Landlord and Tenant Laws
As a real estate investor doing buy and hold, you need to fully educate yourself on the state landlord/tenant laws where you are investing. Skipping this step or doing incomplete homework can be costly and messy. This almost happened to my husband and I. I’m glad we were being extra cautious (not giving into our emotions) and took the time to perform due diligence.
Having lived in two states, I noticed that the landlord/tenant laws vary from state to state. To further complicate things, these real estate laws can also vary from county to county. Once we narrowed down the locations where we want to do buy & hold, I spent hours on the web researching landlord/tenant laws applicable to those particular areas. I also had my husband read those laws. We only proceeded to make offers after we’ve decided that the areas we’re interested in are landlord-friendly. Yet, we soon learned that despite having put in 10 plus hours of research on the web reading and familiarizing ourselves with the laws, we still didn’t get the complete picture.
The Story
The property: duplex; 2 bedrooms, 1 bath each door; unit A was vacant; unit B was on month-to-month rent
The seller countered our offer twice. On the second counter, they gave us a number that we were open to work with. The plan was that during the following day, my husband and I were to make several phone calls to our agent, the local town office and local management companies. We needed actual numbers to confirm our offer number. Then, we were going to make our final offer in the evening if the numbers still look good.
*Tip*: Don’t rely on the numbers the sellers or sellers’ agent provide you when you do your final analyses. You don’t know how accurate those numbers are or how those numbers were derived. Agents and sellers can use tactics to either inflate or deflate certain numbers to make the property more appealing than what it really is. Always do the necessary work to gather actual numbers on your own. Sometimes, even your own agent might give you biased or estimate numbers. Nobody cares more about your own money than you do. Double check your sources.
Unfortunately, instead of spending the day gathering actual numbers, I spent my whole morning on the phone with property management companies (I probably spoke to seven property managers). My initial goal was to get some ideas of the kind of rent we would be able to get on the property. I was also shopping around for property management.
It was the second property manager I spoke with who asked me how many tenants were living in the occupied unit. She sounded alarmed when I told her there were six people living in unit B. She then proceeded to share with me that state law only allowed two hearts per bedroom. As she spoke, so many questions rushed through my head all at once.
“The seller’s agent is the seller’s property manager. Was this agent not aware of the state law? Was she or the seller aware there were six people living in unit B? How many people were on the original lease (the seller’s agent didn’t want to provide lease until the property is under contract)?”
“If we were to inherit the situation in unit B as the new owner of the property, what would that mean for us? What kind of liabilities might we have?”
“How complicated is the process to get all the tenants or extra tenants out? What’s the eviction process like?” And so on…
I couldn’t get much more information out of that property manager. Her business was somewhat out of area. She recommended I contact a property management company in the local area where the property is. A Google search only showed up one. Nobody picked up the phone. Then, I went on to speak with several other property management companies in nearby towns.
One suggested we should get an attorney to help us with the eviction process. A couple others said they wouldn’t take on clients who are either going through or will shortly start an eviction process (oh, but, they would love to have us come onboard once the eviction process is completed!).
Hearing words like that intimidated me. Liabilities? Eviction? Court? Court fees? Attorney?
We liked the property and the potential income stream. However, we didn’t like it that much that we would want to have to deal with the laws right at closing (of the transaction). So, we let our agent know that we were not going to proceed with the final offer until seller takes care of the tenant situation in unit B.
A few days later, we learned that there was no written lease for unit B. We speculated that the tenants in that unit must be the seller’s friends or family. Second, the seller didn’t want to have unit B sign a lease until the property is under contract. Having a lease is for the seller’s own good. Why didn’t they want to have a lease in record? This, compounded with several other things that came up during the process were enough to discourage us from putting in a final offer.
Some examples, (1) the sellers claimed they didn’t know how old the roof was; (2) most of the items on the seller disclosure were marked “No Representation”; and (3) the sellers’ agent rented out unit A without letting my agent know (I only found out about this when I spoke with a property manager).
Lessons Learned
The main lessons we learned during this dealing were these:
(1) Don’t just rely on the Internet for knowledge. Talk to locals.
(2) When the seller’s agent or seller is not seemingly trying to make a deal happen with you, move on to the next deal. In such incidences, they might be trying to hide something from you.
(3) Talk to several property management companies about the property you’re interested in. They generally have good insights to offer.
(4) Don’t make haste on an offer until you have done your due diligence. Skipping a step or not doing your homework can be costly and messy. This is not to say you have to know everything there is to know about real estate investing before you take action. Even in such cases, there’s still no guarantee that you won’t make mistakes. Just do your best to educate yourself. When you do that and you still make a mistake, learn from the mistake and do even better in your next deal!
If you are a REI, I would love to hear your experiences with landlording and working with tenants.
If you are doing REI out-of-state, how do you go about learning your area’s landlord/tenant laws?
Read more about my real estate investing series here.