This due diligence checklist will help prevent post-purchase surprises. In the hustle of putting the deal together, details such as these can be overlooked; if so, they have the potential to have a dramatic effect on the profitability of the investment.  Start this process even before you make the offer; some information is available through open source and some of it will be known by the listing agent. Make sure that your Offer to Purchase includes provisions allowing you to review (and approve) certain documents and have certain inspections done prior to closing on the property.

Here’s a link and I’ve pasted the document on the next page as well:

• File Attachment: due_diligence_checklist.pdf (137 KB)

Auditing the Files

To verify actual income, obtain and review

• Rental agreements – signed by the tenants and specifying the amount of rent
• Documents showing security deposit amounts, bank account numbers, and dates
• Any rental histories showing late payments, problem tenants

Interior Inspection

To learn about the place, the residents, and the future repairs that you’ll have to make, and watch for:

• Any empty apartments listed as rented
• Any pest problems
• Missing, old, or broken appliances
• Any water or fire damage
• Any obvious “problem tenants”
• Anything that will need repairing soon

Exterior Inspections

• Roof condition, age and plumbing systems up to date and to code
• Heating, Ventilation, and A/C systems – age and condition
• Paint and trim condition
• Driveways and parking areas
• Landscaping and irrigation systems

Service Agreement Reviews

To know what contracts and agreements there are, and whether they will transfer (be assignable):

• Property management agreements
• Heating/Cooling system maintenance
• Laundry machine contracts
• Cable or satellite TV services
• Alarm/security system contracts
• Landscaping services & Pool cleaning
• Snow plowing services

Government Compliance Check

To see if the property is in compliance with codes & zoning

• Ask about any permits and permit problems
• Ask local authorities about zoning violations or encroachments
• Check into fire code violations and see if fire department will inspect for you.
• Inspect for environmental problems (asbestos, mold, lead paint, radon)

Books and Records

Get 24 months’ income and expense statements

• Look for any unusual things in the books (expenses too low, income too high…trust but verify)
• Review service agreements and whether you have to assume them as the new owner
• Review the current rent roll – see if rents are under or over the market rates for the area
• Look at utility companies and ask if increases are coming soon
• Check payroll records for unusual arrangements, accrued vacation time you’ll have to pay, loans to family or friends, etc.

Follow Up

• Get an accountant or lawyer to review any suspect documents
• Have your lawyer review your offer and paperwork
• Ask your attorney about other due diligence you should do
• Take notes on any problems and list costs to correct, to use during subsequent negotiations

Most problems that investors run into are foreseeable. A simple due diligence checklist like this one, used during the buying process, will prevent most major problems.

Whatever the situation, the income of self-employed people, even those who are legitimate, is in a constant state of flux. If one of their customers doesn’t pay them, they can’t pay the rent. As a landlord it seems harder to verify the income capabilities of a self-employeed person, but in actuality it’s usually a little easier than you’d think.

Here’s how to check them out:

Check out the financial stability of a self-employed tenant by looking at last year’s tax return. Don’t look at the Taxable Income. Look at the Adjusted Gross Income. That is likely to be a more accurate figure than the income they pay taxes on. You know how that works as a landlord. There are lots of things you write off as expenses that may not be 100% rental expenses. If they are not willing to show you last year’s tax return, I’d say turn them down and move on.

• Confirm where they work.
• Ask to see company letterhead and business cards.
• Look in the telephone directory for a business listing.
• Look them up in a professional directory.
• If they work out of their home, soon to be a new home, ask probing questions about why they would want to uproot their business. Moving your personal residence is hard enough, moving a business, too, is a Herculean task. Then verify their answers. Chances are, if they are leaving their current residence in less than favorable circumstances, they had a story all worked out to fool the new landlord. Be extra thorough with references.

Be careful of tenants who offer to show you a giant pile of money sitting in a checking or savings account. Yes, there’s money there. But, why would anyone keep a ton of money sitting in a checking account?  Normally, large sums of money only stay in checking or savings accounts for a few days or weeks while the owner prepares to either buy something big, or move it into an investment. Cash is in their account is not collateral. Cash in yours is.

I’ve found self-employed to be more willing to share their personal bank, tax, and financial records. In a way, that’s made them some of the lowest risk tenants I’ve taken!

Every time a rental turns over, landlords spend an incredible amount of time, money and effort to advertise, show the property, and screen tenants. A very common mistake made by new landlords is to confuse quantity with success, i.e. they feel good because 20 people have come to view the rental.

