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Turn-Key Property Investing: Buyer Beware!

Caveat empt-y

turn-key property investingWhen you think of the term “turn-key,” what does it mean to you as a property investor?  No heavy lifting involved?  No hands-on dealing with nasty tenants?  No emergency calls in the middle of the night?  High positive cash flow guaranteed?  Think again.  If you’ve been sucked into a seller’s touting of their property as “turn-key,” rest assured you need to take a buyer beware stance, and be very wary of any information provided by the seller.

Seller’s income statement

The first data to check out is the seller’s income statement.  In an effort to show as high a positive cash flow as possible, you can expect the seller willturn-key property investing try to exaggerate income if possible, and/or lessen his expenses.  He may also “abbreviate” his actual expenses.  Make sure you pore over the provided income statement as meticulously as possible.  Any expenses missing?  You can expect the major ones will be there – mortgage, taxes, insurance, energy costs (if landlord is responsible) as well as maintenance costs.  But are all maintenance costs included?  Landscaping?  Plumbing repairs?  Electrical repairs?  Painting?  The list can be extensive.  Make sure it’s itemized.  Then go about actually verifying each expense item with the seller.  You must see the actual bills the seller incurred, then check that they correlate to his income statement figures.

Vacancy figures

In addition, the seller should be including a “vacancy” amount as an turn-key property investingexpense for when tenants leave.  Vacancy rates tend to be in the 10 to 15 percent range of total rent roll.  Make sure this expense has not been left off the income statement.  Vacancy expense is one of those “hidden” charges many new property investors fail to include in their income statement checks.  Tenants are always moving around.  So as a landlord, you must plan on some amount of units being vacant for at least a month between the time a tenant leaves and you find a new tenant and update (eg., paint) the unit before the new one is installed.

Rental income verification

Likewise, you also need to ensure each tenant’s rental income can be checked.  Do they each have a separate lease, or are any on month-to-month rentals?  If the latter, you’ll need to see the seller’s actual deposits of his monthly tenant rent roll.  If there are any vacancies, also make sure the seller isn’t inflating a projected rent for the unit(s).  Once you’ve been able to verify all the seller’s figures, and agree with them, then you can proceed to the next step in acquisition of the property.

Managing the investment property

Many property investors who like the idea of a “hands-off” investment, and are looking for turn-key property, think that a seller’s managing agent has done a good job, and may continue to run things.  But what about the managing agent’s costs for property management?  Are they in line?  Wereturn-key property investing they even included in the income statement expenses?  And, most importantly, what if the managing agent was a brother-in-law of the seller, and not being paid?  You’ll now need to hire a property management company, at an average of 10 to 15 percent of monthly rent roll, in order for you to remain “hands-off.”    Keep in mind, “hands-off” doesn’t mean liability-free.  One bad tenant chosen and installed by a poor property manager can do tremendous damage to your investment property.  And you’ll be totally liable for all the costs related to fixing up and renovating a damaged unit.  So your choice of property manager is a key decision…not to be taken lightly.  Your choice will be all-important to the overall financial health of your investment property.

One more thing…

Remember too, if you’re considering investing in property outside the turn-key property investinggeographic area you live in, don’t.  You can easily fall prey to scammers.  Never purchase an investment property sight-unseen.  You’d be simply asking for trouble.  And in the same vein, never rely on the accuracy of information given you by sellers of sight-unseen property – whether it’s a foreign country investment, or one on the other side of the country.  You certainly won’t want to have to travel to the property in the midst of an emergency.  And most importantly, it would be too easy for a scammer to make up data that looks great – like fake appraisals, for example.  It’s always best to stick to property in areas you know and live close to – this will ensure you retain an extra layer of security.

 

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Cautionary Landlord Advice

More landlord bad behavior

I’m always amazed when I come across yet another way in which some landlords try to take advantage of their tenants.  The list keeps growing, and this latest one has me more in awe of the horrendous lengths some landlords landlord advicewill go to increase their cash flows.  As reported in The New York Times, (“Effort to Remove Landlord Who Made Units Unlivable,” by Mireya Navarro, 4/24/14), this scheme involved landlords scheming the system to try to take advantage of local municipal credits for renovating their property.

