Becoming a Landlord – Part I: Tenant Deposits

for_rent_signBack in February, I posted on issues related to converting your home into rental property (“Converting to investment propertyFebruary 2, 2012). The current post is a continuation of the subject matter, but focuses on what I believe are the key things you need to know if you decide to get into the landlord business. The Massachusetts landlord/tenant laws are considered some of the toughest, most pro-tenant in the country. Many landlords don’t understand the requirements surrounding tenant deposits. If you are going to be a landlord, you need to know how this works.

  • What can you collect in advance?

Mass. General Laws c.186 s. 15(1)(b) specifically states that “no lessor may require[emphasis added] a tenant or prospective tenant to pay any amount in excess of the following:

(i) rent for the first full month of occupancy; and,

(ii) rent for the last full month of occupancy calculated at the same rate as the first month; and,

(iii) a security deposit equal to the first month’s rent ……

(iv) the purchase and installation cost for a key and lock…”

Notice that the exact language of the law is “no lessor may require[emphasis added]…”  Landlords who charge extra fees such as “cleaning fees,” or “pet fees,” or even “credit check” fees are in blatant violation of the law. In those cases, a tenant could later deduct those amounts from her rent, and the landlord would likely have little recourse. The trickier case is where the landlord  and the tenant work out an arrangement where the tenant pays a large portion of the entire lease, such as 6 months or a year, up front. There are situations where this is clearly desirable for both parties. For example, a tenant with marginal credit  might make an offer of six months rent up front to make the deal work. It may not, however, be a legal arrangement. If you are considering making a rental deal and taking more than first, last and security deposit, you should consult an attorney to consider the risks and benefits.

  • What to do with the security deposit and last month’s rent?

The specific requirements set out in the Massachusetts General Laws are nothing short of onerous. See also: Massachusetts Security Deposit: Last-month’s Rent Traps for the Unwary Landlord. For example, the security deposit has to be put into an account that is entirely separate from the landlord’s own funds.  The landlord must also pay the tenants the interest every year and it must be the “actual” interest or the “statutory” amount.  The logistical issues related to setting up an escrow bank account in someone else’s name is not that difficult for one single tenant, but gets much trickier for a set of tenants sharing an apartment. If you want to withhold money from a security deposit at the end of the lease, you will also have to have handled the required “condition statement” properly. Then you can only withhold money for specific repairs where you can substantiate the actual cost of repair. Last month’s rent is easier to handle as it does not need to be put in a separate escrow account. However, the landlord is still subject to the interest requirements. Very few landlords handle all of these requirements absolutely correctly, and are at some risk in the event of a lawsuit. With experience, and often trial and error, you just have to decide what works, what doesn’t, and what risks you are willing to take.

A Deal is a Deal

real-estate-dealMy last post explored what constitutes a valid signature on a contract. In this post, I focus on when a signed contract to sell real estate is enforceable.

Most real estate transactions in Massachusetts start with an Offer to Purchase (“OTP”). The buyer signs the OTP and writes an escrow deposit check. After some negotiation, both parties sign the final version of the OTP. Most real estate agents in Massachusetts use a version of the Greater Boston Real Estate Board’s “standard” form. In the section entitled “Riders,” buyers usually reference an attached mortgage contingency and an inspection contingency. For condominiums, buyers also normally write in a contingency to review the “condominium documents.”

The buyer’s legal obligations
Paragraph 5 of the standard offer states that if the buyer does not “fulfill his obligations,” the worst that can happen is the loss of the initial deposit, usually $1,000. In my experience, buyers very rarely lose their initial deposit. I have never heard of an instance where a buyer had a good faith reason for changing her mind and did not get her deposit back. If the buyer makes a sincere attempt to purchase the property, sellers generally agree to return the deposit if the deal falls apart. It is bad business for a seller to try and hold a buyer’s deposit. The only real damage to the seller is loss of market time. A buyer has to behave extremely badly for a seller to consider retaining a deposit.

The seller’s legal obligations
On the other hand, the OTP is binding and enforceable against a seller. The seller’s only obligation specifically articulated in the standard OTP is in Paragraph 3, which says that both parties “shall sign” a purchase and sales agreement (“P&S”) at some point, generally within two weeks. Real estate and contract law requires that both parties act in “good faith” during the course of the contract, which includes bargaining over the terms of the P&S. Although “good faith” is subjective, a seller cannot change his mind about the deal because he just got a better offer or he just no longer likes the basic terms and conditions. If the seller backs out of the deal, and the buyer files a successful lawsuit, the seller will be required to sell the property to the buyer.

