How to Handle Tenant Deposit Disputes

angry_phone2As a green, freshly minted apartment landlord with zero property management experience in 1990, I one day received an abrupt and stark introduction to the world of security deposit disputes. This occurred roughly three days after mailing my first deposit accounting to a departed tenant, from which damage deductions had been assessed.

The tenant response was a phone call of raw anger, yelling, threats, accusations of dishonesty, and some colorful language. I responded to this verbal assault with relative calm, given that I was caught completely off guard and at first, literally wondering if the tenant was joking, so ridiculous were the protestations.

I muttered short statements of fact in between the barrages of verbal hostility.

“We found fish tank rocks in the disposal and it had to be replaced”.
“Your dog left pee stains on the carpet and those had to be removed”.
“Someone punched two holes in the back bedroom door and the door had to be replaced”.

These, in my mind, were indisputable facts, not matters of subjective pettiness. I really couldn’t even believe the conversation was happening. Little did I know about the interesting psychology and visceral anger that deposit deductions evoke in some tenants.

The closest I can get to understanding is the jolt of anger I feel when I get nailed with a $2 late fee at Blockbuster. It’s rather curious. I know I was late. It was my fault. I did it. I remember dropping the movie in the slot at 10PM the week before, knowing I would get a late fee.

Yet, while standing there in front of the cashier, paying for a new movie and being told I owe $2 late fee for the previous movie, I feel an almost uncontrolable urge to argue about it, to demand to know “which movie” it was (even though I already know). When was it due. And to say how stupid the fees are and how it was better the old way when there were no late fees.

Lucky for me, the person in line ahead of me already made a complete ass of themselves doing all of the aforementioned, and holding up the line in the process, so I control myself and make no mention of it other than to say “ok” when the cashier asks if I want to pay the late fee now.

But it nevertheless is a curious feeling that defies logic. The notion of feeling victimized and abused for being held accountable for not keeping an agreement for which I had full and complete control, but nonetheless did not perform as required.

So, if a perfectly sane person such as myself, who believes 100% in personal responsibility and accountability, and who tries to live his life in accordance with those principles, can feel an emotional jolt of anger over a $2 late fee at Blockbuster, I can only guess that a tenant opening up a deposit refund statement might possibly feel something as strong or stronger upon seeing hundreds of dollars in deposit deductions, no matter how justified and no matter how much they may have been expecting the outcome.

So, my point in opening up with all of this is simply that, as landlords, it should come as no surprise when we receive angry protest from a former tenant who wants to argue over deductions that were made from the security deposit. I view it almost as a sort of temporarily insanity that comes over the tenant, and I don’t take it personally.

And, as a landlord, knowing that this situation is more likely than not, no matter how careful and fair you thought you were being in assessing damage deductions, you should have a clear and pre-established set of steps to follow when dealing with such disputes.

Step 1 – Set Expectations in Writing
I won’t cover the entire topic here, but in a previous blog article I wrote entitled “Why I Never Do Move-out Walk-throughs with Departing Tenants“, you’ll find a move-out instructions letter that I send to all departing tenants explaining what must happen if they wish to avoid deposit deductions. Feel free to borrow from mine or make your own, but have something that you send to tenants upon receiving a notice to vacate. This helps the tenant understand what needs to happen, and it serves as the first in several simple steps that protect you legally and make it more difficult for a tenant to paint you as an unreasonable landlord out to rip people off.

Step 2 – Be Fair
After the move-out, when you first go into the property to check the condition (without the tenant by the way – they are out of the picture at this point), be fair to begin with and know that whatever deductions you are making might have to be justified and documented in front of a JP Court judge. Don’t be petty or frivolous, or try to claim damages for things that are really just normal wear and tear.

You have to actually spend the money curing the conditions the tenant caused. You can’t simply “keep” part of the deposit if you didn’t actually spend it. You must have receipts or invoices from vendors documenting the expenses and the work completed. If you did the repairs yourself, document the dates, time and hours spent and keep  receipts for materials.

Do not try to charge more than what it would have cost if you had hired someone. It’s not the tenants fault, for example, if you are a really slow painter who charges $50 per hour. That won’t fly in court. So, just don’t be stupid or greedy. This is how “bad” landlords get in trouble and cause the rest of us to be mistrusted.

