Tips for Potential Rental Owners

[Ego]

I owned a small apartment building (lost my shirt) and after retiring in my thirties have managed two small apartment complexes for the owners in exchange for free rent.   I've learned a few lessons along the way, some the hard way and others at the expense of the owner (not me.)

I've been a lurker here for a while but hesitated to post anything that goes against the conventional wisdom as I'm certain to be labeled complaineypants.   But what the hell.   I'll post it for those considering becoming a rental-owner.   Do with it what you will.

Most small time rental-owners are Baby Boomers.  They've been doing it a long time.  They learned from trial and error in a time when the risks of error were low.  They've got experience.  They also have deep pockets to solve expensive problems.  Most importantly, they've got no mortgage so they can lower rent as far as necessary to lure a tenant.  This is your competition.  Boomers have competitive advantages.    What is your competitive advantage? 

Every type of investment be it stocks, bonds, or Real Estate has a potential for gain and loss.   Real Estate rentals (and some options trades) are investments that expose the owner to the possibility of unlimited loss.  The upside is income and appreciation.  That comes with unlimited downside risk from liability.  Sure, you could hold each property in a separate limited-liability corporation, but who actually does that?  Granted most of these situations are Black Swan events, but they are Black Swans that are becoming more likely for two reasons.  1) Society is becoming more litigious. 2) Technology gives us the increasing ability to measure precipitating factors cheaply and accurately.     

Black Swan #1  MOLD: Some are calling it the asbestos of our time.  A tiny undetected drip can cause mold to flourish behind a wall.  A simple, inexpensive mold test kit ($10 at Walmart) can alert a litigious tenant to the presence of mold.  They call a mold attorney.  The attorney directs the whole family to his/her special doctor who finds a plethora of health related issues resulting from exposure to mold.  At the same time they send in a mold test company to set up their special filters and document the extent of the problem.  Then they call the owner with threats.  The owner calls their insurance company who informs them that mold liability is not covered on their policy.  Mold is excluded from virtually every insurance policy issued today. 


What can the owner do?
1) Biannual rental inspections.  Carry a moisture meter and your camera-phone.  Document.  Document.  Document. 
2) Require all tenants to carry renters liability insurance.  Put it in the lease. 
3) Make sure the lease has a mold clause. 
4) Never use the word mold.  The word doesn't exist.  Call it discoloration. 
5) Fix leaks immediately.  When a tenant reports a leak be sure to ask, "When did you first see water?"  Ask the questions while videoing the leak (if possible).  When there is evidence that the leak was not reported by the tenant, charge them and their insurance for the resulting damage. 

Good tips from one of my favorite non-profits, Nolo
http://www.nolo.com/legal-encyclopedia/mold-rentals-landlord-liability-responsibility-prevention-30230.html

-----

This is getting too long so I'll follow up with other black swans later. 

[Ego]

BLACK SWAN #2: Pre-1978 Property and DIY:  EPA Lead-safe rules went into effect in April 2010.  DIY mustachians beware.  You are not legally allowed to fix things on your own pre-1978 properties if you are not EPA certified.   This video explains the procedures one must follow to comply with EPA requirements. 

https://www.youtube.com/watch?v=U-3U1pcSIyg

There are attorneys specializing in lead-dust litigation and testing companies who do noting all day but measure lead exposure levels.  That's where the unlimited liability comes in.  A child exposed to lead dust kicked up by the use of a power tool in a (I kid you not) non-hermetically sealed environment could be lead poisoned and suffer lifelong problems.  The owner is responsible. 

 For its part the EPA is just now starting to enforce their rules with minor fines. 

http://yosemite.epa.gov/opa/admpress.nsf/bd4379a92ceceeac8525735900400c27/1146e74c2c12b0f8852579d70069adcc!OpenDocument

What can an owner do?   Follow the rules no matter how absurd it seems to drape off an entire room in plastic sheeting to cut a small hole in the drywall.   

[Ego]

Black Swan #3: Property Seizure / Fines / Lawsuits for the Actions of Your Tenants:  If your tenant is dealing drugs or using the property for other illegal activities you may face fines, lawsuits and ultimately seizure of your property.  I have a friend who spent tens of thousands of dollars fighting the confiscation of her home.  She was living out of state and left a tenant on the property.  Behind the house the tenant planted a raised-bed planter with marijuana which he was selling.   A neighbor once offhandedly mentioned to the owner that her tenant may be using drugs.  The county argued that she knew or should have known what was happening as a result of that neighbor's comment.  When she didn't act to inspect the property and evict the tenant, her property became fair game for confiscation.   The obvious lesson, if you have any reason to believe a tenant is doing something illegal, get them out. 

[Ego]

Black Swan #4:  Fair Housing Lawsuit  You know better than to discriminate on the basis of race, color, age, national origin, religion, family status or disability.  That goes without saying.  No brainer. 

Complying with Fair Housing is much more than that though.  The DOJ tests to make sure landlords are complying with the Fair Housing Act but in reality that's the least of your worries.  There are some individuals who search rental listings seeking Fair Housing violations and then sue claiming discrimination. 

It is not unheard of for a "tester" to have two people call and leave messages asking about a rental.  The first will have a distinctive accent for a particular race/national origin or will mention details in the message regarding family status or disability.  The second will not.  If you call the second person before returning the first phone call, you're in trouble.  If you are in a rush and hurry someone through a tour of the property, failing to show them important aspects, but then take someone else through the next day and give them a complete tour, you're in violation. 

What can the owner do? 
1) Respond to calls / emails in the order they come in.  Keep a phone log. 
2) Give the same exact tour to everyone who comes to see the property. 
3) Screening / Application.  Use one of the online application screening services.  Set up the criteria before-hand.  Do not make exceptions because you like a particular person (or don't like someone). 

[Ego]

Black Swan #5: Bedbugs:  DDT nearly eradicated them.  Now they're back.  In 2004 New York City had 500 bedbug complaints.  In 2009 they had 10,000. 

Treatment is very expensive and very disruptive.  Tenants must wash all bedding and clothing in hot water or have items dry cleaned then bag it in preparation of treatment.  They have to empty out their drawers, move all furniture away from walls, pull up carpeting, and basically turn their house upside down, not once but three times within a few weeks.  When an apartment tests positive, the neighboring apartments must be inspected.  All of this causes a great deal of emotional trauma to the tenants.  They usually move out.  And it costs a fortune. 

