Are there any reasons why I might not want Section 8 tenants?
* * * * * *
Question 1
Are there any reasons why I might not want to have Section 8 tenants?
Answer 1
Section 8 has both advantages and disadvantages. The main theoretical advantage is that the government guarantees the rent. However, in practice there are many ways in which this can become untrue. For example, if the tenant originally qualifies for 100 percent subsidy and a couple of months later the tenant qualifies for only 20 percent subsidy due to a change in financial circumstances (e.g., found a job), the landlord must depend upon the tenant for 80 percent. Furthermore, rent increases are limited and require permission of the housing agency and if the market rent (FMR) goes down, the rent you’ll receive is reduced. There are circumstances where the landlord may not receive payments for certain periods of time.
You also have the same problems regarding unpaid rent and damages that you have with any other tenant because the government is not responsible for the tenant’s share of rent or what the tenant does to your property. In fact, you are less likely to collect for unpaid rent and damages beyond the amount of the security deposit than for non-Section 8 tenants because the typical Section 8 tenant has less to go after.
The most basic disadvantage of the program is that the government gets more control of your business. There is an initial inspection, annual inspections, and inspections if the tenant complains about something. Section 8 standards are often higher than habitability laws and/or what the landlord must usually do in order to attract good tenants for the particular property.
If the tenant must be evicted it is the landlord’s problem and there will be little or no help from the agency that administers Section 8. In fact, they may terminate payments upon commencement of the eviction.
Be sure you understand the program before you get involved with Section 8 and, if you do, be sure that you select tenants using the same screening and selection standards as you would for an applicant who is not Section 8, only taking into account that Section 8 will initially be paying part of the rent.
* * * * * *
Question 2
I want to sell my rental house. It is currently occupied by 4 tenants with a 1 year lease ending about 6 months from now. What are the steps in notifying the tenants about the sale and showing of the home while occupied?
Answer 2
First, the existing lease agreement is valid and enforceable until its expiration date and the l lease binds the buyer if sold before its expiration.
Second, most lease agreements and the laws of many states require tenants to cooperate with any agents of the owner including real estate agents, appraisers, contractors, etc. However, entry to the property must be preceded by a notice period as required in the lease agreement or by state law, whichever is greater unless state law allows for a lesser time being specified in the lease. The minimum period is 24 to 48 hours in most states, but this would be overridden by any longer period specified in the lease. However, the entry time must be at reasonable hours. If a tenant refuses to cooperate, entry cannot be made and the only recourse would be to file a lawsuit.
Due to possible problems with access and the fact that the property may not show well when occupied by tenants, it is usually best to not try to sell a property while leased.
* * * * * *
Question 3
I am soon closing escrow on purchase of a 20-unit apartment building. State law requires that I have a resident manager. Is there any reason why a resident manager must be licensed? Is it true that this person must be an employee rather than treated as an independent contractor? What is the best way to handle compensation?
Answer 3
To my knowledge no state requires that a resident manager need be licensed. It is important that a resident manager be adequately qualified regarding knowledge related to all management issues, including procedures and laws. Of special concern is adequate knowledge regarding federal, state, and local fair housing laws. Accordingly, someone with a real estate license might be expected to have knowledge of such laws.
A resident manager must be classified as an employee for a number of reasons. A primary reason is that the owner or property manager must provide close supervision of the resident manager. An owner almost certainly won’t be giving him/her authority to decide what rents or deposits to charge or what days and hours to work or where to accomplish the work. Ann owner must be absolutely sure that he/she obeys the numerous laws affecting income property including landlord-tenant laws, fair housing laws, lead paint disclosure laws, etc.
Owners must be concerned about everything the manager might do as the owner’s agent and how the manager accomplishes those tasks. One cannot only care about the end result – low vacancy rate and 100 percent of rents collected – because there are many ways to accomplish these end results that would violate a lot of laws (e.g., fair housing) as well as open the owner up to other civil litigation, perhaps even to criminal prosecution. Thus, owners should establish very specific written management procedures.
The penalties for categorizing an employee as an IC can be quite substantial and can come from the IRS, state and local taxing agencies, the state worker’s compensation board, or an owner’s own insurance company.