Hey, we’re not running an episode of “MTV Cribs”; we’re showing the property to people that we want to rent to – this is a partnership between landlords with good properties and tenants with good credentials, not a charitable open door. Seasoned landlords know that pre-screening tenants saves an awful lot of your time and makes you feel a lot better about showings. One of the top ways to pre-screen tenants is to provide them with a written Tenant Screening Policy before letting them schedule a showing.

A Tenant Screening Policy lays out your expectations as a landlord and the rules you are going to apply when reviewing a rental application. It might state a minimum required credit score, tolerance for a criminal record, and income/debt ratios. Most dirtbags will read it and pre-screen themselves, thereby not wasting your time with a showing. I think this is one of the harder lessons for new landlords to learn because vacancies feel terrible and you want to fill them fast. Just remember: showing the property to dirtbags you won’t accept in the end doesn’t get it rented any faster – it just wastes more of your time.

Here is a sample Tenant Screening Policy you can use or tweak (also attached):

• File Attachment: Tenant Screening Policy.pdf (25 KB)
• File Attachment: Tenant Screening Policy.doc (148 KB)

TENANT SCREENING POLICY FOR ____________________________________

We work with neighbors and other landlords in the area to maintain the quality of the neighborhood. We make sure that people do not use rental units for illegal activity. To that end, we have a thorough screening process. If you meet the criteria and are accepted, you will have the peace of mind of knowing that other renters in this area are being screened with equal care and, as a result, there may be a reduced risk of illegal activity occurring in the area. Please review our list of criteria and if you meet the criteria, please apply. Please note that we provide equal housing opportunity; we do not discriminate on the basis of race, color, religion, sex, handicap, national origin, or familial status.

A complete application is required for each adult 18 years of age or older. If a line is not filled in, and the omission is not explained satisfactorily, we will return the application to you; rental application fees will not be returned.

Each applicant must provide a photo ID (driver’s license or other government issued photo identification) prior to move-in. Failure to do so is grounds for rejection.

Your rental history must be verified by unbiased sources. If you are related by blood or marriage to one of the previous landlords listed above, or your rental history does not include at least two previous landlords, we will require a qualified cosigner on your rental agreement (qualified cosigners must meet all applicant screening criteria) or an additional security deposit of $_____. It is your responsibility to provide us with the information necessary to contact your past landlords. We reserve the right to deny your application if, after making a good faith errort, we are unable to verify your rental history. If you owned—rather than rented—your previous home, you must furnish mortgage company references and proof of title ownership or transfer.

You must have sufficient income/resources. If the combination of your monthly personal debt, utility costs, and rent payments will exceed _____% of your monthly income before taxes, we will require a qualified cosigner on your rental agreement or an additional deposit of $_____. If the combination exceeds _____% of your monthly income, your application will be denied.

We must be able to verify independently the amount and stability of your income through sources such as pay stubs, employer/source contacts, or tax records. If you are self-employed, you will be required to submit a business license, tax records, bank records, or a list of client references.

Section 8 applicants must allow information access and sign a consent form allowing the local public housing agency to verify information regarding their rental history.

False information is grounds for denial. Your application will be denied if you misrepresent any information on the application. If misrepresentations are found after a rental agreement is signed, your rental agreement will be terminated immediately.

Criminal convictions for certain types of crimes will result in denial of your application. Your application will be denied if, in the last _____ years, you have been convicted of any type of crime [including the manufacture or distribution of controlled substances] that would be considered a serious threat to real property or to other residents’ peaceful enjoyment.

Certain court judgments against you may result in denial of your application. If in the past _____ years, you have been through a court-ordered eviction or had any judgment against you for financial delinquency, your application will be denied. This restriction may be waived if there has not been more than one such incident, the circumstances can be justified, and you provide a qualified cosigner on your rental agreement.

A poor credit record (overdue accounts) may result in denial of your application. Credit records showing occaisional payments within ____ days past due will be acceptable, provided you can justify the circumstances. Records showing payments after ____ days are not acceptable.

Poor references from previous landlords may result in denial of your application. You will be turned own if previous landlords report significant complaints such as repeated disturbance of the neighbors’ peace, reports of prostitution, drug dealing, or drug manufacturing, damage to the property beyond normal wear and tear, reports of violence or threats to landlords or neighbors, allowing persons not on the lease to reside on the premises, and failure to give proper notice when vacating the property.  Also, you will be turned down if a previous landlord would be disinclined to rent to you again for any reason pertaining to lease violations by you, your pets, or others allowed on the property during your tenancy.

We will accept the first qualified applicant.