Who pays?  That depends.  If you can prove that the unit was bedbug free prior to move in and you had the tenant sign a Bedbug Addendum to the lease, then you might be able to charge the tenant.  If not, you will likely foot the bill.  Huge loss due to mass turnover... plus pest control costs. 

What can the owner do:

1) Every tenant signs a Bedbug Addendum.  Google it.
2) Before a new tenant moves in have a certified pest control company inspect for bedbugs.  They may do this for free in hopes of getting your business post-infestation.
3) Let the tenant know the unit is certified bedbug-free,
4) The moment anyone suggests bedbugs are present, start the treatment.  Worry about who pays later.  Contain the problem. 

[expatartist]

This is brilliant advice! I'll forward it to anyone in the US who's thinking of buying a home.

Any UK landlords care to chime in? We're thinking to buy-to-let there in a few years. (or maybe I should start a new thread for that one.)

[Johnny Aloha]

Do you mind talking about how you lost your shirt?  Was it through housing price collapse?  Were you sued?

Thanks for sharing.  I'm evaluating some potential deals, but houses in the area are all built in 1960 or earlier.  This will help me decide if the purchases are worth it.

[Ego]

I made several mistakes, the biggest of which was not having the ability to lower rents as much as my very close neighbors.  They owned the properties.  I owned a mortgage.  I couldn't go as low as necessary to get good tenants so I had to take what I could get which meant overlooking obvious red flags. 

[Seeking the Brass Ring]

I couldn't go as low as necessary to get good tenants so I had to take what I could get which meant overlooking obvious red flags. 

Ego, I'm not understanding this.  In my area charging a higher rent typically means that you get a higher caliber of tenant, not a lower one with problems.  The other side to this is that you have to provide better service and a 'nicer' unit but I'd rather take the extra time than deal with 'slums'.

[arebelspy]

I couldn't go as low as necessary to get good tenants so I had to take what I could get which meant overlooking obvious red flags. 

Ego, I'm not understanding this.  In my area charging a higher rent typically means that you get a higher caliber of tenant, not a lower one with problems.  The other side to this is that you have to provide better service and a 'nicer' unit but I'd rather take the extra time than deal with 'slums'.

If you don't have a nicer unit, you can't just charge more and hope to get better people.

You have to charge what the market will bear, and if the market gets over flooded with rentals, and rents drop, and you can't drop accordingly, your vacancy goes up (or you do drop and your margins get squeezed too thin).

You have the cause-effect mixed up: a nicer unit, with higher rent, attracts good tenants.   I'll let you know: it is not the higher rent attracting those people.  ;)

Often pricing just under the market rent gets you the best tenants, as you'll have a glut of applications and can pick the best (often in violation of fair housing act, unless you set extremely high written standards to begin with, so watch out for that).  Good tenants want a good deal too, and it can entice them to stay longer, as well.

[totoro]

Good grief.  Never heard of any of this in Canada.  We have pretty good landlord-tenant laws that favour tenants but no litigation like this that I am aware of.  You couldn't get a lawyer to take this type of case on contingency here so you had better have deep pockets to even try.  Something is wrong with your system...

[arebelspy]

Good grief.  Never heard of any of this in Canada.  We have pretty good landlord-tenant laws that favour tenants but no litigation like this that I am aware of.  You couldn't get a lawyer to take this type of case on contingency here so you had better have deep pockets to even try.  Something is wrong with your system...

There's a mix of truth and FUD here, so heed the warnings, but don't take them as gospel.

[Ego]

We finished up with our third bedbug infestation not too long ago (Black Swan #5 above) and the bedbug addendum worked perfectly.  The unit had been inspected at turnover before the new tenant moved in.  The tenant agreed that the unit was bedbug-free when they took possession.  More than a year later they reported bedbugs.  The inspection company confirmed infestation.  The tenant decided to move out.  Their unit and adjoining units had to be treated then reinspected.  They paid for the treatment and inspections. 

Be sure to have tenants sign a bedbug addendum and make sure the addendum includes a clause that requires the tenant to reimburse you for eradication expenses. 

In case you think it might never happen to you... take a look at http://www.bedbugregistry.com/

We are not slumlords and it has hit us three times. 

[arebelspy]

Nice that you were able to get tenants that were moving out to pay for it.

Events like your black swans can be mitigated if planned for (such as with your suggested bedbug addendum), but they're definitely good to know about so that you can plan for them.

Thanks for sharing!

[Ego]

Nice that you were able to get tenants that were moving out to pay for it.

Events like your black swans can be mitigated if planned for (such as with your suggested bedbug addendum), but they're definitely good to know about so that you can plan for them.

Thanks for sharing!

It was sad all around as they were good tenants, but the tenants brought the bugs into the property so they can't expect us to pay for solving the problem.  We did not have a bedbug addendum on the first unit and had to foot the bill for that one.  We learned our lesson. 

I am glad it was helpful. 

I manage a complex for a great company that is on the cutting edge of litigation in this area.  The next big thing is smoking.  We made our complex non-smoking a few years ago and the turnovers are significantly less expensive than they would have been for smokers.  Tenant quality is better also.  It is a good way to legally weed out problems.  Put it at the top of the rental advertisiment and have them sign a No-Smoking Addendum (in packet below).

HUD put out a good guide on how to make your apartment building non-smoking. 

PDF:  https://portal.hud.gov/hudportal/documents/huddoc?id=pdfowners.pdf

[Nords]

The more I read landlord threads, the more it seems to come down to tenant screening.

But I'm going to take a contrary approach:  "pet friendly".

My FIL owned rentals for over 20 years and always struggled with his "no pets" clause.  Most of his stories involved the creative ways that tenants would smuggle their pets into his properties, and the hilarity that ensued when he found them (or when they found him).  When my spouse and I started renting out our property, we decided that "no pets" is effectively just as enforceable as "no smoking" or "no bedbugs". 