Problem is, they went about destroying their existing rental units in order to qualify for the upgrade reimbursements.  All while they had tenants in place, living in these units.  In effect, they sent in “repair crews” to effectuate repairs.  But these crews were actually demolition crews, who were dismantling existing, working plumbing systems in the units.  Thus, it left tenants with no running water, and no ability to use their kitchen or baths.  It is truly too insane to believe.

The reported tale of woe

As reported in the story, you can start to see the unraveling of the scope of this insanity…“In a case that Gov. Andrew M. Cuomo is holding up as an example of “egregious harassment,” New York state and city officials are moving aggressively against a Brooklyn landlord accused of wrecking the kitchens andlandlord advice bathrooms of occupied apartments to drive out longtime tenants.

Officials with the New York City Department of Housing Preservation and Development announced on Wednesday that they had gone to the city’s Housing Court seeking to remove the landlord, Joel Israel, from managing a six-unit, rent-stabilized building in Bushwick, and to have the court appoint an independent administrator for the property.

The department had already sued the landlord over numerous violations at the building, at 98 Linden Street, but the most recent action is a more aggressive tactic to access city and federal money for repairs and to bring relief to the tenants almost a year after their basic services were destroyed.”

Landlords behaving badly

So why do some landlords feel they can mistreat tenants? Because they’re natural bullies, of course.  Let’s face it – some bad landlords tend to give all landlord advicelandlords a bad reputation by inference.  The story goes on to say:  “Tenants in at least four of the buildings have complained of actions taken by the landlord to create hazardous conditions and render their units unlivable under the guise of undertaking repairs, state officials said.

In some cases, the officials said, families with young children and elderly members were forced to move to a homeless shelter; in others, the landlord engaged in intimidation tactics, including locking out some tenants.”  It seems impossible that a landlord would knowingly wreak such misery on their tenants.  But, alas, some still do just that.

Trying to gentrify an area

The article then notes that “housing advocates and city officials who havelandlord advice rallied behind the tenants and pressed for more aggressive action over the last months argue that strong-arm tactics are typical in gentrifying areas of the city where unscrupulous landlords seek to evict longtime tenants to renovate the units and charge higher rents.”  Clearly, some landlords just don’t get it.  It would be nice if they could themselves be subjected to what they are dishing out.  Maybe then they’d clean up their act once and for all.

Not simply a matter of money

The article sums up the situation with a quote from Gov. Andrew Cuomo:  ““It’s not only unconscionable but it is flat-out illegal for any landlord to subject families to living without running water or a functioning bathroom or kitchen,” Governor Cuomo said in a statement.”  I think most reputable landlords would agree with this basic philosophy.  Tenants deserve your proper care.  It’s not simply a matter of dollars and cents.  All landlords must do the right thing.

 

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Investment Property Dangers: Your Tenants

Heed the warning signs

investment property dangersHere are some basic no-no’s to be aware of and avoid when acquiring investment property.  These are related to strictly tenant issues here for brevity’s sake.  When you understand how you can get burned, you tend to steer clear of these pitfalls more easily, and heed the warning signs that are associated with these particular set of investment property dangers.

The Tenant Slide

The slippery slope of leasing to tenants is a definite learning curve.  Hopefully, you can scope these common dangers out before they hurt you financially.   Tops among tenant problem areas is that, by and large, renters have a bundleinvestment property dangers of legal rights that protect them.  So, for example, you can’t simply throw a tenant out if they don’t want to leave, without first going through an eviction proceeding.  They didn’t pay you rent last month?  They won’t allow you n to inspect their unit?  You’re getting complaints from other tenants in the building about them?  Tough.  You still can’t legally throw them out until you go through the formal eviction.

