12 Tips for Reducing Your Rental Management Liability:
Adding rental and property management services can boost your profitability. Be sure to protect those gains with these 12 risk-management ideas.
By G.M. Filisko
It can be a wise move to broaden your business base by expanding the services your brokerage offers, and handling rentals and property management is a natural segment into which to expand.
That’s especially true given market changes in the past few years. “For the past couple of years, we’ve seen more first-time landlords—people who couldn’t sell their home and wouldn’t have ordinarily been landlords,” explains T.J. Rubin, managing broker of Fulton Grace Realty in Chicago, a leasing, management, and brokerage company. “We’ve also seen a growth in single- unit condo investors. Maybe they’ve seen a foreclosure and bought it intending to rent it out. Finally, there’s been a trend of more luxury units being rented.”
Rubin’s experience is being repeated throughout the country, and all those rental markets present opportunities for brokers. However, rental management isn’t hazard-free. Without savvy planning and controls, you can expose your company to liability that could wipe out any added profitability you generate. Here are 12 great ideas to safeguard your company when you offer rental management.
1. Create a separate legal entity.
Operate your rental management business out of a company separate from your brokerage, advises lawyer Bruce Ailion, ABR®, CRS®, CRBsm, e-PRO®. Ailion is an associate broker at RE/MAX Greater Atlanta in Marietta, Ga. However, through Success Real Estate Brokers, at which he’s the principal broker, Ailion manages about 110 rental units.
“It is easier to do the management though a separate company,” he says. “Our structure was done for accounting convenience. But it’s also a good strategy for minimizing liability.”
2. Don’t manage a property here and there.
“Don’t just rent out a property as a favor to someone,” says Kimberly Smith, CEO of CorporateHousingbyOwner.com and Avenue West Global Franchise, a Denver-area brokerage that manages furnished residential units and trains franchisees to do the same. “Make sure rentals and management are part of your core business model. Unless you know who to connect with—like the most appropriate insurance vendors—you’ll fail.”
“You also need to know your local laws,” adds Smith. “They’ll dictate whether you need to collect use taxes on rentals; whether owners have to provide a written notice within a certain period of time to keep any of a tenant’s deposit, along with what charges can be deducted and not; whether you have to keep security deposits in escrow; and when and how in your marketing you must disclose you’re a broker. Don’t dabble in property management because there are penalties if you get those things wrong.”
3. Train your agents before they handle rentals.
“Careless agents not following procedures is the quickest way to get in trouble,” says Rubin. “We have a property management handbook to make sure everyone learns our processes and procedures. But agents also have to jump right in. So we have junior managers mirror senior managers. Then the junior managers get their own accounts while still having their mentor’s help. Finally, they become proficient and operate independently.”
4. Properly screen all potential landlord clients.
“When we’re managing properties, if there’s a lawsuit for premises liability, we’ll be named as a defendant in addition to the owner,” explains Melania Mirzakhanian, a lawyer and director of operations at Tomea Inc., a full-service brokerage in San Diego with about a third of its business from property management. “So we do credit and criminal background checks on potential landlord clients. I also like to get a feel for their character. I really like one-on- one and face-to-face meetings, but a lot of our clients live out of state and have a second home here. In those cases, we do a lot on the phone and through Skype. If we find out owners aren’t honest with us about their financial situation— say they’ve filed for bankruptcy or their property’s in foreclosure and they haven’t told us—that’s a red flag.”
Another red flag? A too-involved owner. “I need a property and an owner I can represent,” says Smith. “A lot of times, owners are too hands on, saying things like, ‘I’m going to pop over every other week and check the backyard.’ A key benefit every tenant is entitled to is the quiet enjoyment of the property; that can be lost if an owner is too invested in it. I deal with relocation clients, and one Fortune 500 company may be leasing 10 of my units. If one landlord messes things up, it could mess things up with all 10 units.”
One additional point on owners: Be sure they have the authority to do what they’re agreeing to do. “In one situation, it turned out there were several owners,” says Smith. “I was dealing with one owner who hadn’t properly disclosed the situation to the rest. It got messy fast. Verify the potential client owns the property. If there’s more than one owner, understand that dynamic, and make sure the contract reflects their consent.”
5. Personally inspect properties before you accept the business.
“We inspect every property, and it’s mostly about the safety of the premises,” says Mirzakhanian. “If a hazardous situation needs to be repaired, my legal background kicks in. We tell the owner what needs to be fixed before we can rent out the property. We won’t let tenants move in with a landlord’s promise to fix that type of thing in a month or two. Pools are also a big issue. We need to be sure they’re maintained and don’t have hazards that can harm children.
