, but it should. Is there a time of year when you tend to get vacancies (say when school gets out because you've got a college nearby)? Then you don't want your leases ending during that time if you can help it. There is no rule that a lease has to be for a year. Also, different properties have different considerations - houses can often take longer to lease and often (in our experience) have more damage, clean-up and paint to take care of. We decided that we were looking for longer-term tenants on houses. So we eventually settled on two-year leases for houses, eighteen-month leases on duplexes, and one-year leases on apartment units. This has helped a lot. Our bad month is December, so I try to avoid having too many leases with November or December expirations, and will use odd-length leases as needed.

Due Date: All your rents should be due on the same day. Most people pick the 1st, but maybe the 15th or some other date would work for you. I foolishly started out making rents due on the date of the lease signing - and promptly found myself spending all month long collecting rents. Have it all due on one day, then your legal notices can all be posted on one day, and you can take all the deadbeats to court on the same day. You don't want to be doing this hodge-podge all month long.

Your rent amount should be stated clearly, along with any late fees, discounts, etc. Remember, if it's not clear, then the court will likely rule the interpretation most favorable to the tenant.

Next, on to the detail terms of the lease, based on the lease we use.

Tenant Application and Background Check Part II

Yes, bad tenants want to rent from you. In a perfect world, bad tenants would just rent from bad landlords. This isn't a perfect world, and it's up to you to protect yourself as much as possible from the sure-fire disaster tenants. Your first line of defense is checking public records, newspaper articles and court records. We've found that one of the greatest indicators of problem tenants is a history of legal problems. Often the tenant will consider the legal scrapes to be minor, but if someone has a driving without insurance, a 4th degree assault and a couple of lawsuits over debts within the last few years they may not have gone to jail for any of them, but what are the chances they will be a good tenant? Driving without insurance is a very bad sign, for example; it indicates extreme irresponsibility and irresponsible people tend to not pay rent or take care of property.

Your primary tool in beginning to weed out bad tenants is the application, but there is one more tool and that is the application fee or good faith deposit. You should always take in some amount of money, whether you call it a fee or good faith. You'd be surprised at how many people can't even come up with $50 or $100 to go with the application. That's a pretty good indicator of how well they'll be able to pay the rent. Also, the ones that know they've got serious problems in their record won't want to throw away money, or at least some will come somewhat clean about their problems to see if you think they should even bother with the application. Most landlords charge an application fee; we do it a little different. We ask for a $100 good faith deposit, telling the prospect that if they are approved, all of the $100 will applied to their deposit. If we turn them down, we will return all but the $15 the state charges us for the criminal background check (saying this lets them know for sure that you will be doing the background check, and that they'll lose $15 if it's bad). We learned to take this approach because 1) "fee" is a very negative word. Nobody likes to pay fees that seem like penalties or unnecessary charges. "Good faith deposit" sounds like the start of a positive relationship and we don't keep any of the $100 if they are approved. 2) The main reason is the surprising number of people who will fill out an application with no intention of renting, or who will change their mind, or who keep looking and find something else. Foolishly, at first I didn't charge anything for the application - it seemed like a good way to attract prospects: "no application fee". I quickly learned how many of them would let me spend all the time and money doing the background checks but not rent. Many took advantage, treating it like an option - I couldn't rent to someone else for a while if they were approved, so they could keep looking around at other rentals. Now we include language that makes it clear on the application that if they are approved they must execute a lease within seven days or lose the $100.

Now on to the nitty-gritty:

Name: pretty obvious, you'd think, but we've learned to also ask for maiden names or any aliases. We've run across a number of women who got into all kinds of trouble with a married name and would later change back to using a maiden name to fool folks like us. When you get a maiden or alias, search for it just as much as you would their current name (and of course always search under variations like Liz for Elizabeth). If someone is married and won't give you their maiden name, that's a pretty bad sign.

Social Security & Driver's License numbers: obviously you must have at least the social in order to get a criminal background check done.

Email: we now ask for email addresses. It helps in communications, saves money since we can send them statements via email, etc. However, there is one more thing - while there are numerous good reasons for exceptions, we have found that in general people under 60 without email addresses are worse tenants. At the least, we consider it a plus that someone has a working email address.

Current address: often not a tremendous help, but search Google News on this address; if there has been a big drug bust or something there in the last few days, you'd at least like to know it.