Step 3 – Provide a Written Accounting of Deduction
In Texas, you have to provide the tenant with a deposit refund and an itemization of any deductions within 30 days of move-out. Your written accounting of deductions does not have to be fancy. It can be hand written on notebook paper. Just make sure it includes the appropriate information such as the names of you and the tenant, property address, date of move-out, date the accounting is being mailed, the original deposit amount, list of items and amounts of deductions, remaining balance and the amount being returned to the tenant or the amount being demanded from the tenant if the deposit did not cover all costs.

Remember, the frame of mind for a professional landlord (which you should consider yourself to be even if you own only one rental home) is that everything you produce in writing or say to a tenant can be introduced as evidence if you are sued. Ask yourself as you proceed whether or not your efforts will make you look better or worse in court. More on that in a moment.

Step 4 – Do Not Debate with the Tenant over the Phone, Ever
When I mail a deposit refund to a tenant, my hope is to never hear from that tenant agin, regarding the deposit. That’s how it goes with about half of our deposit returns. The other half will call “with a few questions” about the deductions. This is when you have to be disciplined and avoid getting into telephone debates with tenants.

My policy is that I absolutely do not discuss deposit refunds and deductions over the phone, period. It ain’t gonna happen under any circumstance whatsoever, at all. Instead, I cordially invite the tenant to submit any questions about deductions in writing, and I promise that I will respond quickly to whatever it is they have questions about. Usually, this does not end the conversation and I have to repeat the same thing a few times, which I’m happy to do, and we can discuss the process itself, but I never, ever, under any circumstance, allow myself to be drawn into debate over specific deduction items.

This steadfastness often causes some tenants to become extremely irate and hostile because they feel like they are being stonewalled and given the brushoff, which isn’t the case at all. But they sometimes start yelling and threatening to sue, telling me I’m the worst landlord they’ve ever had, saying I’m a crook, etc. – and worse.

But that’s ok. Remember, we’re talking about a normal human reaction that isn’t always rational. Instead of getting angry in return, or engaing in battle over the phone, I simply explain that we have a process by which the tenant can ask the questions and receive answers they want, but that the process is a written process and will not happen over the phone.

Why not just explain it over the phone?

Because, again, knowing that landlords, as a business class, are sued more than anyone else in small claims court, I have to assume that each and every deposit dispute represents a potential court case. Knowing that, I want to take away from the tenant any ability to open up a “he said, she said” set of accusations, which are difficult to defend against, even when they are blatant lies.

Instead, I want everything 100% in writing so it can simply be handed over as evidence and I can rightly state that the written communication represents ALL communication about the disputed items.

Thus, there shall be know “he said this or that”. It’s all in writing, every bit of it. Frankly, the tenant should want the same, so I’m actually doing them a favor by making it so.

Step 5 – Respond Politely and Thoroughly in Writing
A common gripe is about the cleaning charges. Tenants will proclaim “we left that house cleaner then when we moved in”. Why those specific words are uttered in that specific order by so many departing tenants, I don’t know. This will be the same property for which the cleaning crew calls me to get authorization to bill for a “heavy” clean, so dirty is the property, and especially the oven. But the tenant really does belief it was left cleaner than when they moved in and will want an explanation of how it could be otherwise.

Other common deductions we make are for hauling trash, replacing dirty A/C filters, curing deficiencies in yard maintenance, repairing cosmetic damage, carpet stains, damage to walls and paint that are well beyond normal wear and tear.

I generally keep the written explanations fact-based and short, and send a copy of the invoice we paid. Remember, this response might be read by a judge, so that’s who my target reader is, not necessarily the tenant.

The reply might say something like “the A/C filter was dirty and, as outlined in your lease agreement, this is your responsibility. The charges are justified and appropriate”.

Same with lawn care, damages, etc. Short and succinct, absent opinion or commentary, just the facts.

Finally, in a response, I’ll end with something like “I am sorry you feel like the deposit deductions were unjust. I hope this response helps you see that the deductions were made in accordance with your lease agreement and in compliance with Texas Property Code, and I hope you find this response sufficient”.