Whether you are a buyer or a seller, do not enter into a real estate transaction lightly. You should have the intention of doing what you can to make it work. Buyers have several avenues of escape if the deal no longer makes sense. Sellers, however, are basically locked in unless the buyer becomes unreasonable.

 

* In most cases, just because the buyer can’t get the deposit back doesn’t mean that the seller automatically gets it. The deposit is initially stuck in the agent’s escrow account. The seller cannot receive the deposit until the escrow agent obtains the consent of both parties. Initially, this can prove difficult. Most often, the parties eventually agree to some compromise based on the threat of litigation and the trouble and time related to fighting over $1,000. I have also seen the parties simply fail to come to an agreement and the money never released.

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In the electronic age, when is a deal a deal?

esignatures-real-estateMassachusetts courts have been grappling with the question of “when is a deal a deal” for a long time. Most communication in real estate is now done via email and other electronic means. It was just a matter of time before a court was faced with whether and to what extent emails, and electronic signatures constitute a binding and enforceable agreement to purchase and sell real estate.

Don’t real estate deals need to be in writing?

The Statute of Frauds is the genesis of the saying “always get it in writing.” The ancient law, originating in England, provides that all real estate contracts must be in writing signed by the party (or agent) to be charged. In the old days, application of the Statute was quite simple. If there wasn’t a written agreement signed in ink, there was no binding deal. Now, email makes it much more complicated.

The UETA
In 2004, Massachusetts adopted the Massachusetts Uniform Electronic Transactions Act (UETA), which provides that parties to a real estate transaction may consent to conduct the transaction electronically via email or electronic signature technology if they use such technology in their dealings (which everybody does these days). The UETA requires some form of electronic signature.  Just what exactly constitutes an electronic signature has not yet been fully determined by the courts. In a recent Superior Court case, Feldberg v. Coxall (May 22, 2012),  the judge ruled that an email signature block or even the “from” portion of the email could constitute a valid electronic signature. Accordingly, the judge found that the buyer would at least have the opportunity to make a case that a binding deal had been reached, despite the seller refusing to sign the hard copy offer. Email signature technology in the residential real estate business

Many real estate agents in Massachusetts still work with hard copy contracts signed in ink, hard copies of contracts,  or, at best, electronic copies (PDFs).  I expect this practice will wane. There are a variety of free Internet services that enable you to sign documents electronically. Check out DocuSign.com (which I was able to register for and use in minutes), e-signlive.com, or rightsignature.com. My office of Keller Williams recently started accepting electronic signatures and takes it one step further by using a company called Dotloop. With this system, all the parties to a transaction can register for access to a common electronic file cabinet. Any party can enter a password to access and electronically sign a document.

A deal is still a deal in Massachusetts, but a signature is not what it used to be.

This article is a modified version of the article “Think Before You Hit Send: Emails May Constitute Binding Real Estate Agreement Without Signed Offer.” Many thanks to Attorney Vetstein for allowing me to use his article.  The Mass. Real Estate Law Blog is absolutely one of the best out there.

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Don’t Renovate and Sell!

home renovationsHomeowners often consider making renovations before selling. They believe the increased value of their home will exceed the cost of renovation. Unfortunately, this is often not the case. For every dollar you spend on renovations, you generally recoup less than a dollar back.  See the annual report in Remodeling magazine, which compiles statistics on the cost recouped of most remodeling projects.

Based on surveys of thousands of real estate professionals, Remodeling magazine concludes that the highest return projects are around 70%, while the lowest are in the neighborhood of 40%. The magazine sends out surveys to thousands of real estate professionals across the country essentially asking for their experience and opinions. The conclusions can’t be scientifically proven, but as the costs of construction are fairly easy to determine there is no reason to doubt the survey’s construction figures. However, I wouldn’t rely too heavily on the specifics of cost recoupment figures. I have seen the surveys they send out and there is simply no way to compile figures in any truly scientific way. Who really knows how much a particular home would have sold for if the kitchen hadn’t been renovated?? Rather, the opinions of thousands of real estate agents, appraisers and other real estate professionals are probably fairly accurate in a general sense. They should be used as a general guide as to which projects result in higher or lower cost recoupment, and very approximately what to expect.