Employer information: we ask for the typical employer information, address, contact, phone, number of years on the job. If they work at a fast-food place (except in management), or other restaurant, video rental, etc., then the fact they have a job is frankly not much help to you. These are fluid jobs that have constant turnover; even if they say they've been there for a few years it doesn't really help. We have found a disturbing pattern of tenants losing or leaving jobs right after we rent to them. Either they are good at faking, or more likely they realize that the end may be near and if they want to look good on an application they need to act soon. Whatever it is, job stability isn't a given. You do at least want them to have a job or source of income like disability, of course. If it's a tough call on whether to rent, then you need to contact the employer and ask frankly about the applicant's chances for continued employment. They won't come right out and say "we've had enough, they probably won't be here another week", but you should be able to read between the lines. We also ask for previous employer contact information. While not overly helpful, it does give you a better overall picture of their history. If they were only at their last job 6 months and just got a new job, it could be a bad sign.

Current landlord information: we ask for the typical contact information. Of course, if the applicant is a bad tenant, the current landlord probably is happy to see them go and won't say anything too negative, so they may not be the best help to you. If they are good tenants, the landlord may not want to let them go, and may pretend they are bad to scare you off. While we only occasionally call previous landlords, the fact that someone else rented to them is a little positive. Interestingly, in all my years of managing property, we have never gotten a call from a new landlord on one of our current or former tenants to get a reference. There are many who would have benefited from giving us a call. Also beware a scam that we have run across more than once: the tenant preps a friend or relative, maybe even getting a temporary cell phone just for the occasion. When you call, they pretend to be the current/former landlord and tell you that they are wonderful tenants. It has happened to me. Sometimes it doesn't hurt find a way to confirm that the landlord phone number they give you is really their landlord. Apartment complexes will be listed in the phone book, for individual landlords, maybe try a reverse phone number lookup on the internet.

Previous landlord information: this is where the good information is often found. The previous landlord will be more honest with you since the tenant is no longer with them. When we call, I'm more interested in what the previous landlord says than the current one.

Personal references: like most, we ask for two personal references and their contact information. We don't actually call these folks - you know that the applicant isn't going to list someone who would say anything but the nicest about them. The secret here is that this is an old bill collector's trick. Later, when the tenant has skipped and you are trying to track them down, the folks they list as personal references can be a great source of information - often that's where they are living. There is one more trick to this; we also do a quick computer search on news and courthouse records for the people listed as references (don't order criminal background check, that's probably not legal as it requires their consent). The reason is this: birds of a feather. If your prospect lists as references people with a bunch of convictions or lawsuits for debts owed, that's a terrible sign since people tend to gravitate to the behaviors of those with whom they most closely associate.

Auto information: you want to get the make, model and license tag number of the vehicle(s) they plan on parking on your property. This is important for controlling parking, but also lets you know something about what is likely their biggest asset (you also want to ask if they own or lease). You will know about what is appropriate for people living in your properties to drive. If they put down that they own some expensive late-model car and your rental would be more appropriate for something a little more modest, you might be dealing with someone who doesn't handle their finances well (or worse may be making money illegally and your modest rental is going to be the front). On the other end, if they are driving something that is falling apart and it turns out they don't even own it - say they are 40 years old, but the car belongs to Mom or Dad - that tells you a little about how far along they are financially. While you don't want to read too much into what they are driving, it does give you another piece of the puzzle.

The big four questions: "Have you ever been convicted of any misdemeanor or felony? Have you ever been evicted or sued for unlawful detainer? Do you owe on any judgments, including child support? Are you currently behind on any bills or payments owed? If Yes to any, give details." It's not that you would say "no" automatically in any of these cases, but you want as complete a picture as possible. Someone may never have been convicted of any crime, but if they've got 3 evictions in the last two years, you probably don't want to touch them. Being behind on some bills may be due to a recent divorce or medical emergency, and not indicative of their general payment history. You have to make a decision as to how relevant each of these is to your applicant's likelihood of paying you on time.

Also ask: how did you hear about us? It's always good to have some idea whether it was yard sign, classified ad, website, referral, etc. that's getting you applicants, especially ones that look good. A whole other topic would be your website, but we've found that an informative website brings us qualified prospects.