You’ll still have to pay an attorney to take you through the eviction process – and win.  And this not only costs in terms of their fees, but the time spent could be several months – of lost rent.  Not to mention the clean-up and repairs after the tenants trash your place.  How to prevent this?  Always find good tenants.  And that’s not always so easy to do…

Vacancy issues

And speaking of lost rent, vacancies are another lurking property investment investment property dangersdanger.  Even in a tight rental market, when one renter leaves, you still have to show the unit and usually clean it up, or even simply paint it, before the next one can move in.  That’s a month of lost income right there.  Naturally, you build in a vacancy rate for all your units when figuring out your cash flow – but don’t think you’ll escape unscathed in softer rental markets, or areas with stiff competition for apartments.  Don’t be surprised if you’re losing several months’ rent when you lose a tenant.

The “bad” tenant

Of course, another key investment property danger is the Tenant from Hell.  And yes, there are a few of them out there. Most landlords can relate their investment property dangers“Tenant From Hell” story.  It ain’t pretty.  A seemingly “normal” renter can become a bad tenant almost overnight.  Your unit will suffer the most.  Bad tenants have a nasty reputation for tending to destroy units.  It’s usually not willful…think of it as more “playful” destruction of your property.  It’s just in their genes.  And it will cost big bucks to repair said unit after you successfully remove the tenant through the aforementioned eviction process.

Lawsuits and you

investment property dangersAnd also don’t forget this fun investment property danger:  when your tenant sues you.  They could slip and fall on a patch of ice in your parking area, or fall on a cracked walkway, or trip on a poorly lit stairwell in the building.  Whatever the reason, if the tenant is determined to see some cash from your misery – they will be relentless.  This is mainly due to our legal system, as well as how our insurance companies work.  Naturally, as any smart landlord, you have adequate liability insurance on your building.  (Remember my article on you and your insurance agent, right?  The one where the agent tells you his recommendation for how much liability insurance would make sense for your size building?)

Well, even with the right amount of liability insurance, a suing tenant will investment property dangerstraditionally have hired a personal injury attorney who only gets paid if there is an award of cash damages.  They traditionally receive a third of the award.  Then they sue you, your insurance company’s attorney reviews the case, and in long order  (yes, it takes months if not years in some cases), the insurance company authorizes a settlement amount to pay out to your tenants and their attorney in order to avoid a lengthy and potentially devastating court case and heftier damages if they lose in court.  This is our judicial system.  Welcome to it.  Yet another potential investment property danger just waiting to snag you.

 

photos courtesy of investors.housez.ca,  kristinandcory.com, mcclurepropertymgmt.com, tenantchecker.com, clickpropertymanagement.co.nz, tenantscreeningblog.com,  thegreatestrealestateblog.com

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Investment Property Code Inspection Advice

Tips for all residential landlords 

In a typical town, multifamily dwellings are normally inspected by the local investment property advicebuilding department in regular intervals.  In this way, local municipalities can better protect not only tenants, but the overall housing stock in the community.  This ensures that all multifamily units are up to code, risk of fire hazards are reduced, and saves the town the expense of over-usage of their fire department.  In addition, logically, safe houses are going to remain properly-assessed houses on the village rent rolls.  And this saves the municipality the added expense of writing down tax revenue losses when a fire guts a property (or set of properties).  

A local example

As an example, a town near me, in Saranac Lake, New York, recently announced they would be starting their regular multi-family dwellings inspections – done in three year intervals in their municipality.   (Interestingly,  it takes the town almost two years to achieve the desired investment property advicecode enforcement routine.)  According to an article in the Plattsburgh Press Republican this week (“Rental Housing Inspections Underway in Saranac Lake,” by Kim Smith Dedam), “all multi-family apartment buildings in this village are being inspected this year…The focus is on rental houses with three or more units and does not include duplex rental buildings or single-family houses.”

The article goes on to explain what exactly is being inspected:  “Code requirements being checked include making sure the apartments and buildings have functioning smoke and carbon-monoxide detectors, cleared entries and exits, handrails in stairways and functioning windows and doors…A comprehensive list of what items will be inspected is sent along with each landlord inspection notice so the owners are aware of what is required.”

Quite the anomaly

investment property adviceThe municipality of Saranac Lake is an anomaly in percentage of private homes versus rental housing compared with most small towns across the country.  The article explains that “rental housing is about 52 percent of all units in the village, according to recent inventory data from the Community Development Office.  As such, in this particular municipality, “according to rental regulations, “each multi-family dwelling (three or more units) must be inspected at least once every three years.”

