WOULD YOU LIKE TO BE THE LANDLORD?
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are a landlord. Landlording is a vocation, not a hobby. How
you do it is up to you. You might be the type of "people
person" who is anxious to handle matters with your tenants face to
face. You might be more aloof, preferring to deal with your
tenants in writing or over the phone, minimizing personal contact.
You can be successful either way, or with any of the infinite gradations
in between. Whichever way you choose, you will need a plan.
The purpose of this article is to assist you in formulating a plan to
assume the position of landlord of a newly acquired property. You
may have thought that once escrow closed, you were automatically the
landlord. This is not so. At close of escrow, you are the
owner, which is a very different thing. You are not the landlord
until you have taken control of the property as well as title to it.
Think of the property as a machine -- a money machine. You have
control of this machine when you have got it working your way, well
oiled so as to minimize friction, smoothly delivering the cash flow you
envisioned when you first drove by and saw the "for sale" sign
on the front lawn.
This article assumes that you have decided to take on the landlording
work yourself, either personally or through a representative, and will
not delegate it to a property management firm. It is aimed at
landlords who can really do it themselves because they have a relatively
small number of properties. If you are buying your twelfth one
hundred unit complex, well, you probably will not even be reading this.
If you are just taking over a duplex bequeathed to you by a generous
relative, or buying a six or seven unit building to add to a modest but
valuable collection of real estate, this article should help.
The first step in becoming the new landlord starts before you become the
owner. There is a quantity of information you should obtain at or
before the formal transfer of title to you. In the ideal
world, all of the things we are about to mention will be provided to you
of course. In the real world, there will be gaps you will have to
see to it are filled.
Unless you are buying a completely vacant building, the most important
early step is to get information on the tenants. You should obtain
information on their identity, their rent payment history, and their
employment and other sources of income.
Information on the building in general is also essential. You
should, before close, know the maintenance history of the building, the
overall condition of the building, the rental agreements with the
tenants, accurate information about security deposits and potential
liabilities, vendors, and compliance with zoning and other housing codes
and applicable security deposit and rent control ordinances. You
should also get a letter of attornment.
After close of escrow, you will introduce yourself to your new tenants.
The object of this exercise, whether done in person or in writing or
through a surrogate is to fill in gaps in the information you received
at close of escrow, inform the tenants of the change of ownership and
where the rent needs to be paid, find out the major tenant concerns
(which probably will be yours if you know about them), ensure you have
such access to the building that you need, and, in general, make an
assessment of the job ahead.
Once this is done, it is time for follow up. You should make such
repairs as are apparently necessary, update whatever records you have
with the information you have received from the tenant, and double
checked contradictions between what the tenants have said and what you
were told before the sale, and demonstrated that you are serious about
discharging your newly acquired responsibilities as landlord, and are
not just a hobbyist.
When all this is accomplished, you are ready to make those changes
which, in your judgment, will bring the building in line with your
philosophy of landlording and your landlording style.
Before title passes, you really have nothing to say or do with regard to
how the property is run. Your job at this stage is to obtain as
much information as you can about your prospective new property, and the
environment in which it operates. You probably will have received
from the seller an abstract of information about the cash flow of the
property, the appraisals would reflect actual, pro forma and comparable
rents, but it is a good idea to supplement and confirm this information,
if possible, as well as to ensure you get certain things through escrow.
Direct contact with the current owner or the tenants will probably be
forbidden, but there is a wealth of information which you, a willing
buyer, can obtain from the motivated seller, or from public records and
governmental agencies, which will stand you in good stead when you take
over, and may even justify you in backing out of a deal before it closes
if you find important facts have been withheld from you.
One of the records which should pass through to you is an accurate
maintenance history on the building. Ideally, there should be a
record of each requested repair and action taken in response. In
reality, particularly with single unit or small multiple unit dwellings,
there will be little day to day information on this type of thing
(something which you will naturally correct once you take over).
Judge the maintenance history in order to be prepared for what is to
come. If you see a history of increasingly frequent and
increasingly expensive repairs on vital systems in an aging building, be
prepared for major work. If you see nothing but one or two
scattered items of correspondence, make it a point, when you take over
the property, to interview your tenants about maintenance so that you
can nip the inevitable ignored problems in the bud. Be ready to
pay the cost.