One thing we don't look at in the application is a credit history and score. It costs money to get these, and though many would think otherwise, the information is of little value. Unless you are renting high-end properties (in which case you probably should do a credit check), you are dealing with people who either have bad credit or no credit. Credit scoring, though sworn to by lenders, is actually quite worthless in telling you anything about creditworthiness. The formulas for the Fair-Isaacs credit scoring formula were developed years ago and were rather sophomoric then, let alone in modern life which has brought many changes to people's financial lives. If someone is really in deep on their bills, you'll see civil lawsuits in the court records. You can add a fifth question, which is "have you filed for bankruptcy in the last seven years" or something similar. Of course, most bankruptcies are due to divorce or medical bills, which means it still doesn't really tell you much. We have also found that in some cases people who have filed bankruptcies are better able to pay; they have eliminated or cut down debts and they can't file bankruptcy again for seven years meaning that they can't bail out on what they owe you until that time is up. We consider bankruptcies, but only after determining what led to the bankruptcy. If it appeared to be financial mismanagement, then that is a real danger sign; if it was divorce, medical, or other singular event it may not be so bad.

Bottom line, some people over-emphasize employment and credit score for renting, but we've found that the best indicator is in the court records - someone with DUI's, driving without insurance, civil suits over debts (unrelated to divorce and medical), misdemeanors, and of course felonies is going to be the highest risk. This is a better indicator that rental history (except if they've been evicted), job history, credit score, etc. even though all those help give you a big picture.

The final thing I do is when something goes really bad with a tenant, I go back and look at their application - was there something we missed, was the tenant able to cover up something we would like to have known, etc. These help develop questions and procedures you might want to add to your application process in the future.

The Lease

While it may seem overly obvious, you absolutely must have a written lease when renting. It amazes me how many people rent without a lease (I see them in court later, and they are very frustrated landlords at that point). If you don't have a written agreement, then most states have minimum standards that are established by law, and those tend to err on the side of the tenant, not the landlord. For example, in my state you can write in the lease a period as short as seven days to give notice of breach (like not paying the rent). Less than seven days is considered "unreasonable" by the courts. However, if you don't spell that out in the lease, the state establishes 30 days as the period of notice. I have seen many times when a landlord was in court trying to get a tenant evicted who was already a month or two behind on the rent (letting them get that far behind is a mistake in itself) and didn't have a written lease. They usually have heard about "seven days" somewhere, but then when the judge finds out there isn't a written lease they have to give the landlord the bad news that they have to give them 30 days notice, and then file again. The deadbeat tenant is laughing at that point - they've already gotten away with a month or two of free rent and now know they can steal at least another month from the hapless landlord. The landlord can't even think about retaliatory actions like removing the doors - nearly all states have adopted very harsh penalties for doing those types of things.

You really don't want the state establishing the rules for your rentals, trust me. It's also amazing though, how many very, very poorly done leases I've seen (in nearly every case where I've purchased properties and had existing tenants the leases were not very good), and I confess that my early leases weren't the best. It took a while to develop a solid lease. Most landlords realize they need a written lease, but they do it almost as an afterthought, or they get a canned one from an office supply or off the internet. These are usually mediocre at best (though better than nothing), and fail to address many, many things that have to be addressed in good lease. Keep in mind that if there is an area of ambiguity where it could be interpreted more than one way, the courts will normally interpret in the way most favorable to the tenant, because you presented the lease. The courts consider that because it was your lease, you had an advantage in the time to prepare it to say what you wanted. That's a big pitfall of boilerplate leases.

Some landlords will at least get an attorney to put something together, but even then some attorneys are just going to give you something that is pretty boilerplate, while some have real experience at what needs to go into a lease (and what your state laws are). Even if you go to the trouble of getting a good attorney, you will still discover things as you go along that you will want to add to your lease to address specific situations, and you can't just forget it once you have a standard lease. You need to review your lease at least once a year keeping in mind situations that have come up and changes in law. If you are serious about your real estate empire, your lease is one of your most important tools - and will be your best friend when you end up in court (which you will frequently) with a bad tenant. It is possible for you to write your own lease that is a good one (or adapt a boilerplate one), if you are willing to take the time to study all the aspects of what a good lease requires. It is also possible for you to get a poor lease from an attorney if you don't study what is required in a good lease and just leave everything to the attorney. Either way, you need some familiarity with the tools needed for a lease that does what you need.

This series on putting together a lease will be a long one - because a short lease probably is a bad one. The purpose of the lease isn't for you to trip up your tenants later; it is to establish all the necessary aspects of your relationship in a way agreeable to both of you. When you both agree on all these aspects, you've created the basis for a win-win deal. Of course, if things do go sour, it's also to insure that you are protected as much as possible from bad actions by the tenant.