Tenants have responsibilities too

But don’t think that it’s just the landlord that maintains all theinvestment property advice responsibility.  The article goes on to mention that tenants have their own set of responsibilities.  To wit:  “And, village regulations maintain, “although it is primarily the property owner’s responsibility to (ensure their) building is compliant with applicable codes, tenants also have the responsibility to maintain rented units in a sanitary condition and to (ensure) that all safety equipment, such as fire extinguishers and smoke and carbon-monoxide detectors, are functional.”

Be prepared

investment property adviceSo any landlord should be mindful of checking their rental units on a regular basis.  Not only for your own protection, but more importantly, to ensure safety for your tenants, as well as neighbors to your property.  Be prepared for local building department inspections to occur at regular intervals.  You’ll want to ensure all basic elements of safety well prior to any public building department inspection.  If you don’t already use a property manager, whose job includes making sure your properties are kept up to code, it should be part of your regular inspections of your own building on a regular basis.

 

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Quick Property Investment Tips

 Advice for the beginner investor 

Novice property investors should be cognizant of these quick and simple property investment tips.  They will keep you pointed in the right direction.  Always refer back to them when you hit a snag in the process… (It also makes sense to try to memorize them, and recall them as you begin searching for new investments to acquire.)  In this way, you too, can become a savvy, experienced property investor. 

Purchase for retention 

property investment tipsMake sure you always purchase rental properties for retention purposes.  The longer you hold, the better equipped you’ll be to take advantage of long term appreciation in the property.  You’ll also concurrently be writing down any mortgage note you’re paying off, thus increasing your equity valuation in the property.  If you make a plan for purchasing a property at set intervals (for example, every couple of years – or yearly, even better), then you’ll be able to slowly accumulate a portfolio of properties (your “stable”) that will continue to throw off ever-increasing amounts of cash flow, as well as capital appreciation. 

The power of leverage

Make sure you take advantage of leverage, when possible.  While making all cash offers on properties may be advantageous to netting the best price on any one property, it is not advantageous to utilizing other people’s money to grow your investments through the concept of leverage.  If you can obtain a mortgage, by all means do so.  The greater the loan to value ratio the lender will allow, the better.  Just make sure you don’t overextend yourself, and that you’ve double-checked your expense numbers properly.  You want to ensure you have a comfortable positive cash flow on any property you’re thinking of acquiring.   

Beware the bargain basement 

While the concept of “stealing” a house in an auction or other competitive bid situation sounds really appealing, always be wary of the cost of a “steal.”  Finding a great bargain in a poor location is like finding fool’s gold:  you’ll end up paying for it down the road.  Longproperty investment tips term difficulties with obtaining market rent, high vacancy rates, and terrible capital appreciation tend to make that “steal” a steal for the seller!  So be very, very careful when a deal feels too god to be true.  It probably is. 

The location axiom 

Naturally, more desirable neighborhoods will yield greater upside potential in terms of capital appreciation.  This does not mean buying a property in a rundown area is bad.  Just be aware that a cheaper price for a lesser neighborhood will require you to understand the vagaries of dealing with the neighborhood…which will probably be run down in five or ten years, or whenever you will be selling the property.  Keep your sights set realistically.  If a bad neighborhood is all you can afford, make sure you don’t expect much from the property n terms of its capital appreciation over time.  Or, at the very least, buy in a changing neighborhood – one that’s experiencing the start of some gentrification.  (Hint:  let the changing face of local stores be your guide here.) 

Cash flow is great, but… 

Make sure you always keep an eye on the capital appreciation rate in any given area you’re searching in.  It’s the holding and growth investment property tipsof the marketplace of houses surrounding your building that will add value to your property in the long run.  Be very mindful of this fact.  Your year-to-year cash flow is obviously important to paying the bills and allowing yourself a profit on a regular basis.  But it’s when you are ready to sell the building that most of your profit should be made… 

Create an individualized investment strategy, and stick to it

Critical to this concept is that you’ll need discipline.  In addition, you’ll need a plan.  And most importantly, you can’t have discipline and a plan without also being scrupulously devoted to research and numbers-crunching for any potential property you are looking at.  Simple math errors, not doing total due diligence on a property, accepting seller information only – these are like death to a property investor.  You cannot tolerate mathematical mistakes.  If you know this is not your strong point, then enlist the aid of a partner – or at the very least, seek the outside help of a trusted, math-oriented friend.  Either way, this is the simplest way to mess up.  So don’t.

