Top 3 lease writing mistakes by DIY landlords.

 

 

Kindly note that this post is an excerpt from the live webinar hosted by Foundation homes property management. (video above)

So the topic for today is the top least writing mistakes that we see people make over the past few years we’ve been in business, and these are things to pay attention to when you’re a DIY landlord or you’re writing your own leases and you’re getting your own tenants, you want to make sure that you don’t make these mistakes. And we’re going to tell you why and how to avoid them.

The first one is, Working with an obsolete or an antiquated lease.

The second one is Failing to strategically identify the lessees on your content

The third one is allowing everything at the property to be warranted. And Mike’s going to talk a lot about this. He’s got a ton of experience around it. So you definitely want to pay attention to number 3. So we’re getting a little more nitty gritty, assuming you’ve got the basic founding blocks building blocks of your lease, writing process down. These are going to be the top mistakes that we see people knowing that they have no idea they’re making, but they have a real consequence in real life when you write them this way. So here’s the consequences; unknown, unnecessary risk to you as the landlord. That seems like that was a consequence from last week. And so I think we’re talking everywhere. There’s a lot of unnecessary risks. This is going to be the theme throughout a lot of this education, not necessarily risk unmanageable. You’re going to see the same consequences show up over and over again. And the last one is financial exposure and we all would know what that means. That means legal. That means coming out of pocket for things to fix things, to remedy situations that you otherwise might not have been prepared for. All right. So moving on. So the solution is to know your plan, Chris created a strategic approach to lease writing that insurance compliance and mitigates unknown risk. How do you do that? It’s a way of just saying basically know what you’re writing and that’s what we’re going to talk about is, is sort of the strategy behind when you’re drafting your lease, take a slowing down and taking a moment to think through what these terms that you’re writing, how this might play out, right. In a worst case scenario.

So number one, using obsolete or antiquated contract. So we found in our 15 years of business, there are lots of independent landlords who are working from a lease that they maybe googled, maybe got from a friend, maybe they pulled it from another state or maybe it was from a legitimate source, but it’s from like five years ago or even two years ago. In all of these cases, you would be using an obsolete or antiquated. Yeah, I’ve got a story about that. So I pulled a lease earlier this year from a prospective client who had been working with a property management company for a long time. Her father, her parent family actually owned these properties and they had, written these leases and the leases weren’t updated going back to like the late nineties. And there were a lot, he says, had been there for over 20 years at these properties and they were still on the same lease there. At least our leases nowadays are almost what you know. Yeah, well that’s what does the hazardous closure, but the basic nuts and bolts of leases are usually about 10 to 14 pages long with all the new addenda that’s been supplied to Carly’s itself is eight or nine pages long. So these leases in comparison were one page leases and you can, you can imagine how much detail was left out of them, as a result. So what you want to do is you want to know the source of the contract. Is this something you pulled together off the internet or did you use a reliable source by California apartment association (CAR) or another legitimate? So if an attorney, a local real estate attorney who does business as a real estate attorney representing landlords and tenants is going to know how to write a good lease. And if that’s someone that you’re going to lean on trying to at least versus these other California apartment association or California association of realtors, that’s a good source And that’s probably not a good use of your money.

The money is going to cost you to pay an attorney that I don’t know, I would say that doesn’t necessarily make sense. And I wouldn’t say we see most people doing that. Most people are googling a lease and grabbing them from some generic source online or what we commonly see as clients that are like, my attorney reviewed it, or I’m an attorney, but you’re not specifically a real estate landlord tenant attorney in California. And there’s a big difference between those. So if you have an attorney write the lease, which is fine, um, again, as you might know, a guy or have a friend or a family relative, or someone who, who wants to help you out, that’s great. If they’re a landlord tenant attorney, even better, if they’re not, you definitely want to second guess that lease and you probably want to have someone who knows knows what they’re talking about with you. So we definitely recommend if you’re not a member join the California partner association because they do have a lease there that’s accurate; it’s accurate, but theirs is written for apartments, which is, I mean, we use the CAR, California association of realtors. If you work with a realtor, they’ll be using that. That said, a lot of realtors don’t handle leases. I think we’re possibly the only management company in Marin who are also realtors. So a lot of management companies I’m right, are using true farms professional publishing, which is not quite as comprehensive.

