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Who Holds the Security Deposit?

This post is an excerpt from the Denise Evans book, Alabama Landlord’s Desk Reference and Forms Book.
If you’d like more information, including free table of contents and index, there is a link at the end of the article.

Sometimes a landlord hires a property management company, but wants to hold all security deposits itself. Often, the property manager balks, and says that is not allowed. The answer is more complicated.

A property manager is the agent for the landlord/property owner. Unless the management contract has some different provision, then the manager must surrender the security deposit to the owner if it is demanded. Agents must comply with their principal’s instructions, unless those instructions are illegal or a contract between the parties dictates a different result. There is nothing illegal about the owner holding the security deposit money.

This typically comes up in three situations:

  1. Owner wants the deposit forfeited and manager disagrees.  Unless the management contract says the manager is the one who is allowed to make that decision, then the manager must declare the deposit forfeited. If that happens, ask the owner to sign an indemnification agreement saying that if the manager is sued because the deposit was not refunded, then the owner will pay all of the manager’s legal fees and other costs and expenses.
  2. Owner wants to change management companies, or self-manage. It does not want to declare the deposit forfeited, but it does want sole control over the money.  This has the same answer as #1 above.
  3. Owner wants the security deposit so it can use the money. It is allowed to do that in Alabama, but the funds must be available and refunded at lease end if there have been no deductions.  Obtain the same indemnity agreement as described in #1 above.

Property managers who want to avoid such situations should have a contract clause that says security deposits will be held only by the manager, that forfeiture decisions are in the sole discretion and control of manager, and that if there is a change in management companies the manager will refund security deposit by checks made jointly payable to the tenant and the new management company. That last item avoids the problem of the new management company failing to refund the deposit (but with no forfeiture-related reason) and the tenant is allowed to get the refund from the former company, under Alabama law. With my method, the tenant has ALREADY received the refund, even though jointly payable to the new management company.

Interested in the Landlord’s Desk Reference and Forms Book? Click HERE

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Question of the Week: Security Deposit Deductions

This question comes from a landlord in Birmingham. He is just starting out, and can’t afford to hire cleaning crews and repair people every time a tenant moves out. So, he does the cleaning himself, and makes simple repairs such as drywall damage, broken window panes, and similar things. Normally, he would have to pay someone $300 for an “extra” cleaning job, and several hundred dollars for his repairs. He asks, “When I deduct these things from a security deposit, do I have to charge an hourly fee for my time? If so, how much per hour? Or, can I deduct the same amounts that independent contractors would charge me?”

The answer is, he can deduct the same amounts that independent contractors would charge him. In the case of cleaning and repair deductions from security deposits, they are the result of damages the landlord suffered as a result of the tenant’s default regarding property maintenance. The measure of the damage, meaning the dollar amount of tenant’s liability, is what it would cost to fix things. Not what it actually costs, but what it would cost. People who want to read an appeals court decision discussing this should read Tabor v. Thacker, 521 So.2d 66 (Ala. Civ. App. 1988)

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Question of the Week: Ad Valorem Tax Values

The question this week comes from somebody in Jefferson County who just received the new tax appraisals for his rental properties, and went into shock!!! He was hoping they were worth as much as the county thought, but that was highly unlikely. It just meant his taxes were going to increase astronomically and unfairly. What could he do?

If this happens to you, be sure to dispute the valuation to the local Board of Equalization. Counties are not able to afford the personnel necessary to appraise properties by the old fashioned methods. Instead, they rely on computer software and artificial intelligence that makes educated guesses about values. Those guesses can be wildly wrong. It is fairly easy to attack them, but you have to be prepared.

First, don’t miss your deadlines, or you’ll be out of luck until next year. You have thirty calendar days from the date of the final published notice to dispute it, in writing. The Code sections explaining this process start at Section 40-3-20, Code of Alabama 1975.

Second, call the tax appraiser’s office and find out HOW their appraisal was done. Was it recent comparable sales, or was it replacement cost minus depreciation?

Third, be prepared for the hearing with all of your evidence. You will need to persuade the Board of Equalization that your property is worth less than the tax appraisal. For a comparables methodology, you will need information about recent comparable sales, and current competing properties in the market place. If at all possible, try to find sales within the last year, within a one- to three-mile radius and in the same community. For example, a property one block away from a Mountain Brook address, but actually in the Irondale city limits, would not be a legitimate comparable sale. If past sales were at higher prices, but there are very similar properties that remain unsold even though listed for those higher prices, (or even your tax appraised value) then that is very good evidence the value is lower. For replacement-cost-minus-depreciation, you will need information about the quality of the construction, and the current condition of the components.

Fourth, be prepared to dispute the evidence offered by the County attorney. They might have recent sales they say are comparable, but which are really not. You should bring your laptop computer and be able to access property information quickly. You cannot rely on wireless Internet. Make sure your cell phone is set up for mobile hot spot use, and know how to use it. Practice doing this, and looking up information on MLS, Zillow, or other sources. Or, they might say your building is better-built and still in better shape than reality.

Get to the hearing early. Ask the county’s attorney for a list of the properties they plan to use as comparable sales to support the appraised value. In the alternative, ask the for details regarding the base value of construction, and how they calculated a percentage of depreciation. That way, you can research them while the Board is getting settled in for the hearings. Hopefully you will not be the first one!