Now we simply say that pet damage will be paid out of the security deposit.  The reality is that pet owners seem to struggle to find pet-friendly rentals, and they're incredibly grateful to find out that you're happy to take their dog and two cats. 

Better yet, your seven-year-old fully-depreciated carpet is pet-friendly for at least another five years.  In fact your tenant will probably not want you to replace the carpet because they don't want to have to keep it up to its "like new" standards, or they may even decide that they prefer low-maintenance tile.

Yeah, I know.  Neighbors are complaining that your tenant is breeding pit bulls and feeding the puppies to his pet boa constrictors.  It turns out that community & state laws cover many of the situations that landlords try to duplicate in their leases, so you simply expect your tenants to conform to the existing laws.

[arebelspy]

The more I read landlord threads, the more it seems to come down to tenant screening.

But I'm going to take a contrary approach:  "pet friendly".

I'm pet friendly as well.

That isn't contrary though to "tenant screening" - my standards for the people are high.  My standards for the pets aren't as much.  :)

[Another Reader]

The one thing you must look out for is your insurance company's policy about certain dog breeds.  Some companies will not insure you if you allow pit bulls, rottweilers, dobermans, etc.

[Peony]

Pet friendliness is great but do be aware that your insurer may have an opinion on this matter. I had a tenant that I liked whose son adopted a pit bull puppy ... Renewal of the insurance became difficult (insurer even wanted a photo of the dog), there were small children in the neighboring house, and it began to look like trouble just waiting to happen. In the end, I declined to renew the tenants' lease. Now I allow 1 cat per unit, but not dogs.

However, if a tenant wanted a small apartment-type dog I'd probably still consider it depending on the tenant, the dog, and the insurance company. I'd probably also be okay with 2 cats per unit if I knew the tenants were good housekeepers. Accepting pets is a definite goodwill-builder. As is keeping rents just below market and tending to problems promptly.

[Ego]

The more I read landlord threads, the more it seems to come down to tenant screening.

The trouble with tenant screening is that most of the things people here think of as "screening" (ie. the applicant gives me a creepy feeling) is illegal.  You may be able to get away with it once, twice, even ten times.  It might catch up with you. 

When my spouse and I started renting out our property, we decided that "no pets" is effectively just as enforceable as "no smoking" or "no bedbugs". 

We allow pets.  If it was up to me we would not.  At least not dogs.  They cause damage, for instance they chew blinds, scratch floors, doors and door frames, kill landscaping..... I could go on. 

This damage takes longer to repair, lengthening the turnover time and the resulting period of zero income.  Also, the repairs can cost more than the security deposit when then involves collections. 

No pets and no smoking are easily enforceable.  Put it in the lease.  When you notice it, give a warning.  Second time, give a notice to correct or quit.  They will almost always shape up and solve the problem when they see the 3-day notice. 

[arebelspy]

The more I read landlord threads, the more it seems to come down to tenant screening.

The trouble with tenant screening is that most of the things people here think of as "screening" (ie. the applicant gives me a creepy feeling) is illegal.  You may be able to get away with it once, twice, even ten times.  It might catch up with you. 

What makes you think anyone here thinks that, let alone most?

Many of us are well versed in the laws regarding tenants, specifically the Fair Housing Act.

When we say tenant screening, we mean not lowering standards regarding credit score, income, length of time at job, deposit, etc.  Just because you have a vacancy, don't rush to get someone in, but make sure your tenants fit your written requirements.

[Daleth]

The bedbug addendum is a great idea. Thanks!

[Nords]

The more I read landlord threads, the more it seems to come down to tenant screening.

The trouble with tenant screening is that most of the things people here think of as "screening" (ie. the applicant gives me a creepy feeling) is illegal.  You may be able to get away with it once, twice, even ten times.  It might catch up with you. 

While I agree that some of the landords on this forum could over-complicate anything, there are plenty of places on the Web (like BiggerPockets) to figure out how to do a proper tenant screening.  They're pretty clear about what you should (and should not) do, and they even include conversational scripts for discussing adverse info with the tenant.  The landlord-tenant handbooks of local governments are a great guide too.

Adding clauses to leases is fairly straightforward, and it surely makes landlords feel as if they're accomplishing something useful.  Tenant screening is hard and fraught with squishy issues like assessing people and doing credit checks and tracking down references and making decisions.  It's far easier to decide what kinds of bedbugs and other pets your tenants are "allowed" to have.

I think too many landlords try to turn their leases into comprehensive tenant-landlord manuals designed to solve any problem, and I'm sure that lawyers are happy to support the effort.  But instead of solving problems, maybe landlords should focus more on avoiding problems in the first place by selecting tenants who won't cause problems.

[Ego]

What makes you think anyone here thinks that, let alone most?

Many of us are well versed in the laws regarding tenants, specifically the Fair Housing Act.

Good point.  Probably should not have said most here. 

I think too many landlords try to turn their leases into comprehensive tenant-landlord manuals designed to solve any problem, and I'm sure that lawyers are happy to support the effort.  But instead of solving problems, maybe landlords should focus more on avoiding problems in the first place by selecting tenants who won't cause problems.

Actually the lawyers get happy when the landlord does not have a detailed lease.  It is such a simple thing to do.  Google the addendums, they are usually online for free. 

The last sentence in the quote above is particularly worrisome.  It begs the question, what do you mean by "select"?  You don't really get to select a tenant.  You put the ad online.  They apply.  They either qualify by the standards you've previously set or they don't.   You don't get to decide after the fact if they qualify.  You set the standards before you ever met them.   The first qualified applicant gets offered the house first.  Not the best qualified.  The first qualified. 

Don't get me wrong, I know there are gray areas.  Wiggle room.  But the fact is, there are people out there who have nothing to do all day but test to see if you sound like you follow fair housing laws.  Some are even funded by the government.  See the youtube video below.  "Serial-plaintiff" is a booming industry.  I guess because I get to hear the horror stories at company meetings I am more gun shy. 

http://www.mercurynews.com/business/ci_25168898/disabled-serial-plaintiffs-do-legal-battle-small-businesses

https://www.youtube.com/watch?v=FmEjzxKrFGE

[Daleth]

You set the standards before you ever met them.   The first qualified applicant gets offered the house first.  Not the best qualified.  The first qualified. 