Do not rely only on the Pest Control Report and kicking a few bricks to
determine the overall condition of the property. Your cash flow
will quickly turn very negative if there are latent defects or
dilapidation in the property that will need correction. The pest
control company does not work for you and is only interested in assuring
there will be a structure of some kind standing to cover the lender's
security interest in the property. Engagement of a private
property inspector, working on your behalf, will go a long way to
provide you information about conditions which will require attention
(and money) to correct, which may not be apparent to the untrained eye.
This will permit you to be ready for them once you take over, or to
include appropriate terms in the sale agreement to deal with them before
close of escrow. The cost is quite reasonable when compared with
the overall cost of your new building, or the damage which can be done
to your financial statement if the problems come as a surprise.
Ethical property inspectors do no contracting work on their own, and do
not recommend contractors to do work they have found to be needed.
Their sole function is to make an objective assessment of the condition
of the property and make recommendations. Their independence of
mind is ensured because there is no way they can profit from the
subsequent repairs. The owner's permission for such an inspection
will be needed, but no honest seller will refuse, although he may insist
on some reasonable conditions.
See to it that all rental agreements are passed through to you through
the escrow, and for any units for which there is no written agreement, a
statement that the agreement is oral or lost. A precise accounting
of the security deposits and their disposition as of the date of closing
must also be there. These are routine matters, but are sometimes
overlooked or incomplete. You, the new owner, do not start with a
clean slate. You are bound by all existing written or oral rental
agreements, together with any written or oral modifications to them, and
by the status of the security deposits as of the close of escrow.
If a tenant has a $500 security deposit posted which is not passed
through to you on close, then you, the new owner, are obligated in most
states to honor every penny of it. Your only remedy is to try to
recover your $500 in small claims court from the previous owner, who by
this time has probably moved to Nice on the proceeds of the sale.
A powerful tool for pinning all this down is the estoppel certificate.
This is a document which the current owner sends to each tenant during
the escrow. It states, in effect, that as of a given date certain
named tenants are living in the unit, all the terms of the rental
agreement are still in effect without modification, a security deposit
in the amount of $X is posted, and there is no outstanding maintenance.
The tenant is given a brief fixed time to respond or be bound by all the
statements in the certificate. These are then passed through
escrow and become a part of your business records as to each of the
items mentioned in the certificate.
A letter of attornment is an essential part of any transaction,
particularly involving a multi-unit building. Nothing creates
chaos as effectively as a change in ownership of rental property.
The process of rent payment alone can be paralyzed as some tenants
withhold payments in good faith because they do not know to whom they
should be sent, or worse, send them to the old owner who cashes the
checks, and others withhold them in bad faith, taking advantage of the
confusion. The attornment letter is a document signed by the
previous owner and passed through escrow informing the tenants that the
property has been sold, identifying the new landlord and his agent, if
any, and instructing where and how rent payments and other
communications are to be made after a specific date. This letter
should be sent to each unit upon close of escrow and, except for those
few percent who never get the word, will remove this source of
misunderstanding and problems from your post escrow check list.
While escrow is pending, make it a point to check with your local zoning
and code enforcement departments to ensure there are no outstanding
violations and that the building is being used legally. Many
factors may motivate a person to sell a rental property, but most of
these factors also carry the side effect of a loss of interest in it.
Even a scrupulously honest seller may have overlooked a notice, or
failed to renew a certificate of occupancy, or fallen out of compliance
with some stupid regulation. Checking on your own can eliminate a
small, but potentially nasty problem. If you are in a rent control
jurisdiction, get a copy of the ordinance and regulations. If
registration is required, see to it the property is in compliance, and
all rent increases have been legal. Ensure also there are no
pending enforcement proceedings against the prior landlord, because if
there are you will become the respondent as soon as escrow closes.
From your inspection of the records at the time you made your offer, you
will know who the major vendors are. A letter might go out from
escrow to ensure that all vendors, such as handymen, off site or on site
managers, painters, etc., are paid in full, or, if not, how much they
Escrow is closed and you are the titleholder. Having gone through
all of the above, you are armed with a pile of documents including
rental agreements, security deposit accountings, estoppel certificates,
and so on. The letter of attornment has gone out to each of your
new tenants. Now is the time for you, either personally, or
through your representative, to become the landlord.
It is not a good idea now to send out a letter detailing all 33 changes
you intend to make in the previous, unsatisfactory routine of running
the building, threatening instant eviction in the event of failure to
comply. Before overthrowing the ancien regime, you should avail
yourself of the first month of your ownership to find out what the
ancien regime actually was.
