In our latest neighborhood tour, we take you on a journey through Aviation Subdivision, a neighborhood that’s partly in Detroit, partly in Dearborn—and that used to be an airfield.
In our latest neighborhood tour, we take you on a journey through Aviation Subdivision, a neighborhood that’s partly in Detroit, partly in Dearborn—and that used to be an airfield.
Continuing our series on lease agreements, here’s a look at the legality—or illegality—of some common lease provisions:
In addition to the standard content required in a lease agreement, landlords can elect to include additional provisions that protect their property and clarify the terms of the lease. Provisions can be as specific as “only red cars can park in the garage on Sundays,” but you don’t see terms like that often—in part because they’re weird, and in part because they would be difficult to enforce.
More common provisions include clauses that prohibit smoking and pets, and clauses that further clarify protocol around the agreement and terms of the lease—for example, specifying how certain kinds of notices have to be delivered.
What’s legal, what’s not, and what should you take a moment to consider as you’re drafting or signing a lease? Here are the most important things to pay attention to:
Your lease can’t contradict the rights and responsibilities assigned in Michigan’s Truth in Renting Act.
Michigan state law is pretty clear about the landlord’s responsibility to maintain a certain standard of habitability on their property, and both parties’ responsibilities to mitigate damages. There are also specific rules around security deposits and fees, as well as legal proceedings and their associated costs. Any provision that violates or contradicts these laws and regulations is illegal and void.
Michigan state law also considers tenants to be consumers, so the Consumer Protection Act applies. This mostly regulates things like deceptive advertising and fake rebates.
Think about who’s going to live at the property. You’ve vetted your tenants, but have you thought much about subleasing, AirBnbing, or guests? Landlords can restrict who’s allowed to live on their property: outlawing subleasing, allowing only the initial group of tenants on the written lease, or even specifying how long individuals can stay as guests.
You can charge a fee for subleasing, or require sublessees to submit an application and undergo your normal screening process and subsequent approval. Tenants can sublease by default, so if subleasing isn’t mentioned in the lease, it’s allowed.
Castle’s standard lease prohibits subleasing without prior written approval.
Civil rights laws stand, so you can’t discriminate against tenants based on race, color, religion or creed, nationality or ancestry, sex, physical or mental disability, veteran status, citizenship, or age (people under 18 exempted, since they’re too young to legally enter into contracts). So that “no girls allowed” clause isn’t going to fly, even if you’re trying to preserve your man cave.
Amazingly, in Michigan, it’s still legal to discriminate against tenants based on their sexual orientation. Luckily, many cities have their own ordinances banning this. (Wikipedia has the full list.)
It’s important to add a provision for severability: a clause stating that if one aspect of the lease is found to be illegal, the rest of the agreement still holds. That way, on the off chance a part of your lease is ruled against, the rest remains valid.
You should also know that under to Michigan State Law, either party can terminate the agreement if the other doesn’t fulfill his or her duties, as long as they give proper notice. Landlords, go one step further and actually list out situations that would lead you to terminate the lease. Then if such issues arise, the lease agreement will back you up.
Think about what you want your property to be like at the end of your lease. What can you do to make sure your tenant is protecting your interests in the property, and how will your provisions be enforced? Remember, there are a lot of rules around what and when you can charge your tenant. Tune in next week for the full story on deposits and fees.
A lease agreement defines terms of tenancy within the parameters of federal, state, and local laws. It’s not just legal mumbo-jumbo; it’s an important contract that defines tenant and landlord obligations and rights.
Oddly enough, it’s technically legal to just have an oral agreement around the terms of your lease, but we wouldn’t recommend it: a written lease you can refer back to will make settling disputes much easier. Also, if your lease agreement is for a period of more than one year, an oral lease is not an option—your lease must be put in writing to comply with Michigan state law.
When you’re looking at your lease agreement, here’s what you should see:
The basics: It’s important that your lease agreement includes the names, addresses, and signatures of everyone involved. How can you hold people responsible if you don’t know their name or contact info? In Michigan, the lease must also include a very specific statement acknowledging that the agreement must comply with Michigan state law.
