Few aspects of real estate management are as complex and multifaceted as the residential sector. Residential, of course, includes both single-family (houses and condominiums) and multifamily (apartments and condominium associations). As a career, managing residential property offers some of the greatest opportunities simply because of the diversity and number of properties available to manage. Being new to this industry, it’s important to be prepared for the dynamic, ongoing evolution of what it means to manage real estate. This chapter specifically examines the details involved in managing residential property as opposed to other property types.
Professional real estate managers provide services for the following residential property types:
From high-rise buildings to single-family homes, rental housing is in use 24 hours a day, meeting the housing needs for all the residents. This continuous occupancy tends to increase the demand for highly skilled professional management, maintenance, and repair. When people rent a space, they expect management to provide specific services such as yard work, window cleaning, and snow removal. If service is inadequate for any reason, the property manager might inevitably become a representation of the problem to the resident—residents have an emotional as well as a monetary value attached to their apartment. For this reason alone, having superior customer service skills is essential in addition to proficiency in the administrative functions of managing residential properties. Because the rental income of the property is usually the basis for the real estate manager’s compensation, efforts must be focused on maintaining the highest levels of occupancy, without sacrificing the quality of the resident. Satisfied residents are always more likely to renew their leases.
Management of residential property requires specific applications of the principles of real estate management already outlined in this book. The personal nature of the use of leased space makes special demands on the property’s staff. The following sections discuss characteristics of rental housing that make its management challenging, unique, and rewarding.
Gone are the days when apartments were seen as nothing more than an affordable place to stay. Today’s renter has many options and is able to choose a site and location that best suits their lifestyle. Additionally, the apartment industry offers much more in terms of concepts, design, size, and features that appeal to everyone from the millennial or senior looking to downsize or the career-minded professional with concierge needs. Newer apartments usually have standardized floor plans, appearing in the types of amenities built into the individual units and the building, or the property as a whole.
Although new buildings are generally more popular with renters, there are some renters who prefer a specific period architecture or “vintage” property type, especially in urban areas. Location, size, age, and amenities make every apartment building unique, and the challenge of managing those apartments is recognizing and accentuating the positive characteristics to create a more appealing residence and enhance the property’s value. The oversight and management involved in multifamily housing requires carefully selected, qualified on-site personnel who can execute on the owner’s management plan and enforce lease terms.
Apartment Types. With land values on the rise, many real estate developers are forced to explore high-density projects, especially in major cities. As developers build upwards, this creates more high-rise buildings. Buildings 10 stories and taller are considered high-rise buildings; however, the classification varies by region. Some larger high-rise buildings can contain hundreds of apartments and can house thousands of residents; they can also contain a variety of recreational amenities such as fitness and business centers, tennis courts, community rooms, swimming pools, saunas, and hot tubs. The availability of parking on decks or in underground garages connected to the building might be another amenity. Most high-rise buildings have a continuously staffed front desk, concierge, or they may have all-night attendants or security staff on duty when the on-site office is closed. Some high-rise buildings might include retail space on the ground floor for convenience stores or newsstands.
Mid-rise apartment buildings, a type of multiple-unit development that has five to nine stories, exists in both cities and suburbs. These buildings may include the same types of amenities as high-rise buildings—some might have central lobbies, mailrooms, or fitness centers. Mid-rise buildings in urban areas usually do not provide parking, but their counterparts in small cities and suburban areas usually do.
Low-rise buildings consist of one to four stories and may contain ten or more apartments within a single structure. Some have elevators; those without elevators are called walk-ups.
Garden apartments, another type of low-rise building, are often located in suburban areas where land is comparatively less expensive and developers have more leeway—some garden apartment communities occupy several acres. In some cases, a separate building may house laundry facilities, the management office, or recreational amenities. Appealing landscapes and quieter surroundings are part of the attraction of suburban garden apartments as compared to a downtown, urban area.
The two main factors in distinguishing different types of properties are (1) building height and (2) configuration. If land is relatively cheap, the developer can more easily construct shorter buildings and spread them out over a larger area. If land is expensive, developers construct taller buildings in order to get more apartments onto the land. The number of apartments in relation to the land area is referred to as density:
Apartment Management. The architectural design, construction, location, and size of multiple-unit apartment developments affect the complexity of managing them. For instance, high-rise apartment buildings include sophisticated elevators, centralized HVAC equipment, and other systems that require specialized maintenance. Large garden complexes offer a different set of management challenges because they have more spacious lawns and separate systems and equipment in each of several buildings. Small apartment buildings usually provide few extra services and facilities and consequently are less management intensive. However, those structures are sometimes older, and their general maintenance may be time consuming. In addition to the physical upkeep, the number of properties in a portfolio influences administrative time. If all the units in one building are owned by a sole proprietor, the preparation of an operations report on 300 apartments may be a relatively light exercise. On the other hand, 300 apartments in 30 individually owned 10-unit buildings will require the same type of reporting magnified by nine.
When part of the rent payment or other considerations impacting rent comes from a governmental body, the residential type is considered government-assisted housing. In some cases, the interest rate on the mortgage is subsidized for some government-assisted housing types. Unlike conventional housing, subsidized housing has unique marketing and leasing requirements, some legislative and regulatory, due to the nature of the property type. Public housing, on the other hand, is generally owned and managed through a local or state governmental agency. As a rule, governmental housing subsidies are either resident- or property-based (explained in more detail later in this chapter).
Private investors usually own rental property in which a subsidy is provided. The common forms of real estate ownership—partnerships, corporations, and REITs—also apply to subsidized housing. The owners’ desire for a fair return on investment (ROI) is the same as in conventional housing; however, a portion of the ROI in subsidized housing may result from additional tax advantages granted for (1) development, (2) leasing part of the property to residents eligible for housing subsidies, or (3) leasing to the local housing authority. Special loan arrangements involving lower debt service payments also increase the return so the investment is competitive with conventional housing. Another common arrangement is for the developers and investors—looking for a tax break—to build the complex and sell it to the housing authority or to a nonprofit (religious or charitable) organization that specializes in subsidized housing.
Resident-Based Rental Assistance. The Section 8 Housing Choice Voucher Program, a part of the Housing Assistance Payments Program, was authorized by the Housing and Community Development Act of 1974, which provides nationwide rental assistance to low-income families, seniors, and disabled individuals. Public housing agencies (PHAs), which receive funds from the U.S. Department of Housing and Urban Development (HUD), locally administer housing choice vouchers.
The individual or family who receives a housing voucher is responsible for finding a suitable housing unit in properties that accept such vouchers. The PHA then pays the subsidy directly to the property owner on behalf of the participating renter. The renter pays the difference between the amount subsidized by the program and the actual rent charged by the owner—usually limited to 30 percent of the renter’s adjusted monthly income. In some cases, PHAs have extensive waiting lists of prospective renters for certain properties. The voucher program has provisions that outline resident and owner responsibilities.