Not in my book. It's more typical for me to have several applications for the same place at the same time, because I like to schedule showings back to back, and if I have more than one application the place will go to the people who are the best qualified. All other things being equal, if I've got one guy with a 680 credit score and another with 750, it's going to the 750 guy even if Mr. 680 filled out his application first.

Of course, that's assuming the best-qualified people actually give me a check. Once I had two couples who wanted the same place, both with great credit scores and good jobs, and the ones who had applied first dragged their feet on setting up a meeting to give me the money and sign the lease. The apartment went to the other couple, much to the chagrin of the foot draggers. If the foot draggers had been members of a protected class (i.e., capable of suing me for discrimination), I had emails back and forth showing their foot-dragging, and also emails with the other couple showing extreme eagerness to quickly meet and get the deal done. In other words I had evidence that I absolutely was willing to rent to them (namely, the emails from me trying to set up a meeting to sign the lease), and evidence that while they dragged their feet, another qualified couple moved faster.

[arebelspy]

You set the standards before you ever met them.   The first qualified applicant gets offered the house first.  Not the best qualified.  The first qualified. 

Not in my book. It's more typical for me to have several applications for the same place at the same time, because I like to schedule showings back to back, and if I have more than one application the place will go to the people who are the best qualified. All other things being equal, if I've got one guy with a 680 credit score and another with 750, it's going to the 750 guy even if Mr. 680 filled out his application first.

That's dynamite, but in the federal government's book it's a first in, first out service, and if the 680 meets your qualifications, you should rent to him.

[totoro]

Yet more rules we do not have in Canada. 

In Canada we can rent to the best qualified candidate, not the first qualified candidate.  What a terrible precedent you have to work with.

We can't discriminate on protected human rights grounds (age/gender/orientation/marital status...), which is appropriate, but if I have two candidates who apply who are qualified I am entitled to choose and can consider things like if they seem like they may stay for a longer period of time.  I give a time limit for completing the application and providing the deposit.

I like the bedbug clause.  I'm going to research that a bit more and add it in.  It is becoming more of an issue in Canada, like everywhere.

As far as smoking goes, I agree it is possible to monitor and enforce this.  I have never had anyone smoke inside, but I have had people smoke outside in the yard which is also not permitted.  I let this go if they are not bothering another tenant.

[Ego]

You set the standards before you ever met them.   The first qualified applicant gets offered the house first.  Not the best qualified.  The first qualified. 

Not in my book. If the foot draggers had been members of a protected class (i.e., capable of suing me for discrimination), I had emails back and forth showing their foot-dragging, and also emails with the other couple showing extreme eagerness to quickly meet and get the deal done. In other words I had evidence that I absolutely was willing to rent to them (namely, the emails from me trying to set up a meeting to sign the lease), and evidence that while they dragged their feet, another qualified couple moved faster.

Actually it is not unusual for us to have several qualified applicants for the same place.  In that case, the first qualified applicant who delivers a cashier's check or money order for the holding deposit gets the apartment.  I should have made that clear above.   

Here is a good holding deposit agreement:PDF

http://www.sdcaa.com/RentalForms/150%20Holding%20Deposit%20Agreement.pdf

The agreement allows you to deduct pro-rated rent from the holding deposit if the applicant backs out and requests their deposit to be returned.  With no agreement, you must return the deposit in full (depending on jurisdiction).

[Nords]

You set the standards before you ever met them.   The first qualified applicant gets offered the house first.  Not the best qualified.  The first qualified. 

Not in my book. If the foot draggers had been members of a protected class (i.e., capable of suing me for discrimination), I had emails back and forth showing their foot-dragging, and also emails with the other couple showing extreme eagerness to quickly meet and get the deal done. In other words I had evidence that I absolutely was willing to rent to them (namely, the emails from me trying to set up a meeting to sign the lease), and evidence that while they dragged their feet, another qualified couple moved faster.

Actually it is not unusual for us to have several qualified applicants for the same place.  In that case, the first qualified applicant who delivers a cashier's check or money order for the holding deposit gets the apartment.  I should have made that clear above.   

Here is a good holding deposit agreement:PDF

http://www.sdcaa.com/RentalForms/150%20Holding%20Deposit%20Agreement.pdf

The agreement allows you to deduct pro-rated rent from the holding deposit if the applicant backs out and requests their deposit to be returned.  With no agreement, you must return the deposit in full (depending on jurisdiction).

Again, if you're time-stamping your applications and filling out holding deposit agreements then you're working harder than necessary-- and perhaps on items that aren't necessary. 

For example, here's a guide which helps you screen the tenants:
http://www.biggerpockets.com/renewsblog/2013/01/27/tenant-screening/

It's a lot of work, although it complies with applicable laws.  It's the kind of work that landlords hate to do, and it makes them uncomfortable, and many are tempted to go back to adding bedbug clauses to their leases.  But if you do a good job on the screening then you don't need a 30-page lease with 126 clauses-- because you have a fantastic tenant who already takes care of their habitats.

Here's the script from that post that I mentioned earlier:

When I deny a tenant, I like to avoid complication by having the tenant “disqualify themselves,” a trick I learned from Landlording on Auto Pilot by Mike Butler. If a tenant doesn’t qualify because of a bad landlord reference – you have two choices. Which sounds easier to you:
“I’m sorry Jerry, but your landlord gave you a terrible review and I can’t rent to you” or
“Hi Jerry, I ran into a bit of a snag in getting positive feedback from your previous landlord – so what I need you to do is go and speak to that landlord and get him to call me with a positive review and we can move on. Can you do that for me Jerry?”
Jerry will, most likely, mumble “oh – okay, sure” and then disappear, never to be heard from again. You never disqualified Jerry – he simply gave up due to the work you needed him to do.

[Ego]

  But if you do a good job on the screening then you don't need a 30-page lease with 126 clauses-- because you have a fantastic tenant who already takes care of their habitats.

What would you do if an absolutely horrible person applied and was approved according to your criteria?  Great references.  Perfect credit.  Excellent work history.  But an all-around deplorable person.  For instance, someone on the sex offender list.  Or just a rude jerk who tells you in advance that they know their rights, know they are qualified and will file suit if you do not approve them.  How would you screen them out while waiting for the next fantastic tenant to come along?   