There’s a couple other big ones, but basically don’t overcomplicate this for yourself. Just google; I mean find a source of one of the legitimate sources that sells leases and buy that. Don’t try to piecemeal it together yourself. And if you write your own attorney, your own addenda, have a real estate attorney review your identity that you’ve written with all your custom terms. Cos’ we also find out a lot of landlords are throwing in terms that are not legal. I would, if I had I’m using the lease that my, my agent wrote for me last year. It’s probably out of date. The car lease is updated annually, if not more than that. And if something has been updated like three times this year, well yeah, when you have new legislation passing, then everything gets changed right away. So you must always be using the most up-to-date  lease. Like a real life example is recently in Miranda. We’ve had ordinances passed where we have the flood. That one was maybe, we’ve got the garage door opener term. I mean the, the battery and the thing, there’s all kinds of new little bits of legislation that are passed. They’re not as big as all this COBIT stuff, but if you’re out of compliance and heaven forbid there’s an accident and you weren’t in compliance and you didn’t give your tenant the right notification about that.

I mean guess, but the other thing about these addendums that are in the contract. For example, the bedbug addendum, flood hazard addendum, is it also places some of that onus back on the tenant. For example, if your property doesn’t have bedbugs, when the tenants move in and the tenants bring bed bugs into your property, the bed bug addendum tells the tenants, Hey, you made this, you brought the bedbugs into this house. It is your responsibility to remedy the situation so that that’s not an insignificant cost and it has a loss of repercussions. So you want to make sure that someone is going to be taking care of that on your behalf. Same thing with the flood hazards; if you, if you tell the tenant, hey, just so you know, my property is located in the flood zone. You need to be aware of that when you get your renter’s insurance or anything else, you click that box. It puts the onus on the tenant, knowing that they’re taking that risk of living in that area at that time.

So you want to just make sure that they know that. And another good example is the mold addendum. So the mold addendum contrary to what a lot of tenants think when they first read it as, Oh, there’s mold in this property. No, no, no. That’s not what it says. It says you are acknowledging that you play a part in the role of preventing mold from growing, by doing things like venting your shower and windows, whatever; you’re opening your windows and reporting when you see growth, because if the tenant doesn’t do that stuff and then mold grows, well, guess what? You can put some of that blame on the tenant. And they’re acknowledging that if they haven’t done these things okay. More to the point of reporting leaks that you can see. So if there’s a leak at the property and we use this example a number of times, but there was a property that we represented in Santa Fe. There was a leak under the sink. The tenant knew about it, it was very visible. They didn’t report it, it caused a huge water damage, black mold, all that stuff. So you want to make sure you have these in there, they’re there really for your protection at the end of the day and disclose, disclose, disclose. Right, make sure you’re using a 2020 lease.

Number two is strategically identify the lessees on a contract. Well, I just can’t wait to tell you our story about this one, but what this means is when you’re writing your lease, there are ways you can write it where you name the tenants that will protect you as a landlord and protect your ability to enforce the lease and collect on the lease and the events something needs to be enforced or collected on versus there are ways to do it, but set yourself up, not for success where you have no recourse at all. So I’m gonna tell you the story. This is from a long time client of ours, this was a property we did not represent as an area. It was in LA, we had nothing to do with this and was represented by a realtor. She did use the car contract, but unfortunately she didn’t know what she was doing when it came to writing a lease. So they wrote this expensive, I don’t know, 10, $12,000 a month lease. They rented it to a person of a celebrity venture who used the corporation and low and behold when they moved out, loads of damage to the tune of $200,000 and big lawyers and blah and all this stuff. And when it came down to and why the owner had to settle for about 50 cents on the dollar, that would be, he got back about, I think 80 or 90,000 of the $200,000 in damage was because the lease was written in essentially a shell corporations name. It was whatever, blah, blah records, LLC. Well guess what? This guy owns like nine different companies. So all he had to do was take that one LLC and make it defunct, make it no money in it.