If your application is accepted, you will be required to sign a rental agreement in which you will agree to abide by the rules of the rental unit or complex. A complete copy of our rental agreement is available for anyone who would like to review it. In particular, in addition to the other important requirements, please note that your rental agreement will:

• Require that you prevent all household members, guests, and visitors from engaging in any lease-violating behavior
• Forbid you and any member of your household, or your guests, from engaging in illegal drug use, sale, manufacture, distribution, or other criminal activity on or near the property.
• Limit your ability to allow guests to stay for long periods without the advance permission of the landlord.
• Provide that serious or repeated violations of the lease requirements on these items, or any other item addressed by the rental agreement, will result in termination of your rental agreement. 

Please read the rental agreement carefully, because we take each part of the agreement seriously. The agreement ahas been written to help us prevent illegal activity from disturbing the peace of our rental units and to help make sure that our tenants are given the best housing we can provide.

The four types of tenants that follow tend to be problem tenants. They may have decent references and good credit, and they are certainly nice people, but the situations that they create are situations that can make them undesirable as tenants. Be forewarned that two of these types are protected classes, that is, they are members of a group that you may not discriminate against on that basis. That means that for you to reject them as tenants and keep searching for a more acceptable tenant, you have to reject them for a reason other than that they are part of this particular group.

Read about the four main categories of high risk tenants and what you can do about them.

1. Marital Change in the Past Year

This is a protected class. You may not discriminate because of marital status. However, you may discriminate based on the damage the tenant and/or his or her guests do in and to the property. The most volatile situation is where a husband and wife have split, and one moves into a rental unit that you own. Two things are likely to happen, neither of them good. The best is that they will get back together. Yes, that is nice for them, but not for the landlord. Assuming it is the wife who moved out, she will live in the property for two or three months, then she and her husband decide to try to resolve their differences and reunite. That means that you have a vacancy.

Every vacancy will cost you at least a month’s rent. The worst thing that can happen is that the husband wants her to move back with him and she doesn’t want to. Then he will be getting drunk, coming over, kicking in doors, breaking windows, and otherwise causing a ruckus, and getting the police called. If it is an apartment house, other tenants, the good ones, complain and move out. If it is a single family dwelling, the other neighbors complain to you and the police. Then you have to evict the tenant and try to collect for the damages over and above the security deposit. Some state laws even provide that a woman who is in fear of her ex-husband or boyfriend can move without notice whit no penalty.

One way to mitigate damages for the situation where the tenants get back together is a lease. A one-year lease will at least pay you until the unit is rented again, assuming you can collect the damages for failure to maintain the lease. For the situation where the separation is not mutually acceptable, you have a much more difficult problem. Obviously, if this is not the first dwelling the tenant has rented since the separation, the previous landlord may provide you with some enlightening information.

If they are just separated, then you may have to rely on amount of income, credit history, or some other criterion that is clearly spelled out on the sheet that you hand to all applicants. Under no circumstances should you pull something out of the air, something that you have not required of all other applicants. Do that and you will get to talk to the Fair Housing investigators.

2. People Who Have Never Lived Together Before

Usually this situation arises with people in their 20s. They have recently left home and have found some friends they think it would be neat to room with. Won’t it be fun? Fun for them, not the landlord.

You can deal with this circumstance more easily than the first one. Here there is less likelihood of discrimination based on marital status. What you look for from applicants here is all of them meeting your qualifications. If any fail to pass muster, you can reject the lot.

If it is two recently separated men or women, though, go back to the first example, "marital change in the last year." The problem you will have is that people who have never lived together discover that they can’t. They find out that going to parties and hanging out together was great, but that one of them is a slob, or they can’t stand the boyfriend or girlfriend of the other one, who has, incidentally, moved in without their telling you.

Now one moves out, again without telling you. You keep getting the rent, but one day you show up at the door and the person who answers wants to know who you are. You were going to ask the same question. Remember Landlord Right Number Six? You have a right to rent only to those people who signed the rental agreement.

The problem is, they are now living there and you may have accepted rent from the un-rented-to party. In some states that can present a real problem in getting them out. If you have knowingly accepted rent from a tenant, you have automatically accepted him or her as a tenant. Then the question becomes, whether you knowingly accepted rent. The best defense you can mount is not renting to them in the first place.