[Daleth]

You set the standards before you ever met them.   The first qualified applicant gets offered the house first.  Not the best qualified.  The first qualified. 

Not in my book. It's more typical for me to have several applications for the same place at the same time, because I like to schedule showings back to back, and if I have more than one application the place will go to the people who are the best qualified. All other things being equal, if I've got one guy with a 680 credit score and another with 750, it's going to the 750 guy even if Mr. 680 filled out his application first.

That's dynamite, but in the federal government's book it's a first in, first out service, and if the 680 meets your qualifications, you should rent to him.

I've looked at federal fair housing law and am not aware of any "first in/first out" requirement. Can you point me to chapter and book? This is what Nolo.com says (excerpted, full text at link). I added the boldfaced italics:

"When choosing tenants, keep in mind the following best practices.

Check credit, income, and references.... Be consistent in your screening. Make it your policy, for example, to always require credit reports; don't just get a credit report for a single parent or people of a particular nationality.

Make decisions based on business reasons. You are legally free to choose among prospective tenants as long as your decisions are based on legitimate business criteria. Don't make choices based on personal reasons. You are entitled to reject applicants with bad credit histories, income that you reasonably regard as insufficient to pay the rent, or past behavior -- such as property damage or consistent late rent payments -- that makes someone a bad risk....

Understand fair housing rules. Fair housing laws specify clearly illegal reasons to refuse to rent to a tenant. The Federal Fair Housing Acts (42 U.S. Code §§3601-3619, 3631) prohibit discrimination on the basis of race, religion, national origin, gender, age, familial status, physical or mental disability (including recovering alcoholics and people with a past drug addiction)....

Train your staff to understand the rules, too....

Be consistent. Consistency is crucial when dealing with prospective tenants. If you don't treat all tenants more or less equally -- for example, if you arbitrarily set tougher standards when renting to members of a racial minority -- you are violating federal laws and opening yourself up to lawsuits. And if you give one person a break (such as lowering the security deposit for a single mother but not for other tenants), you'll likewise risk a charge of discrimination from other tenants."

http://www.nolo.com/legal-encyclopedia/choosing-tenants-avoid-fair-housing-29816.html

I think "choosing among tenants" to prefer the ones with the highest credit scores (or best references, highest income, etc.), even if people who meet my minimum standards filled out their application first, would qualify as a "legitimate business reason" for choosing between prospective tenants A and B.

[Daleth]

  But if you do a good job on the screening then you don't need a 30-page lease with 126 clauses-- because you have a fantastic tenant who already takes care of their habitats.

What would you do if an absolutely horrible person applied and was approved according to your criteria?  Great references.  Perfect credit.  Excellent work history.  But an all-around deplorable person.  For instance, someone on the sex offender list.  Or just a rude jerk who tells you in advance that they know their rights, know they are qualified and will file suit if you do not approve them.  How would you screen them out while waiting for the next fantastic tenant to come along?   

The sex offender would fail the criminal background check, so they wouldn't qualify. I do not rent to crooks.

As for the all-round deplorable assh0le, that is exactly why I approve the best qualified person, not the first qualified person. And frankly if the deplorable person were a member of a protected class (racial, religious, etc. minority or whatever else may be protected under your local laws) and had threatened to sue me if I didn't rent to them, I would try really hard to find a qualified renter who was also a member of that race/religion/etc., or at least a member of some other protected class, so that if Mr. Deplorable A-hole did sue me on the grounds that "she won't rent to X-race people" I could send their lawsuit down in flames by saying, "Actually, I did rent that exact unit to someone of X race."

**Edited to add** but that is a pure hypothetical--as Another Reader wrote, such people are highly unlikely to have the objective qualifications you mention, especially great references. If you call such a person's past landlords or employers and those people actually talk to you (larger corporate employers often won't tell you anything more than "yes, he worked here from X date to Y date"), you will hear stories about them being deplorable a-holes to their landlords, fellow tenants, coworkers, etc. And if their references won't do anything more than confirm their dates of work or tenancy, then by definition they do not have great references.

[Another Reader]

Registered sex offenders have criminal histories.  My property managers automatically reject an applicant who is a registered sex offender.  Accepting such an applicant opens you up to liability claims from other tenants and neighbors.

Deplorable people rarely have everything you mention.  It's almost impossible for them not to get into trouble.

[arebelspy]

Theoretically if you have a reason like that you may get away with it, but typically legal advice is to process first in/out to avoid having to make judgement call decisions.  Example:

www.nwfairhouse.org/images/1276205767.pdf

Question: What should I do if there is more than one qualified applicant for a unit?
Answer: If you have clearly stated and well-thought out criteria, anyone who passes those tests should be a good tenant. If you try to pass judgment beyond these criteria, these judgments are likely to be subjective and may result in a discriminatory decision. Usually the best way to handle this decision is to select tenants by date of application. The first fully qualified applicant should be offered the unit.

Here's the problem: what happens when your criteria is 650+ credit score, someone applies and meets all your criteria at 680, someone else applies a bit later at 750, you choose the 750, and the 680 sues as being a member of a protected class (which you may not even have known)?

You can claim all you want that you went strictly with the higher credit score, but if the people investigating get your written criteria, see the person met, and you didn't choose them, they could decide it was discrimination, and I think you may well be getting a large fine and/or jail time.  Not worth the risk to me.

[Daleth]

Theoretically if you have a reason like that you may get away with it, but typically legal advice is to process first in/out to avoid having to make judgement call decisions.  Example:

www.nwfairhouse.org/images/1276205767.pdf

Question: What should I do if there is more than one qualified applicant for a unit?
Answer: If you have clearly stated and well-thought out criteria, anyone who passes those tests should be a good tenant. If you try to pass judgment beyond these criteria, these judgments are likely to be subjective and may result in a discriminatory decision. Usually the best way to handle this decision is to select tenants by date of application. The first fully qualified applicant should be offered the unit.

Here's the problem: what happens when your criteria is 650+ credit score, someone applies and meets all your criteria at 680, someone else applies a bit later at 750, you choose the 750, and the 680 sues as being a member of a protected class (which you may not even have known)?