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Tenants Breaking Bad-ly

Got meth? 

The popularity of the TV show “Breaking Bad” (the grammatical incorrectness of this rental investment propertyseries title annoys me to no end) highlights a potential problem that all landlords of rental investment property could have: the criminal bad tenant.  I’ve previously written here about what happens when overzealous prosecutors go after commercial landlords for criminal activities of their tenants, and how asinine this approach to crime prevention truly can be. After all, how can you possibly be held accountable as a landlord when you don’t know the actions of your tenants?  Am I my tenants’ keeper? 

Landlord obligations 

Having said that, as a landlord, you still have an obligation to know a little about what’s going on around your tenant’s building or unit. Continuing to look the other way just sets yourself up for danger.  Using the Breaking Bad analogy, and given therental investment property tenor of our times and how many methamphetamine dealers and producers of these and other illicit and illegal drugs are being targeted and found by law enforcement these days, you have to also be wary of what tenants you put into your unit just to protect yourself.  No standard form lease, and nothing in general tenant law will allow you as a landlord to simply enter the tenant premises without their permission. Usually only in emergencies can you enter their domicile. Or, certainly, you can enter if they ask for repairs. Other than that, you cannot search their premises even though you own the rental investment property. 

In the news… 

If you have a reasonable suspicion that something bad is happening, then you can rental investment propertyturn that into an “emergency.” Either that or calling the local police will get you entrance, if you truly suspect crimes are taking place. Let’s face it, methamphetamine production is getting a lot of attention in the news headlines these days. A day doesn’t go by without reading about another local meth manufacturing drug bust. In addition, it’s hard not to also hear about your local drugstore being robbed of meth-producing ingredients.  Besides popular culture blaring about it (like Breaking Bad), or the ease of obtaining the ingredients, coupled with the ease of acquiring the production know-how on-line, it’s no wonder there has been a spike in meth-related crime. 

The ultimate cost to you 

Unfortunately for landlords, the residual effects of this occurring in your own investment property, and discovering that your tenants are producers of illegal substances there, can have disastrous effects on your bottom line. It’s not simplyrental investment property turning them over to the police that can be your problem. It’s your cleanup afterwards. You’ll be left stuck with this cleanup of the unit or units where the production occurred, especially if it was methamphetamine. And since these are considered hazardous waste materials, the cleanup will be extensive, and incredibly expensive.  It would certainly not be something you would be planning for in your “contingencies” line on your rental investment property income statement.  And on top of this, consider what other tenants in your building will want to do when they find out their upstairs neighbor’s unit was a meth-production lab?  Will they stick around for the clean-up?  Take a guess…Not very likely, right?  And what will that do to your cash flow on the property?

An ounce of prevention… 

So how do you best protect yourself? The first line defense, of course, is to not put in a bad tenant. Like I’ve written before about tenant selection and the process involved rental investment propertyin choosing the best tenants, you’ll certainly want to run a credit check on them. You’ll also want to do a reference check too. And these days it’s getting very commonplace to do criminal background checks as well. Then there’s the use of common sense. Just use your own simple common sense to know if your prospective tenants look okay. Most often than not methamphetamine producers are also methamphetamine users. That prospective tenant that you meet that is wan and gaunt-looking may not necessarily be on a diet. Use your intuition and common sense to help you root out potentially dangerous tenants.  Like, oh…do they simply appear physically healthy?  I’m not saying you should become an expert on drug addiction…but it would be helpful. 

The vetting process 

Using simple common sense when interviewing a prospective tenant is the best wayrental investment property to avoid landing a bad, or criminal, tenant.  And you should be able to avoid the worst-case scenarios. You really don’t want to get stuck with a bad tenant. But you really, really don’t want to get stuck with a criminal tenant. One that could cost you a tremendous amount of money to repair the damage that they may cause. Be sure to choose your tenants properly by vetting them before signing them up.  In this way you can best protect your rental investment property.