So the landlord, even if you were to prevail in a court which would have been real court above small claims court, how would he have ever been able to collect? Because it just would have been this LLC that didn’t have any money. Yeah. he was protected, and the other point about this is that you never know when you’re working with a corporation, but if it’s a larger corporation, they have attorneys that they pay tons and tons of money to protect your clients. And when they get involved, they’re going to do their best to spend as little as much money as they make. You spend as much money as possible to do that for them to defend themselves. And it be, as our attorney reported, they were throwing tons and tons of paperwork items that he had to respond to, which costs our client a lot of money. So what we’re saying here basically is, and this kind of happens a lot in Miranda in San Francisco in the Bay area is that we want to put the lease in the company’s name. Fantastic. Guess what? We want a living, breathing person with a social security number. Who’s qualified attached to this lease. And that’s our rule for when we’re renting to corporations. But basically what you need to know is anyone who’s over 18 years or older at your property, you should have the policy where you accept an applicant. You require an application and any eviction check from anyone who is going to be occupying that property and however it is that you need to structure your lease, you make sure that there is a qualified social security number attached to this lease. So in a worst case scenario that you have someone to go after who’s got some skin in the game. And if our client had done this, he would have been able to personally go after the celebrity’s assets. And he would have been much better protected than just having this corporation that had all the shield and which was obviously intentionally written that way to protect them.

So, you know the other question that comes up like, well, what if my son or daughter is 18 years old? They’re not working. How come they have to fill out an application and all that. And the answer to that question again, an au-pair or nanny or someone else who’s going to be living at the property. And the answer is here in California, they’re getting tenants rights and especially right now in COVID times when we’ve got all these eviction bans, any adult who’s living in that property is going to be able to have a claim to that property. So you need to make sure, even if you’re not considering that person’s income, which is how we handle it, we don’t care what the 18 year old makes as long as the parents are qualified financially for the property, but you do want to run an eviction check. Cause what if that nanny has been evicted three times? Well, that might be someone who’s a little wise to the system and could cause you some problems we’ve seen that happen before and have seen that happen with a property we managed. But you can list people who are maybe younger people as occupants. They don’t necessarily need to be the legal lesees of the property, but the people who are on the lease, either the adults who are paying the rent definitely need to be there. If there’s going to be a guarantor, that person should be labelled as a guarantor. You want to make sure you have them go through the application process.

You also want to verify their assets and all that to make sure that if something happens, you have someone to fall back on and it’s best case scenario is that person is local or in state, not outside. So our company rules are, in the case we take a guarantor, they must be in state. But our lease only clients can make individual decisions. So if they’re going to take a guarantor and we strongly advise that the guarantor be in California, obviously they have to qualify with credit. And the income is they have to be able to support their personal, whatever their personal housing costs are, whether it’s rent or a mortgage plus the cost of the property that they are guaranteeing. So we need to see usually that six times, whatever the two housing costs are times three. So, Mike, do you want to add something? Yeah. I just, I just want to say as far as the proximity of a guarantor, so everything Darcy said, that’s how we’ve always operated, but, preferably locally in Northern California, if your property is in Marine and you’re accepting a guarantor, it’s better that guarantor is somewhere in Northern California, around the Bay area, maybe as far East, as Sacramento, but the further that person is, proximity wise from your property, the additional people will have to be hired out of the area in order to try to pursue them. So that’s a good point.