You can claim all you want that you went strictly with the higher credit score, but if the people investigating get your written criteria, see the person met, and you didn't choose them, they could decide it was discrimination, and I think you may well be getting a large fine and/or jail time.  Not worth the risk to me.

There is no jail time for housing discrimination. It's a civil law with civil penalties (i.e. fines), not jail time.

If my written criteria say "at least 650 credit score, but applicants with higher scores will be preferred over those with passing but lower scores," then all I've done is comply with my own preexisting written requirements. Since the requirements themselves aren't discriminatory (i.e. they're not based on race, etc., but on objective business reasons such as credit scores), I'm good to go.

Such a policy also makes intuitive sense, which to me suggests it would pass muster with a judge or jury. Anyone who has ever gotten a loan knows that even if they meet the minimum credit score to get the loan, they won't get nearly as good terms as someone with a higher score. In other words, it is a standard business practice to prefer people with better scores. In the case of a bank that can give an infinite number of loans, they express that preference by giving better rates to folks with higher scores. In the case of a landlord with only one apartment available, the only way to express that perfectly legitimate preference is by choosing the tenant with the higher score over the tenant with the lower one.

[Ego]

I've looked at federal fair housing law and am not aware of any "first in/first out" requirement. Can you point me to chapter and book?

I am in California.  Here is what it says in the California Fair Housing Handbook:
http://www.hrfh.org/forms/2012_Fair_Housing_Handbook.pdf

"The landlord should take the time to check out the information and make a selection based on the first qualified applicant(s)."

In practice, the way it works here.... the moment we call to tell them they are approved (they apply online) we tell them that the first person to provide the holding deposit gets the place. 

[Ego]

Deplorable people rarely have everything you mention.  It's almost impossible for them not to get into trouble.

I've had two crummy people try to rent with co-signers.  Their upstanding parents. 

[Daleth]

I've looked at federal fair housing law and am not aware of any "first in/first out" requirement. Can you point me to chapter and book?

I am in California.  Here is what it says in the California Fair Housing Handbook:
http://www.hrfh.org/forms/2012_Fair_Housing_Handbook.pdf

"The landlord should take the time to check out the information and make a selection based on the first qualified applicant(s)."

In practice, the way it works here.... the moment we call to tell them they are approved (they apply online) we tell them that the first person to provide the holding deposit gets the place.

Interesting. I'm not in California, and even if I were, I wouldn't take that booklet as gospel for two reasons: (1) it was not issued by the CA government or any law firm or legal organization; it's from some nonprofit. And (2), on the page right before the bit you quoted it says, "A landlord is not obligated to rent to an individual if there is a legitimate business reason for denying them." How is it not a legit business reason to prefer a person with a 750 credit score over a person who barely meets your 650 minimum?

And what if you have three applications in front of you at the same time--you have to pull somebody's credit first, and ALL of those three applicants could be members of some class or other that is protected under federal or state housing law. In other words ANY of them could potentially sue you. What if you rent to the person with the 650 credit score and then the Muslim dude with the 750 score sues you, saying "I was way better qualified than that dude--you rejected me because I'm Muslim, so I'll see you in court"?

Choosing someone because they happened to be the first one whose credit check you ran is not a legitimate business reason for rejecting the others, at least not others whose applications you got at the same time. In fact, people could even claim that you rigged the system--for instance, Mr. Muslim with the 750 Score could say, "You purposely ran the other guy's credit first because you knew I was Muslim and didn't want to have to rent to me." But choosing someone because they had the HIGHEST score of all three checks you ran is a legitimate business reason and is something you can't rig.

[Ego]

Registered sex offenders have criminal histories.  My property managers automatically reject an applicant who is a registered sex offender.  Accepting such an applicant opens you up to liability claims from other tenants and neighbors.

Again.... California Fair Housing.... page 21

http://www.hrfh.org/forms/2014_Fair_Housing%20_Handbook.pdf

Although registered sex offenders are not a protected class under the fair housing laws, California Civil Code §
290.46 (l)(2)(G) does make it illegal to use a person’s status as a registered sex offender for purposes related to
housing or accommodations.  This includes denying a person housing because of their status as a registered sex
offender.

[Daleth]

Deplorable people rarely have everything you mention.  It's almost impossible for them not to get into trouble.

I've had two crummy people try to rent with co-signers.  Their upstanding parents.

All co-signers do is semi-guarantee that you'll get paid. They have nothing to do with whether the guy is going to harass or annoy your other tenants, trash the place, commit crimes, or lie naked in the front yard with a bottle of whiskey, yelling at passers-by. If the crummy person doesn't have good references from work and previous landlords, which crummy people generally don't, then he's not as good an applicant as someone with good references.

[Ego]

Interesting. I'm not in California, and even if I were, I wouldn't take that booklet as gospel for two reasons:

It is published by the fair housing commission.  It is a state funded non-profit.  They are the people who do the mediation if you have legalese in your lease that says you will go to mediation rather than court.  It is a quasi-government agency. 

And what if you have three applications in front of you at the same time--you have to pull somebody's credit first, and ALL of those three applicants could be members of some class or other that is protected under federal or state housing law. In other words ANY of them could potentially sue you. What if you rent to the person with the 650 credit score and then the Muslim dude with the 750 score sues you, saying "I was way better qualified than that dude--you rejected me because I'm Muslim, so I'll see you in court"?

The question they are going to ask you in court or mediation is how long you sat on the first application waiting for others.

[Daleth]

Registered sex offenders have criminal histories.  My property managers automatically reject an applicant who is a registered sex offender.  Accepting such an applicant opens you up to liability claims from other tenants and neighbors.

Again.... California Fair Housing.... page 21

http://www.hrfh.org/forms/2014_Fair_Housing%20_Handbook.pdf

Although registered sex offenders are not a protected class under the fair housing laws, California Civil Code §
290.46 (l)(2)(G) does make it illegal to use a person’s status as a registered sex offender for purposes related to
housing or accommodations.  This includes denying a person housing because of their status as a registered sex
offender.

