Why Rental Agreements Beat Handshakes

While I like the idea of confirming an agreement with a handshake rather than a contract, I’ve seen a few too many handshakes turn into fisticuffs to recommend them, especially when the agreement involves an asset worth several hundred thousand dollars. This week’s column is dedicated to answering questions from a reader about how to minimize the paperwork involved in renting your property, or more to the point, why you shouldn’t.

The reader asked, “What is the minimum paperwork (contract) a landlord should have a tenant sign? What should be included in the contract? How important is it to have a contract? What are the legalities? What if no contract has been signed?”

Given the value of the property you’re allowing a tenant to use, I’d rather focus on all the things a lease agreement should include, rather than figuring out the minimum contract you can get away with. While the law doesn’t require a contract when leasing for less than a year, why wouldn’t you protect your asset?

Our lease agreements include provisions that cover the following:

  • Property address
  • Term of agreement (when it starts and ends)
  • Cost of rent
  • Who pays which utilities
  • What the property will be used for and by whom
  • Whether pets are allowed
  • In a multi-unit property, what the house rules are (e.g., noise, parking, etc.)
  • Adhering to state and federal laws
  • The tenant’s responsibility for the actions of guests
  • Whether the tenant is allowed to sublet
  • If the tenant stays past the end date of the contract, that the contract remains in force
  • Who is responsible for what maintenance and repairs
  • Whether the tenant is allowed to alter the property (e.g., paint, renovations)
  • Clarification of who is responsible for damages
  • Under what circumstances the landlord may enter the property (how much notice, etc.)
  • A prohibition on the tenant re-keying the property without approval
  • A prohibition on tampering with smoke and carbon monoxide detectors
  • Clarification that the tenant must insure his own personal property
  • What happens if the landlord does not deliver possession of the property, as promised
  • A prohibition on having illegal drugs in any form on the property (including medical marijuana)
  • What happens if either the tenant or the landlord does not live up to his or her end of the agreement
  • What happens if a tenant only moves half way out: vacates the premises but leaves enough personal property that it isn’t clear whether the property is occupied
  • Clarification that the tenant can expect his or her personal information to be used to run a credit report
  • What happens to the security deposit, and that it cannot be used as the last month’s rent
  • A clause about attorney’s fees stating that the prevailing party pays for legal fees up to $1,000
  • A standard waiver stating that if part of the lease becomes unenforceable, only that clause is void—the rest of the agreement remains intact
  • Notification of legal notices: where to send them and how (e.g., certified mail)
  • Clarification that if the landlord waives a right, it is only that right that time (allowing your old dog to move in with you does not permit you to adopt a wild puppy when your old dog passes away)
  • Megan’s Law Disclosure: a notice stating you can go online to determine if any sex offenders live nearby (UPD has a program called Nixle that will send you notices about all kinds of interesting safety and law enforcement facts—at ukiahpolice.com)
  • The procedure required to terminate the contract

I’ll share information about addendums next time.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

 

 

Real Estate Investing – Part IV: Commercial Property

This summer I’ve written three “Real Estate Investing” columns covering single family residential properties; duplexes, four-plexes and apartment complexes with fewer than five units; and larger apartment complexes (with up to sixteen units). I recently received a request to write a column on investing in commercial real estate, so here you go.

Commercial property is not for the faint of heart. It’s not too different from the other types of real estate investing, but because of the longer depreciable life there are lower tax benefits and the bigger investment makes it a bigger risk (if you’ve heard of the risk/return trade off, that’s what I’m talking about: bigger risks can lead to bigger returns or profit. Of course, bigger risks can also lead to bigger losses, so it’s best to do your homework to minimize risk where possible.)

When investing in commercial real estate, you’ll want to run a thorough background check of any potential tenant(s), including a credit check and rental history. Don’t give the keys to anyone until the history and credit check come back clean. I’d also screen potential tenant(s) for business experience for the type of lease you’re offering. For example, if the whole reason a potential tenant is opening a restaurant is because his sister-in-law says he’s a great cook, the business plan may not be sound.

Although you may feel uncomfortable asking specific questions about the person’s business plan (especially if you haven’t done this type of lease agreement before), you’d be negligent not to inquire. When turning over an asset worth hundreds of thousands, or even millions of dollars, you want to be certain that the prospective tenant can and will perform the full agreement.

