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.