3. Job Change in the Past Year

Last hired, first fired. Especially dangerous are people who have worked at several jobs in the past two years. Usually people are not able to find work first thing after they have left a job because of layoff or being fired. That means, unless they have considerable money in savings, they won’t be able to pay some of the bills they owe. Sometimes that is the rent. What it all boils down to is that people who are unstable in their jobs may also be unstable in their living arrangements. Often frequent job changes go along with frequent residence changes. Often tenants will not tell you about the frequent residence changes on their rental application, either. What you will see is some of their addresses being “forgotten.” That is why it is important when you check the tenant’s references that you verify length of residence with the previous landlord. This reference is one that the previous landlord is likely to be more forthcoming about than, say, how good a tenant he was.

4. Self-Employed

This is a category that I, personally, don’t like to admit to being a high-risk, since I am a part of it. Hey, I wouldn't rent to me. Fortunately, I am a home owner and so don’t have to try to rent a property from one of my subscribers or another careful landlord. In some circles “self-employed” is short for drug dealer. They are indeed self-employed, but they don’t want to tell you at what. They might tell you something like they are “wholesalers” or “suppliers.” I suppose “manufacturers’ representative” (in pharmaceuticals) might be appropriate.

For more tips on screening tenants, use a Tenant Screening Policy and see our special tip on “How to Verify Tenant Information”

• File Attachment: Tenant Screening Policy.pdf (25 KB)
• File Attachment: High Risk Tenants.pdf (506 KB)

The best way to deny an applicant is to be short, sweet, and to the point. If the decision was based in part or in whole on their credit score, then you are required to provide them with the recourse to obtain a free copy of their credit report. Prepare a standard letter or find someone who can provide one to you. You are only required to inform them that:

·         Their rental application has been denied,

·         A notice that the decision was in part, or in whole, made based on their credit score,

·         As such, they are entitled to a free credit report, and

·         The contact information for the credit agency used.

This protects your legal liability, establishes clear and appropriate records, and effectively resolves your problem.

You should never get into a protracted conversation with someone about why they were denied. Nothing good will come from having a detailed discussion about why you think they are not good enough. Denied tenants can be defensive, aggressive, and difficult. If you do have a discussion with the denied tenant, and they feel your decision was based upon discrimination, they’ll get ready help from the local tenant advocacy groups. Your only defense in court will be documentation proving that the decision was made on non-discriminatory grounds, and the only reliable proof of that is your letter stating the decision was made in part, or in whole, because of their credit!  And your decision is ALWAYS based at least partly on credit…

After all, I wouldn’t rent to an obviously dangerous crack cocaine dealer even if they had a 700 credit score…my threshold for criminals is an absolute perfect 800 credit score and no lower!  J So, it’s always in part, or in whole, about their credit score.

This is the fourth blog I have been a part of, and by far the most successful. On Sunday, while watching all my favorite teams lose in the last 2 minutes — why, Green Bay, why??? — I put pen to paper about why most blogs lose it in the 4^th quarter. Sure, they start out strong, full of enthusiasm and self-congratulation, but more often than not they’re gone within 6 months.

If you want to write a blog, or become a free-lancer, here are the top things to avoid:

1. Forget to drive to a business conclusion.  Probably the most common mistake bloggers make is that they forget blogging is a form of marketing, and marketing is meant for only one thing—to sell something. You blog to gain readership, yes, but not because readership in itself is the goal. You blog to create business opportunities. For example, a blog about property management would be a silly use of time for my company if we didn’t tie that blog directly into the website where we sell our products. Posting free, good, content must drive to a business conclusion…namely bottom line profit…or you should spend your business time doing something else. Every page must have a call to action and the ability to create a sale. You would never continue a TV ad spot costing $10,000 a month if it didn’t result in sales. Blogging is no different. If a reader takes the time to review your post, they should have some way of paying you that is immediately visible, e.g. a banner ad, a link, navigation in the header…

2. Over-inflated ego. Readership does not equal validation. It does not mean people “like” what you say. It only means you’re saying something interesting. Really dumb people and complete flakes are interesting too but you don’t want them selling your company. A blog, like direct mail or a radio ad, is a marketing tool. Step off the high horse, focus on saying something interesting while not being an idiot, and drive a business result. If your post starts with the words, ‘Random ramblings on…” then save everyone 2 minutes and just don’t do it.

3. Posting one article a day. Unless you’re Superman or have no job, you will not…I repeat absolutely NOT…be able to maintain that pace. It takes at least 5–15 minutes to conceive of a good daily post, do some research, and formulate an overall plan for a good post. Now spend 15–60 minutes writing something interesting. Here’s an idea: spend time editing. Can you dedicate 20 percent of your work life to blogging? Unlikely. Most blogs peter out after several months because writers either run out of good material, or just can’t sustain the pace.

