Why Don't You Make the House Energy Efficient?

Since the Christmas blizzard, my tenants have been cringing at their natural gas bills.  All of my properties have central heat and air with a gas-fired furnace; in Arkansas, this is the cheapest way to heat.  Also, many of my homes were built in the 1950s, and have aluminum frame windows.  These windows are not energy efficient. 

Over the weekend a tenant asked me “In 2009, there was a tax credit.  Why didn’t you put in efficient windows?”  The answer is pretty simple: landlords weren’t allowed to take the credit.  But to be honest, our messed up tax system makes it almost impossible for me to update my houses in a manner that makes financial sense. 

The rest of this blog post is to illustrate how stupid our tax system is.  Feel free to pop some popcorn and laugh at my frustration.   

I’ll use one of my houses as a real example.  I have a 3 bedroom, 1.5 bath house in the Broadmoor area of Little Rock.  The windows are aluminum frame, single pane.  They’re not energy efficient.  When the weather gets cold, the windows sweat a little and even though they’re caulked and sealed perfectly, the frame and glass get very cold, and the house's heater has to run longer. 

How much money are we talking about?  Window World sells vinyl frame replacement windows at roughly $200 each.  If I want the argon E-series glass, that’s another $65.  There are 10 windows in the house to be replaced, for a total of $2650.  But remember, landlords didn’t get the energy tax credit so I have to pay for those windows out of immediate cash flow, after paying the mortgage, taxes and insurance. 

“But wait,” you say.  “Don’t you get to write that off your taxes?”  Well, not the way you think. 

If the existing window was broken, I could write it off the entire amount as a repair the same year.  But if the existing window is NOT broken, the IRS considers the new window an “improvement” and requires me to depreciate the cost; in other words, I can only deduct a little part of the cost each year for a fixed number of years. 

“How many years?” you ask.  Well, it depends upon how many years I’ve owned the house, subtracted from 27.5.  In this example, in 2009 I had owned the Broadmoor house for 4.5 years.  That means that I would have to spread the $2650 out over 23 years.  Each year I would only be able to deduct $115.22 a year off my house’s taxable income.   

$115.22 is not much at all, especially as prices keep going up.  To add insult to injury, my accountant would charge me more to keep up with the paperwork on my tax forms! 

While this will sound harsh, it’s a fact that rent for most areas is market driven, not feature driven.  Having vinyl windows will not let me raise the rent to cover their cost, and having aluminum windows doesn’t lower the rent.  To me, with such a bad tax system in place, I am actually encouraged by the tax code to NOT spend money improving my houses. 

With our current tax system, the real loser is the tenant who continues to pay higher utility charges.

Thoughts of Eviction, Part II

As discussed last week, Arkansas has a patchwork of eviction laws that change county by county, and sometimes even judge by judge.  Evictions are a no-win: the tenant has stolen the use of the property from the landlord, and the landlord almost never sees the money owed. 

In this post, I am not talking about run down properties needing repairs or long-term tenants who have lost their jobs and just need an extra week or so.  Good landlords keep up their properties, and I know lots of landlords who worked with long-term tenants to get them back on a regular payment schedule.

To recap from last week: most evictions are because:

• The tenant REFUSES to pay the rent owed; and
• The tenant REFUSES to vacate the property.

At the point of an eviction, a landlord has given up on the tenant and needs possession of the property back in order to find a new tenant.  Landlords need consistency within jurisdictions, and the top recommendation of the Non-Legislative Commission was to streamline the eviction process.
 
Below are some thoughts on how I would streamline the eviction process in Arkansas.  These thoughts are my own; they’re not official commentary from the Landlord’s Association, or from the Non-Legislative Commission.  And no, I'm not an attorney.

When the tenant’s rent is late as defined within the lease, the following happens:

• The landlord posts a three day cure-or-quit notice on the property.  Landlord takes photos with a date stamp as acceptable proof.
• At the end of the three day period, if the tenant has not paid, the landlord goes to the court clerk and fills out a form to evict the tenant.  The form will be “statutory”, in other words, standardized across the state, with instructions so that an attorney is NOT needed at this point.  A summons is issued to the tenant.
• The landlord uses any method of service to serve the notice to the tenant.  If the tenant dodges service for 3 days, the landlord can post the notice on the door, once again photographing it.
• The tenant has 5 days to respond.  A form will be provided with the summons, with simple instructions for the tenant to follow.
• Upon service, a court date will be assigned no later than 5 business days.  At court, there is only one issue: did the tenant pay the rent? 
• If the tenant has not paid the rent, the judge will immediately issue the Writ of Possession.  If the judge wishes to give the tenants “extra time” then the Court shall pay directly to the Landlord funds equal to the daily pro-rated rent for the “extra time.” 
• Once the Writ is issued, the Sheriff’s Department will schedule a lock-out within 72 hours.
• At the lock-out, the landlord is only required to change the locks.  Any tenant property remaining on the premises becomes the property of the landlord and will be disposed of however he sees fit to recoup the missing rent money. 