Again... that booklet you keep citing is not a reliable source of information. For one thing, there is no such thing as California Civil Code § 290.46 (google it, you'll see). There is a California Penal Code § 290.46, and it's about online sex-offender registries--in other words, it's NOT about the simple fact that someone was convicted of a sex crime that shows up on a criminal background check; it's about online registries that the public can access. And here's the other part that booklet leaves out:

"(L) (1) A person is authorized to use information disclosed pursuant to this section only to protect a person at risk.
   (2) Except as authorized under paragraph (1) or any other provision of law, use of any information that is disclosed pursuant to this section for purposes relating to any of the following is prohibited:
   (A) Health insurance.
   (B) Insurance.
   (C) Loans.
   (D) Credit.
   (E) Employment.
   (F) Education, scholarships, or fellowships.
   (G) Housing or accommodations.
   (H) Benefits, privileges, or services provided by any business
establishment"

Again, I'm not in California and although a lawyer am not one in California, but my first take on that is that:

- Unless some exception applies, I cannot use information disclosed in California's online sex-offender registry to make decisions about housing. But that has nothing to do with whether I can refuse to rent to a prospective tenant based on a criminal background check showing that they were convicted of a sex crime.

Remember: prospective tenants have to consent to your running a criminal check, and the check will say specifically what they were convicted of; they do NOT have to consent to your looking at some website of sex offenders, and those websites generally do not say why the person is considered a sex offender. It could literally just be that he had consensual sex with his 16yo girlfriend when he was 18...or it could be because he's a pedophile; you have no way of knowing. Long story short, it's a very different animal from a criminal background check. My guess is that the reason that you can't use the registries to deny someone housing (unless one of the exceptions applies, in which case you can) is because they're trying to ensure that (1) tenants won't get driven from their homes in the middle of their lease terms by landlords who happened to notice that they're on the registry and (2) landlords won't reject such tenants without doing a more thorough safety evaluation (e.g., criminal background check and consideration of whether there are "people at risk" that the landlord may be responsible for, such as other tenants in the same unit.

- I CAN use info from the state's sex-offender registry to reject a prospective tenant IF an exception applies, and there's a big fat exception right there in the law: "to protect a person at risk." If I have any female tenants, especially more vulnerable-seeming ones, and I'm renting a unit in that same building, I would think I have a legitimate argument that I would reject a sex offender as a tenant in order "to protect [those female tenants]" who I think would be at risk. And there may well be any number of other exceptions written into other parts of CA law.

Long story short, that pamphlet you keep linking to was written by a nonprofit with an agenda. It was not written by a law firm or government agency. If I were a landlord in California, I would call up my lawyer and run these questions by her to make sure I'm on solid ground; since I'm not in CA I'm not going to take the time to look at this in depth, but that pamphlet is clearly not super-reliable as a source of legal advice.

[Ego]

Deplorable people rarely have everything you mention.  It's almost impossible for them not to get into trouble.

I've had two crummy people try to rent with co-signers.  Their upstanding parents.

All co-signers do is semi-guarantee that you'll get paid. They have nothing to do with whether the guy is going to harass or annoy your other tenants, trash the place, commit crimes, or lie naked in the front yard with a bottle of whiskey, yelling at passers-by. If the crummy person doesn't have good references from work and previous landlords, which crummy people generally don't, then he's not as good an applicant as someone with good references.

True.  But if crummy guy gets turned down because you called everyone on his application (employment, previous landlords, personal references) he can legitimately question whether you do the same thing for other applicants.  If you can provide documentation that you do indeed call everyone listed on the application for every applicant, then you are okay.  Who does that in practice?

In CA Unhru has been expanded by the supreme court to include any arbitrary discrimination.  Not just protected classes.  If you arbitrarily discriminate for any reason (he is a crummy person) regardless of whether it is for a protected class or not, it is illegal. 

Marina Point vs. Wolfson.

[Ego]

Long story short, that pamphlet you keep linking to was written by a nonprofit with an agenda. It was not written by a law firm or government agency. If I were a landlord in California, I would call up my lawyer and run these questions by her to make sure I'm on solid ground; since I'm not in CA I'm not going to take the time to look at this in depth, but that pamphlet is clearly not super-reliable as a source of legal advice.

As I said above, it is the fair housing commission pamphlet and it clearly says you cannot use it for housing decisions.  But what the hell.  Believe what you want. 

[oldtoyota]

Black Swan #3: Property Seizure / Fines / Lawsuits for the Actions of Your Tenants:  If your tenant is dealing drugs or using the property for other illegal activities you may face fines, lawsuits and ultimately seizure of your property.  I have a friend who spent tens of thousands of dollars fighting the confiscation of her home.  She was living out of state and left a tenant on the property.  Behind the house the tenant planted a raised-bed planter with marijuana which he was selling.   A neighbor once offhandedly mentioned to the owner that her tenant may be using drugs.  The county argued that she knew or should have known what was happening as a result of that neighbor's comment.  When she didn't act to inspect the property and evict the tenant, her property became fair game for confiscation.   The obvious lesson, if you have any reason to believe a tenant is doing something illegal, get them out.

I started a thread about civil forfeiture several months ago. We talked about how someone could do something illegal at your own home (your kid could smoke marijuana, etc) and your property could theoretically be seized. This has been documented all around the country. Several cases took place on a road running through Louisiana, I think. Maybe it was Texas. A sheriff would stop those who came through town by car, say they were doing something wrong, and take their property. In one case, the police threatened to take the children into "protective custody" if the parents did not agree to turning over their belongings.

This law is a bad one because, being the beneficiaries of the money/homes/cars, it's easy for police departments to abuse it. In smaller towns, people are fearful of speaking out lest the police come take their homes, etc.

[Daleth]

Deplorable people rarely have everything you mention.  It's almost impossible for them not to get into trouble.

I've had two crummy people try to rent with co-signers.  Their upstanding parents.

All co-signers do is semi-guarantee that you'll get paid. They have nothing to do with whether the guy is going to harass or annoy your other tenants, trash the place, commit crimes, or lie naked in the front yard with a bottle of whiskey, yelling at passers-by. If the crummy person doesn't have good references from work and previous landlords, which crummy people generally don't, then he's not as good an applicant as someone with good references.