The tricky: If you’re a renter signing a lease with another tenant, your agreement may define the tenancy as “joint and several.” This makes you responsible not only for your individual obligations, but also for the obligations of all other tenants. This includes paying rent and performing all other terms of the lease.
Main takeaway? Unless you’re prepared to foot the bill, don’t sign on for joint tenancy with someone you don’t trust.
The recurring: Your lease agreement should define when and how do you pay rent and utilities. It usually boils down to how much the tenant will pay to the landlord each month, and who covers utilities. It may also specify where and how you pay: for example, if a landlord only accepts online payments.
The timeline: In a fixed tenancy, the lease agreement will define a set time period in which the tenant is obligated to pay a certain amount for a certain amount of time. On the one hand, this limits the landlord’s ability to raise rent or end the lease during the fixed timeframe. On the other hand, the tenant is bound to the lease terms, guaranteeing monthly payment of the agreed upon amount.
The one-time payments: In addition to rent and utilities, lease agreements often stipulate security deposits and fees that the tenant must pay at the start of the lease. There are some state-specific rules around these one time payments which you may need to be aware of, but the main thing to know is that most fees are for good while security deposits you can get back.
The what-ifs: Lease agreements should at least touch upon who’s responsible for repair and maintenance of the property. This can be general (for example, the landlord may take responsibility for all repair and maintenance costs) or more specific (for example, the landlord may take responsibility for unavoidable costs such as old appliances breaking down, but not costs related to the tenant’s activities such as pet-related damage to the property or pests that are attracted by crumbs).
In Michigan, as in almost every state, landlords are required to maintain a certain standard of habitability at their properties. This usually includes things like running water and electricity, heat in the winter, and functional walls and roofs.
The particular: It’s natural for landlords to care about their property, and to protect its value, they may make some additional rules. No smoking, no pets, and no parking on the grass are three common examples of legal lease provisions a landlord may stipulate.
Lease can include all kinds of weird terms—for example, it’d be legal to ban tenants from parking red cars in the driveway—but provisions cannot violate local, state, or federal law. For example, when a Florida Apartment complex imposed a “no bad reviews” clause, they got in trouble for impinging on tenants’ freedom of speech.
We’ll dive more into what’s legal and what’s not in next week’s article on legal and illegal lease provisions!
Title is our system for demonstrating legal ownership of a property. Property titles define your authority to live in or rent out spaces, build on your land, and, should you wish to move on, sell any property you own.
If you’ve ever been a part of a real estate transaction, you know it requires experts to pin down a clear title, and you’ve either paid or seen people pay astonishingly high closing costs for title insurance and title search.
But have you ever asked why it’s such a complicated process to ensure a clear title? Have you ever wondered what you’re really paying for?
When a title company conducts a title search at closing, they’re not searching any kind of central list. That’s because in the United States, there’s actually no central list of who owns what property.
People have documents of title, but these are just claims, not definitive proof. At any point during your ownership of a property, someone else could come forward with their own claim to ownership, and the only way to resolve the conflict would be through the legal system.
Title insurance protects against this possibility. The title insurer’s job is to review all public records connected to the title until they’re confident making the bet that no previous owner’s great grandchild is going to come calling about false documents that their great uncle used to make a bogus sale, and claim the property as his or her own. Then, if someone does come forward with an ownership claim for your property, the title insurance company will have your back.
Generally there are enough deeds and supporting documents for the attorney to sign off with near certainty of a clear title, but it’s impossible to really know for sure. Whether the source of the claim is fraud or confusion, you need title insurance to protect you from the financial risks involved.
Why do we maintain this complex system of recording transactions? Why do we jump through so many hoops of title protections when many other countries (and a few jurisdictions in America, like Seattle) can just register the title itself, the way you register the title for your car?
The legal system for property ownership in America has its roots in America’s founding fathers, who defined a legal right for Americans to buy, sell, and own real property. At the end of an era in which land had been granted to an elite class by inheritance and the authority of the Crown, the greater circulation of land in America represented a new political ideal—republicanism— which offered opportunities for political participation unprecedented in European society. This new freedom of land ownership and property rights was a pretty big deal.