Interestingly, according to the study, renovated kitchens and baths recoup somewhere around 55-65% versus other projects that return more. Common real estate wisdom says that kitchens and bathrooms sell homes. So what’s going on? The answer to this conundrum is that nice kitchens and baths make homes appeal to more people and easier to sell, but are just not valuable enough to recoup the initial investment.

The value proposition of renovating your kitchen and baths looks much better when you do the renovations a few years before you sell your home. You also get the chance to actually enjoy the renovations. Most real estate agents consider kitchens and baths fairly new up to around 3 years after renovation. For example, you spend $50,000 on a new kitchen and enjoy it for 3 years. You then recoup 65% of the cost at sale, so the renovations cost you about $17,500 and help sell your home.

In real life, it may be difficult to plan ahead. However, if you are considering making improvements to your home, considering recoupment values may help you determine what renovations make the most sense in the long term. After making improvements, I often hear sellers say, “Wow, I should have done this earlier.”

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What Condo Association Budget?

condo-budgetCondominium association budgets come in all shapes and sizes. If, like me, you live in a very small association with 2 or 3 units, it may be questionable whether an actual written budget even exists. Large associations, made up of hundreds of units, often have detailed budgets prepared by professionals. In either case, when you went to sell your condo in the past, only the prospective buyer cared about and reviewed the budget. In today’s lending climate, it is standard practice for the buyer’s lender to review the budget. Fannie Mae, the quasi-public company through which most mortgages pass, does not require a written budget for 2–4 unit associations, but does require it on associations of 5 or more units. Many lenders also have an “overlay,” which is essentially an additional requirement that 2–4 unit associations have a written budget. The bottom line is that it is a good idea to have an actual written budget, because it is likely that the lender will ask for it when someone goes to sell a unit in the association.

The lender reviewing the budget will want to see a line item for a 10% reserve. 90% of the annually collected fees must account for all of the regular recurring expenses, and 10% must be saved as reserves. According to the lenders I work with, it is unnecessary to have a separate reserve account. Be careful, however, as buyers looking to get mortgages guaranteed by the Federal Housing Administration (known as FHA mortgages) require condominiums associations to meet stricter requirements.

Most condominium budgets can be set up to show a 10% reserve. All obviously recurring expenses, like insurance, water and sewer, the common electric bill, and all clearly recurring maintenance (snow removal, for example) must be budgeted for in a line item. I also recommend some money be put in a line item labeled “maintenance,” because not having any money for general maintenance is not realistic or credible. Expenses that do not come up every year do not have to be budgeted for in advance and can come out of reserves. For example, if your association plans to spend $10,000 in the upcoming year on a new walkway, the budget can still show a 10% reserve for the year that you build the new walkway. The following year, when you produce a “budget vs. actual” report, you would show that you spent the money out of reserves.  As a matter of fiscal prudence, your association may still want to raise fees or collect money via a special assessment, but that is a different conversation.

I always enjoy a good conversation about condominium association budgets, so please don’t hesitate to contact me or write a comment and tell us about your condo association budget.

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5 Stats that Determine the Real Estate Market

housingPeople often ask me, “How’s the market?” The answer is clearly subjective, but careful analysis of the following statistics leads to at least an educated subjective judgment:

1.Value

Values or prices are usually expressed in terms of how the median price of closed sales compare year-to-year or month-to-month. Because the seasons strongly affect home sales, I recommend considering the median prices for any given month compared to the same month a year ago:

  • In April 2012, the median selling price of single family homes in the greater Boston area fell 2.5%, and condominium prices were up 6%, compared to April  2011.

 2. Volume

The most relevant statistic for sales volume (the number of homes sold) is the number of homes sold compared to the same month a year ago.

  •  The number of single family homes sold in the greater Boston area was up 11%, while condos were up 18.5%.

 3. Inventory

Take a look at how many homes are on the market compared to a year ago.

  •  The inventory of single family homes was down 10% in April, and for condos the inventory was down a whopping 30%.

 4. Days on Market

Still relevant but not quite as important, are the figures for “days on market and “supply.” This is the average time it takes a home to go under contract.

  •  The average days on market for real estate in the greater Boston area stayed relatively stable, declining two days from 122 to 120 days for April 2012 compared to April 2011. For condos, the time fell 19 days from 117 days to 98 days.

 5. Supply

The “supply” is the number of homes on the market divided by the monthly rate that they are selling. For example, if there are 50 homes on the market and 120 homes sold over the past 12 months (an average of 10 per month), there is a 5 month supply. Most experts consider somewhere between 7.5 and 8.5 months supply of homes a fairly balanced market.