4. Lack of a phased plan. The first 3 months of a blog are all about building a content base, not necessarily a customer base, so don’t write and post your best stuff on Day 1. Even if it scores highly on web indexes, and magical hordes of readers show up on the doorstep, when they see the blog has but one lonely post, they’re unlikely to subscribe or see any “credibility” in the company. Which translates into Zero sales. Build good quality, high value content that gives readers something additional to browse on the blog. It was the interesting article you write in month 3 that gets them there…the large content base gives them confidence to come back. I recommend breaking it into 3 distinct phases:

   -Phase 1 – Content building. This writing is less personal but very-high value. For example, we provide free landlord forms, great links, and reviews of landlord web gadgets. High quality stuff, but it’s not something you’d subscribe to. Strive for 3–4 posts per week.

   -Phase 2 – Write really interesting stuff. After you’ve got a content base, and assuming you’re already knowledgeable about your industry / company / product, then take provocative stances on current issues. Write something heated and take a position. This gets you onto someone’s iGoogle home page. You should strive for 1–2 good posts per week. Unless this is your full time job, the quality of the posts will suffer if you shoot for more than this. Creative and Interesting are key. Volume is not key.

   -Phase 3 – Really drive business actions. After you’ve got the foundation built, and have started building subscribers with topical, provocative content, then it’s time to start really driving business decisions. Put a coupon at the end of a post. Make sure to have a widget for sign-ups, free trials, downloadable forms, etc. Drive readers to take action. Then, measure those actions, e.g. “1,800 people read this post, 72 clicked the free trial, and 68 converted to paying customers worth $100 each. Therefore, we made $6,800 for that post, and earned roughly $3.78 per reader.” If you’re not doing this, chances are you have no idea if blogging is worth your business’ time.

5. Not using blog software. It takes about 2x as long to write a post in the Wordpress web-based console than it does in a good desktop tool. Desktop tools also offer better image manipulation, text formatting, and more flexible integration with things like YouTube and Twitter. I used to use BlogDesk, which is good, but not great. It is, however, free. My favorite is BlogJet, which I’m using for this post. It’s $39 but well worth it just in time savings, let alone the many cool features, e.g. auto-generating excerpts, full integration with YouTube, scheduled postings, trackbacks/comments/pings… Even if you only write 1 post a week, BlogJet is worth it.

6. Not pre-scheduling posts. Unless you have the stamina of Dirk Diggler, you’re going to run out of gas. You don’t have to write a post every day. If you can sit down and write 5 posts in a row, great. Use Wordpress or BlogJet’s built in schedules to trickle those posts out over time. If you’re leaving for vacation, or just want a few weeks off, drop a dozen posts in the queue and let them trickle out while you soak in the sun. To really knock this one out of the park, integrate it with the next tip… 

7. Not having an Emergency Kit. As backup, I typically have 50–70 single spaced pages of blogs and ideas at any one time. If I’m not “feeling it” today, I’ll just pull a post I’ve got in this emergency kit and send it. This accomplishes two things. First, if helps keep your momentum and enthusiasm. Instead of going “dark” on the blog for 6 weeks in a row, your readership and blog maintain a steady stream of your creative dribble. Second, it helps weed out crappy ideas. Everyone writes boring articles now and then. (except me…in this blog… )  If you go to the emergency kit and re-read your post, only to find you’ve absentmindedly played 22 games of Spider Solitaire…scrap that one!

8. Never measuring the results. Nothing pops you out of a slump like looking at the numbers (as long as those numbers include profit calculations). Go refigure how much revenue per reader you average. Try using Google Analytics’ Goal Conversion code for your blog. Go back and review your last 5 business conversion campaigns on the blog. Find the most profitable one and copy it again. When you see that your good post brings in $5,000–$10,000 in revenue, it gets a lot easier to write that next killer article!

On your next blog, plan to succeed in the 4^th Quarter as well as right out of the gates. And don’t become another 2008 Green Bay Packers disappointment!

During the upgrade on Monday night, we found a bug that’s been really persistent that impedes current landlords from uploading new photos for existing properties. It doesn’t affect newly added properties or new owners…just our most loyal customers!

Once we’ve got that problem licked, we’ll post a big announcement. I think you’ll really like the new design and features.   Best, Jeff

Sometimes life stinks. I have friends and family that are being laid off, relocating, can’t sell properties, don’t see how they’ll make ends meet, changing their life situation, etc. Little incident above reminds me that if we don’t take the down times too seriously, if we see the beauty and silliness in situations and the people around us, we’ll continue to smile and laugh.

And, that makes the tough times not quite as bad. 

Only a few hours until RentingYourHome.com Version 3.0 is launched…