In addition to the traditional resident screening by property owners, HUD permits PHAs to screen applicants to define and verify acceptable documents, which is also a major challenge for real estate managers. To simplify this time-consuming task, Enterprise Income Verification (EIV) systems are extremely helpful for this process. The EIV system is a federal database that provides the information needed to verify a resident’s income—federal wages, quarterly unemployment compensation, monthly social security, and supplemental security income benefits. In 2010, HUD mandated that owners and agents use the system to reduce subsidy errors. Since the EIV system is closely monitored and protected by the Federal Privacy Act, it can only be used by authorized persons; it requires a signature agreeing to the rules and strict accessibility guidelines, ensuring the privacy of information.
A PHA may choose to use up to 20 percent of its voucher funding to implement a project-based voucher program to provide rental assistance for eligible families who live in specific housing developments or units. After one year of assistance, a family may move from a project-based voucher unit and switch to the PHA’s resident-based voucher program when the next voucher is available—meaning that the resident can therefore choose where they live. A PHA may commit to pay project-based assistance for a term of up to 10 years, subject to availability of funding from HUD. In some locations, a PHA’s payment standard (the amount paid by the housing authority from the federal subsidy received through HUD) will not support the asking rent of an apartment home. This is especially concerning for owners who like to work with the Section 8 program, but are forced to subsidize the difference between their asking rent and the PHA payment.
Project-Based Rental Assistance. Section 8 Project-Based Rental Assistance is also available directly from HUD. With this program, HUD makes up the difference between the rent that a very low-income household can afford and the approved rent for an adequate housing unit in a multifamily project. Eligible renters pay rent based on their income. HUD originally provided such project-based assistance in connection with new construction or substantial rehabilitation of existing structures. In addition to these Section 8 programs, many other federal housing programs exist. For example, the Section 202 and Section 811 programs cover supportive housing for seniors and the disabled, respectively. The U.S. Department of Agriculture, Rural Development, administers other housing programs that might include rental assistance for those who meet their qualifications.
Federal housing programs are often subject to the availability of funds, and the government may modify requirements for participation—by property owners and low-income residents—from time to time. In some cases, certain programs could be discontinued, but aspects of it do not change immediately because of the long-term commitments involved.
Subsidized Housing Management. The need for effective management for subsidized and public housing creates a demand for real estate managers who are skilled in balancing the interests of all the parties involved:
In addition to understanding the principles of real estate management, one should thoroughly understand all of the applicable local, state, and federal regulations. For example, to continue to receive housing benefits, residents of subsidized housing must be recertified periodically by the real estate manager. If dealing with subsidized and public housing, it’s important to understand the role and structure of the governmental agencies involved and the way they must work within budgets that are limited because of lower-rental income. Under most federal, state, and local housing programs, an extensive series of forms and reports must also be submitted, which is often time consuming. If the reports are improperly completed, the governmental agency will not send compensation until the reports are correct.
Managers of subsidized housing have a specialization that extends beyond the ability to work with governmental agencies. Their interactions with residents are often more demanding than in other housing types because the objective of assuring the residents’ comfort has additional social, political, and fiscal dimensions. In subsidized housing, real estate managers must establish lines of communication to overcome a multitude of barriers—ethnic, economic, social, and linguistic. In addition to maintaining peaceful coexistence at the property, the improved relations that result from their efforts help the community and society at large.
Low-Income Housing Tax Credit (LIHTC). In 1986, President Ronald Reagan signed into effect the Tax Reform Act of 1986. This marked the birth of the federal low-income housing tax credit program. Throughout the past 30 years, the program has helped house more than 13 million people. In short, a federal tax credit used to develop affordable housing can be claimed over a 10-year period. This allocates $1.25 per capita to state agencies for use in incentivizing the development of low-income residential units. The program places great emphasis on compliance and, as a result, the management companies who choose to include LIHTC in their portfolios typically employ a compliance director or department to review resident files and income certifications to ensure compliance with the state or local agency’s agreement.
In 1996, the Military Housing Privatization Initiative (MHPI) bill was passed to help the military improve housing conditions for their service members. The fundamental goal of the legislation was to partner with private-sector financing, expertise, and innovation to provide necessary housing faster and more efficiently. With the military housing privatization act, the Department of Defense (DoD) provided safeguards against any disruption in the flow of rental payments in the event of base closure, downsizing, or deployment. Military personnel receive a stipend for housing called the Basic Allowance for Housing (BAH). When private housing is created or converted on the site of the military post, the BAH is released directly to the housing manager. Unlike civilians, military personnel cannot voluntarily end their employment, but they can be redeployed as the need arises. In a time of war, deployment from the base may sorely challenge the real estate manager’s ability to turn over the residences for new prospects. This market offers many unique challenges and rewards, but not without its share of unique operational issues.
As people age, housing that suits their needs and lifestyle becomes increasingly important. Many considerations influence the type of senior housing—some retirees are more concerned with social and recreational activities while others might require more hands-on medical care. Housing options range from aging in place to full-scale assisted living. Of course, many alternate housing choices are available between the two extremes. When residents age in place in conventional rental housing, real estate managers are usually confronted with a changing occupant profile, which would require spending more time with the residents, altering the building services or building components, and being more aware of services within the community. Purpose-built senior housing requires managers, their vendors, and their partners to broaden their skillset to include knowledge of recreational amenities; food service; transportation options; and social, psychological, and medical services.
There are two primary types of senior housing communities: (1) regular rental spaces and (2) Continuing Care Retirement Communities (CCRCs), also known as buy-in communities. Both types of senior housing are designed for healthy seniors looking for security and living an independent lifestyle. However, residents of CCRCs typically pay a substantial entry fee—usually a six-figure amount—which establishes an ownership interest in a community with available nursing services. In addition to the entry fee, a monthly service fee (in essence, rent) is paid by the resident for services rendered by the community.
Regardless of the types of senior housing communities, managing these establishments involves a greater diversity of services and greater interaction with residents and their off-site families. For the most part, offering a variety of amenities and services keyed to seniors’ needs is likely to attract and retain a growing, stable, and appreciative category of residents. Associations such as the National Investment Center for Seniors Housing & Care (NIC) offer valuable resources for real estate managers working in senior housing. NIC provides research, data, and various publications for this growing market.
In the past 15 years, a niche has developed in the student housing market—luxury student housing. These newer developments, characterized by high-end amenities and high-priced rents, are located just off campus, but close enough to serve as student housing to neighboring campuses. These properties try to provide some aspects of dorm life without the parental tone, by hosting social and student-oriented events.
The types of amenities available for these developments include resort-like swimming pools with cabana and lounge, high-speed Internet, fitness centers, gaming rooms, large clubhouses for socializing events, laundry services, and granite countertops in kitchens. Some student housing is rented by the bed, rather than the unit, and strangers are placed together as they would be in campus dorms. For example, a typical unit has three to four beds with each bed priced from around $925 to $1,335 per month and includes utilities. These residences present a new set of challenges for real estate managers, who must market buildings to multiple audiences through multiple channels, while still providing exceptional customer service.
Another challenge is appealing to a greater number of audiences other than the final name on the lease. There are three constituencies: (1) students, (2) parents, and (3) college administrators. The manager must be creative in promoting the property. Using social media to publicize the property is a good starting point. It is important to keep a focus on pleasing the parents, who want to know that the building is safe, secure, and clean.
