DEAR BENNY: I recently signed a one-year lease with a property management company for a house for my family. As I was opening junk mail the other day, I came across a letter addressed to the property owner notifying her of a pending notice of default and demanding mortgage payments for the last several months in the total amount of $21,000.
I am reluctant to pay future rent to the property management company as the property owner will be (or already is) in default, and will cease to own the house long before my one-year lease is fulfilled. I realize that the property owner could still make up the past-due mortgage payments, but as I understand it, if I pay the rent to the property manager I may still be liable for those same rents to the bank/lender if the foreclosure is transacted, and at that time will not be able to collect any part of my deposit back. My rent is $1,895 per month, and the owner’s mortgage payment is $3,000 per month. Am I right in not paying the rents? I plan to open an account and put the rent money in it instead. –Chris
DEAR CHRIS: I do not know what state you are in, so I can provide you only with general advice. I strongly urge you to consult both the property manager as well as your own attorney.
First, be careful. You called this "junk mail" but actually it was addressed to the property owner. While I doubt that you will get in trouble, you have violated the U.S. postal regulations by opening someone else’s mail. If you get any more mail addressed to anyone other than your family, either return it marked "addressee unknown" or send it to the property manager.
In some states, such as in the District of Columbia where I practice law, if a lender forecloses on a property owner, that owner has no more rights to the house. However, if there is a tenant in the property, the party who buys the house at a foreclosure sale has a number of tenant rights — including the right to remain in the property for the duration of the lease term. This is something that your attorney can advise you on.
Often, where there are tenants residing in properties that have delinquent mortgages, the lender will go to court and ask that a receiver be appointed. This means that all future rent payments will go to a property manager selected by the judge, and the court will determine the terms and conditions as to how the rent payments will be distributed. It does not appear that this has happened in your case.
The last thing you want to happen is to be in default on the terms of your lease. Thus, under no circumstances should you decide not to pay any rent. Your idea of putting the rent in escrow makes sense, but you (or preferably your lawyer) must immediately advise the property manager of your decision. In fact, it would make more sense to have the rent paid to the attorney who will deposit the moneys into an attorney escrow account.
The bottom line: You really should let your attorney handle all of this for you.
DEAR BENNY: My husband and I own two investment properties in rural Virginia. We are renting one and are in the process of renovating the other. We plan to purchase another property when we are done with this one. When (if at all) do we need to form an LLC? Is it after we own a certain number of properties?
Although we have been using a computer program to do our taxes, we feel it is time to hire an accountant to do them in order to take advantage of tax savings and possible deductions. What type of accountant should we be looking for? –Cindy
DEAR CINDY: These are good questions. As for the accountant, you need someone who has knowledge and experience with real estate investments. Talk with friends and get some names of potential accountants. Talk with them, and specifically ask if they handle real estate investment issues. And don’t forget to ask about their fees.
I believe that everyone who owns real estate investments should seriously consider putting each one in a separate limited liability company, or LLC. As the name implies, your liability is limited. That means, for example, if you are sued because of a problem with one of your investment properties, so long as you make sure to carefully follow the rules for operating a LLC, your other assets should be protected.
What are these rules? You should consult your attorney or even that CPA you will hire. Oversimplified: (1) don’t commingle funds; (2) keep accurate books and records for each LLC; and (3) whenever you sign any legal documents relating to one of your LLCs, add the word "member" or "managing member" after your signature. In an LLC, you and your other investors are members, and if there are a number of members, one of you will be the manager.
I recognize that in some parts of the country, it is expensive to create a legal LLC. For example, I have been advised that in California, it costs upwards of $800 for each such company. One reader asked "instead of paying $800 for each LLC, wouldn’t I be better off just getting umbrella liability insurance coverage?"
My response: Perhaps. But if there is a court-ordered judgment against you that is over the limit of your insurance coverage — or if for some reason the carrier did not insure the kind of lawsuit (such as lead paint) — then all of your assets may be at risk.
So, talk to your new accountant, but consider creating that LLC before you buy so that the new property will be held in the name of that company.
DEAR BENNY: As a member of my homeowners association board of directors, are there any legal issues in my taking photos of shabby properties as proof to show other board members to deal with an enforcement issue. Or can a resident/property owner in the HOA take photos to submit to the board in order to get the property owner to clean it up? –John
DEAR JOHN: So long as the pictures are not sold or used for profit-making purposes, there is no legal restriction. Whether you are a board member or just a homeowner, if you are concerned that these properties are an eyesore and may lower property values in your neighborhood, you can take pictures. The houses can be seen from the street, and the pictures merely depict what the eye can see.
Obviously, you cannot take pictures of the inside of any house without the permission of the owner. And your pictures should not include any people standing in doorways or at the windows.
But, there are certain restrictions and limitations on what a board can do if there are houses in "shabby" condition. Who makes this decision? One person’s junk is another’s treasure. You may believe that the house is unsightly, while others may not.
Does the board have clear, written guidelines? Does the board uniformly enforce those guidelines, or are you selective? If the board is arbitrary in how it treats homeowners, that is a clear legal defense should the board take the owner to court.
If you believe that a homeowner is violating your legal documents, give that owner the opportunity to have a "due process" hearing before the board (or the architectural control committee). If the homeowner wants a lawyer to be present at the hearing, that is his or her right.
Too many boards are too proactive. You don’t want to be walking around the neighborhood wearing a trench coat, carrying a clipboard and a pair of binoculars. After all, the board was elected to serve the community — and not to be the local KGB.
DEAR BENNY: Over the past 20 years I have spent a considerable amount on landscaping my property, such as trees for screening. Can these expenses be added to the cost basis when I sell? –Ted
DEAR TED: Oversimplified, any improvement to your property — including the land — that has a useful life for more than a year is generally considered an "improvement," which can increase your tax basis.
However, if you installed trees 10 years ago and then recently replaced them with new trees, you cannot include the cost for both sets of trees.
A good source of information can be found in IRS Publication 523, entitled "Selling Your Home," which is available from the IRS online. This publication provides a number of examples of what can and cannot be included as "improvements."
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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