True.  But if crummy guy gets turned down because you called everyone on his application (employment, previous landlords, personal references) he can legitimately question whether you do the same thing for other applicants.  If you can provide documentation that you do indeed call everyone listed on the application for every applicant, then you are okay.  Who does that in practice?

In CA Unhru has been expanded by the supreme court to include any arbitrary discrimination.  Not just protected classes.  If you arbitrarily discriminate for any reason (he is a crummy person) regardless of whether it is for a protected class or not, it is illegal. 

Marina Point vs. Wolfson.

From a summary of Marina Point v. Wolfson:
"Arbitrary discrimination is prohibited (e.g., hippies). You can exclude kids who have been disruptive, but you can't exclude kids as a class--that's arbitrary."
http://foofus.net/goons/foofus/lawSchool/property/MarinaPointLtdvWolfson.html

Marina Point was about a policy that excluded all children, as a class. That is what was held invalid. Arbitrary means rejecting an entire class of people (such as kids, hippies, etc.--not just protected classes like race and religion) for no good reason. It does NOT mean rejecting a particular individual because you think, based on his personality and his references, that he is likely to be disruptive to you, fellow tenants, your handymen, etc. To have standing to bring suit under the Unruh Act (which only applies in CA) he still has to be a member of a class with evidence that you discriminate against that entire class. I highly doubt that a rejected tenant is going to file a lawsuit that boils down to, "Your Honor, he discriminates against assholes!"

[Daleth]

Long story short, that pamphlet you keep linking to was written by a nonprofit with an agenda. It was not written by a law firm or government agency. If I were a landlord in California, I would call up my lawyer and run these questions by her to make sure I'm on solid ground; since I'm not in CA I'm not going to take the time to look at this in depth, but that pamphlet is clearly not super-reliable as a source of legal advice.

As I said above, it is the fair housing commission pamphlet and it clearly says you cannot use it for housing decisions.  But what the hell.  Believe what you want.

If you want to think that some pamphlet from a nonprofit, which can't even cite the correct statute, is correct when it says something that THE ACTUAL LAW ITSELF contradicts, be my guest. To sum up, here's the contradiction:
- Pamphlet: "You can't refuse to rent to sex offenders."
- Law: "You can't use the fact someone is on the registry to refuse to rent to them, except that if you're refusing in order to protect someone else's safety, you totally can, and you also can refuse if any other exceptions in any other state laws would let you do so."

As I said, if you're a landlord in CA, call your lawyer and have a five-minute chat about this. I would bet money that your lawyer would tell you, "Here's what you gotta do to legally reject a prospective tenant who's been convicted of sex crimes: X, Y and Z. Easy peezy."  Again, if I were in CA, I would avoid this whole issue by never even looking at the state sex offender registry's website--which is the ONLY thing referenced in that statute. Instead, I would just do criminal background checks on tenants and continue my usual practice of not renting to crooks (though depending on what exactly the "X, Y and Z" in my lawyer's advice was, I might have to tweak my procedures a bit).

And one last note: there is such a thing as the California fair housing commission--it's actually the CA Department of Fair Employment and Housing (http://www.dfeh.ca.gov)--and that nonprofit ain't it.

[Another Reader]

I don't think you have to allow co-signors.  We require the occupants to be the ones on the lease and they must meet the minimum income ratio requirements.  And we are pretty strict on verification.

Bad references are an automatic rejection. 

Fortunately, my rentals where the sex offender issue would likely come up are not in California.  And, as Daleth points out, the conviction is going to show up anyway.  You don't have to use the information disclosed pursuant to that section to make a decision. 

It looks like HRFA is a JPA authorized by some local agencies in the Sacramento area that are not explicitly listed in the document.  HRFA is related in some way to a 501 c 3 public benefit corporation called the Carol Miller Justice Center.  JPA's are used when multiple jurisdictions want to work together to accomplish something.  They are used for building and operating sports arenas and airports and for fighting wildfires.  What authority does a regional JPA have over the state?  None.

Being a landlord in California is not easy.  BTW, this kind of nonsense is one reason to hire a property manager.  They are responsible for knowing the rules in your jurisdiction.  And they can call their lawyer for that five minute chat if something is unclear.

[Nords]

  But if you do a good job on the screening then you don't need a 30-page lease with 126 clauses-- because you have a fantastic tenant who already takes care of their habitats.

What would you do if an absolutely horrible person applied and was approved according to your criteria?  Great references.  Perfect credit.  Excellent work history.  But an all-around deplorable person.  For instance, someone on the sex offender list.  Or just a rude jerk who tells you in advance that they know their rights, know they are qualified and will file suit if you do not approve them.  How would you screen them out while waiting for the next fantastic tenant to come along? 

I'm a little confused on how an "absolutely horrible, all-around deplorable" person and a "rude jerk" could come through with great references. 

I'm not sure how the rude jerk would know in advance of an application that they're qualified.  I wouldn't share my qualification list any more than required by law, and anything beyond that would be by subpoena.  "Thanks for applying, yes you were indeed the first applicant, but not the first to qualify, and I'll even refund your application fee.  Can I help you find another place?  'K, thanks, bye."  Who fronts their legal costs while they're dragging me through the courts (or mediation, or arbitration)?

I'm pretty sure that you can create plenty of scary strawman scenarios right out of Pacific Heights.  However my point is that I'm not going to rent to those people in the first place (because they didn't meet my qualification criteria) so there's no need to create a 30-page lease to ensure that they will not act like ""absolutely horrible, all-around deplorable rude jerks".

[monarda]

I've had many applicants at once, but never at the end of the screening have we had more than one qualified tenant who followed through and actually wanted to rent.  We thought about having earnest money or an application fee. Haven't done that yet.

But a realtor/property manager friend suggested to us that if you have too many people interested in renting all from a single day or two of showings, then you should probably raise your rent.  That turned out to be SO true for us, the one time we had too many applicants, all very interested and qualified (and we went with the first ones, regrettably, it turned out)...we were seriously under market in our rental rate. Those tenants took advantage of us at every turn. Self-entitled complainy-pants 20-somethings. Harumph.    For the next group of tenants after they left, we increased rent to $1000 per month (from $800) and we still had two interested and qualified groups. We're probably still undercharging, but not as much as before.