Compensation of a resident manager depends greatly on a number of factors including the quality of the project, the size of the project, the duties and responsibilities of the manager, and the qualifications of the manager.
Usually, compensation of a resident manager includes a rent-free or reduced-rent apartment unit. The reason for this is that there are tax benefits to both the employer and employee compared to all compensation being in the form of paychecks.
The value of any living space provided the manager without charge or at a reduced rent must also be taken into account when calculating withholding and other payroll tax items for federal, state, and local levels of income taxation. However, landlords and resident managers do not have to pay FICA taxes on the value of free or discounted rent if all of the following conditions are met:
- The resident manager’s unit is on the rental premises and
- The landlord provides the unit for the landlord’s convenience (or to comply with state law) and
- The resident manager accepts the unit as a condition of employment. That is, the manager is required by the landlord to live in the unit in order to be the manager.
The value of the reduced rent will be considered regarding minimum wage and overtime issues.
In addition to or instead of a free or reduced rent unit, additional compensation might be provided via fixed salary, hourly wages, bonuses, and/or commission,
Fixed Salary – A fixed weekly or other period salary can be a good way to handle compensation as long as one retains a way to determine what and when work is getting done and ensure that minimum wage and overtime laws are not violated. This means that one must require the manager to maintain a timesheet and adhere to the maximum hours allowed each week considering the compensation.
The main advantage to the resident manager of a fixed salary is that the resident manager knows exactly the amount of the next paycheck. This is a disadvantage to the owner if the work load varies significantly from month-to-month, for example, in areas where there are significant seasonal variations in vacancies.
Hourly Wages – Since owners should require the manager to maintain time sheets, anyway, there is no administrative reason to not pay by the hour. However, there are two issues that must be taken into consideration.
First, at the one extreme, one doesn’t want the manager making work in order to increase his/her paycheck, so there must be a maximum number of hours per pay period. Second, at the other extreme, most managers probably want and need to know that they will have a minimum income each month, so one also needs to also provide a minimum number of hours of tasks per month.
Bonuses & Commissions – When compensating resident managers, some owners like to provide additional incentive to their resident managers by paying bonuses or commissions related to maintaining high occupancy rates and/or low vacancy and/or turnover rates. There are two potential problems with doing this.
First, laws and regulations of some states prohibit payment of such fees and commissions to unlicensed persons. Some states do make exceptions for nominal payments to resident managers. Owners must determine whether their state deals with this issue and, if so, follow the law.
Second, there is the possibility that rewarding the manager for minimizing vacancy might result in lowering of standards, particularly in a bad rental market. This would be of most concern when the resident manager is allowed to select tenants and would be of much less concern when screening and selection are not performed by the manager.
Landlords should always utilize a written employment contract as well as a written lease agreement for resident managers. Although oral agreements can be legal and binding, it can be difficult, even impossible to prove what the terms of an agreement were if there is a future dispute about the terms.
Owner’s should not promise or even imply long-term job security or otherwise give assurances about the length of employment or tenancy. The employment contract should make clear that it is an “at will” employment situation and emphasize the right to fire an employee at any time and for any reason not prohibited by law. Similarly, the employee may quit at any time, for any reasons, and with or without notice.
Many attorneys recommend that they be separate agreements rather than a single combined one. If separate documents are utilized it is important that each agreement be adequately tied to the other and that each provides for the termination of occupancy with termination of employment issue and vice versa. Remember that the person cannot serve as manager if not a resident.
It may be possible in some states to terminate the tenancy of a resident manager upon termination of employment without the normal tenant notice requirements, but other states give the resident manager the same rights as any other tenant, that is, stay until the end of the term of the lease even after termination of employment. Being sure that the manager is a month-to-month tenant will minimize the problem. It may be possible to expedite departure with a reasonable cash payment, but be sure that this is done carefully. Whatever the law of the state where the property is located, if the manager refuses to leave voluntarily the owner will have to evict in order to recover possession of the manager unit.
Much more information regarding resident manager issues can be found in our Mini Training Guide titled “9 Resident Manager Issues.”