That’s it. Now I’m done. I generally ignore any further attempts to debate to matter, unless a 10 Day Demand Letter shows up, which is the first required step a tenant must take in order to file a small claims suit. But unless there is new information that needs to be added to the initial response, or new questions being asked that I didn’t address in my initial response, I simply don’t respond to further attempts to engage in debate.

Having accounted back deposit refunds to at least 2,000 Austin tenants since 1990, the above approach has resulted in a total of three disputes ending up in JP Court. In all three of those the tenant lost. I currently have a 4th one in process, which I will win as well, because the evidence does not support the claims being made by the tenant.

With a track record like that, I don’t see any reason to change how these matters are handled.

Whether you are a professional property manager, or a private landlord, your greatest exposure to legal hassles lies in the deposit return process (2nd biggest is how you handle repairs – a separate blog I should write soon). As such, that process should be controlled by you and nobody else (other than Property Code of course). Every aspect of it should be documented and justifiable. If you keep your side of the street clean, don’t allow emotion to take over, don’t sink into no-win debates with the tenant, and keep all communication in writing, you make yourself virtually bulletproof against frivolous accusations and lawsuits.

It’s hard, I know. I bite my lip and stay quiet a lot when on the phone with a departed tenant. But you have to stick with the process and not deviate or be dragged onto a different playing field.

Source: CrosslandTeam.com

Suing a Cosigner for a Lease Breach?

ask-the-attorneyThe Landlord Protection Agency®presents John Reno, Esq., a highly experienced Landlord – Tenant attorney based on Long Island, NY.

Q:  Dear Mr. Reno:

Quick question: if I am going to small claims court to file breach of lease and damages , do I add name of co signer to the case ? or file separately? The co signer lives in different county in NY.
Also you represent in Westchester ? Thanks.

Lyn A., New York State

A: Both tenants should be named, but in small claims, I don’t think they’ll allow it. The Court will probably tell you to sue other tenant separately in his County.

Legal Disclaimer
The Landlord Protection Agency’s “Ask the Attorney” column is for informational purposes only. The questions answered by Mr. Reno on this site do not constitute an attorney – client relationship and are not to be considered legal advice. Not all questions will be answered and some may appear in the LPA Q&A Forum.
The Landlord Protection Agency recommends that you seek legal advice before using any of the material offered on this web site, and makes no guarantee on the effectiveness, compliance with local laws or success of any of the material offered on this web site. The Landlord Protection Agency is not engaged in rendering legal advice.

Pokemon Craze!

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Use #PokemonGO as a way to get out of your house, and #BevRobertsRentals as a way to get into your next one! #PokemonCraze

More renters sour on homeownership, some blame student debt

For-Rent-Landlord-Tenant-Investment-300x300As home prices and rents continue to rise, confidence in the housing market is starting to wane. It is showing up in weaker traffic at open houses and less interest in taking on a mortgage as some worry about their student debt loads.

The numbers are dropping, and a new survey from the National Association of Realtors only adds fodder to the current market’s failings. While three-quarters of Americans surveyed in the second quarter of this year still think now is a good time to buy a home, the numbers are slipping, especially among renters. Just 62 percent of renters said now is the time to move to homeownership, down from 68 percent at the end of last year. Those under the age of 35 were the least confident. Millennials today have the lowest homeownership rate of their age group in recorded history.

On the flip side, nearly 4 out of 5 people who currently own a home, as well as respondents over the age of 55, said now is a good time to buy. That is likely because homeowners have seen their equity increase dramatically in just the past year, as prices rise. In fact, home equity jumped by a collective $260 billion in just the first quarter of this year, according to Black Knight Financial Services.

“Existing-home prices surpassed their all-time peak this spring and have climbed on average over 5 percent nationally through the first five months of the year and even faster in areas with severe supply shortages,” said Lawrence Yun, chief economist of the Realtors. “Most homeowners appear to realize that if they’re ready to sell, they’ll likely find a buyer rather quickly and be able to use the sizable equity they’ve accumulated in recent years towards their next home purchase. Meanwhile, renters interested in buying continue to face minimal choices, strong competition and home prices growing faster than their incomes.”