The original title recording system was implemented at state and local levels, so different jurisdictions ended up with slightly different systems. Some state governments responded to inefficiencies by allowing localities to adopt the Torrens Title system – a registration system that originated in Australia, wherein titles can be registered with and guaranteed by the state. Today, select localities where you can register your property title are exceptions that prove the rule.
Title registration systems are almost certainly the more efficient way forward, but the realities of fragmented jurisdictions, the legal industry’s vested interests in the current system, and the sanctity of land ownership (and the law surrounding it) in America have made progress piecemeal, and a national title registration system unlikely to evolve.
In the name of our constitutional freedoms and maintaining the status quo, our closing costs are likely to remain high as our system continues to be weird.
In our latest video, we take you on a tour of Detroit’s West Village neighborhood. Featuring the Tea Pot Dome scandal, plat vs. plot, and getting lost in a parking lot.
When we started Castle, we set out to reexamine as many of the property management industry’s standard practices as we could. When something has been done the same way forever, sometimes that’s for a good reason—but other times, it’s just because no one has thought to take a second look.
The ways in which prospective tenants are evaluated is a great example. For decades, checking credit scores has been a standard component of applicant screening in the property management industry.
But as it turns out, credit scores aren’t a fair or accurate way to evaluate applicants. In fact, no evidence exists to indicate that people with good credit scores are any more likely to pay their rent on time. Here’s why.
Many people assume that not paying your rent will hurt your credit, but this actually isn’t true. In most cases, rent payments have no impact on your credit score.
One provider, Experian, has started to factor rent payments into their scores, but only if the tenant’s landlord or management company reports their payments to the Experian RentBureau—which most don’t. And those payments are not factored into the official FICO score anyway.
While we’re on the subject, here are a few other kinds of payments that that aren’t factored into your credit score: utilities, cell phone bills, and insurance.
Oh, and the other thing that isn’t factored in? Your income. Making a six-figure salary—or even winning the lottery—will have no impact.
Credit reports are often taken as gospel, but in reality, they’re not nearly as accurate as many people think. Common errors include accounts showing up twice, debt from an ex-spouse, and someone else with a similar name showing up on your credit report.
In fact, a recent FTC study found that 25% of consumers had errors on their credit report that might affect their credit scores.
When you imagine a person with bad credit, you probably imagine someone who wasted money on frivolous expenses, or did a poor job managing their own finances.
But in reality, the single most common reason someone might have bad credit is an unexpected medical expense. In fact, over half of all collections on credit reports are associated with medical bills.
And the second most common reason for bad credit? Divorce. Hardly an indicator of one’s ability to pay either.
The idea of letting the wrong person into your home can be scary, so it’s no wonder that many landlords and property managers turn to whatever resources they can when screening tenants.
But credit scores are an outdated and inaccurate method of judging someone’s ability to pay rent. It’s well past time for the industry to move beyond them.
To an investor, buying a property that’s already tenanted can seem like the perfect plan: you’ll save time on placement and be able to generate cash flow right away. Plus, if you were planning on using a management company that charges a month’s rent as a tenant placement fee, you’ll save some cash.
But having a tenant already in the property is very different from having a good tenant already in the property. And if you buy a property and get stuck with a bad tenant, you’re actually worse off than you would have been if the property had been vacant.
If you’re already working with a management company you trust—or you’re going to be managing the property yourself—our recommendation is to avoid tenanted properties altogether. Sure, you’ll have to wait an extra month or so to place a tenant, but it’s worth it to avoid the risk of inheriting a problem tenant.
Ultimately, it’s an issue of misaligned incentives: sellers know that tenanted properties often sell for more, so they’re highly incentivized to get someone in the property quickly—even if they haven’t been thoroughly screened. Once the property is sold, that person is your problem. (We’ve also seen more than one situation where someone sold a property precisely because the tenants were so difficult, then lied about it out of fear that the truth would hold up the sale.)
If, though, you are going to purchase a tenanted property, there are a few simple precautions you can take to greatly reduce the chance that the purchase goes wrong.
Ask for proof of past payments
This one is so straightforward that it’s amazing more people don’t do it: ask for a rental history to demonstrate that the tenant has paid rent reliably in the past. Of course, a rent roll can always be faked, but some evidence is better than none.