I’m just gonna touch on this real quick. Um, there are some local colleges in Marine County, and we’ve run into this a few times where students will apply and they’ll want their parents to co-sign or be a guarantor on the lease. We don’t generally accept that, but if you are an independent landlord, you want to accept that, make sure you just get one guarantor who is going to basically cover anything that could happen for that entire property. It really will set the tone for how that relationship is going to go. And also puts a lot of skin in the game for that person. If they have any trepidation, they don’t want to do that, likely that lease won’t go through. And you’ve probably just dodged a bullet. Well what we get a lot when we get student groups like that is they’re saying each student or each parent only wants to be responsible for their one part. And we’re like, that’s not how it works jointly and severally because you don’t want to get caught in a bunch of infighting. Then like Mike said, the notice serving to all the different parties, like it’s all about putting it together. And this is talked about in business a lot. You put, build something up the way you want to take it apart. And when we’re, when we are crafting our leases, you’re thinking about it the same way.

We’re not trying to be negative Nancies but you need to always think about what’s a worst case scenario. How am I protected in a state like California where there’s so many rights for the tenant? What are the things to do as a landlord to set yourself up for success in the event that something bad happens? Okay. There’s none, when things go downhill, all bets are off; it’s war at that point. And so there are people are going to take the gloves off and they’re gonna do whatever they can to protect themselves. Yeah. Okay. So mistake number three. See here. See what, allowing everything at the property to be warranted. Mike, what does that mean?

That means that everything at your property has an implied warranty, right? So whether it’s an appliance, it’s a window, it’s a door, it’s a lock. Everything is the landlord’s responsibility to maintain as part of the implied warranty of habitability of the property. Are there some common appliances and stuff that should absolutely be part of that you to your knowledge should be included or excluded, included?

Oh, yeah, included, all the kitchen appliances are always included, right? State of California, renting a home with a working kitchen. You’re including the appliances. They all come with an implied warranty, water heater, furnace, implied warranty. I will say in Southern California, there is an exception in Southern California. It is, traditionally refrigerators do not come. You rent an apartment or a house is often just vacant, which is crazy. You bring your own refrigerators. It’s kind of weird, but that’s true of other states as well. It’s pretty common in other states as well, but we’re talking Marin here. We have a state wide audience. So I want to make sure we’re addressing some of that. But like, if you have a dishwasher, you as a landlord do need to provide a working functioning range for your tenants to cook food on and hot water by law. So that’s like the best, like the basic thing that you need to provide and a furnace, and water heater in a range you have to provide that. You can make an argument that dishwashers, washing machines, refrigerators shouldn’t have that applied warranty. But if you want your property to rent and rent REL and on an ongoing basis, you’re going to include those things. And I’m also saying washers and dryers.

You want to make sure your property has a washer and dryer that you warranty because tenants who are renting your property want to do the laundry. They don’t want to go to the laundry mart. We operate in a higher end sphere. It is expected that washer and dryer come with it. When we have clients who do not wish to include the washer dryer, it will kill deals and it will reduce the rentability and the rent that you can get. Yes, it’s easier for the landlord, but in the long run, you’re going to suffer more vacancies and a lower rent by not providing amenities that are commonly expected. It just going to go to veer. Just talk about that real quick. When you’re asking someone to install their own washer and dryer and entire property, you’re opening yourself up and that property to potential damage because you don’t know who’s going to bring that stuff in, and how many walls are going to bang in. You also don’t know how it’s going to be set up. Someone sets up a washing machine and screws up the drainage or screws up the hoses, or the hoses get holes in them. Now you’ve got a water issue and the leaks, and now I’ve got a story. It’s going to be great