In commercial real estate, you’ll deal primarily with two types of leases: gross leases and triple-net leases. With a gross lease, the landlord is responsible for most expenses, including taxes, insurance, and routine maintenance (the tenant fixes things he breaks). With a triple-net lease, the tenant takes care of virtually all expenses, including taxes, insurance, and all maintenance.

There are pros and cons with both. As a landlord, a primary benefit of the triple-net lease is not having to deal with much property management. You’ll get no calls about a broken window or clogged sewer on a Saturday afternoon. However, if your tenant doesn’t keep up with routine maintenance over the course of several years, the long-term damage can be substantial. And, if the tenant’s business struggles, routine building maintenance is likely to be one of the first expenses to go. Sometimes the ill effects of poor maintenance are not immediately obvious, so trying to recoup expenses years after a lease begins is difficult (bordering on impossible).

As a rule, finding a tenant for a commercial building can take more time than for a residential property, so vacancies can last longer, but because commercial leases are typically multi-year contracts, vacancies are less frequent. As you consider negotiating a commercial lease, it will likely be quite different from the experience you may have had with a residential lease. Commercial tenants may be more along the lines of, “Have attorney; will travel.” If you’re lucky enough to have a major credit tenant (e.g., major grocery store, federal agency, national chain store), you’ll benefit from additional foot traffic and more stable rent. If your building allows for multiple tenants, a major credit tenant will attract other tenants. Because they know they bring these benefits, major credit tenants often play hardball when it comes to lease negotiations. They expect their rents to be lower  than other tenants, and even than operating costs for that space. Depending on how much lower, you’d be smart to play ball.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Being a Good Renter

The real estate market continues to evolve into a seller’s market. Prices are up, inventory is down, and buyers outnumber sellers. However, if you would rather rent than buy right now, here are some tips on how to be a savvy renter.

  1. Find a property that fits your needs. You can find places for rent listed in your local newspaper, via an online search, or call a professional property management company.
  2. Make sure you’re dealing with a reputable landlord, and that the person you’re dealing with is, in fact, the owner or legitimate property manager. A recent scam involves “landlords” advertising properties for rent. They accept your application and your deposit, but get “called away” and cannot meet with you. They abscond with your money and personal information and never send you the keys. If possible, it’s best to deal with people you can meet with face to face.
  3. Pay attention to the condition of the property. This is the honeymoon phase. If the place doesn’t look nice now when the landlord is trying to rent it, it’s unlikely the landlord will put in more time and money to fix things once you’ve moved in.
  4. Tell the truth. Complete the rental application thoroughly and in good faith. You should assume the landlord will verify the information.
  5. Read your lease agreement, and pay attention to your obligations. You don’t have much negotiating power after you’ve signed your name. If you have questions, ask them.
  6. Use a move-in checklist and take pictures. If the landlord doesn’t offer a move-in checklist, make one for yourself. Take inventory of what’s broken or missing, as well as the condition of appliances and other features. Pictures are a great way to catalog the property.
  7. Confirm that the locks have been re-keyed.
  8. Prepare for an emergency. Find out where the breaker box is, along with the emergency shut off for water and gas. Also inspect the property for a smoke and carbon monoxide alarms. Landlords are legally required to provide them.
  9. Communicate with your landlord. Renters sometimes fear that sharing bad news with landlords about needed repairs will result in a bigger rent payment. However, a good landlord will appreciate being informed about problems when they’re small and easy to take care of. A little leak is usually cheap to fix; massive dry rot is not. Replacing an electrical outlet is relatively easy; losing your property to fire is not.
  10. Move out well. When you leave a property, give appropriate notice (check your lease agreement) and really clean the place. Use your move-in checklist as you move out. Ask the landlord for a pre-move out inspection, so they can tell you what they believe requires attention. This gives you an opportunity to fix things yourself rather than to be charged for them later.

If you’re wondering how much to pay for rent, look at what similar homes in the area are renting for. If the one you’re interested in is really high or really low, pay attention. Be aware that the security deposit cannot legally be more than twice the monthly rent for an unfurnished property. Be informed.

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