Does this seem harsh?  Maybe.  But remember, renting property is how landlords make a living.  When tenants refuse to pay and refuse to leave, they are stealing from the landlord.  When judges “feel sorry” for the tenants and give them “extra time”, they are stealing from the landlord. 

Even if I am not paid rent, I still have to pay mortgages, taxes, insurance.  My children still have to buy food.  My children still need clothing.  When rent owed to me is not paid, my children have to do without.  And in a choice between my tenant and my children… well… what choice is there?

My rental properties are not a free social entitlement. 

Thoughts of Eviction, Part 1

There has been a lot of news recently about evictions in Arkansas.  The existing Arkansas eviction system is a patchwork of laws, interpreted very differently in every jurisdiction.  Few landlords are happy with it.  In talking to the Landlords’ Association membership, the vast majority of evictions are for two reasons:

·         The tenant REFUSES to pay the rent owed, AND

·         The tenant REFUSES to move out.

The reasons for the first point are not that important, BUT it’s rarely a case of “poor grandma” who has to choose between her meds and her rent.  Sometimes, especially in this economy, it’s because of people who lose their jobs.  BUT, in most of the cases the money has been blown on alcohol, big TVs, iPhones, chrome wheels for ratty Oldsmobiles. etc. 

The tenant's money is blown, and there is no money left to pay the landlord.  But the landlord still has to pay taxes, insurance, repairs and mortgages for that month.  It’s amazing to me how many pro-tenant supporters just blow off this point: LANDLORDS HAVE EXPENSES TOO! 

When the landlord doesn’t get rent, the landlord loses part of his livelihood.  How many pro-tenant people would voluntarily give up a months’ pay from their job at random?  Think about this… you work all month and at the end of the month, your paycheck doesn’t arrive.  In this case, the employer has STOLEN hard work.  It’s no different when the rent is not paid.

Let me give an example: let’s pretend you RENT a car from Avis for a week.  At the end of the week, you REFUSE to pay more rent, and you REFUSE to return the car.  It’s called “theft” (and the police will soon be looking for you.) 

I’ve had tenants forced into breaking their leases for economic reasons.  We all have.  And while it is upsetting, I let them out of their lease, and if they’ve been a good tenant, I still give them a good reference.  Life can be hard at times, after all.  I want them to find a new place they can afford, and let me re-rent the property.

But it’s when the tenant REFUSES to pay the rent owed AND REFUSES to leave that eviction becomes necessary.  Eviction is a losing situation to landlords: the money owed is gone and will rarely be recovered, and the landlord has to start the process of finding a new tenant all over.  Then the landlord has to navigate the waters of eviction, which changes on a county-by-county, court-by-court basis.

Next, how I would change the eviction process...

Thoughts of a Warranty

I’m sure all the landlords are aware of the media attention to unsafe rental housing in Arkansas.  And as good landlords, we have to admit there is a small percentage of landlords who do not care for their properties.  In last year’s Commission meetings, the second most often discussed topic was the fact that Arkansas doesn’t have a Warranty of Habitability in law.  None of us are required to repair anything broken or damaged. 

But we as good landlords keep our places under good repair.  With that in mind, what should a Warranty cover?  Obviously, it should be based in common sense.  It should protect the good tenants from the minority of bad landlords, but it should not become a weapon to hurt the good landlords.

When I think of a warranty for my tenants, this is what I think it should cover:

• The structure must be reasonably safe and well maintained.  Items like walls, floors stairs and handrails should be tight and secure.
• The roof should not leak.
• The doors and windows should work, should be lockable and not be boarded up.
• The heat should work.  If the landlords provide A/C, then the A/C should work, too.
• The electrical and plumbing should work and be up to code for when installed.
• A working smoke alarm (my units have 2).

And of course there is the opposite: what should the warrnty NOT cover:

• The warranty must NOT be a way for the bad tenants to refuse to pay rent.  Period.  In too many states, tenants who blow the money rent money will intentionally break something before being evicted.  Then once in front of the judge, they lie about “slumlord” conditions.
• Tenant’s items damaged.  If a storm blows off the roof, the landlord should not have to pay for the new furniture.  That’s why the tenants should have renters’ insurance… at $10 a month, renter’s insurance is cheaper than going to Burger King.  I have no sympathy for tenants who do not buy insurance.
• Comfort items.  A stain on the carpet is not a “warranty” item.  And to be honest, neither are kitchen appliances.  I provide refrigerators and ranges, and when they break, I fix them.  But appliances should not be a warranty item.