Your money machine will function smoothly and without friction only if
your tenants comply with your policies and requirements because they
want to do it.
A face to face meeting with each tenant is a good idea. The person
who will be dealing with the tenants on a routine basis should
accomplish this. If that is not you, then you may want to
accompany that person, but do not conduct the first meeting and then fob
the tenants off to an on or off site manager. This person's
authority will only be undercut. Qualify him immediately by having
him meet the tenants. This way there is no question of playing the
representative off against the "real landlord."
Take care not to alarm or offend your tenants. By this time all
sorts of rumors will have been flying through the building. Some
will fear their rent will be doubled, some that the previous owner
absconded with the security deposits, others that the building will be
razed to make room for a parking lot. The initial approach should
be a friendly letter. This might be a form but it should be
individually addressed to each tenant or family and bear an original
signature. Stress that this meeting is merely to get to know them
and get a handle on their concerns. Introduce the person who will
actually be present at the meeting and qualify him to make decisions, if
necessary. Suggest a day of the week and approximate time and
invite the tenant to call to firm up an appointment. If you do not
get a call back, call them. If you cannot make contact, then
present yourself at the unit at a reasonable time.
The meetings will be done in a friendly manner, and are designed, from
your point of view, to fill gaps in the information you got through
escrow. The tenants should do most of the talking. Bring a
copy of the rental agreement and ensure it is the latest version.
Go over the security deposit and confirm its existence and amounts.
Seek information about maintenance issues with the unit or common areas.
Confirm employment and contact information and update as needed.
Ensure the tenant understands where and when rent is to be paid and
establish a person and method for contact for maintenance and other
problems. Keep your eyes and ears open. Note the overall
condition and cleanliness of the unit. Listen for sound. Is
the upstairs unit particularly noisy? When you leave, take a
moment to note your impressions on these and other issues in a memo for
the tenant file.
Take the time also to ensure you have access to each unit. See to
it that the keys you were given out of escrow actually fit the locks in
each unit, and other secured areas of the building. If they do not
fit the unit, ask the tenant to make a copy, offering reimbursement for
the cost, explaining that the law requires that you have access to each
unit (if it does), as does common sense, in case there is an emergency
in the tenant's absence.
Remember that the tenants naturally will be suspicious of you at first.
If the suspicions remain, your management of the building will only be
more difficult. One of the purposes of these meetings is to allay
those suspicions. This will not happen if you are seen to be
snoopy or intrusive. For each piece of information you request, be
prepared to give a friendly but professional explanation of the reason
for you having it.
This meeting is not the time to shove a bunch of documents in front of
your tenants to sign. Make your notes to show interest as well as
to remind yourself of what was said. Give them a maintenance
checklist if you want to, but do not ask for it before you leave.
Give them an envelope with which they can mail it back after a few days.
A sheaf of legally binding documents will only increase the tenant's
perceived threat level.
Most of your tenants will be willing to comply and make a good
impression. There will be a few, however, who for whatever reason
will dig in their heels. Do not enter into a lengthy argument
about why you need to update employment, or have a key to the front
door. The best thing to do at this stage is to explain in a calm
and reasonable manner that you will do your best to provide them all the
service and support that they deserve, but that, without their
cooperation, your task will only be more difficult or impossible.
If they do not come around, mark them down as a problem which will have
to be liquidated at some point, then do it.
Having gone through all this, now is the time to follow up. This
is particularly true as to the matters of maintenance. The
problems that need immediate attention should be attended to
immediately. Do not interpret this to mean that each item on a
tenant wish list should be granted. Concern yourself with those
items that are legitimate and needful. No tenant's rental unit
will ever be entirely free of desired improvements. Make sure the
tenants learn that you are fair, but not a push over. Maintenance
is the most common, but not the only, tenant concern, which may arise at
this time. See to the others as well and in the same spirit.
Now that you have met all the tenants and actually determined what the
situation is, you are in a position to change the things you do not like
about the building. Convert to a uniform rental agreement which is
to your liking. Increase the rents to a level which you believe is
reasonable for what the tenants are getting. Institute your new
pet policies. Set up a maintenance request procedure. In
doing all these things, once you have established yourself as in control
and acting fairly and considerately, remember that change is most
effectively accomplished gradually, that is, in small, palatable steps.
Apply the ideas in this article to your particular situation. They
may well help you avoid unpleasant surprises after you have been handed the keys, and should assist you in establishing
yourself as the landlord of your new building.