Establishing connections with local colleges and universities is essential. Once their support is gained, it’ll be easier to attract residents through their housing offices, which often provide information on off-campus housing options. Due to the nature of the luxury status of student housing, it’s essential to respond quickly to maintenance requests. Most properties provide a 24-hour turnaround in fixing any issues on the property. Managing properties catering to students requires patience, creativity, and resourcefulness.
When selecting qualifying prospects for residency, many responsibilities are involved. Before establishing a lease—regardless of the housing type—the following questions should always be asked about the prospect:
The answers to these questions are usually provided on a rental application form (Exhibit 11.1). With the exception of financial or even criminal background data, verifying some of this information may be difficult. Inquiries pertaining to prospective residents’ behavior must be made cautiously and without any bias—a decision that can be perceived as discriminatory can lead to liability. Understanding local, state, and federal fair housing laws is of the utmost importance in selecting residents. (Resident selection will be discussed in more detail in this chapter.) However, whether state law requires it or not, it’s a good management practice to inform residents of the items for which they will be screened, prior to the screening itself. For instance, in the state of Oregon, if a screening fee is accepted to cover the cost of the resident screening, the law requires that property management provide prospects with written criteria first, so they will have an opportunity to decline or accept.
Fair Housing Laws. Since the adoption of the Fair Housing Act in 1968, HUD held a lead role in its administration. Today, fair housing laws at all levels—federal, state, and local—effectively prohibit housing discrimination on the basis of race, color, nationality, sex, religion, age, family status, or mental or physical handicap. It is unlawful to refuse or to fail to show an apartment, to supply rental information (e.g., rates), or to rent an apartment because of an applicant’s protected status. It is also unlawful to impose different terms or conditions, such as extending different privileges in regard to the rent of an apartment or in providing services based on a resident’s protected class.
The interpretation of fair housing laws has been strict—partly because few people overtly say to a prospective renter, “I will not rent this apartment to you because….” Even an unwitting breach of the law can result in a discrimination lawsuit—an event that can end a career and result in a substantial monetary fine. One of the most common discriminatory practices involves steering—which includes dissuading a prospect who inquires about available property from living at a particular site, encouraging them to look elsewhere, or hiding known vacant spaces from them.
Occupancy standards vary by state and local jurisdiction, check with the state and local ordinances, or consult with an attorney before establishing occupancy standards or guidelines. Once the occupancy standards are established, they should be uniformly applied as a standard to all applicants. It’s important to maintain consistency in all phases of relationships with prospects and residents, especially when upholding the spirit of the law.
When preparing the lease, it’s important to understand the difference between a private occupancy restriction and a local building code. Most cities have local building codes that impact occupancy standards; however, building codes may not be appropriate and should not be relied on for setting a proper private housing occupancy standard—as they are customarily used in determining occupancy for single rooms and studios. In addition, while many state and local fair housing enforcement agencies try to persuade housing providers to adopt occupancy policies that may allow more than two persons per bedroom, most of these agencies are not acting pursuant to any established law. Always be aware that those states may accept familial status complaints based on a two-person-per-bedroom limitation, and be sure to check with an attorney to avoid a familial status complaint based on occupancy standards.
Fair housing law also applies to marketing materials. Advertisements should never include words or images that indicate or imply any limitations or preferences in the rental of apartments—or sale or other transactions related to housing. Some state and local jurisdictions may publish lists of words that rental advertisements may not use. As a rule of thumb, describing the specific property being rented, as opposed to the type of resident being sought, is an acceptable policy for such advertisements. For example, it is acceptable to state that this is a nonsmoking building, but it cannot be advertised that only nonsmokers are welcome. Additionally, it may be interpreted that having policies against certain behavior directed solely towards children can be discriminatory. For instance, posting a sign that says, “No children allowed on the lawn,” could be discriminatory against familial status. If the lawn is a concern, the sign should simply state, “Please stay off of the lawn,” and it should apply to all residents.
Fair housing laws are always subject to change, particularly as states and local jurisdictions enact their own rules and courts adjudicate discrimination lawsuits. Local requirements are often more stringent—they may include additional protected classes (e.g., sexual orientation)—and the most stringent law in place is at the local level. Two ways to remain informed on these important laws are to (1) consult with an attorney and (2) read on the subject of fair housing.1 Because these laws are constantly being expanded, real estate managers are responsible for staying up to date on the local, state, and federal fair housing laws.
Rent-Paying Ability. A prospect’s past payment record, sources and amount of income, and level of indebtedness are the main considerations in determining rent-paying ability. The amount of rent as a percentage of the individual’s income is not by itself a definitive indicator of an individual’s ability to pay rent. The size of a household and the number of its members who are employed affect the amount of money available for rent.
Most occupants of rental housing pay their rent from current income. Use of reserves or proceeds from financial investments is not common. The resident who loses a job may soon be unable to pay the rent because they do not have enough cash in reserve to meet living costs for an extended period. In times of financial difficulty, some real estate managers accept proof of significant assets.
Income Sources. Examining prospective residents’ sources of income to verify their ability to pay rent is fair and necessary. Factors to consider are the length of time a worker has been in a position with a company, the amount of income and frequency with which it is paid, and the nature of the employer’s business. Individually, these factors may not qualify or disqualify a prospect, but taken together, they can be a good indicator of personal financial strength.
Review of these factors may cast a favorable light on a prospect, but none of them indicate whether they manage money wisely. A large family with limited means may be very frugal, while someone with a large income and a secure position might not. Just as verification of sufficient income is important, so is checking the applicant’s payment record for loans and revolving credit programs. Regular and timely payments signify responsibility and ability to manage money.
Credit Reports. Real estate managers generally hire credit bureaus or consumer reporting agencies to conduct the financial investigation of an applicant. The resulting credit report includes information on bank accounts, credit card debt, outstanding loans and judgments, and bankruptcy filings that can help determine how much of a prospect’s income is already committed. Credit bureaus give individual consumers a credit score based on their credit activity. Many real estate management firms require that prospects meet a minimum credit score in order to qualify for a lease at properties they manage. Businesses are willing to provide a reputable credit bureau with accurate information because they may rely on the credit bureau for information themselves or they may foresee a use for the service. With a credit bureau’s well-known reputation for maintaining confidentiality and for being a reputable organization, they know precisely what to ask without inadvertently requesting information that cannot be shared. Keep in mind that using a third party to check credit shifts the real estate manager’s responsibility at lease initiation.
Regardless of how the information is acquired, the Fair Credit Reporting Act (FCRA) requires that the prospect be advised that their credit is being checked. A standard rental application form usually includes a statement that the prospect—by signing the form—authorizes the property owner to verify the information provided. The FCRA also requires written authorization to investigate any other aspect of the applicant’s background—e.g., occupancy history, employment, and criminal record. Applicants who are rejected based on a negative credit report must receive written notification of the adverse action. The letter must include four major areas: (1) give names, addresses, and phone numbers of all consumer credit reporting agencies that provided information; (2) state that the agencies only provided information and were not involved in the rental decision; (3) advise the applicant of their rights to obtain additional information from the credit reporting agency; and (4) provide a consumer statement describing their position.