  •  The supply of single family homes was down about 10% from 7.9 months in April 2011 to just 6.4 months of supply in April 2012. There was a 4.8 month supply of condominiums available in April, down sharply from April of one year ago when there was an 8.2 month supply.

 If you can get the answer to these statistical questions for the geographic area (neighborhood, town, city, state, or country) that you are interested in, you should have a pretty clear picture of what the real estate market is doing. So how’s the greater Boston area market doing? My analysis is that the greater Boston area is experiencing a transition to more of a seller’s market. The supply is shrinking and demand appears to be growing, pushing prices up and making it easier for sellers to sell. What’s your analysis?

The figures for this post can be found here on the Great Boston Association of Realtors site.

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What is ENERGY STAR?

Energy-StarENERGY STAR is a joint program of the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy designed to help consumers save money, and protect the environment through energy-efficient products and practices.

In 1992, the (EPA) introduced ENERGY STAR as a voluntary labeling program designed to identify and promote energy-efficient products to reduce greenhouse gas emissions. Computers and monitors were the first labeled products. By 1995, the EPA had expanded the label to residential heating and cooling equipment. The ENERGY STAR label is now on major appliances, lighting, home electronics, and has been expanded to cover new homes and commercial and industrial buildings.

Whole Home ENERGY STAR Rating

For an entire home to be labeled ENERGY STAR, it must be built by an ENERGY STAR builder-partner to meet strict guidelines for energy efficiency set by the U.S. Environmental Protection Agency. These homes are at least 15% more energy efficient than homes built to the 2004 International Residential Code (IRC), and include additional energy-saving features that typically make them 20–30% more efficient than standard homes.

The ENERGY STAR label is rapidly becoming more of a selling feature. Home buyers are now very conscious of a potential home’s energy efficiency. The Multiple Listing Service has specific sections where ENERGY STAR rated systems and appliances can be highlighted so that buyers can easily determine if there is ENERGY STAR rated equipment in the home they are considering. However, as the whole-house Energy Star rating is fairly new, it doesn’t yet appear often.  As more and more homes get the designation, you will see it more often and consumers will look for the whole home rating.

The ‘No Cost Energy Assessment’ & Benefits

Locally, the ENERGY STAR program is partnered with a program called Mass Save. This initiative is sponsored by several local energy companies and administered by a company called Conservation Services Group. Through Mass Save you can schedule a no-cost “Energy Assessment” on your home or even your rental property. Depending on the results, homeowners are then eligible for an instant rebate of up to $2,000 for 75% of the cost of installing insulation, and a zero percent interest loan on new heating equipment. The website also contains a wealth of information on saving energy as well as information like current tax credits available for energy efficient home improvements.

As energy costs continue to rise, taking advantage of the Mass Save program, and looking for ENERGY STAR rated appliances will not only benefit you in the short term, but add value to your home when it comes time to sell.

Resources:  www.masssave.com, www.energystar.gov

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Has your home’s value decreased? Buy a more expensive one!

trading-upIf your home has decreased in value and you are thinking about selling it, it’s hard to see any silver lining. However, if you have other resources and have been thinking about buying a larger home, this is, surprisingly, the best time to “trade up.”

Here’s why…

I recommend that homeowners consider home ownership a long term investment in the residential real estate market. Most people plan to “stay invested,” buying and selling several homes in their lifetimes, or stay in the same home for decades. Most people enter the residential market when they first buy a home. They leave the market when they sell their last home or leave their last residence to heirs. People might trade up into a more expensive home or make a lateral move or two to something of similar value before downsizing in retirement as “empty nesters.” If you don’t sell your home and completely step out of the housing market by renting for a long time or traveling the world for few years, you stay invested. Similarly, you are no longer invested if sell your home and move to a completely different market, like moving from Boston to Florida. In these cases, you might want to carefully consider your relative position in each market.

Here is an example of how trading up could look when the value of your home is down:

2006: The value of your home (either just purchased or not) – Home A: $500,000

2012: Your home has decreased in value 15%. Current value Home A: $425,000

2012: You purchase your dream home – Home B: $750,000

2027: 15 years later the market has recovered and gone up a total of 30% since 2012

The value of your home – Home B: $975,000

The value of your old home – Home A: $552,500

You benefit in the long run, because you purchased the more expensive home in a lower market. Your home is down today, but the more expensive home is down more!