So early on in my career, before we were managing; when I was just a leasing agent, I rented a beautiful house in Mill Valley, we rented a beautiful house in Mill Valley to a pair of tenants who became great friends, we’re friends to this day, but this was like a $7,000 a month house. And the landlord didn’t want to include washer, dryer. Okay. The deal came together anyway. So the tenants installed their own washer dryer. It was upstairs again, beautiful house, beautiful hardwood floors. And guess what? They did not use a professional installer. They use like just kind of a basic handyman. I think the tube; something was not hooked up properly, water everywhere while they were gone. Water everywhere all over the brand new hundred floors, and this was upstairs. So the water soaks through the downstairs, the tenants were not home. It was a massive issue. And then it was a massive issue between the tenants liability insurance, the homeowners insurance, all kinds of subrogation between the two. But what it came down to was when you’re a landlord and you’re taking care of your property, or if you’re working with a management company, we’re making sure you’re working with licensed insured vendors who know how to do this. When you leave it up to a tenant, they’re not, they haven’t been trained. This isn’t their business. It isn’t their property. They’re just solving the problem. And they don’t have the experience to know, Oh, Hey, why would I not use a handyman to maybe install this it’s cheaper. It makes more sense. So there’s real life consequences to things like that.  Mike I want your point of view. Why don’t you talk about things that we generally don’t include in our leases, and to be more specific, specifically exclude these from what we’ve learned over the years.

So countertop, microwaves, hot tubs, televisions. It’s the owners leaving a TV behind with the property , jacuzzi bathtubs, auxiliary refrigerators are exhilarated appliances. If there’s a second refrigerator in the garage, like those are common items that we will exclude from obligated warranty or implied warranty by the landlord. It’s important to note these things should all be disclosed on the front end. This is a very common mistake that a landlord does not want to warranty these things. And the lease may be written to reflect that. But if it is not disclosed when the property is being marketed or when the property is being shown, it will come as a surprise to your tenant when they’re presented the lease. So it’s important that anything that you are marketing with the property, any amenity of the property, you have to be very clear if those amenities are being warrantied or not. Because if you do not exclude them from warranty, it is implied that anything being marketed as an amenity of the property has that implied warranty. So this can come with, like, if you have a pool and your pool is heated and solar or a gas, and that pool heaters failed have pool heater fails. And the pool cannot be used like during the winter time times of the year. The tenant could be like, well, I ran this party because it had a pool and it was a heated pool, ‘cos I used the pool all the time. This happened to the property that we managed, the tenant actually had a disabled occupant who needed that for the pool for physical therapy year round and the pool heater broke. And they couldn’t use the pool which really bummed the tenant out, but also costs the owner a ton of money. Yeah. It’s not just that it bums the tenant out, right? First of all, you’re creating friction. Second as Michael’s said, if it’s not specifically listed as an amenity where it’s not warranted, there’s the implied warranty.

So the homeowner now has to fix it. Not a big deal if it’s a hundred, $300, fix; big deal. If it’s a $6,000 or a $10,000, we can’t even tell you how many times we’ve seen this happen. It was again early on in our career that we changed the agenda and our agenda is actually different than what a lot of standard addendums are because we’ve been through this so many times, tenants will withhold rent. They will break leases and  generally it’s arguable that they’re within their rights to do so if you haven’t protected the landlord’s position correctly. So like hot tubs is a really common one, right? They can break $6,000 mistake. I had this happen to a client in Mill Valley. Tenants were furious. She ended up having to knock off, I think like a thousand dollars a month off the rent. And after paying all the attorney’s letter writing campaigns back and forth, like it was a Marin like ice makers. That’s another, if  you have a refrigerator that has an ice maker, does it work? Yes. Great. We’re not going to warranty right now. It works. But think those things can break the tube. Especially older refrigerators, they have metal. Two is I can get holes in it. It could be really costly to repair or the it could be just like the water source to the refrigerator is a problem. It causes leaks and it causes water damage to the property. So they have to shut that part off and to preserve the property, the tenants expecting to have ice from an ice maker, and you don’t clarify that this is not included. They’re going to be upset and they’re going to want, you know, a concession on some level. Jacuzzi bathtubs, another one. This is a big thing that everybody got Jacuzzi bathtub in the eighties, nineties, and early two thousands as part of the remodel. They’re not great appliances. They’re prone to falling apart. They’re prone to like shooting out gunk, the tubes that they haven’t been using a long time.