Respect for Property and Neighbors. Real estate managers are permitted to inquire about a prospect’s rental history—whether they maintained the properties in which they lived and displayed the required respect for the “quiet enjoyment” of the neighbors with whom they shared the dwelling. However, that is difficult to verify. The information is usually beyond the scope of a financial investigation, although other local firms may be engaged to perform such background checks. Such firms may also scan public records for evidence of evictions and checks returned because of insufficient funds. It is extremely important not to invade a prospect’s privacy. Length of residency is additional evidence of reliability. A succession of moves may imply instability, while long-term occupancy tends to indicate that the prospect is dependable. Keep in mind, however, that in an active market with substantial new construction, a succession of moves may only indicate a prospect’s search for the best rental deal.
It’s also important to note that a complete criminal history may not be given if the prospect intentionally failed to list a previous address. Check carefully for gaps in the prospect’s rental history and ensure that background checks and collections are handled by a vendor specialist. Failures in these areas have led to expensive lawsuits and serious crimes. Although taking the extra time to check on the background of prospective residents can seem time-consuming, in the end it’s beneficial to secure a lease with trustworthy and responsible people.
The lease protects the resident’s as well as the property owner’s interests. In an attempt to dispel any negative connotations of the word lease, management firms sometimes call a residential lease a rental agreement. The lease for any rental property is based on the intended use of the space and any special provisions for that usage. Residential leases by nature are not complicated, but they must include certain provisions and clauses discussed in the following sections. Some states require residential leases to be written in “plain language” because they might require preapproval of the lease, and violators may face stiff penalties.
Lease Clauses and Provisions. Printed lease forms include specific clauses that define the leased space, govern the payment of rent and handling of security deposits, and state the responsibilities of and the relationship between the property owner and the resident. These forms usually include various protections for both parties. The clauses listed below are especially important:
Parties to the Lease. The lease should state that all of the signers are responsible for paying the rent and fulfilling the lease agreement. In some situations such as college student housing, having unrelated individuals sign separate leases may be appropriate. While having multiple leases for one rental unit may seem cumbersome, it facilitates changes in occupancy. Having an individual lease for each roommate makes it easier to evict one resident who is irresponsible or behind in paying rent. That arrangement also prevents friends of the residents from becoming long-term guests.
Lease Term. While no standard lease term for residential property exists, one year is the usual period; six-month or month-to-month terms are also common. The length of the term is often based on what is popular in a given market. In most markets, a written lease that lasts at least one year covers residential units that command high rents.
Establishing the term of the lease has advantages and disadvantages. When a lease is signed, the rent is probably the highest the market will bear at the time for the space leased. If market demand rises during the lease term, the owner has essentially undersold the space. If the market declines, the resident has agreed to a rent that may exceed the rate for comparable space.
Other circumstances may also justify a modified lease term. For example, a prospect who needs to find a place to live during the winter and an owner who wishes to fill a vacancy during that period are both limited in their options because little turnover occurs in winter, especially in northern regions. If a qualified prospect is found, a 16- or 17-month lease may benefit both the owner and the resident even though the period is unusual. The longer lease term would preclude the unit becoming vacant the following winter, and it would protect the resident from having to move again in the cold.
Condition of Premises. Prior to a resident’s moving into an apartment, a statement of condition is a reflection of what a real estate manager notes during their inspection. Incidental damage may be noted so a new resident will not be charged for it on move-out. Some residential leases spell out the resident’s responsibilities for maintenance within their leased premises—e.g., cleaning carpeting once a year, keeping appliances clean and in working order, not keeping hazardous substances other than appropriate cleaning aids, etc.
The statement of condition also includes information about what charges for damage the management will assess at move-out and what it considers to be normal wear and tear. The overall purpose of the statement of condition establishes the state to which the resident is expected to restore the apartment at the time of move-out, in order to receive their full deposit without offset.
Non-Refundable Fees. Depending on state law, some properties allow the collection of cleaning and move-in fees that help offset the expenses incurred for turnover. If this fee is charged, some states require that an itemization be provided to the resident detailing how the fee was used (or will be used). On the other hand, some residents think because they paid a cleaning fee, they can leave the apartment in worse condition than they ordinarily would. While such fees may cover the cost of turnover carpet cleaning or other turnover expenses, there can be an inherent list of dos and don’ts that come with them as well.
Pet Policies. Regardless of the property owner’s decision of allowing pets in the units, a pet clause is necessary.2 The lease can establish thorough guidelines that specify what’s allowed and what’s not. Alternatively, pet policies may be stated in a separate pet agreement that the pet-owning resident signs, or the policies may be listed in the resident’s handbook (discussed later in this chapter). The provisions in a pet agreement may just reiterate local ordinances, but if they are a stipulation of the lease or of house rules, they are easier to enforce. Guidelines often set limitations on the type, size, and number of pets allowed—requirements should be listed for damage deposits, use of leashes, and cleanup of animal wastes—and reiterate legalities related to licensing and vaccinations (Exhibit11.2).
Separate agreements may also state an amount of monthly “pet rent” that has been established for each pet, which essentially allows owners to collect a premium for the inevitable wear and tear that a pet can cause on an apartment. Although a pet policy may appear harsh when itemized and listed in an agreement, remind the resident that these measures are similar to advice given by pet associations and humane societies. In addition to protecting the owner’s property, these policies safeguard the pet and protect all residents of the property.
Right of Reentry. The resident is entitled to quiet enjoyment of their leased space, free from disturbances by others and by the management. However, the property owner is granted the right to enter an occupied apartment to make repairs, provide agreed-upon services, and show the apartment to prospective residents and others—subject to certain limitations, which should be specifically stated in the lease. For ordinary repairs, obtain written permission to enter the premises; notification requirements may be prescribed by law. In case of emergency, the property owner can enter regardless of whether granted admittance. Real estate managers typically inspect apartments to review maintenance issues, to ensure the proper functioning of smoke alarms, and to check the overall cleanliness of the apartment at least once or twice per year. Frequent inspections that lack a specific purpose could be construed as harassment, which violates the resident’s right to their quiet enjoyment of the property.
Subleasing. In certain cases, prospects request inclusion of a transfer clause that allows the resident to break the lease without penalty in case of a job transfer. If that is the case, request documentation from the resident’s employer to that effect. On the other hand, a prospect who is renting while also looking to buy a house may ask for a home purchase clause that similarly allows the resident to break the lease in the event a purchase transaction is closed before the lease term ends.3
The lease may also contain a sublet clause, which states that in order for the resident to vacate the premises before the end of the term, the resident must find a suitable replacement to sublet the space for the remainder of the lease obligation. The replacement resident must be approved and the resident or the subtenant must pay for the credit check. In the event of a job transfer, the employer may use its resources to help find a subtenant, or it may pay, on the employee’s behalf, a negotiated penalty for breaking the lease without finding a subtenant. If the subtenant defaults, it’s the responsibility of the original resident to pay for the remainder of the lease.
