Robert S. Griswold - Property Management Kit For Dummies

Make sure that you have copies of all current state and local rental laws and ordinances that affect your rental property. Check out www.wiley.com/go/propertymanagementkitfd4e .

Get all the account and payment information for every utility provider that provides services to the rental property, along with verification that all payments are current. These utilities may include electricity, natural gas, water/sewer service, trash collection, telephone, cable TV, and Internet access. Before the close of escrow, contact each utility company, and arrange for the transfer of utilities or change in billing responsibility as of the estimated escrow closing date. If you give them sufficient notice, many utility companies can arrange for the final meter reading and/or billing cutoff to coincide with the close of escrow, preventing the need to prorate any utility bills between owners.

Also find out whether the seller has any deposits on hand with the utility company and whether you need to place a deposit for service. You may be able to handle the transfer of the deposit through escrow with a written deposit-transfer acknowledgment from the utility.

If a review of the property expenses indicates that utility costs are unusually high, you may want to insist on reviewing copies of the historical bills to determine whether a one-time variance occurred or \the property might benefit from conservation efforts.

Let me reiterate: Verifying the accuracy of all utility bills is extremely important. One of my expert-witness cases involved a water utility improperly charging a property owner for sewer charges related to a water meter used only for irrigation. (Some water utilities exempt irrigation-only meters from sewer charges because the water never enters the sewer system.) In this case, the water company had collected sewer fees for many years until the discrepancy was brought to its attention. The property owner did receive lower bills in the future, but state law protected the company from refunding any overcharges beyond the previous 12 months. The owner paid thousands of dollars in overpayments — a very expensive management lesson.

Make sure to obtain copies of all service agreements and/or contracts. These documents may include agreements with maintenance landscapers or gardeners; pest-control services; heating, ventilation, and air conditioning (HVAC) companies; boiler maintenance services; laundry services; elevator, swimming pool, or spa servicing; and other providers. Review all current contracts, and meet with service providers that the current owner uses. If contracts bind you to continue service, ensure that such provisions are legal and in your best interest. You may need to consult an attorney or renegotiate your purchase if you discover service agreements and/or contracts that are not competitively priced or provide only what you need.

If you plan to terminate the services of a particular contractor or service provider, the seller may be willing to voluntarily send a written conditional notice of termination indicating that, should the property sell as planned, the provider’s services will no longer be needed as of the close of escrow. Then you’re free to make your own plans for services and can even renegotiate with the current company for better terms. If the seller already had favorable pricing with the provider, of course, you may be able to negotiate the same terms.

One of the most important steps in the takeover of your new rental property is securing insurance coverage. Make sure that you have the proper insurance policy in place when you legally become the new owner. Most lenders won’t fund your loan until you provide written evidence that the property is adequately insured. Although the seller’s policy won’t protect you in any way, request a copy of their existing policy or declaration of coverage and the loss history (typically, for the past five years) because this information can be very helpful to your insurance broker or agent when analyzing the property to determine the proper coverage.

When you receive the current insurance information, take steps to verify the accuracy of all records. If certain representations about the types and amounts of coverage are made verbally, not in writing, protect yourself by sending written documentation to the seller and all agents to confirm any information you’ve received. This step can be important in preventing future disputes about the representations made by the seller or any of the agents.

Always seek the advice of a professional insurance agent when obtaining insurance coverage. To avoid the unpleasant surprise of very high premiums, be sure to have your agent run a loss history on your new property before you close escrow to determine whether any losses have been claimed. You may find that the property had significant claims in the past, which affects your ability to find reasonably priced insurance coverage. The loss history can also show problems that have occurred at the property, including several small ones that can indicate larger ones (such as plumbing leaks). Finally, you should ensure that no claims have been paid by the current insurer for repair or replacement work that hasn’t been done.

Before you close escrow, take a final walk-through to make sure that the property hasn’t been damaged before closing. I was an expert witness in a case in which the new buyers learned this lesson the hard way because they didn’t visit the rental home before closing.

When the sale was complete, the new buyers excitedly went to see their new property, which had sat vacant for nearly a week during escrow. They were shocked to find the home flooded and severely contaminated with mold. The buyers sued the seller, claiming that someone had intentionally or inadvertently left the water supply line valve to the refrigerator’s icemaker open, allowing water to cover the entire first floor. The buyers were unable to prove that the damage occurred while the seller still owned the property, so the seller’s insurance company denied the claim.

Ultimately, the buyers’ insurance company agreed to pay for some of the damage, but not before the buyers went through more than two years of expensive and emotionally draining litigation; they also lost rent because the property sat vacant the entire time. The buyers could have avoided this mess if they had inspected the property just before the close of escrow and stopped the sale until the damage was addressed.

Although you may trust your insurance agent implicitly, don’t allow your escrow to close until you have written documentation confirming that your insurance coverage is in force. A property can suffer a catastrophic loss or liability claim hours after it changes hands, before the new owner’s insurance coverage is in place. The previous owner’s policy automatically ended upon the sale, so you need to make sure that there is no gap in coverage, even if you have your new policy start slightly before the day you close escrow. It’s better to have overlapping coverage for a couple of days than to discover that you had no coverage when the tornado or hurricane came down your street.