Alabama Real Estate Exam Property Management 2017 Steve McTyeire, MBA Broker, Real Estate Instructor New Vocation Realty School Broker in Alabama, Florida & Georgia SteveMcT@gmail.com 205-807-5200

6. Property Management 8 Questions Learning Objectives Understand provisions of lease contracts Learn elements of contracts Learn about trust fund accounting Know why tenants leave Evictions

6. Property Management 8 Questions General Principles of Property Mgt. Agreements Basic Provisions / Purpose / Elements of Property Management Agreements Types of Contracts Duties and Obligations of the Parties Market Analysis and Tenant Acquisition Accounts and Disbursements Property Maintenance and Improvements Evictions

6. Property Management General Principles of Property Management Agreements Agency agreement between property owner (principal) & management company’s broker (agent) Agent responsibility: Honest COLD AC Similar to listing agreement because it list property for rent Plus, Gives broker general agent authority to manage over time Sets fees, duties, and other agreed upon terms

6. Property Management B. Basic Provisions / Purpose Elements of Property Management Agreements Names parties to bi-lateral agency management agreement Outlining owner goals for: Specific parcel Enhance owner value Market property Accept applications Negotiate leases Accept rent Delegate repairs Disperse funds Accounting Inspect / Correct

Negotiating Property Management Agreements

6. Property Management C. Types of Contracts Property Management Agreement between Owner and Broker Lease between Broker and Tenant Lease is two contracts Transfer of Possession Granting Credit Fair Credit Act Applies Broker may also have property listed for sale May be listed with another company for sale

Lease Agreement

6. Property Management D. Duties and Obligations of the Parties Owner Pay mortgage, taxes, insurance & maintenance - TIMm Give Tenant possession & quiet enjoyment Maintain habitability Work with Broker to retain Tenant (cheap to keep) Due diligence in maintaining habitability Maintenance issue #1 reason Tenants leave Implied warranty of habitability Legal doctrine that imposes this duty on landlord

6. Property Management D. Duties and Obligations of Parties Broker Due diligence in maintaining habitability Maintenance issue #1 reason Tenants leave Implied warranty of habitability Legal doctrine that imposes this duty on landlord Develop plan to maximize owner wealth Regularly contact Tenants and maintain good relationships Walk through inspections Opportunity to ask about repairs Enforce lease Collect & Disperse funds Conform to all laws Correct as needed

6. Property Management D. Duties and Obligations of the Parties Tenant Follow lease rules Pay rent on time Notify landlord about issues Take care of property – change HVAC filter Give proper notice to vacate Conform to all laws

6. Property Management E. Market Analysis and Tenant Acquisition Real estate is local, but regional and national issues have some effect Larger brokerages may have relocation connections Everyone has Internet – Zillow Supply & Demand drive rental market, Higher demand drives prices higher When rates are rising quickly, add a graduated rate clause After first year, rate goes up X amount If not rented quickly, lower price

6. Property Management Fair, Consistent Obtaining tenants Showing property Negotiating lease Price & Terms Responsibilities of owner & tenant Pet policy Application process Credit Background Fair, Consistent Owner’s decision to accept tenant

Actual Eviction When Tenant breaches lease Non payment Breach non-monetary Landlord must file suit for possession (unlawful detainer) Owner may file, but property manager must use attorney Serve notice Court Landlord may not change locks or turn off utilities Better to pay “cash for keys” Constructive Eviction When landlord breaches lease Time to comply Alabama Landlord and Tenant Act applies

Transfer of possession Lease is two contracts Transfer of possession One stick in the bundle of property rights (UPEED) Possession, and right to exclude others (with exceptions) Use is lost by owner Owner has reversionary right Tenant stays beyond lease expiration creates: Tenancy at Sufferance If tenant and landlord agree to continue tenancy: Creates Holdover Tenancy Extending credit Must follow Fair Credit Act Similar to Fair Housing Includes marital status, age & receipt of public assistance

RECAD not required for property management No need to present to owner or tenant Disclosure of material facts to lessee Pre 1978 requires lead based paint form & pamphlet Health & Safety deficiencies must be corrected HOA or CC&R must be given to tenant, signed off

6. Property Management E. Tenant Acquisition More mobile app inquires everyday; make it easy to find property Old fashion signs gets calls Negotiate an earlier move in, even free days to get commitment Offer commission to outside agencies to show property Micro market if property fits a potential market like UAB Showings; batch a few at same time You will get stood up so often showing rentals, even confirming

6. Property Management Obtain tenants by: Internet post Yard Sign Show property, open house Negotiate lease Price & Terms Responsibilities of owner & tenant Pet policy, extra fees Application process Credit Background Owner’s decision to accept tenant