And if you don’t have, in some, a lot of times, these two choosy bathtubs were set up where you can’t access the motor because they’ve all been tiled in. So if that becomes an issue and the tenants, depending on this jacuzzi bathtub, you have an outline that is not warrantied that, you know, we’re actually dealing with this right now. The tenants can make it a big deal and they can make it a big deal for you. So that said, if you’re a tenant, right? And you’re like, well, I rented the house with this jacuzzi tub or this TV or whatever. Like if it’s important to you, and if the landlord is saying, this is not an amenity, well, that’s a negotiation point upfront, right? That you say, look, I’m renting this because I need this year round pool, the heat. So I need your word. I need it in the contract, but this pool will be heated. And sometimes we can fix it by putting a cap, right? We’ve done that on hot tubs that the owner will warranty it. But if the repair is over $500, like the owner will pay up to 500 of any repair or a thousand, or, you know, depending on the scope of the home. And so there are ways to make this equitable for both the landlord and the tenant to make it fair, but it all needs to be done upfront. The problem is when it’s done on the backend and when the landlord hasn’t thought through, Oh wait, my ice maker doesn’t work, but here I am, I’ve got a leasing agent showing it. And I haven’t told the leasing agent that, or I’m showing it myself and I’m not mentioning. And the tenant assumes it works. Landlord.  Doesn’t say anything. That’s where you end up in a Hotwire. No pun intended, but especially when markets get depressed or there’s a run, even though, even when there’s a run on properties, things get there you overlook certain things that you might otherwise be thinking about. So it’s really important if something doesn’t work or something is a little funky quirky or whatever you tell them about it on the front end. So that when you, and you also identify that in the lease contract, because if you don’t, you’ll be sorry.

Yeah. So we had a property in Tiburon, a high end property that I had, not one, but two outdoor grills built in Mike. I think this was yours. And one of them stopped working or never worked. And the landlord hadn’t disclosed and it became this massive issue that these tenants didn’t have both of their outdoor grills working. And again, you got into the implied warranty. So if we’ve got a million little stories like that, but Another one that’s important to remember is fireplace in Marine or in Marine real estate. There are plenty of older homes and people don’t burn wood much anymore in Bay Area, spare the air organization. Doesn’t like it. But if it’s a concern that you know, the floor tiles could be old and cracked or you’ve actually inspected and you know, they are, and you want to leave it inoperable. It’s very important to disclose that like somebody comes to see the house and they’re touring it and you let them know that. And you put that in the contract. Because again, when somebody looks at anything in your home, they assume everything works. And that’s how the lease works. It’s implied that everything works as it should, unless it’s identified as not working coroner and be obligated by law. And like Darcy said, these situations are contentious. They take time, they’re stressful. They will affect your personal well being and they will potentially cost you money. So I have learned as both the leasing agent and you know, an experienced property manager disclose, disclose, disclose, because you will set yourself up for success for that tendency. It’s funny  you mentioned the fireplaces because we have two sets of tenants that will come into marks from our experience or tenants. So I know so bad, none of your plan to create a strategic approach to lease writing that ensures compliance and mitigates unknown risks. And again, all of this basically means that every single little term you write in your lease potentially has a consequence. So this means your clauses using an updated lease. And you want to think through, you want to put your lease together the same way you would take it apart, and don’t be afraid to write a page full of adenda to your property cos’ it will ultimately protect you. Ideally outlining things that do and do not work in the property, that’s the goal that’s attorney approved.

So that’s it for today, below is the video link of the full webinar. Stay safe out there. Be positive and test negative. Take care.

Video link: https://app.searchie.io/watch/04NypdbEDa