Services and Utilities. Residents are usually responsible for payment of utilities, such as gas and electricity, for which the utility provider bills them directly. The lease should state specifically what utilities are the resident’s responsibility. This is especially important if residents pay for their own heat, water, and sewer. If some utilities are charged to the property owner, such as a boiler providing heating for the entire building, a system for prorating such expenses—based on apartment square footage or some other generally acceptable formula—may be implemented. Some residential properties include utilities in the rent.4
Rules and Regulations. To guarantee the safety and protection of residents, their rights, and the physical integrity of the property, a set of rules and regulations should be distributed to residents in the form of the a resident’s handbook. In addition to reiterating information from the lease, the resident’s handbook states specific policies regarding trash disposal, laundry room, common area amenity use, and permissible or prohibited furnishings. To encourage residents to abide by these rules, residents should sign a form accompanying the handbook stating they understand the rules. The lease should also contain a clause stating that the resident understands and will abide by the house rules. To make the house rules more acceptable, they can be called policies rather than rules and regulations—positive statements are more readily accepted than a list of what is not allowed. Exhibit 11.3 lists some items that a resident’s handbook can include. Certain items that are not covered specifically as lease provisions should be listed in an addendum and incorporated into the lease by reference.
Compliance with Landlord-Tenant Laws. Most if not all local jurisdictions have laws that affect the rights of residents; known collectively as landlord-tenant laws, they state the rights and obligations of owners and residents and detail what either party can do if the other does not comply with the lease or the law. Landlord-tenant laws usually govern issues that the lease clauses or policies (rules) for the property address. In particular, they define habitability, regulate the handling of security deposits, set the maximum late fee, state provisions and requirements for subleasing, explain insurance requirements, and specify procedures for eviction.
Certain locales also have rent control laws that set a maximum on the amount of rent that an owner can charge or the maximum allowable increase on renewal or both. Rent control is a concept that some metropolitan areas see as a way to maintain affordable housing, but it does not benefit owners or residents over the long term. If rent is held below what the market will bear, the income of the property may not be adequate to maintain it properly. The result will be a greater concentration of poorly maintained residential space; properties that are not maintained lose value. Depressed property values reduce municipal income because of the lower real estate taxes they yield. Since it reduces or precludes the potential for financial success, rent control also discourages new construction.
Rental Forms and Other Resources. Local associations like IREM or the National Apartment Association (NAA) exist in most states. These associations provide rental housing forms that comply with the latest and most up-to-date landlord-tenant laws in the area. Certain forms, such as regular leases, screening criteria, lead-based paint pamphlets, pet policies, and late notices, can be purchased in bulk and used as main forms for the property. Some associations also allow these forms to be completed online, with a subscription, so as to eliminate the need to purchase a stock of forms that may later be out-of-date when new laws or regulations are implemented. Either way, associations do most of the leg work to help eliminate the need to create or monitor such forms for their legality.
There are many creative ways to have strong resident retention program through a solid marketing strategy that might have been established for a new residential property, or for a new initiative when taking over an existing property. Along with having good resident relations and maintaining great upkeep on the property, gaining lease renewals is the ultimate goal.
Encouraging Lease Renewals. Residents whose leases are nearing expiration should be contacted two to three months before the expiration date. Some real estate managers send out a new lease, while others simply send a renewal notice stating any change in the rent and noting any specific changes in terms and conditions of the prior lease. Hand delivery of a renewal lease or a follow-up visit is a way of showing residents through personal contact that their tenancy is valued. However, personal interaction with a resident does not have to be limited to lease renewal time. Frequent, but respectful interaction with residents almost always results in a more positive experience for both parties, making the renewal process more pleasant and meaningful.
Unit Improvements. Even though residents generally anticipate a rent increase, they may protest it. Because of the potential for reaction, focus on lease renewal as the time to improve the unit. Upgrading is a sound business practice and can be an incentive for the resident to renew. Upgrades can include items such as new appliances or painting a few rooms. In fact, improvements might actually be necessary to keep the unit competitive in the market if the resident does not renew the lease. The following lists three main benefits to improving a unit as part of a lease renewal:
Properties in which individuals own dwellings, along with a shared interest in so-called common areas, are called common interest realty associations (CIRAs). Examples are condominiums, cooperatives, and planned unit developments (PUDs). Managing CIRAs is different from managing residential rentals because of the ownership structures involved.
A condominium is a multiple-unit residence in which the units are individually owned. The word “condominium” literally means “joint dominion,” where the domains (homes) are arranged together in a single property. An individual who owns a unit in a condominium development actually owns the space bounded by the floor, walls, and ceiling of a particular unit (or townhouse) but does not own the land that it sits on.
Managing condominium associations can be a difficult venture for newer real estate managers who are not accustomed to managing associations. Since the owners of each unit have a stake in the decisions made about the property through the Board of Directors, the real estate manager will commonly become the go-to person for any conflicts, essentially becoming a quasi mediator between the two groups.
Common Area. The rest of the property—hallways, lobbies, grounds, and any other part of the property not individually owned—is referred to as the common area. Individual owners technically own a percentage of the common area, and this percentage is usually based on the square footage of their living areas compared to all of the living area in the building. It may also be based on the desirability of the individual unit; irrespective of square footage, some units will have higher values because of various amenities and, therefore, represent a greater percentage of the entire property value. However, common area ownership is undivided, so no owner can claim a particular section of common area as their own.
Condominium Association. State law requires that condominium unit owners form a not-for-profit corporation comprised of all the individual owners, the condominium or homeowners’ association, which discusses and acts on common concerns of the property. All owners are association members with a board of directors elected from among the membership. Among the board of directors, the association members elect individuals to serve as officers. A large association may have a president, vice president, secretary, and treasurer, while a smaller association may combine responsibilities. The remaining board members, who are not officers, are at-large members. The condominium board is responsible for managing the property and normally hires or contracts professional management.
Ownership of a condominium does not mean that the owner must live in the unit. An owner may move out but not want to sell the unit. As an investment, the owner may lease the unit to someone else whose rent payments ensure that the mortgage and monthly assessments will be covered. In fact, some people invest in condominium units solely to lease them to others. Since renters have no vested interest in the condominium, they cannot participate in the association, so having a large proportion of a condominium’s units occupied by renters can pose problems. The renters of these condominium units might feel they have no voice in how the property is managed or maintained and, therefore, may be reluctant to come forward when there are issues that could affect other renters or homeowners. In addition, lenders might be more reluctant to finance a condominium purchase if more than a certain percentage of the units are not owner occupied, which is an issue that should be addressed by the condominium association.
Governing Documents. In addition to hiring and communicating with real estate managers, the condominium association upholds and fulfills the tenets of the governing documents, which usually include the following items:
Two other documents relate to the establishment and operation of a condominium: (1) the articles of incorporation, which state that the condominium association is a corporation under the laws of the state and (2) the house rules and regulations, which are the guidelines for day-to-day behavior on the premises and for settling disputes that may arise. Although many rules are common among condominium properties, each association is likely to establish their own unique rules that might cover anything from pets to noise to parking.