6. Property Management F. Accounts and Disbursements Real Estate Brokerages need at minimum 2 accounts if holding security deposits, earnest money and rents, along with at least one more as a company operating account (AREC doesn’t audit operating account, but does trust, escrow) Security Trust Account – to hold earnest deposits, security deposits & pre-paid rent Rental Receipts Escrow Account – to hold rent These two trust account must be in a federally insured bank in Alabama with Qualifying Broker (QB) on account

6. Property Management F. Disbursements Security Deposits are held in escrow (trust) until lease ends and Tenant moves. Damages and unpaid rent will be deducted and an accounting will be mailed to Tenant within 60 days – law changed in 2015 from 35 days Security account must be reconciled every month for random audit by AREC

6. Property Management F. Disbursements Rental Receipt account is an escrow account to hold owner’s rent deposits until final accounting for current month Pay expenses, owners proceeds, with balance to company operating account Negative balance in an escrow account could cost license Co-mingling Placing unearned funds from an escrow account into operating account Conversion Spending these funds for unintended purposes Broker’s company operating account is used to pay company expenses

Must account for and return any escrow funds within 60 days of termination of lease

Rent $900 month Divide by 30 days $30 per day rent Move in on 20th 10 days X $30 = $300 Prorating Rent 20th 900 300 100 150 2,350 900 rent 300 pro rated 100 pet 1300 > RR 900 + 150 = 1050 To escrow Security Account Held until some future event

6. Property Management G. Property Maintenance and Improvements Life safety measures Prevent with safety procedures like smoke detectors (required) Fire Extinguisher Detect issues early - inspections Mitigate – reduce further loss Repair – as needed, owner approved risk management Regular maintenance is good policy – change filter, SD batteries, extinguisher inspections #1 reason tenants leave is poor maintenance

6. Property Management G. Property Maintenance and Improvements Improvements help keep tenants happy Paint & carpet have short life Preventative - Seasonal servicing of systems Corrective - Repair broken items, rails, door knobs Routine – Physical cleanliness of property - shrubs, trees Construction – upgrading to meet tenant needs - ramp

6. Property Management H. Evictions Actual Eviction – Landlord Evicts Tenant due to breach of lease non-payment of rent or infraction of rules Rent is paid in advance on set day every period, with short grace If not paid by grace date, contact tenant immediately and find out why Negotiate when rent will be paid, if not Post a “7 day pay or quit” notice giving 7 days to pay or get out This usually works Follow up with form “48 hour notice to file eviction” Keep pressure on Work with tenant to get rent paid or get out Empty units produce no rent “days are dollars”

6. Property Management H. Evictions (unlawful detainer) They just won’t pay or go Attorney must file paperwork, $500 Filing fee - $300 Tenant has 14 days to respond to complaint Court date will be about a month away Judgement, because they didn’t show $100 Sheriff to serve notice and place tenant’s possessions on street $300 Took 2 months total, plus property will be trashed Negotiate next time Days are dollars Offer cash for keys. Cheaper and quicker than eviction Give them $500 Saturday at 5 if out and property is broom clean $500 may not get them out, but $1,000 may, and you are still better off

6. Property Management H. Evictions Constructive Eviction - landlord will not repair or keep home habitable. 14 days notice to repair most systems, unless it is a one bath, toilet exploded, snakes everywhere. Can’t take the full 14 days to fix that Tenant can sue landlord to break lease, maybe even some damages

Eviction is called: Unlawful Detainer

Co-mingle?

Lease has two parts, what are they?

In a property management agreement, name two broker duties?

In a property management agreement name two owner duties?

In a lease - name two tenant duties

What are two ways tenants are found?

What are two reasons tenants are evicted?

Is RECAD required in property management?

Name two things that tenant must be told about?

How long does a property manager have to account for security deposits at end of lease?

How often does a property manager have to reconcile security deposits for AREC?

What is primary reason tenants leave?

If tenant will not pay, can landlord turn off utilities?

What is an example of a life safety measure?

Does “Landlord –Tenant Act” apply to commercial properties?

Introduction You, the broker, are key to managing risks in your office. If you are the qualifying broker, QB, the burden is even greater. Your risk management obligations can be divide into two areas – Managing Money and Managing People. It is up to you to ensure that your agents service clients and produce income while staying out of trouble. You are the key.