 

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The Story of Jackie – Ohhhhhh!!!

A cautionary tale when investing in rental property…

I was attending a get-together dinner recently for members of my curling club, as curling season begins in earnest this month.  Jackie, one of our esteemed  board members (and the most ebullient curler in our group) was recounting her rather unfortunate recent tale of woe.  It  involved a small, but rather intense kitchen grease fire that she accidentally started in her apartment.  Of all the possible worst-outcome scenarios, she has to consider herself lucky – she, nor anyone else in her building, were harmed.

Her apartment was not so lucky.

To her credit, she had the foresight to have a kitchen fire extinguisher on hand in case of emergency, and coupled with her staying calm under pressure, she was quickly able to extinguish the flames caused by the fire.  (Note to  landlords:  provide fire extinguishers for all your tenants….you know – an ounce of prevention and all…)  Unfortunately, smoke damage to her unit was extensive, and while the local fire department did not have to put any fire out, the local building inspector pronounced her unit uninhabitable, forcing her to seek temporary lodging.

Several key issues arise from this accident…

Since she as the tenant was responsible for damage to her unit, what exactly is she responsible for?  Does the landlord have to make the necessary repairs (utilizing a specialized fire-damage contractor, for example).   What time frame must the repairs be done?  Doe the landlord have to allow her back into his building after the repairs are made?

To make matters even more complicated, Jackie mentioned this little addendum to her tale of woe:  the landlord was set to close on the sale of the building in a few days.  So, what happens to that sale?  Can it go forward as planned?  What liability, if any, does the current owner have to the buyer, since they are under contract?

 

A bit of a pickle, right?

Let’s start with the basics – that is, Jackie’s rights and responsibilities as a tenant.  She apparently did not have a lease, and was on a month to month tenancy arrangement with the landlord.  Very common…but alas, very unfortunate for her and her landlord.    So when investing in rental property, know that without a lease, the landlord has no requirement to reinstate a tenant in his building after repairs are completed to the unit.  In this case, Jackie most probably will have to look for another living arrangement.

Liability issues

Next – what is the extent of Jackie’s liability in this case?  She started the fire, so landlord negligence is not applicable here.  Most leases have traditional damage clauses in them. For example, a standard Blumberg lease calls for the tenant to make all repairs at their own expense when a fire is started due to their negligence or act.

But if the tenant has no renter’s insurance, it is doubtful they will be able to cover all related repair expenses.  So in reality, the limit of financial liability for any tenant  is the full amount of their security deposit.  If there is no lease, then the security deposit is all the landlord can recover.   (Though legal action to recover further damages can be sought in the court system, it’s usually quite difficult and pointless for landlords to attempt to recover from most cash-strapped tenants.)

How to best protect yourself

Obviously, you as a landlord need to protect yourself.  So the three basic rules to be learned here when investing in rental property are:  You must always have a lease.  In that lease you must always require the tenant to carry renter’s insurance.  And that lease must also require that you be named as a co-insured on the tenant’s policy.

Now,  if the tenant has a tenant’s insurance policy, then the tenant’s insurance carrier would be in the first position to pick up the tab for all repairs due to the tenant’s negligence.  However, if the tenant has no renter’s insurance, then the landlord’s building insurance policy would come to the forefront, and would pay for the requisite repairs (less the deductible of course).    And the landlord could use the tenant’s security deposit to defray the cost of his deductible, for example.

Either way, the tenant is still responsible for their rent up till the time the unit was damaged.   If the unit becomes uninhabitable, the tenant cannot be charged rent.  Of course, the tenant usually wants to move back in after repairs are completed.  So it behooves the tenant to aid the landlord in finding a contractor quickly to make those repairs as soon as possible.  In this case, without a lease, it becomes the landlord’s option whether to allow Jackie back in as his tenant again.