Meet the tenant
If possible, meet with the tenant before the sale. Not only will you get a sense of what they’re like, you can smooth nerves on both sides and reassure the tenant that you’ll be attentive to their needs and a good steward of the property. Don’t forget that as a tenant, having your home change hands can be very stressful.
Meeting the tenant is also a chance to learn more about the seller. Sometimes, tenants will have stories about being badly mistreated by the owner of the property. Don’t do business with a landlord who treats their tenants poorly, even if they seem like they’re treating you well. The real test of character is how a person treats someone they don’t want anything from. It’s just like how you shouldn’t date someone who’s rude to the waiter, even if they’re nice to you.
Build move-out protections into the contract
Sometimes, a tenant moves out after a sale no matter what you do. That’s why, if you can, it’s to your advantage to push for a provision in the sale contract that gives you a small refund if the tenant moves out within a month or two of purchase. Getting such a provision won’t always be possible, but in the best case scenario it can protect you from an immediate move-out.
As an investor, it can be tempting to view “tenanted” as a binary state: either a property is tenanted, or it’s not. But this view fails to take into account the fact that tenants are people, and that they’re not all the same. You don’t just want any tenant in your property; you want a good tenant. So be careful not to let the short-term appeal of buying a tenanted property harm you in the long run.
In our latest video, we take you on a tour of Detroit’s gorgeous Sherwood Forest neighborhood. Featuring Manly Daniel Davis, the notorious Outer Drive gap, and a challenge to all our viewers at home.
Pop quiz: what do real estate agents have in common with car salesmen, telemarketers, and members of Congress?
Answer: They’re among Americans’ least-trusted professions, according to a recent Gallup poll.
In a recent Huffington Post article, Castle cofounder Max Nussenbaum tries to figure out why. Take a look if, like us, you’ve always wondered about the answer to this longstanding question.
Imagine picking up the phone, and the voice on the other end of the line tells you that your landlord isn’t your landlord anymore. You have a new management company now. Oh, and you have to start paying rent to them.
You might be left thinking, “Is this a scam?,” “Who even owns my house?,” or “Am I going to have to move?”
Onboarding inherited tenants is one of the trickiest and most sensitive parts of our work at Castle.
If a property is sold to a new owner, or the owner changes management companies, the tenant is usually the last one to know. So they are expected to start paying rent and reporting maintenance issues in a completely new way, with very little warning.
For us, this process is all about establishing trust and open communication. We work diligently to build a relationship with tenants and onboard them into the Castle system. How do we do it?
First we call the residents to introduce them to the Castle team, go over the terms of their lease, and check to see if they have any ongoing maintenance issues. We follow up with a packet of information in the mail and over email. We’ll always offer to let tenants see a copy of our Management Agreement, showing that we are legally responsible for their property.
What helps Castle onboard an inherited tenant quickly?
We want our system to be as user friendly as possible. Tenants have two options for rent payments: online accounts and MoneyGram. Every month we send automated rent reminder text messages so that they know when rent is due and how much they owe.
If they have a smartphone and email address, we get them set up with a Castle tenant account. These accounts are used to stay up to date on rent payments, access their lease and our online resources, and even report maintenance issues.
Frequently, we take over properties that have many outstanding maintenance issues, which means we inherit those grievances. We take a record of tenants’ maintenance concerns, and send a contractor to address them right away. This is an important step to build trust and ensure that the property is not in violation of the warranty of habitability.
Sometimes we work with tenants who are used to a more informal system from their old property manager, and need time to adjust their rent payment habits. After a tenant misses a rent payment, we send a Demand for Possession, Nonpayment of Rent (or “7 Day Notice to Pay Rent or Quit.”). If the seven days expire without payment, a court date is set for sometime in the future. Tenants can pay rent with the late fee at any point before the court date, and the court case will be dismissed. If a case does make it all the way to court, the judge will either demand payment or demand that the outstanding maintenance is addressed.
From this point forward, we embrace the right to quiet enjoyment! We’re available to step in anytime there’s a maintenance issue or related concerns, but we want everyone to be comfortable in their homes.