In general, the lease should use straightforward language. Yes, it will have to have some legal terms in it, but it can still be reasonably understandable rather than legal gobbledygook. You should read through the lease with the tenant at signing, explaining legal terms, emphasizing key points (like how much the rent is, when it is due, etc.), and asking if they have any questions.

Having said that, you are going to be absolutely flabbergasted by what tenants will later claim the lease says or think it says. This will happen no matter how thorough you are in going over the lease, explaining terms and answering any questions. There is some aspect of the human psyche which can literally change our memories to the opposite of what actually happened if we need it to fit our actions later. I once had a tenant angrily write complaining that we had breached the lease because the smoke alarms hadn't been inspected. We had to write back pointing out that the lease said the tenant must inspect the smoke alarms monthly and report any problems immediately and that the tenant had initialed that page of the lease right after we read that page to them. Her memory got bad (and obviously she didn't want to challenge her memory by looking at her copy of the lease) because she had wanted out of the lease and we had said no. She then was convinced that we had been a "bad" landlord all along and "remembered" us breaching the lease on a number of points (this wasn't her only faulty memory). The fact that we had actually lived up to our obligations didn't suit what she wanted, so she created things in her mind. Despite the fact that tenants will do this, you still need to make sure the tenant understands what they are signing at the time the lease is executed, but then your job in that department is over.

The Rent to Value Spread: Where Are We Headed? Part II

So, the relationship between the price of houses and the rent that houses generate has deviated from its historic norms - house prices are up much more than rents - and the question is where we are headed from here. Some economists see house prices coming down to correct the imbalance, as much as 3% a year for the next 5 years. Here are the factors that are going affect housing prices and rent:

The median house price can be affected by more sales of lower priced homes, while the actual values of homes may not change as much. The median is simply the number where half the houses sold for more and half sold for less. The low interest rates and too-easy lending practices on owner occupied housing led a lot of people to buy "McMansions" on loans that were doomed. Now those higher-priced homes are difficult to sell in many areas of the country, while their former occupants will be looking for something more affordable. So, we may see the median price fall while values - especially of the lower cost homes - may not.

Lending may dry up: While I think someone - either a stronger hand, perhaps foreign banks/investors or the government, will step in before letting too many mortgage sources fail, it will be harder for marginal borrowers to get loans. Obviously fewer borrowers means potentially fewer buyers, which can mean lower prices. However, those people have to live somewhere, so they will rent (or move in with family for a while and then rent). That's a lot of new renters coming into the market and it seems to me that as they cause vacancy rates to drop, we may finally see rents pop up for the first time in years. This factor may cause both to happen - prices to drop and rents to increase, but I believe it may bring rents up more than bringing prices down (see Loss Resistance below).

Lower interest rates: traditionally this causes house prices to increase and rents to decrease. All indications are that we will continue to see interest rates fall this year. However, I think it will be different for two reasons: 1) Lower interest rates help get marginal buyers into homes, but tighter lending standards that will occur negate that. 2) We've had lower interest rates for years now, and most of the people who would be helped by lower interest rates have already made the leap into home ownership (and many of those are now in trouble on their mortgages).

Foreclosures: more foreclosures means lower prices. However, I think we may have lower foreclosures than expected because the lenders are being forced to renegotiate loans rather than get eaten alive with an overwhelming foreclosure rate. In most states the foreclosure process takes a long time, 6-18 months, and the time can vary. Not all foreclosures are going to hit the market all at once. The foreclosure effect may be less than people think.

Building starts: Builders are going under left and right, and those surviving have finally realized that building more houses that they don't have people lined up to buy isn't helping. December housing starts saw an extreme dropoff. In the normal course of human events, people tend to let the pendulum swing too far in each direction. Buildiers built too much when times were good, I expect them to reach a point where they are building below demand (much as the airlines in recent years have cut available seats to the point where nearly all flights are full or overbooked). All this translates into some degree of price support on houses, though probably not enough for any near-term significant appreciatation. Eventually, builders will get their inventories under control and the incintives will dry up. At that point, existing housing and may start to look more attractive, giving some price support there.