If other tenants in the building were affected by the fire as well, the landlord can’t demand the tenant make restitution for the other tenants’ rent roll, or repairs to their units. In that case, the landlord’s insurance policy would cover both the lost rent revenue from other tenants, as well as  increased expenses due to the additional repairs from the fire damage.  However, any time a claim is made on a landlord’s insurance policy, obtaining subsequent coverage for future buildings may be much harder to get.  In addition, premiums may rise on existing policies as a consequence of a claim.  That’s why it’s also so important to require your tenants to carry their own insurance, with you named as the co-insured on that policy.

The hard part

When there is an existing contract of sale in effect between the landlord and a buyer for the rental property and  then disaster strikes prior to closing – whether through an act of nature, or an act of God… or an act of  Jackie…the seller is required to put the building back to the condition it was in when the contract was signed.   This does not mean they are required to make everything new.  De facto, some repairs require new materials  – for example, new sheetrock being installed due to a small amount of fire damage.  Or, in the case of a total destruction of  a building due to flood, fire, tornado, etc. the buyer is not entitled to a new building.

As such, most real estate contracts cover this rare possibility by allowing the buyer to either accept the seller’s insurance company’s amount for replacement coverage, thereby taking the building damaged, as is, along with the settlement cash,  or they can walk away from the deal with their deposit returned to them.

Renegotiating

In the case of a smaller amount of damage, like oh, say… a small kitchen grease fire, then it is common for some amount of renegotiation to occur.  The buyer will usually be presented with several scenarios:  if they want a quicker closing, they can wait for the seller’s insurance company to present an amount they are willing to offer the seller for the repairs, as mentioned above.  The buyer could then accept that amount, take the building as is, then close and make the repairs themselves.

Another alternative is for the seller to make the repairs to the building, in concert with their insurance company.  While this is common, it will also take much longer to close, as everyone must wait for not only the insurance company to send an adjuster out, but also a claim amount must be approved with the seller, and then a contractor has to be hired and he must then make all the repairs prior to the closing being set.  Yet another option is for the seller and buyer to renegotiate the price of the building immediately, not waiting for the insurance adjuster.

Delays abound

In all cases, it ain’t pretty.  And if the buyer had his financing set to go for the original closing date, he might lose it if the closing were to be delayed by more than a month or two.  And usually a sales contract would spell out a buyer’s rights in event the seller has to delay a closing.  (The norm would be that the buyer unilaterally would then have the right to exit the deal if he chose not to wait.)

The bottom line

So while poor Jackie has to wait for all these issues to sort themselves out,  including finding temporary housing, she also wonders if she can be locally “blacklisted” by area landlords for her accident.  And the answer is yes, she can.  When subsequent landlords ask for her prior landlords contact information to check her references as a tenant, they may disqualify her as a prospective tenant for purely economic reasons:  she has unfortunately made herself a higher-risk tenant due to this one accident.

But there will always be landlords who don’t do their homework, and don’t check references when selecting tenants.   In a more positive light, some landlords may be more understanding of a prior accident, and not be so rigid, if they can be financially protected.  As mentioned above, a solid lease which calls for a tenant to have renter’s insurance, and which names the landlord as co-insured, should be adequate protection for anyone investing in rental property.

photos courtesy of  biancoinsurancepittsburgh.com, glogster.com, recipetips.com, floridarealestatelawyerblog.com, intowner.com, startribune.com, home.howstuffworks.com, insurancequotes.com, ehow.com

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Filed Under: Rental Investments Tagged With: building departments, building inspectors, co-insured, Contract, contractors, fire clause, fire clauses in leases, fire damage, fire damage to investment property, fire damage to rental property, fire damage to rentals, housing, investing in rental property, investment property, investment property advice, investment property information, investment property precautions, investments, Landlord, landlord advice, landlord caution, landlord insurance, landlord insurance policy, landlord precautions, landlording, landlords as co-insured, lease agreements, lease clauses, Leasehold estate, leases, month to month, month to month leases, month to month rental agreements, property insurance, property investing, property investment, Real estate, real estate investing, real estate investments, rental property, rental property advice, rental property information, rental property investment, rental property precautions, rental real estate, rental security deposits, rentals, renter's insurance, Renting, security deposits, tenant insurance, tenant insurance policy, tenant's insurance

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