Learning Objectives: Define Trust Funds Express the need for accounting / recordkeeping Describe the need for trust fund maintenance Identify the violations State the penalties for mismanagement of money

Managing Money I. Trust Funds Trust fund management Earnest money Property management funds Contract provisions

Funds Accounts and Disbursements Real Estate Brokerages need at minimum 2 accounts if holding security deposits, earnest money and rents, along with at least one more as a company operating account (AREC doesn’t audit this one, but does audit trust, escrow) Security Trust Account – SD to hold earnest deposits, security deposits & pre-paid rent Rental Receipts Escrow Account – RR to hold rent These two trust account must be in an FDIC insured bank in Alabama with Qualifying Broker (QB) on account Operating Account OA Pay Company expenses, commissions

Trust funds Disbursements Security Deposits SD are held in escrow (trust) until the lease is over and Tenant moves or as contract provision states Damages (detailed) and unpaid rent or fees owed to company will be deducted and an accounting will be mailed to Tenant within 60 days This security account must be reconciled every month for random inspections by AREC

Trust Funds Disbursements Rental Receipt RR account is an escrow account to hold tenant’s rent deposits until final accounting for month and then dispersed to owners with balance to company operating account Never have a negative balance in an escrow account or you will lose license, and possibly go to jail RR account may have a surplus of company funds to cover: NSF checks from tenants or repairs Placing unearned funds from an escrow account into operating account is co-mingling Placing unearned funds from an escrow account into the operating account, then spending these funds is conversion

Property Ledger Rental Account New Location Realty 1951 Hoover Ct #201 Hoover, AL 205-807-5200 Rental Account 100 Creekstone Trail Calera, AL 35040 Josh Smith 555-555-5555 joshs@aol.com   3136 Woodchuck Trail Birmingham, AL 35242 Tom Tenant 205-205-9516 ttenant@hotmail.com Date Debit Credit Escrow 9/18/2012 Security Deposit 900.00 Pet Deposit 150.00 9/24/2012 Rent October 900 + 300 prorated 1200.00 Pet rent 100.00 Leasing fee 500.00 grass cut Larry Lee 50.00 Owner's Proceeds 750.00

Bank Reconciliation

Trust Funds Disbursements & transfers of earnest money Different from security deposits EM is from sale contract waiting to close transaction Held in escrow account until: Sale closes and is transferred to operating account or Sale falls apart due to contingency, and it is returned to buyer Sale falls apart due to breach Both parties must agree to release of money Either of these require a “mutual release” If no agreement, must hold money in escrow

Trust Funds Replacing broker at company Or Buying another company with escrow account Must reconcile all trust accounts Best to have AREC to audit at this point Never buy a company, buy contracts only

Trust Funds Company may not pay its expenses from trust account Company may not leave earned funds in trust account Includes accrued interest Interest is addressed in contract Never a negative balance Keep a small amount extra to cover bank charges

Trust Funds Violations – Commingling - placing escrow money in company operating account Conversion – using escrow money to pay company bills These are common violations, and will result in fines and possible license revocation

Violations Using trust funds for operating expenses Failure to deposit funds in a timely manner Failure to disperse funds in a timely manner Using trust money to offset accounts receivable Using trust funds to offset other’s repair expenses Failure to deposit cash immediately

Trust Funds Earnest deposits must be dispersed within 7 days Security deposits must be accounted for and dispersed within 60 days Tenant may be entitled to triple damages for non-compliance

Trust Funds Disciplinary Action Penalties Hearings Appeals Minimum $250 up to $2,500 Hearings Appeals

II. Auditing Procedures Types of trust or escrow accounts Earnest money Security deposits Rental receipts Other business accounts Operating

Auditing Procedures All properties managed by agents with a company must have security and rental deposits held in brokerage company accounts or have a letter stating company is not involved with management. Dangerous for broker, because broker is still responsible for all acts of agents. Best policy is know what is going on with agents

Auditing Procedures

Audit Procedures

Fined and Suspended

Property inspection

7 day pay or quit 48 hour

Managing People III. Training & Supervision Law & company policies Discuss – With the growth of electronic and digital forms, brokers must consider how to maintain complete and accurate files. What policies and procedures should a broker have in place to practice good risk management in this area?

Training & Supervision Responsibilities of Qualifying Broker - The burden imposed by the law Discuss – From a risk management perspective, discuss new licensees vs. experienced agents, and then full-time agents vs. dual career licensees What Training Is needed?

Training & Supervision Strategies for supervising agents & staff Discuss – What steps can the broker take on a daily basis to ensure that the licensees in the company are following proper risk management practices?

Training & Supervision Strategies for supervising agents & staff Discuss – How should a broker manage his/her agents who work from another location without micro-managing them?

Training & Supervision Law requirements Real Estate Commission Local, state, & federal laws Anti-trust Other

Training & Supervision Law and company policies Discuss – List the specific issues that should be included in an office policy manual

Training & Supervision Risk Issues- Personnel files, office files, & confidentiality Discuss – Concerning the protection of confidential information, Where are the files kept? Who has access to them? What about the fax machine? Emails?

Training & Supervision Advertising Marketing Social Networking Technology Discuss – How can the broker monitor the agents’ advertisements in the active multi-media locations available today?

Supplemental Content Current Legal Issues Disciplinary Action Current Cases

Agent Selection Independent contractor vs. employee New licensees Experienced agents Non-licensed assistants

Termination/Transfer