So, how would such a warranty work?

• First, the tenant must NOT be behind on rent.  As I said above, if the tenant is facing an eviction for non-payment, the tenant might break something on purpose to avoid the eviction.
• The tenant must CONTINUE to pay rent.  If the tenant refuses, then the law must assume the tenant is lying about the repair request and proceed to eviction.  Paying the rent into a court registry is an acceptable compromise.
• The tenant must notify the landlord of the needed repair in such a way that the date may be proven to a judge.  Certified mail comes to mind.  All good landlords work from a phone call or email, but it’s not solid proof.
• The landlord would have a specified number of days to begin the repair.  We all know plumbers, electricians, roofers, etc., have their own schedules.  We also know that some workmen do a much better job than others.
• The landlord must try to control the damage until the workmen can start the repair.  For example, in the case of a leaking roof, the landlord should staple a tarp over the hole.
• The tenant must give access and cooperation to the landlord and workmen for the repair.
• If the landlord refuses to make the repair, then the tenant may terminate the lease and move immediately, or the tenant may go to a judge to order the repair made.

Due to the current regulatory environment, there is no way I personally would agree to let a tenant contract to make a repair, or make the repair themselves.  The issues of liability today are simply too complex.  And during natural disasters, there are many unscrupulous workmen who prey on low-income families.  As a landlord I know the good workmen in my city.

Finally, the Warranty must NOT open up landlords to unlimited liability claims.  Arkansas doesn’t recognize tort liability limits, and we all remember the lawsuit suit over a cup of spilled coffee at McDonalds.  In fact, in speaking with landlords through our chapters, this one issue is the root to much of the resistance to a Warranty bill.  As landlords, we are worried about frivolous lawsuits costing us thousands of dollars.  Liability MUST be contained.

This is an overview of course, and is not meant to propose a specific law.  The Landlords Association is willing to work together and review any proposed Warranty bills.  This is something than can be a win-win for both landlords and tenants.  From our viewpoints as good landlords, a Warranty bill could be crafted to “give” the tenants what we already do anyway, with no harm to us.  And it will hammer down some of the bad landlords who make us all look bad.

A lot has been in the media lately regarding the “Non-Legislative Commission for the Study of Landlord-Tenant Law” and its recommendations.  I was privileged to have a seat on that Commission.  The final report, while not perfect, was a balanced report between those advocating more tenant protections and landlords who see the current system failing.  I’ll write more about that later, but for now I wanted to share a recent court case.

A friend of mine just went through an eviction in Central Arkansas.  She admits that she did follow her own rules, and she “made an exception” for a borderline family.  And once in the property everything was fine for a while… then the tenants went feral.  They stopped paying rent and trashed the house.  They brought in pets not allowed under the lease.  The house was filthy.  She had dated photographs documenting it all.

She tried to evict them using the 10-Day Failure to Vacate law (10-day).  However she messed up the paperwork and the clerk refused to help her.  Let me repeat this: the Prosecuting Attorney’s office… whose office budget is funded by taxes this landlord helps pays… refused to help.  Once she corrected the paperwork, the clerk told her there was a SIX MONTH waiting list for evictions.  SIX MONTHS???

She was forced to change to the Civil Eviction procedure (3-day).  She hired a very well-respected attorney and proceeded to court.  Once in court, the tenants showed up as well.  They had no defense at all and the judge found in the landlord’s favor.  However the judge sat on the Writ of Possession and did not sign it for three additional weeks.

THREE WEEKS?  This unnecessary delay cost her about $700 in carrying costs (mortgage, insurance, taxes) while waiting to get the keys back.  And in that time, the tenants went wild.  Carpet destroyed, master bathroom trashed, kitchen heavily damaged.

Finally the judge signed the Writ and the Sheriff served the 24 hour notice.  The tenants ran away.  Once in the property, the landlord broke down into tears at seeing the damages.  It took a contractor two months to repair the house at a cost of over $20,000.  This is not including the lost rent.  She has since sued the tenants for damages but her judgment was only 35% of the actual damages.

This case hit her very hard emotionally: she has put this house up for sale and is considering walking away from the business.  I’ve known her for years, and she is a good landlord to her tenants.  If I was looking to rent, I would go to her.  I’ve recommended tenants to her in the past.