In my experience, they rarely give taxpayers the value they want, but usually do lower the values somewhat. If you are unhappy with the result, you can always appeal to Circuit Court. The legal fees to do that might be far more than the higher taxes, though. Even if your property is owned by an LLC or corporation, you can still be the advocate in the Board of Equalization. If you appeal to Circuit Court, though, you will have to hire a lawyer unless the property is titled in your own personal name.

We do not currently have a specific class or video on disputing your property tax valuation. You can always reach out via email, though, if you need to hire a consultant to help you prepare for your dispute.

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Flipping Strategy That Works

Television flipping shows intimidate me. Designer colors and finishes that all go together, walls removed, windows added, stairs moved and roof pitches changed entirely. One designer always paints the brick, another one always strips the paint off. Don’t even get me started about the insanity of California homes of 1,100 square feet with 4 bedrooms and 2 baths on 1/5 of an acre, miles from the beach, and $800,000 price tags.

Which kind of proves my point in this article. People in California, New York, Chicago, London and Tokyo might have $100,000 in cash and good credit for real estate investments, but they cannot afford anything in their own back yards. Investor money is pouring into Alabama for single family rental houses up to four-plexes. They don’t care about trendy tiles for the backsplash or mid-century modern light fixtures. The only question that matters is, “Do the numbers work?”

I can deal with that type of flipping! Experts say we are seeing an explosive demand for single family rental properties. Older people were traumatized by the Great Recession and an inability to sell their homes. Younger people want maximum flexibility and near-instant gratification. That means rental housing, but not apartments. Start investing now, so you don’t miss this opportunity.

Do you want to learn more about flipping rental houses? How to find properties, how to find investors, and what they need in order to making buying decisions sight-unseen? There’s an app for that! No, not really. But there is a class for that, coming to cities all over Alabama. Check out the schedule and see if there is a date and time convenient for you, or order the video if that will be more convenient. Click HERE for details.

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Renters Insurance

Landlords should insist on renters insurance for their own protection. As a marketing tool, you can often include the insurance as a free bonus to tenants.

Renters insurance can be purchased for around $210 a year for $10,000 replacement cost coverage, $100,000 liability, and a $500 deductible. That quote is for a policy that does not depend on checking credit scores or insurance history. Tenants who suffer a loss are less likely to sue the landlord (for the tornado, the theft, the fire, whatever) if they have insurance they can use. The money has to come from somewhere, right? The liability portion provides a fund in case the landlord has claims against the tenant for being the one who burned the place to the ground, as one example. Another situation would be if your tenant were sued for harming somebody, he would have money available to pay your rent while his renters insurance pays for legal fees and paying off claims.

Tenants often have no idea the insurance is so cheap. They are usually reluctant to spend the time calling for quotes or filling out online forms. Many have been unable to get economically priced insurance for health or auto. Or, they bought insurance in the past and then lost it when they could not keep up the monthly payments. To them, it seems like a waste of time to try to get renters insurance.

In my experience, a landlord who spends $17.50 a month on renters insurance can almost always price their rent $20 a month above the market, if they offer the insurance at no charge! Plus, just offering the insurance gives them a competitive advantage in the market place.

Call your own insurance agent to check out prices, policy limits, deductibles, and underwriting criteria that might cause the premium to be higher. Then have your lawyer help write up the disclaimer language that goes with your marketing, so you don’t get locked into paying higher premiums than you intended. Let us know how it works for you!

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Extra Revenue

Most apartment complexes have open parking. The first one to find a spot, gets the spot. Until next time. When someone else might get the good space.

Apartment complexes around the country are setting aside 10% to 15% of their spaces for reserved parking. Tenants can pay for the expense of a sign for their reserved spot, plus parking space rental of $20 to $200 per month, depending on market conditions and apartment rental rates. The tenant of a luxury apartment renting for $1,500 a month would think nothing about spending another $100 for a reserved place. If you charged only $20, you’d be leaving money on the table.

Yes, there are some headaches with people illegally parking in someone else’s reserved spot. A large fine to the guilty party if a tenant, or towing the offending car if anyone else, will send the right message and avoid future problems.

Using a conservative cap rate of 6%, adding $1,000 a month in reserved parking fees results in $12,000 a year of additional revenue and an increased value of $200,000 for the property. There are no additional expenses in creating that revenue and value, because the tenant pays for the sign!

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Unpaid Water Bills

You are not liable for your tenant’s bills unless you agree in writing!

Local water authorities cannot make landlord pay former tenant’s past due water bill before turning on water for new tenant. They claim they can, because of their local “rules,” but that doesn’t make it legal. Anybody can make up rules for their handbooks. If you agree, then that’s a contract. Otherwise, it’s just wishful thinking on their part.

Ala Code Section 35-9-15 says, “The provider of goods or services may not require a landlord or real property owner to pay the delinquent bill of a tenant for goods or services provided to the tenant of the landlord if the account for the goods or services is in the name of the tenant. In addition, the provider of goods or services shall not have a lien on the real property for any goods or services provided in the name of the tenant.” Also, Section 35-9-14 says, “Notwithstanding any other provision of law, any bill for sewer service received in the name of a tenant or tenants, shall be the sole responsibility of the tenant or tenants and shall not constitute a lien on the property where the sewer service was received.”

If local water authorities refuse to connect water for a new tenant just because the old one has an outstanding bill, show them a copy of this article. If that does not work, contact the attorney for the water authority.  Usually, THAT person knows how to read a statute and understand what it means.