Those with student debt, according to the Realtors’ report, are far less likely to want to take on a home loan. Half of respondents with student debt and under the age of 35 said that not only did they not want a mortgage, they doubted they would qualify.

“The financial and emotional impact of repaying student debt is contributing to a delay in purchasing a home for many would-be buyers,” wrote Yun. “At a time of quickly rising rents, mortgage rates at all-time lows and increasing housing wealth, a lot of young adults in their prime buying years are struggling to enter the market and are ultimately missing out on the stability and wealth accumulation that owning a home can provide.”

Jorge Alborta, 32, rented in northern Virginia for seven years before finally buying a home this spring. He and his sister own a restaurant, and his income is below $100,000 annually. He did not have student loan debt, and that played a role in helping him become a homeowner. Still, it was a long and arduous process.

“It was a little bit too pricey, all I could afford was an efficiency, one-bedroom apartment, so I started looking in different places, also in D.C. and it was a very long process, and it took a long time,” said Alborta.

He also found the mortgage process long and tedious. Alborta wouldn’t have been able to afford to buy, but for a low-income housing program in D.C. that helped with closing costs and allowed him to qualify for a lower price in the townhouse community where he purchased. Still, saving for the down payment was arduous — “Yes, it was very hard,” he said.

First-time homebuyers are still at a historically low share, less than one-third of buyers in June, compared to the historical norm of about 40 percent. The supply of homes for sale on the lower end of the housing market continues to fall; homebuilders are concentrating largely on the move-up buyer, due to higher costs of construction. This is only pushing prices higher for first-time buyers, and sidelining them longer.

Higher prices, however, may finally be getting potential sellers to take the plunge. More current homeowners, 61 percent, responding to the Realtors’ survey said now is a good time to sell, compared to 56 percent who felt that way in the first quarter of this year.

Source: cnbc.com

Why would you lease without a Property Manager?

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You would NEVER drive a Lamborghini without insurance, so why would you #Lease without a#PropertyManager?

Renting to Your Family Members? Don’t Fall for the “Personal Use” Trap!

rent-to-family

There are plenty of great reasons to allow your family to stay in one of your properties. Whether you are allowing relatives to stay in your vacation home, your child to stay in a home of yours near their college campus, or your elderly parents to stay in one of your nicer places, you must be weary of the tax traps that will result with all of these situations.

The problem with all three of the above scenarios is that your property will be considered a personal use property unless you structure it in a manner that proves it’s a rental property. This is true whether or not the property has been a rental in the past.

The problem with personal use property is that it will be treated like a second home. You’ll lose all sorts of great rental deductions and may even have to claim rents your family member is paying you as income on your returns. Family members staying in your property will qualify it as personal use unless it is appropriately structured. Not a great way to maximize your tax efficiency.

What is Personal Use Property?

We should first point out that the IRS speaks in terms of “dwelling unit” when discussing personal use of property. A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. It does not include property used solely as a hotel, motel, inn, or something similar.

Personal use of a dwelling unit simply means that you are using the property for your personal needs. You are not trying to make a profit with the property and are not placing it into service as a rental. Many people have second homes, and many times these second homes qualify as personal use. While there’s nothing necessarily wrong with having personal use property, there most certainly is when you weren’t expecting it to be classified as personal use. As you’ll see in a minute, the tax deductions disappear, and you may be caught holding the bag.

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The Day of Personal Use Test

Naturally, there is a test to determine whether a dwelling unit is considered a personal use property or a rental property. This test is measured in the number of days you’ve used the dwelling unit for personal use. It’s the first of two tests, the second of which we will discuss shortly.

Your property (dwelling unit) will be considered a personal use property if you use it for personal purposes more than 14 days, unless you use it less than 10% of the total days it is rented at a fair rental price. Remember, “personal purposes” also means allowing a relative or child to live in the home rent-free.

It can be confusing, so let’s break out some examples.

First, let’s say you have a vacation home and you stay in it for two weeks (14 days) during the year. It will be considered a rental property, and you won’t have to worry about losing certain deductions.