The point is that it doesn’t make sense to put off selling your home, because you can’t get what you want for it. Sell when it makes sense in your life to be in a different home. Your investment in the residential real estate market will take care of itself in the long term.

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A Different Type Of Tear-Down: Court Orders Million Dollar Marblehead Manse Demolished For Zoning Violation

One Very Expensive Lesson

This is a human interest story that contains a good reminder for those of us who often believe that when it comes to dealing with certain authorities, it is better to ask for forgiveness than permission. In this case, that strategy proved disasterous. I have posted it here courtesy of Attorney Marc Canner’s and Attorney Rich Vestein’s Massachusetts Real Estate Law Blog.

marblehead-home-teardownAfter a 16 year long saga, wealthy Marblehead mansion owner Wayne Johnson’s battle to save his house from a court-ordered wrecking ball has come to an end. The underlying legal saga is convoluted and complicated, but the end result was swift and destructive — the million dollar mansion is now rubble.

Johnson’s battle started in 1995 when he recorded a plan dividing his land into two lots. One lot contained an existing single-family dwelling. The second lot contained a garage.johnson-tear-down The house lot complied with all zoning dimensional requirements, but the garage lot didn’t comply with lot width requirements. The Building Inspector incorrectly determined that the garage lot complied with all applicable zoning requirements.

Johnson’s neighbors appealed the Building Inspector’s decision, arguing that the new house would greatly diminish their valuable ocean views. The local zoning board allowed the issuance of a building permit. After the building permit issued, the plaintiffs filed an appeal in Land Court and asked for an injunction to prevent construction on the garage lot. The Land Court judge warned Johnson that proceeding with construction was at his peril. In a decision by another judge in May, 2000, the court ordered the building permit to be revoked. However, the court ruled that the house could remain in place while Johnson attempted to obtain appropriate zoning relief.

Johnson, however, was unable to obtain zoning relief. After several unsuccessful appeals, the Land Court ordered Johnson to remove the house by October 4, 2010. Johnson failed to comply with that order, and the neighbors attempted to hold Johnson in contempt. With the threat of contempt and possible jail looming, Johnson finally threw in the towel.

The Land Court ruling can be read here:
Schey v. Johnson

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Is Your Painter Lead-Paint Certified?

Lead Paint RegulationsOn April 22, 2010 Massachusetts adopted a lead paint law that  likely affects you if you own a house built before 1978. Previously, you could hire anyone,  to paint anything  in your house. Not anymore.  The “Renovating, Repair and Painting Rule” (RRP) requires that for home improvement projects that will “disturb” more than 6 interior square feet of paint or 20 exterior square feet of paint, your painter must be certified by the EPA.  The only exceptions* to this rule are if:

  1. Your house was built after 1978
  2. The house or “components” of the house have been tested as lead free by a Certified Risk Assessor, Lead Inspector, or Certified Renovator
  3. You do the renovations yourself.

Fortunately, professional painters can become certified relatively easily by taking a one day course and paying a fee of $375. Painters who are not certified face fines of up to $5,000, license suspension and can be subject to a “cease work” order by any number of public health agencies, including  possibly, the local building inspector. The “cease work” order/penalty is the major risk to a homeowner. There is no provision in the law for any other type of penalty against a homeowner.

Initially, a Boston Globe article reported that there were concerns that the certification requirement would make hiring a painter more expensive.  However, almost 2 years after the law went into effect, I couldn’t find any evidence of increases in the cost of hiring a painter. Although the time and expense of obtaining certification are relatively minor, there are real expenses associated with properly managing work sites that contain lead dust. Costs will likely rise, but worksites should be safer and ultimately homes will be safer as well.

If you decide to undertake a do-it-yourself renovation or painting project where there is any possibility of creating dust and you might have lead paint, I highly recommend you  learn how to properly handle and contain the dust from your project. Most of it is common sense and merely requires a high level of preparation and care. A good resource is the Renovate Right pamphlet that lead-certified contractors are required to provide to consumers.

The laws around lead paint are extensive here in Massachusetts. If you have information or expertise you would like to share, please comment, or contact me.

Other helpful resources are:

*The question arises that if you hire a general contractor who is lead-paint certified, and he sub-contracts out the painting work, do those painters have to be certified? The answer is complicated. There are rules about who has to be certified on a job site, and when a “non-certified” painter can be on the job under the supervision of someone who is certified. As a general rule, if you are hiring a general contractor make sure he really understands the lead laws and fully intends to follow them.

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