So how does this relate to the Commission?  In the Commission meetings, both the pro-tenant and landlord representatives are unhappy with the eviction system in Arkansas.  The example above shows why landlords are unhappy: a major complaint is that a clerk in the PA’s office can accidentally (or arbitrarily) entangle and eviction at whim.  Any judge or sheriff can delay eviction, allowing the tenants time to trash a property.  There is no consistency from court to court.

There is a real world cost here.  The clerks do not lose money.  The judge and the sheriff do not.  But it comes straight out of our pockets.  And the majority of the time, we never see this money.

We as landlords do not want deadbeat tenants in jail; we simply want them out of our houses as fast as possible.  We need a simple, streamlined eviction system with enforced deadlines.  And what came from the Commission report is we should develop a new system of eviction.

The Landlords Association is willing to help draft and test a new system.  But it is not a simple process, nor will it be immediate.  We need input from the Legislature and the Judiciary to make sure such a new system is Constitutional.  Such a new system should protect the rights of both tenants and landlords.

Are You a Good Landlord?

Today was the first meeting of the "Non-Legislative Commission On The Study Of Landlord-Tenant Laws". This commission was created by HB 2171 in the 2011 legislative session. The purpose of the commission is to review Arkansas law as compared to other states, and make any recommendations to the Governor's office. I have the privilege to be the Landlord's Association nominee to the Commission.

The commission has eight sitting members: tenant advocates, landlord advocates, legal experts plus industry representation (see my earlier post for the details of the makeup of the Commission.) I enjoyed meeting the other members today… I do not agree with all their points (just as they will not agree 100% with me) but in today’s session I’ve developed a great deal of respect for their positions. I hope they will see and come to understand some of the issues we landlords deal with.

But, I’m not going to report on the details. I think the Commission needs time and privacy to do its work. But there are points brought up by the tenant advocates today that strike a chord with me.

So my question: are you a good landlord?

When something breaks, do you fix it? Are your properties maintained? Are you “business-friendly” with your tenants? Do you respect them? Do you treat them fairly?

I often say that 90% of landlords are good people, and 90% of tenants are good people. People never talk about the 90% of rental relationships that are peaceful, professional and successful. Instead, we hear about the 10% of rental relationships that turn sour.

As a landlord, I head lots of stories from my landlord friends… about the bad tenants, the parties, the drinking/drugs, the pit bulls, the late rent, and the trashed houses. But as landlords, we have to be aware of the slumlords who tarnish our reputation.

There are the slumlords who withhold the security deposits after the tenancy. The slumlords who board up broken windows instead of fixing them. The slumlords who won’t fix an air conditioner or a leaky roof. The slumlords who enter into the properties with no notice, and dig through the tenants’ belongings.

Like the 10% of tenants who are “bad”, the 10% who are slumlords also taint our reputation. And bad landlords result in bad laws. Arkansas is a good place to be a landlord… it would be a sad thing if bad laws were passed that impact the majority just because of a small minority.

I’m not saying you have to be buddy-buddy with your tenant (although there have been a few of mine that became good friends.) But shouldn’t each tenant deserve a basic amount of respect? Shouldn’t we treat our tenants with the level of respect we would also want?

So I ask: are you courteous to your tenant? We can disagree with the tenants and be polite about it. Yelling doesn’t accomplish anything.

We can keep the properties up. That doesn’t mean stainless steel appliances and granite countertops, but it means that if the HVAC breaks in summer, we fix it as quickly as possible. Letting the house fall apart doesn’t accomplish anything.

Campaign Contributions

As we all know, election season is coming up. In Arkansas, state law makes giving to state campaigns very easy through our state’s tax treatment.

In Arkansas, an individual may contribute up to $50 for a state campaign ($100 for married couples) and take this as a CREDIT… not deduction… from their state taxes. Let me say this again, it’s a credit… for every dollar you contribute, you get that dollar back on your state tax refund.

In other words, it doesn’t cost you a dime.

In past election, the Landlords Association has been very active in donating to campaigns for candidates who support us in the legislature. The vast majority of our candidates have won their elections, and we have benefitted from their support once in office.

Past legislative sessions have seen attempts to take away our ownership rights. Imagine trying to provide good housing while dealing with rent control, no evictions, government fees and other governmental roadblocks.

The Landlords Association has stood firm again repeated threats against our livelihood, and intend to keep doing so. Elections are expensive, and the candidates need our financial support.

So I’m asking my fellow landlords to contribute to the Landlord’s Political Action Committee. We work with our lobbyist to donate money to candidates that we believe support our views on providing good, comfortable housing.

What does it cost you? Nothing (up to the $50/$100 limits.)

What do you have to lose? Only your livelihood.

To the right is a link to Arkansas form AR1800. Please donate to our legislative effort.