6. Be sure to have solid contracts.
Absolutely have a management contract with clients. “Whatever we ask the landlord to do, we put that in the management contract so it’s clear,” says Mirzakhanian. “We also ask landlords to indemnify us for all the things we’ve listed in the contract that need to be repaired. I don’t think we should be liable for those problems.”
Always use written leases, and make sure they’re kosher in your state. “Some states don’t allow you to change their lease forms,” says Smith. “Also, be sure to put any discussions with tenants and owners in writing. One mistake I made was when a tenant asked to leave early and have new tenants take over. Over the phone, the owner agreed. But I didn’t get that in writing, and the owner changed his mind overnight. Get all changes to leases in writing.”
7. Get and require applicable insurance.
Be sure your company has professional and general liability insurance, and ask your clients to include your company on their policy. “In our contracts, we require owners to name us as an additional insured on their homeowners or landlord’s business policy,” says Rubin. “If people get hurt at the property, they know only us as the landlord, and they’ll sue us.”
8. Communicate with clients and tenants the way they prefer.
“You can reduce liability by learning from your clients how they want to communicate,” says Ailion. “Some want in-person meetings, some want to be contacted by phone, others only
by e-mail or text. Some want regular updates, others want a quarterly call. Some are annoyed if a voice mail isn’t returned within two hours while, for others, the next day is fine. Learning what the client’s communication preferences are and meeting those expectations reduces liability.”
Do the same with tenants. “A short time ago we had a tenant who was recently discharged from active duty in Afghanistan,” adds Ailion. “We were told by his mother that he had PTSD and anger management issues. He required special handling. While we had some tense moments, understanding how he needed to be responded to and making the extra effort to accommodate his lower ability to tolerate inconvenience and delay allowed us to keep him happy as a tenant and the property leased.”
9. Track business to identify your market’s high-risk clients.
“When you’re first trying to get business, you take any business you can,” says Rubin. “After a while, you start to spot trickier situations that cost you more time and money and as a result possibly greater liability. We started to limit our service areas because we found that multi-unit buildings further outside our core market are tougher for us to manage. It’s harder to respond to maintenance requests, which increases our liability.
“We’re also very cautious of managing buildings that haven’t been well run before the owner approaches us,” adds Rubin. “Maybe they don’t enforce rent requirements or late fees, and we might have to begin numerous eviction proceedings. We’ve inherited improperly screened tenants, and when we tried to evict, they argued over things previous managers said that we had no idea about. Or maybe buildings aren’t in great shape or there are code violations. It’s sometimes impossible for us to bring a property up to code and make sure the tenants are perfect. If we step into a situation like that, we could get sued because of some dangerous aspect of the property.”
How can Rubin tell the status of a building’s management? “We look at whether we have contact information for tenants and whether clients are aware of the building’s situation. They can’t hire us expecting a 180-degree turnaround in a few days. Also, there are costs to turning a building around. We’ve managed for owners who are cash strapped and been handcuffed. That reflects poorly on us.”
10. Identify a visible point person for owners and tenants.
“Having a strong customer service person as a point of contact for owners and tenants goes a long way to reducing liability,” says Ailion. “Both owners and tenants want to reach someone who can hear and begin a resolution to their problem.”
Also remember that problems don’t go away the longer they’re not addressed. “A small issue or problem grows over time,” adds Ailion. “If a mistake has been made, acknowledging, addressing, and resolving it goes a lot further than ignoring it, avoiding it, denying it, or making excuses. How we make a bad decision right makes all the difference. Those I work with know they can make a decision that binds the company, and even if I wouldn’t have made the same decision, I’ll support theirs. Ultimately, a happy client is more important than a few dollars.”
11. Network with others in the field.
Whether it’s through NAR’s Institute of Real Estate Management or another professional group, networking expands your knowledge base. “The most significant decision I made to reduce liability was joining the National Association of Residential Property Managers, attending its meetings, and taking its training,” says Ailion. “It’s a group of seasoned professionals willing to train and share their knowledge and experience.”
12. Remember who pays your bills—and that it may not matter.
“It’s important to keep in mind that property management is an odd industry from the standpoint of the definition of a client, ”says Rubin. “Technically, it’s the property owners who pay your bills. But you also need tenants to keep your business going. Essentially, you may need to learn to become an effective mediator between the two.”
G.M. Filisko is a lawyer and freelance writer who specializes in real estate, legal, business, and personal finance topics.
Tip: Want to learn more? Click Here.
- 7 Ways to Limit Your Liability When Offering Rental Management Services – Part II
- 7 Ways to Limit Your Liability When Offering Rental Management Services – Part I
- What Your Landlord Doesn’t Tell You Might Hurt You
- How Property Owners handle Property Management
- Tip: Learn more property management with NARPM