To the untrained eye, it might seem like being a landlord or property manager is pretty easy: You just find tenants, collect rent, make repairs when necessary, and resign leases each year. Unfortunately, it’s not that easy. If it were, more people would be doing it!
In reality, being a landlord or property manager requires significant time and expertise. Novice landlords often find themselves in hot water after cutting corners or ignoring landlord-tenant laws (whether the oversight is intentional or not). The last thing that you want is for your investment to go up in smoke as a result of a lengthy, expensive lawsuit.
Here are 5 all-too-common legal mistakes made by landlords that you should be sure to avoid.
Common Legal Mistakes Made by Landlords: #1
Refusing to Rent to Families with Children
We all know that young children tend to cause more wear and tear in a unit than adults; but the last thing that you want to do is to tell an applicant that they can’t rent from you because of their pint-sized roommates.
Discriminating against families has been illegal for more than 20 years. Turning away tenants with children is a major violation of federal, state, and most local fair housing laws. In addition, you cannot discriminate against a rental applicant based upon their race, color, religion, national origin, sex, or disability status. Be sure to stay up-to-date on HUD regulations so that you don’t end up being sued as a result.
Common Legal Mistakes Made by Landlords: #2
Banning Applicants with a Criminal History
A criminal history might be a standard red flag; but according to a new policy memo issued last year by the Department of Housing and Urban Development, criminal history alone is not a sufficient reason to turn down a rental applicant.
To be clear: that does not mean that you can’t consider a person’s criminal history at all during the tenant screening process. Instead, HUD is basically telling landlords and property managers the following:
- You cannot institute a blanket ban on all applicants with a criminal history.
- You cannot reject a tenant based upon an arrest that did not result in conviction.
- You must treat comparable criminal histories similarly without consideration of race, national origin, or other protected class.
Instead, when reviewing a person’s criminal history, consider factors like:
- Was the applicant arrested or actually convicted of the crime?
- What was the severity of the crime?
- How long ago was the crime committed?
- Was it a drug-related crime?
Just to be on the safe side, we suggest screening tenants based upon financial and other financial qualifications before conducting a background check. This will protect you from denying a tenant for a financial reason–for example, a history of unpaid rent–and having that tenant argue that they were denied based upon their criminal background.
Common Legal Mistakes Made by Landlords: #3
Using Generic Lease Forms
Standard lease forms should just be a starting point for landlords and property managers. Generic lease forms available for download online usually include the most basic information: names of all parties, property address, rental amount, term of lease, and so forth. However, there’s no way for you to know if this generic form is compliant with your state and local fair housing laws–and its protection may not extend as far as you’d expect.
Instead, hire an attorney to craft a lease that’s specific to your property (e.g. Is driveway parking included in the lease? Who is responsible for yard maintenance?) and is in compliance with all local landlord-tenant laws. Hiring an attorney to draft your lease agreement is a one-time cost that will pay dividends in the protection that it offers through the years.
Common Legal Mistakes Made by Landlords: #4
Improperly Collecting or Holding Security Deposits
Laws vary by state, but most have very explicit rules around how much you can collect as a security deposit. Some states also have specific rules regarding how that security deposit must be held.
In Massachusetts, for example, all security deposits must be held in an interest-bearing escrow account that was opened in the name of both the landlord and the tenant. Each year, landlords must refund tenants any interest that has accrued on that amount. The interest must be paid to the tenants by bank check, which can cost upwards of $15 to issue depending on your bank–something that many landlords forget to do, especially because the interest is often only pennies or dollars each year.
Most residents don’t realize that this policy exists, so it often falls under the radar. However, in the event that you were to end up in court for an unrelated housing dispute with this tenant, the tenant could challenge how you’ve collected and held their security deposit. In some states, this automatically results in treble damages, regardless of the outcome of the other dispute. This is among the costliest legal mistakes made by landlords and property managers, so be sure to steer clear of it!
Common Legal Mistakes Made by Landlords: #5
Hiring a Resident as Your Property Manager
This seems benign enough. If a resident is already living on-site and is willing to assist with general property maintenance and other management duties, why not cut them a break on rent and save on property management fees?
Honestly, it’s not worth the risk. Here’s an anecdote from one landlord we’ve worked with in the past: When he played football in college, per NCAA guidelines, he could not get a paying job while on the team. However, he still needed some cash, so he worked out a deal with his landlord: He’d be the property manager for the 14-unit property in exchange for a $500 discount on his monthly rent. It seemed like a win-win scenario… until a massive fire broke out at the property.
See, because he wasn’t an actual property manager, he didn’t realize potential fire hazards. When a resident threw a mattress outside and let it lean against the building until trash day, he didn’t think twice about it. Somehow, the mattress caught fire (note: mattresses are a major fire hazard!)–and the whole building went up in smoke. The landlord’s investment went up in smoke right along with it as the property was deemed a total loss.
If you’re going to hire a property manager, don’t cut corners–hire someone with experience.
Being a landlord can be a great, fruitful experience. It can also be a financially crippling one if you don’t comply with local laws. That’s a major reason why we suggest hiring a property manager. Property managers are trained to be on the lookout for these legal pitfalls, lifting the weight off of your shoulders. When you’re ready to get free quotes from property managers in your area, All Property Management will be here to help.
Amanda Maher is a self-proclaimed policy wonk who dabbles in real estate law. Amanda holds a B.S. in Political Science and Sociology from Boston University, as well as a Masters in Urban and Regional Policy from Northeastern.