Assessments. The bylaws or a separate document usually specify the percentage of the property owned by each unit owner by taking into account the amount of living area—and possibly the desirability—of each unit. These percentages are the multipliers used to calculate the monthly assessment paid by each owner, which is used to pay the operating expenses for the whole property—common-area services, maintenance, and management.5
The regular assessment collections must also factor in the reserve funds, which can be used to pay for anticipated and unanticipated capital expenditures. If a capital expenditure is required and reserve funds are not sufficient to pay it, or if the association chooses not to deplete reserves to pay the expense, a special assessment will be necessary to defray the cost.6
Timeshares. The timeshare is a specialized form of condominium found mostly in resort areas. As the name implies, the owner has the right to occupy the unit for a specific period of time. There are several ways to set up a timeshare condominium. In order for the owner to have an actual share of property and its accompanying tax advantages, they might cooperatively own a percentage of a condominium unit. In other words, a person who owns one month’s possession of one unit every year may own 30/365 of a unit. On that basis, a 100-unit building could have 1,200 or more owners.
Fractional Ownership. Similar to the idea of timeshares, fractional ownership—sometimes called private residence clubs—divides a property into more affordable segments for individuals and also matches an individual’s ownership time to their actual usage time. Unlike timeshares, fractional ownership often allows a longer time on the property and a greater chance of property appreciation, while offering the same rights as any other real estate purchase. Although the cost of a fractional property is quite a bit higher than that of a typical timeshare, it is still less expensive than whole ownership of a luxury home in the same location.
Cooperative ownership differs from condominium ownership in that the cooperative incorporates itself to purchase or build a multiple-unit dwelling and issues shares in the corporation to represent the proportion of ownership of the entire property. A single mortgage covers the entire cooperative property, and shareholders receive a proprietary lease that entitles them to occupy one unit. This traditional ownership structure is common, and unit owners can pledge their shares in the cooperative corporation as collateral for a loan. The proprietary lease is assigned to the lender—the transaction is recorded in the land records—and the lender obtains a recognition agreement from the cooperative corporation. Under the agreement, if the borrower or unit owner defaults on their obligation to the cooperative corporation, the corporation will give the lender an opportunity to cure the default before the cooperative forecloses on the unit.
Managing a cooperative differs from managing a condominium in several ways. Residents tend to be long-term, highly stable, and consistent. Decisions for the cooperative are made by a board, which is comprised of shareholders in the corporation. However, cooperative boards can be more active than condominium boards, and they sometimes enforce greater restrictions on the property. The board must interview and approve new residents. It may have the right to approve or deny improvements to units. The board may stipulate that all sales of shares must be on an all-cash basis, and it might state that only shareholders can reside in units, that is, they cannot be bought as investments and leased to others.
The residential planned unit development (PUD) combines the concept of the conventional neighborhood subdivision with characteristics similar to condominium ownership. Most residents purchase their dwelling, the property, and an undivided share of the common area—roads, parks, and recreational amenities— within the PUD. The residents pay a monthly assessment to maintain the common areas. The assessment may also pay for lawn care, snow removal, and other services for individual units.
A developer normally designs a PUD as a single entity before ground is broken, much as the plans of a building are completely drawn prior to construction. Unlike a single building, however, the PUD may be constructed in stages over several years. A characteristic of PUDs is that the developer pays as much attention to the location of open space as to the placement of buildings. Although open spaces are emphasized, land is used more intensively than in conventional subdivisions because townhouses and multiple-unit dwellings are more common than single-family homes. This concentration of land use particularly benefits the following three groups:
A PUD is a departure from conventional residential zoning; therefore, the term planned unit development also refers to a special zoning apparatus that permits the undertaking. Because it is a unique zoning form, public officials can be heavily involved in the site plan review and may play a key role in determining the nature and shape of the PUD.
In addition to dwelling types that may range from detached houses to rental apartments, a very large PUD may include retail and service facilities if such facilities are not immediately accessible from its location. In most cases, a homeowners’ association comparable to that of a condominium governs the PUD. However, the developer may be more prominent in the homeowners’ association of a PUD, especially if the property has rental units.
Since only property owners can be association members in PUDs that have both privately owned and rental residences, renters do not have a voice in the association. The collection of assessments for common area maintenance would be the major responsibility of the real estate manager. In fact, the association may rely on them to create the assessment structure, which might entail a variety of separate collections including standard assessments, special assessments, rental security deposits, and rents. Maintenance services provided may encompass landscaping as well as general upkeep and repair of apartments, building exteriors, roads, and amenities.
While the homeowners’ association governing a small number of units may manage the property on its own, larger properties require full-time supervision, which is usually why a real estate manager is hired—or retained as a consultant. Unlike rental property, condominiums and cooperatives have no effective gross income; PUDs may have some rental income as previously mentioned. Their monthly assessment collections are based on anticipated expenses, including management fees and funds for reserves. Because of this, compensation for management is usually a fixed monthly amount, which is prorated into the owners’ monthly assessments. However, separate fees may be negotiated for specific additional services or for attending after-hours board meetings.
Owner Relations. Because each encounter between a staff member and a resident is an encounter with one of the property owners, all management employees must understand their relationship to the owners. Their efforts to extend goodwill should not compromise the agreement between management and the board of directors. Because the residents actually own the property, they may think the staff is at their service for any maintenance or repairs in their individual units. However, owner-residents usually have to pay separately for such services. Depending on the management agreement, the residents may have to call an independent service of their choosing or pay the association to have the work done by staff. To be fair to the other unit owners, the individual owner must reimburse the association for an employee’s work on an individual unit. As a convenience, some properties can provide service in individual units at no extra charge to residents. However, the association members must agree that such a benefit is worth higher assessments for everyone.
Working with a Board of Directors. Each year, the association usually elects a board and new officers, or it may have an annual election with staggered multiple-year terms to ensure consistency of the board’s decisions. The meetings are usually after-hours in one of the resident’s units or in an office or common room on the premises. Because the board meeting is also a gathering of neighbors, the agenda may yield to tangential discussions. Sometimes complications can arise when disputes occur among the owners, board of directors, and real estate manager.
By virtue of living in the same building or property, the proximity of the board members encourages frequent meetings. Real estate managers are required to attend some meetings. However, the amount of time spent at these meetings can often be minimized if the management agreement includes an hourly fee for attending meetings.
While the board makes management decisions, the real estate manager might be the one who carries out those decisions, which sometimes requires mediating differences of opinion among the board members. Real estate managers are probably better qualified to decide which course of action to take. However, management decisions may provoke dissent because some board members might consider the manager’s viewpoint biased. Because these differences of opinion can be extremely frustrating, it would be smart to have the board hold the president responsible for communicating with the real estate manager; that will help prevent conflicting demands and bombardment from several owners at once.
Maintenance. As owners of the property, the residents will be especially attentive to maintenance of the building and grounds. While a rental property must be sold as a whole, the units in a condominium (or PUD) or the shares of a cooperative may be bought and sold independently. Rental property can tolerate some deferred maintenance for a limited time without losing value. However, once the owner decides to sell a rental property, they must correct its deferred maintenance to assure the highest sale price possible. In contrast, any deferred maintenance of a resident-owned property, whether in a particular unit or in a common area, lowers the individual unit or share value. The real estate manager may occasionally have to remind the board or the president of that fact, especially when a repair is extremely costly. Because resident-owned properties are investments and resale potential is paramount to the resident-owners, it’s important to be aware of a heightened demand for custodial maintenance. It is especially important to work diligently with the association to ensure that adequate funds for maintenance of the property are budgeted and sufficient funds are in reserve.
