Concerns regarding screening for criminal records…
Q1
I have some concerns regarding screening for criminal records. What should the rejection threshold crime be?
A1
You are right to be concerned about this issue. A comprehensive discussion of this subject is way beyond the scope of this forum, but I’ll briefly mention a few issues.
In general, convicted criminals are not a protected class under federal fair housing laws. An exception is that those who were convicted of past drug use, as past drug use is considered a disability. Those currently using drugs or those convicted for the manufacture or sale of drugs are not protected. However, state or local laws may have protected classes not in federal law or may more generally prohibit arbitrary discrimination on the basis of personal characteristics. Regarding the latter, it is possible that a specific judge might rule that a criminal record is a personal characteristic in a jurisdiction having such a law.
There are a number of issues that must be considered when using criminal record in screening. First, (and probably most important) you must be sure that the applicant is really the person in the criminal record report. Second, your qualifying criteria related to criminal records, which should be in written form, must be reasonable and related to the safety of others. As examples, you could be treading on dangerous ground by denying housing to a person convicted of embezzlement or even someone convicted of armed robbery as a teenager 25 years earlier with no subsequent criminal record. Third, your criteria must be applied equally to all applicants in order to avoid fair housing claims. You cannot do criminal checks on some applicants and not on others or have different criteria because of the applicant’s appearance or other characteristic. Fourth, you must understand that the criminal record check does not guarantee an applicant is not a criminal, as there are numerous reasons why the report might not show a single conviction for even repeat offenders.
Accordingly, be sure that you understand federal, state, and local anti-discrimination laws if you are using criminal record reports when screening tenants. You should consider consulting a competent local attorney who is knowledgeable about the specific issue for advice regarding your decision criteria.
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Q2
Is it normal that both my wife and I be required to sign a personal guaranty when refinancing a property owned by an LLC of which I am the sole member?
A2
If an LLC, corporation, or other limited liability entity is not highly financially qualified (e.g., a GMC or Microsoft) at least some of the owners or managers should expect to personally guarantee the loan unless it is to be non-recourse. It is often required that both spouses sign as guarantors for loans because, in many states, the other spouse’s income and assets cannot otherwise be made liable for the loan. Similarly, landlords must consider the same issues when leasing to a limited liability entity.
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Q3
Can I require a tenant to be responsible for all repairs and maintenance?
A3
That might depend on a number of things, including the state where the rental property is located, the type of rental unit, and the types of repairs you want to include.
In some states, the tenant cannot be made responsible for some types of repairs. The theory is usually that a current tenant should not be responsible for repairing things that were nearly worn out when he moved in, particularly things that are costly. The type of rental unit might also make a difference. In general, a tenant can likely be made responsible for more repairs in a single-family home than for a unit in a multi-unit building.
The type of repair for which a tenant can be made responsible might also depend on whether it’s a $25 dollar repair or a $2,500 repair. You should not expect to make a tenant pay for replacement of a non-repairable HVAC system that is 20 years old. When considering tenant repair responsibilities, you must always take into account landlord responsibilities under federal, state, and local habitability laws.
However, just as important as “can you do it” is “do you really want to do it.” Even if you can legally require the tenant to be responsible, you should understand that it might not be beneficial for you to do that. I’ll mention a few of numerous possible issues.
First, the tenant may neither make the necessary repair nor report the problem to you. This might occur because (1) he doesn’t know how, (2) he hasn’t sufficient funds available, or (3) he just simply doesn’t want to spend the time and/or money to deal with the problem. Deferral of repairs and maintenance can result in substantial collateral damage. For example, failure to repair a leaking roof can lead to ceiling and/or wall drywall destruction and serious flooring and/or cabinet damage. A neglected $100 repair by a licensed roofing contractor can turn into thousands of dollars in repairs, the costs for which you may never be able to collect from the tenant.
Second, the tenant may (1) fail to hire the necessary professional services for complex jobs or for tasks that by law require use of licensed contractors, due either to lack of knowledge of the law or unwillingness to pay the cost of a qualified contractor, or (2) do inferior work himself, potentially even increasing the damage in the long-term because of collateral damage. Bad work is often more costly to correct than having it done correctly in the first place. For example, he may perform plumbing repairs that later fail, causing costly damages to your unit and/or to property of a subsequent tenant. Even worse, he may illegally do work (e.g., electrical or gas) for which state law requires a licensed contractor and/or local law requires a building permit. Your liability could be greatly increased if the faulty work resulted in serious injury or death to a subsequent tenant or other party.
Third, in the course of doing the work the tenant may cause injuries to third parties or may himself be injured. You may be held liable and, for some possible scenarios, you may not be covered by your insurance.
Finally, there are circumstances under which there could be issues regarding payroll taxes and/or worker’s compensation insurance because you assumed the tenant could be treated as an independent contractor whereas the IRS and/or state taxing authorities would classify the tenant as an employee.
The bottom line is that it is usually much better to charge a higher rent and retain responsibility for most, even all repairs. If you do decide to make tenants responsible, you need to (1) be sure that your insurance covers you for any liabilities resulting from repair work being done by a tenant, (2) have adequate lease clauses regarding the issue (including clear definitions of what items are the responsibility of tenant and landlord, respectively), and (3) make regular inspections of the property to be sure that necessary work in being done in an acceptable manner.
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