The taken for granted factor: This is an intangible that takes a little to explain, but can be summed up this way: people notice and complain when prices go up, but simply take it for granted with the prices of things get better. The best recent example is the price of gas. It was just a few years ago that we were seeing prices drop towards a dollar a gallon, even after many years of already failing to keep up with inflation. Instead of enjoying and appreciating that bounty, people took it for granted that it would continue and ran out to buy gas guzzlers. Now we're at $3 a gallon. Rents likewise have taken a recent dip in many areas of the country after years of not keeping up with inflation. People have taken that for granted. Could it be that rent - housing being a commodity just like gas - is about to turn up? It seems these things take place when we've reached to point of taking for granted that they'll stay that way and I think we're at that point on rent.

Loss resistance: This is a common, but also intangible, phenomenon in real estate - a seller (whether owner or bank which has taken it through foreclosure) typically becomes fiercely resitant to taking a loss on the sale. This gets to the point that they would rather take a larger loss, but a month at a time, on the mortgage. I've seen banks take huge losses over time insisting on going through the foreclosure and marketing process rather than sell at a small loss to me early on. Eventually sometimes it will dawn on people if their price is completely unrealistic, but from my experience this is a very long time. The effect of this is that if the majority of sellers are holding on to their pricing ideals, it can create a reality of slowing the downward price drift.

When looking at all these factors, while I agree that the median price will drift down, the actual prices of individual houses on the market may not decline as much as the economists predict, whereas the factors that appear to be ready to finally push rents higher seem to be a greater influence: less building, low interest rates having fewer new buyers to attract, and resistance to lower house prices by sellers. It could well be that it is rent pricing that is the next commodity to move up in the post housing/lending bubble world.

Rent to Value Spread: Where are we headed?

This past Summer, people became familiar with the term "crack spread" as gasoline topped $3 a gallon in the U.S. The crack spread is the margin between crude oil prices and the prices of refined gasoline. A large spread means the refiners are making fat profits. In stocks, investors are concerned with the price to earnings ratio. In real estate we also have a ratios to look at; an important one is between the cost of the raw material (the house or building) and the price of the finished product (the rent). This rent-to-price ratio or spread is something that real estate investors should pay attention to. I began noticing about three years ago that the spread was getting out of sorts. We were seeing the prices of houses increase, yet rents were actually decreasing. In our area we've seen rents decrease about 15% over the last three years, while house prices continued to increase at 2-3% a year (no, we're not in one of the hot spots that saw big increases). This spread became so large that it was squeezing profit margins and it made more sense to sell off houses than continue to rent them. So beginning about three years ago I began selling down our single family house inventory and now we just have a few left. Fortunately we got most of them sold before the sub-prime lending crisis threw lending and real estate markets into turmoil.

What created the problem was the overbuilding and over lending which has affected all areas. Rents were falling because people who normally would have rented for a few more years before saving enough to buy a house, and even people who should never have bought a house, were jumping in to home ownership. At one closing recently where we sold a single family home, it turned out to be to an unmarried couple with no money (literally), no credit and no regular jobs. They seemed like nice folks who wanted the American dream, but they just weren't ready for it. This confirmed for me the lending crisis was going to get much worse. Builders compounded the rent problem. As they found themselves sitting on homes without buyers, many turned to renting, creating a temporary over-supply in rental markets. Not having experience with landlording, many builders ended up with the bad tenants that experienced landlords were shunning which just compounded the builder's problems.

There is another spread in real estate, which is the difference between new and existing home sales. I also saw that getting entirely too large beginning about three years ago. People began to pay premiums of nearly 30% more for identical housing that was new rather than existing. This spread told me there were problems coming for new housing, unless existing housing prices were going to jump up to match (they didn't). Now most of the builders in our area are bankrupt, out of business or on the ropes, and they are offering concessions that effectively have lowered the prices of new housing dramatically.

Sure enough, my experiences were backed up this week as some Federal Reserve economists released a study saying that the rents to prices spread had gotten away from the norm. Their study showed that between 1960 and 1995 the rent to price ratio remained fairly steady at 5 to 5.5 percent (I assume they mean annual rent to price, though 5% would be a bad ratio for a savvy investor - that's another post I need to do), but from 1995 on has fallen steadily to a low of 3.5 percent in 2006. When a ratio like this gets away from the norm, the question is which factor will move towards the other (or will they both move towards each other). The economists who did the study concluded that housing prices would have to move down to get back into relationship with rents. They predicted house price declines of 3% a year for the next 5 years, and were factoring in "normal" rent increases continuing at 4% a year.