Fiscal Affairs. The assessments paid by unit owners are primarily to cover the operating costs of the property that they own in common—insurance and utilities. These costs must be kept under control to minimize the residents’ individual assessments. However, assessments should not be so low that a provision for reserves is lacking. Low monthly assessments usually result in requirements for special assessments every time the property needs a major repair. If only one or even a few residents do not have the money available to pay a special assessment when it is levied, the necessary work may be jeopardized. For this reason alone, accruing an adequate reserve fund through the regular assessment is important. Encourage the board to develop ample reserves since it’s in the owners’ best interests to preserve the value of the property as a whole and to enhance it. Prospective buyers recognize the value of a large reserve and will be more inclined to pay a higher price for a condominium or PUD unit or shares of a cooperative because of it.
As a rule, a homeowners’ association can apply for tax-exempt status under the Internal Revenue Code in the following four situations:
Some sources of income, such as interest earned by reserve funds or fees received for special use of amenities are not exempt under any circumstances, especially since tax exemption protects the principal of the reserve fund. If the association does not have exempt status, the IRS could construe that the reserves collected as part of the assessment are the association’s profit, and it could tax them accordingly. Periodically consult a tax specialist for updates on rules governing tax exemption of a homeowners’ association. It is always good practice to keep up with changes in state laws regarding different types of common-interest realty associations.
There are plentiful variations on traditional rental and ownership arrangements; they include single-family homes, manufactured housing (mobile home parks), military housing, and senior housing. Few real estate managers work exclusively with these types of properties, but they represent a large part of the housing market. In some localities, one of them could be the dominant type of housing.
A single-family home is defined as a house that has its own entry. Townhouses are also classified as single-family homes because, by definition, they share a common wall but have private entrances. A single-family home requires a smaller financial commitment than a multiple-unit dwelling—the percentage required as a down payment is often lower, and owners usually resell a house more quickly and easily than a larger property. Some first-time real estate investors start in this manner. Those who buy a house to live in when they retire and retain their original house as a source of rental income make up another group of investors. There is also a trend in the growth of vacation homes, which are rented out when the owners are at their primary residence. Because these investors may live far away from their rental properties, they often seek professional management services.
Since houses used as rental units are rarely next door to each other, they can generally be more time-consuming to manage. If an owner demands a level of maintenance that exceeds what can be required of the resident, the general upkeep of the premises can be as time-consuming as it is for a larger property. Marketing and leasing require more time because of the amount of travel to the individual units. In all likelihood, each rental house in a management company’s portfolio will be individually owned, and reporting to numerous owners is required—many of whom do not live nearby.
In essence, real estate managers can end up doing the same, if not more, work for single-family home management as for a 12-unit property. Despite these seeming disadvantages, some real estate managers have marketed their skills exclusively to the single-family home rental market with great success. In fact, a house usually commands more rent than an equivalent-sized apartment due to the value placed on greater privacy, more accessible parking, and a private yard. Another benefit is that some owners allow residents to take care of the lawn and other yard work, further reducing extra maintenance tasks from the real estate manager’s end.
Manufactured housing is usually built at a factory and, depending on its width, is transported to the installation site in halves or as a whole. At the site, final assembly and connection of the home to gas, electrical, water, and sewer facilities takes place. In most cases, zoning laws prohibit manufactured housing in neighborhoods of conventionally built houses. For the most part, manufactured housing is found in areas zoned for mobile home parks. Residents of these communities generally own their homes, but they rarely own the land. They pay an access charge for the utility connections and maintenance of community roads and amenities. However, residents are responsible for maintaining their homes and private yards, and the utility company bills utilities directly to residents of the manufactured housing community. At other times, the community may serve as a distributor and bill residents for the utilities they use.
A manufactured housing “condominium,” which is popular in resort areas, is an arrangement in which the owner purchases the lot in addition to the manufactured housing unit and pays an assessment for community services and amenities. The form of management for a manufactured housing community depends on what is managed. Community owners may contract with real estate managers to lease lots, collect rents, manage park staff, and supervise the placement of homes on lots in the park. The real estate manager might be responsible for maintaining a clubhouse or other recreational facilities, supervising an activities director, or overseeing any other special services the community offers.
Maintenance for residential properties is usually more intensive compared to other property types because of the amount of wear and tear of having residents 24/7. Once maintenance is required, the resident must be informed prior to staff entering the premises—failure to inform before entry is interpreted as trespassing in a court of law. Certain local or state ordinances require that a written notice be given a certain number of hours before entering a unit. Entry without advance notice is only permissible in case of emergency or a malfunction that threatens the property or general safety. In these specific cases, some jurisdictions require that a note be left in the premises indicating that the property was entered and the purpose (the emergency).
After a resident moves out and before another moves in, management has an opportunity to do extensive maintenance and repairs in a vacant apartment—sometimes specifically for marketing purposes. To minimize vacancy periods and maximize rental income, all units must be attractive and all components must be operational. Even though a vacancy that lasts a month or more reduces income, it can provide significant time to paint and repair the unit. New residents should walk into a unit that is in superior condition, not only for their satisfaction as a customer, but also to avert future service calls.
If the time and resources are available, the staff should inspect a vacant apartment as often as possible, perhaps even as much as every day, depending on circumstances. In relation to weather, inspect for frozen pipes after a snowstorm or water leakage after a rainstorm. Periodically inspect for signs of a break-in or vandalism, depending on the location. As the staff inspects and repairs vacant apartments, a unit make-ready report (Exhibit 11.4) is a useful guide to help verify which units are ready to be shown or to be inhabited by a new resident. During the move-in and at the move-out of a unit, accompany the resident for inspection. In doing so, a combination move-in/move-out inspection form will most likely be used since it has spaces for signatures for both the manager and resident. This form documents the unit condition and its acceptance by the resident at move-in, and it helps minimize disputes regarding condition at move-out—if the real estate manager needs to retain part or all of the security deposit to cover the cost of repairs.
Common area amenities are unique to each residential property and require special care and attention. While the foregoing maintenance considerations are specific to rental properties, condominiums or cooperatives—especially older properties converted from rental use—may have similar facilities and similar requirements for maintenance. For instance, manufactured housing communities and PUDs have road repairs in addition to maintenance of amenities, and all properties that provide parking must maintain the parking lots or garages.
Laundry Rooms. The laundry room is a perfect example of an amenity that should be as clean and inviting as the rest of the property. Maintenance of the room itself is a management responsibility, which is why it should be regularly inspected for wet or soapy floors that can cause a fall, air ducts and drains that might clog with lint, and trash that can accumulate in the area. The regular maintenance of the washers and dryers is often contracted to a company that specializes in this service, and the cost is paid out of the revenues from the machines.