On the other hand, if you stay in the vacation property for more than 15 days or your child or relatives live in your property without paying rent for more than 14 days, you will need to resort to the 10% test. In that case, assuming the property was rented at a fair market rate for 300 days, you can use the property for personal purposes for 30 days (10% of 300), and the property will still qualify as a rental. This is true even though you used it for personal purposes for more than 14 days.

To clarify, earlier I stated “less than 10% of the total days” and that was simply to make the rule easier to understand in conjunction with the 14 day rule. Technically, the rule is “no more than 10% of the rented days,” so just keep that in mind.

If the property is qualified as a second home — meaning you exceeded the limits of personal use as described above — you could be in trouble. If you have a net loss, you may not be able to deduct all of the rental expenses. Deductions such as depreciation, management fees, marketing/advertising, maintenance and repairs may all be excluded from your return.

A day of personal use is any day that the unit is used by anyone who owns an interest in the property unless that person is paying a fair market rate. Additionally, any day that family members of the individuals who own the property use the property at less than a fair market rate will be considered a day of personal use. Lastly, anyone whom you agree to rent the property to at less than a fair market rate could qualify those days as personal use (so be careful with charity cases).

To ease the pain a bit, the IRS does provide some leniency here. Basically, if you were “attempting” to rent the property at a fair market rate, those days will count as rental days, not personal use days. So don’t sweat it if you are experiencing vacancies, but at the same time, don’t overdo it.

The Fair Rental Income Test

While the “number of days” test is important, another test that isn’t brightly spelled out is the “fair rental price” test. A fair rental price for your property is the amount of rent that a person who is not related to you would be willing to pay. The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area.

The key is to have some form of proof of the fair rent in your area. Proof may constitute you printing off Craigslist or Zillow listing of competitors. Or you may want to have an agent run comps and provide you with a rental price range. Whatever the means, make sure you have proof and store it away for later use.

This is normally a sticking point for a lot of people. Who wants to charge their child or parent rent? Aren’t you supposed to be supportive and caring? When money is on the line, decisions must be weighed carefully. While it’s certainly great to support family members, if they are dragging you down and decreasing your production and contribution to society and the economy as a whole, my vote is to steer clear of free rent.

The good news is that you can provide good tenants with monthly discounts that any normal businessperson would find acceptable. Some of my clients have pegged those discounts to be around 8-10%. So if the normal market price is $1,500, they may charge their child $1,350 to live there.

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Deductions Disappear When You Have Personal Use Property

If your property is deemed to be personal use, and if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. You will likely have to report the income but may not be entitled to your full deductions.

If you use your property as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental, but instead personal use. In this case, it should not be reported on Schedule E as normal rental properties are. Instead, expenses such as home mortgage interest and property taxes are reported on Schedule A. In this situation, you won’t be required to report your income.

A fun strategy to consider is to AirBnB your primary home for 14 days while you travel. This will allow you to bring a small portion of income in that is tax-free!

If you use your property as a home and rent it 15 days or more during the year, you will have to include your rental income on your return. If you used the property for less than 14 days for personal use, you’ll report the rental on Schedule E just like any other rental.

However, in the event that you use the property for more than 15 days for personal use and you also rent the property for more than 15 days, you’ll have your work cut out for you. In this case, you will be dividing expenses between Schedule E and Schedule A — between your rental and personal use. Additionally, your rental expenses cannot exceed your rental income. Any excess loss is carried forward into future years regardless of the passive activity rules (which allow most landlords to deduct up to $25k).

Conclusion

The key is to understand that your children and relatives living in your property without paying fair market rent are qualifying your property for personal use. This means that you will have to apply all sorts of IRS tests to determine whether or not you can deduct your expenses.

If personal use exceeds 15 days and you rented at a fair market rate, expenses are split between Schedule A and E, which is bad. If personal use exceeds 15 days and it wasn’t rented at a fair market rate for at least 15 days, now you have a personal use property that can’t deduct the majority of the expenses that make real estate awesome.

While this may be confusing, just be sure to loop your CPA in prior to involving any friends or family in your rental business. And remember, 14 days of personal use!

Source: BiggerPockets.com