LEGAL NOTES

The National Association of Realtors’ annual Investment and Vacation Home Buyers Survey shows that there were 1.65 million investment-home sales in 2006. Twenty-two percent of all homes purchased in 2006 were for investment, while another 14 percent were vacation homes. These figures show that there is a lot of opportunity in property management. Considering the slow sales market, it is a good time for Real Estate agents to consider adding property management to their service offerings. By doing so, you can continue to profit in the Real Estate business even when your homes are not selling. However, before you start advertising your new service, there are a few things you need to know.

The Basics of Property Management
Many Real Estate professionals fail to realize that there are strict rules and regulations in property management. Primarily, if you do not have a license for property management separate from your Real Estate license, it is illegal to provide property management services. In many states, including Nevada, it is a misdemeanor to receive compensation for property management services if you are not licensed as a property manager. For example, if a licensed property manager owns six properties and hires her brother to manage the properties, it is important that both be licensed. If the brother manages the units and charges a fee for his services, unless he is licensed he is violating the law. If the licensed sister is passing the expenses on to her tenants, she is also breaking the law.

When you enter the world of property management, you will find that many responsibilities come along with the job. Property management involves much more than just collecting rent. Property management generally also includes leasing, keeping records, making repairs and carrying out preventive maintenance. If an eviction is necessary, a property manager should know how to handle the whole process, from sending eviction notices to filing court documents and working with the local sheriff.

Finally, property managers must understand and comply with provisions of national, state and local laws, such as fair housing laws. They must ensure that their renting and advertising practices are not discriminatory and that the property itself complies with all regulations and building codes. In short, in order to limit liability exposure, property managers should be fully versed in the rights and obligations of not only a property owner, but also the rights of tenants.

Advice for Investment Clients
Given the large number of property owners who lack the time or knowledge necessary to directly manage their Real Estate investments, it is clear that there are many opportunities for property managers. However, becoming a licensed property manager is a major step and may not be feasible for some Real Estate agents. This does not mean that you cannot take advantage of the property management boom. Many clients purchasing investment properties look to their agents for advice on how to best manage their properties. Simply educating yourself on the basics of property management can help you establish yourself as an agent who specializes in investment properties.

The best advice you can give to investment clients is to seek the assistance of a Real Estate attorney when entering a contract with a property management company. Most companies are good at collecting rent but it is important that they be prepared to handle legal and financial problems as well.

Many investors fail to properly outline their agreement with property managers until it is too late. For example, I recently represented an out-of-state client who had her Nevada property foreclosed upon without her knowledge. It turns out she had failed to pay HOA dues because she believed the property management company was paying them. In actuality, her property management company was receiving the bills and disregarding them. She was unaware of the problem until someone knocked on her tenant’s door asking to inspect the property to be able to bid on it at the upcoming foreclosure sale. Needless to say, both landlord and tenant were shocked, and the tenant was scared off and moved out.

When questioned, the property management company argued that it was not responsible for paying the HOA dues, for including those on the landlord’s monthly statement, or even for passing on the dues bills or the notices of delinquency. Without a detailed contract, my client had no proof that these common-sense responsibilities were within the scope of what she was paying the property manager to do. My client eventually got her property back, but only after a great deal of time, money and heartache. A detailed property management contract, drafted with the assistance of a Real Estate attorney, could have prevented this type of misunderstanding.

In addition, it is critical to make sure the property management company is substantial and has good insurance. Your clients are entrusting a very valuable asset to this company. If something goes wrong, they need to know that they are covered. Consider this scenario: A man owns property in Idaho and lives in California. He hires a property management company to manage the Idaho property. If one of his tenants sues for mold contamination and exposure, the owner looks to the property management company to take care of the issue. If the company has good insurance, all parties should be covered. If not, the owner has to pay for his defense out of his own pocket on an issue he knew nothing about, and that he paid someone else to avoid in the first place. This scenario also highlights why it is critical not only to use a reputable property management company, but also to ensure in the contract with them that they will defend and indemnify the landlord from any suits arising from something (like mold) that falls within their responsibility to avoid.

Finally, always advise your clients to do a complete inspection before the property manager takes over. The condition of the property should be documented with files and photos. If the property goes to shambles under the care of a property manager, this can serve as proof that they did not provide the service they promised.

Knowing the above can provide an additional service to your investor clients, that helps ensure that they come back to you the next time they come to town looking for a great rental or vacation property.

Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup, LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup, LLC and the reader.