Storage Areas. Storage spaces not attached to the units are usually located in a common area, often in the basement. Typical storage spaces are enclosed by wooden or wire floor-to-ceiling partitions that the resident can secure with a padlock. Storage spaces should be protected from seepage, flooding, mildew, and vermin.
Swimming Pools. Many larger developments offer indoor or outdoor swimming pools for residents and visitors. Although these can be a great attraction, pools also pose a serious danger. To minimize the risk, post and enforce rules for pool use that include hours of access. The maintenance staff must monitor the chlorination (or other chemical treatment) level and regularly vacuum the pool. For reasons of safety and security, staff must periodically check fixtures such as fences, gates, and ladders.7
To avoid a financial loss from damage to the property, the best choice is to consult a capable and knowledgeable insurance expert. Unique aspects of a property require inclusion of certain provisions in its insurance coverage. For example, a residential property in an area not prone to earthquakes will most likely not require earthquake insurance; however, insurance for property along the California coast must include this type of coverage. Likewise, a condominium association would not require insurance to protect against the loss of rent in the event of damage to its building, but the insurance of a rental property should include rent loss coverage. In fact, the mortgage holder may require such protection. If the building sustains a physical loss, insurance covering the building will pay to restore the premises. During restoration, however, the property may be partially or completely uninhabitable, resulting in little or no income. Rent loss coverage provides some income to the owner during restoration and thereby reduces the prospect of foreclosure.
Two main types of insurance are common for residential properties:
An option for lowering the premium cost is to carry a deductible, which is a certain amount the owner agrees to pay before insurance pays for any of the claim. This practice benefits both the insurance company and the property owner. The owner pays a lower premium, and the insurer does not have to investigate or pay small claims. A deductible may be $500, $5,000, or $5 million—depending on the circumstances, policy, and negotiated terms. The deductible may apply per occurrence, per building, or per year.
Most insurance policies for damage to a property have fire insurance as their basis. That is especially important for residential properties because of the unpredictability of a fire starting in a private residence. There are often careless causes, such as cigarettes left smoking, stoves that were never turned off, and outdoor grills or candles that were not carefully put out. Fire protection itself is not enough, nor will fire insurance necessarily pay for fire damage under every circumstance. It might pay for direct loss but not for related smoke and water damage. Greater protection is provided by adding extended coverage insurance, which usually encompasses damage from specific perils. Coverage is still limited, however, and broader coverage may be desirable.
A special form policy is more comprehensive because it includes most of the coverages commonly obtained as separate policies, and pays for anything that is not named as an exclusion—anything can be excluded. Special needs can be accommodated by paying additional premiums for specific add-ons, such as boiler coverage or water damage.
Insurance for acts of terrorism may be included in a policy or offered as an endorsement for an additional premium. For most residential properties, with the exception of those in potentially vulnerable locations—urban centers or near military installations—insuring against acts of terrorism may be a questionable expenditure. Advice of the owner’s insurance agent can be helpful in this regard.
In certain cases, real estate managers may need to do some research to find out about the land or area to obtain the proper coverage. For instance, some real estate managers have worked on properties that were located in a flood zone and did not have the proper coverage when it was needed. However, most management agreements state that it’s the owner’s responsibility, rather than the real estate manager’s, to obtain insurance.
Each residential property usually requires a unique insurance plan to maximize coverage, especially since the level of coverage and type of policy vary with the insurance carrier. Insurance for one property may come from several different insurance companies, and numerous endorsements or riders may ensure protection against particular circumstances that the basic policy does not cover.
Possibilities for endorsements are unlimited. If the property has a rare sculpture on its grounds, an endorsement may be added to the basic policy to insure against theft of or damage to that particular piece of art. To obtain the best possible coverage for the lowest premium, carefully calculate the costs and benefits of each type of additional coverage (endorsement). An owner of several properties may be able to group them together under a single blanket policy at a reduced overall premium. In this way, one or two higher-risk properties might be included in the package at a lower rate than they might otherwise receive, which is especially critical for properties that run close to break even, helping reduce the overall expense ratio of the property.
Administration of such complex insurance coverage is also complicated. Real estate managers usually have the responsibility of filing claims and ensuring that premiums have been paid—although some owners elect to do this work since they are named as the primary insured party. However, as the owner’s agent, the real estate manager will act in the owner’s place with regard to the property. For this reason, the owner should agree to list the real estate manager as an additional named insured party on all policies; that will protect the manager and expedite the handling of claims when contacting the insurance company.
Physical damage to the structure is only one type of risk that owners and real estate managers must guard against—liability is another. In particular, if an individual is injured or dies on the premises, the real estate manager or the owner may be deemed liable, which is determined in a court of law, usually in response to a lawsuit. The expense of court time and the prospect of a judge or jury awarding damages to a plaintiff make liability insurance essential.
Liability insurance protects the owner from financial ruin. It pays the expense of defense against the claim and, if the owner is ruled liable, it pays the settlement. The premium for liability coverage is usually a flat rate per $100,000 of coverage. Additional coverage may be obtained by carrying umbrella liability insurance, which is a separate policy that will pay claims that exceed the basic liability coverage. Because the owner is not the only possible defendant in a liability suit, the real estate manager should be identified as an additional named insured party in the owner’s liability insurance.
Regardless of the amount of insurance or the types of coverage a property owner carries, the owner’s insurance only protects the property, the owner, and the real estate manager. The residents’ personal possessions are not covered. For this reason, the real estate manager should encourage all residents to carry renter’s or homeowner’s insurance—depending on the nature of their residency.
Managing residential property is particularly challenging but can also be rewarding. Each property has the potential to create unique situations that require specialized management skills. For instance, government-assisted properties require additional administrative paperwork and compliance with legalities with a heightened awareness of laws. In all rental properties, real estate managers will always work with an owner, but this basic concept becomes more complex when dealing with CIRAs and homeowners’ associations since the residents are the owners.
Whether working with a conventional or government-assisted property, face-to-face contact with staff and residents are important factors in retaining them. Staying up-to-date with local and state laws as well as national news is essential in maintaining a strong awareness of the property, location, and any outside factors that could affect the residents and staff. Developing the ability to recognize trends in the changing world of residential properties is one of the best ways to become a successful real estate manager.
1. For a good resource on fair housing, visit www.fairhousingfirst.org.
2. Fair housing laws apply for people with disabilities (or emotional dependency) that require a service animal. They may not be denied housing because of a “no pets” policy.
3. Federal law is set out in the Servicemembers Civil Relief Act, enacted in 2003 to amend the Soldiers’ and Sailors’ Civil Relief Act of 1940, which provides specific rights relating to renting and leasing obligations.
4. This is a common practice in older buildings in which the apartments are not individually metered or for ease of payments for luxury student housing.
5. For example, if the board determines that operating expenses for the whole property are $6,000 a month and the bylaws state that the owner of unit 6B owns five percent of the property, the owner of 6B will pay the association at least $300 every month.
6. For example, if the property needs a new roof and $30,000 of that cost will not be paid from the reserves, the owner of unit 6B (who owns five percent of the property) will be required to pay a special assessment of $1,500.
7. There are a number of laws regarding the proper type of covers on drains and other requirements, such as showing water depth with clearly marked depths affixed to the pool walls.