I would have to disagree somewhat with their assessment. First, most areas have not been seeing rents increase at a rate of 4% annually. Before the recent decline of 15% over the last three years, we saw rents stay flat for about seven years (and we are in an area of population growth and housing demand). I'd love to see rents start increasing 4% a year. But, with the economists' general assumption that it will be prices that fall to return their ratio to the norm, I think they may not have it right. Prognostication is a dangerous game, but I'll take a stab at it in the next post.

Dealing With the No-Show Part II

I wish I could tell you that there is an easy magic formula for eliminating costly no-shows who set an appointment with you to see a rental and then bail out, but there isn't. Interestingly, even realtors I have spoken with say they have a high no-show rate. You'd think that people who are claiming to be contemplating such a serious purchase would be serious about keeping the appointment, but the "fantasy" or "window-shopping" syndrome hits there as well. There are some things you can do to cut down on no-shows, though:

1) Try to answer any questions they may have before setting an appointment. For some, school districts or other civic features will automatically rule out some sites. Maybe you think you're a natural salesperson who can talk them into taking it anyway, but in most cases you're wasting time, and sometimes people forget to ask you those screening questions that they had in mind. So just ask them - do you have any questions about school districts, utilities, etc.?

2) Absolutely insist on getting a phone number they can be reached at when making an appointment. Tell them you need it in case something comes up and you can't make the appointment, which is true of course, but the reality of giving out their phone number starts to wake up some of the folks who are just calling on a fantasy.

3) Do a little pre-screening if you get a chance. People who are getting evicted somewhere else will do a lot to seem like a promising prospect to you (like show up for the appointment), which is likely a waste of your time. We're in the courthouse regularly, and it's easy then to check on the eviction suits that have been filed. Check and see if your appointment is on that list. If they are call and cancel the appointment and save yourself some time. We do sometimes offer to continue with someone who is evicted if they can come up with a reasonable co-signer, but most of them can't - probably because family members have already been hit up repeatedly and won't do it again. One time we had an appointment in the afternoon, but were in court earlier and saw the prospect there on an eviction case. We called later to cancel the appointment, telling her that we saw her in court on an eviction. She couldn't understand why that would matter, so we offered to continue if she had anyone who could co-sign. She admitted her family wouldn't do that. If the family doesn't trust you, and you aren't paying the rent where you're at, it saves both of us time to just cancel.

4) Try calling them an hour or half-hour before the appointment to confirm. Many times they will answer and tell you they changed their minds. They weren't going to call and let you know that, of course, but when called personally they will admit to it.

5) If they don't show, try calling again. If you can find out for sure they aren't coming at this point, at least you'll save a few minutes.

6) If you aren't far from the site, there is another approach in this age of cell phones that we have tried when no-shows get out of control: Tell them to call you when they get there, or just before they get there. If they tell you they don't have a cell phone, that's not a good sign, but most will have one. You can tell them that way if they get there a little early, they won't have to wait on you - you'll come right over and are just a few minutes away. If you never get the call, you'll know you've saved yourself a no-show trip. While this is a little bit aggressive, and a few prospects might find it odd, when you're running 50% no-shows and have several showings a week, you have to do something to protect your most valuable asset: time.

7) Double book. Very often prospects have some flexibility in when they can see a property. If you already have a showing set for 2:00 on Monday and someone else calls wanting to look at it Monday afternoon, try to steer them towards 1:45 or 2:15 or 2:30, so you only have to make one trip. You've doubled your chances at least one will actually show up. It also never hurts for a prospect to know that someone else is coming to look at it. We've even triple booked when we can, and almost never do all three show up.

8) This one I've never tried, and have reservations about, but offer it as food for thought. I heard through a friend in the business of a landlord in Florida who had gotten so put out with the no-show problem, he quit doing showings. He would tell prospects to come by his office (so this doesn't work so well if you don't have a public office), and he would take down their driver's license information and then give them a key. He would then tell them to go take a look and bring the key back when they were done. The concerns with handing out keys are obvious, but apparently it did work for this one fellow, and he completely eliminated his no-show problem. I believe that closing the deal and getting an application is much easier, though, if you are there with them looking at the property, answering questions, and they can apply without having to make a trip back to your office.

No-shows are costly. They keep you from getting other things done that keep your real estate operation growing and well managed. Using the methods above that work for you will save you more than you realize.