Lesson 3
Maintenance
Introduction
The upkeep and improvement of rental
property is vital to continuing economic
viability. Property that is not regularly repaired and refurbished is not able
to compete effectively for new tenants, except with discounted rents. Taken
to an extreme, a practice of deferring maintenance, and lowering rents, leads to
a downward spiral that is hard to reverse.
Many mom and pop landlords estimate and allocate
5% of gross income for maintenance and repair. However, national studies
indicate an average real cost of $700 per unit in a large complex, to $1,100 for
single family homes. If you are not spending that much, perhaps it's
because Pop or Mom, are not being paid for their labor.
There is a tremendous quantity of information
available regarding maintenance, in both book and Web formats. Home Depot
and Links to some of the available Web sites are found on RHOL's Maintenance
Online page.
Not staying on top of needed maintenance
and repair, and/or failing to make repairs when requested, is one of the most
shortsighted and costly mistakes that property managers make. If the property is
not kept in good repair, the tenant may have the right to withhold rent, sue for
any injuries caused by defective conditions, or move out without notice. And who
could blame them?
Furthermore, poorly maintained property does not
attract the best tenants. Prospective tenants who must accept such
property often do so because they do not qualify to rent better quality
properties where landlords use adequate screening and selection procedures and
the same landlords who do inferior maintenance usually also do inferior
screening.
As a result of shoddy and improper maintenance by
nonprofessional property managers, American courts began to hold that there is
an "implied warranty of habitability" in housing that is offered for
rent. Many states have even codified that concept by statute and landlords can
now be held criminally responsible for neglecting maintenance in some states.
An RHOL landlord member from the UK, Matthew Gibb,
recently emailed us the following: "Our action group managed to
successfully lobby parliament recently on some impending legislation. It was
proposed that if a repair notice was served on a landlord of a house in multiple
occupation, the landlord would be immediately criminalized. Now, a warning
notice must be served first."
As Matt's note from the London suggests, the evolution
from "as is" to the concept that rental property must be guaranteed
safe and sanitary is becoming accepted world wide. You may want to review our
pages on the Warranty of Habitability
to get a better understanding of what is now expected of property owners and
managers and why.
In addition to the new legal requirements, timely
and preventive maintenance is a income property manager's best investment in
both the property and in attracting the best tenants. You may want to also see Maintenance
FAQs, Talk About Maintenance and
our Maintenance pages
elsewhere on this site.
Hiring Someone Else
Selecting and hiring the right maintenance
people can be as important as selecting property and the tenants. But that alone
is not enough, an owner has both a legal responsibility to provide adequate
supervision as well.
Independent Contractors
Selecting independent contractors to
do your maintenance is an important issue that can have both financial and legal
implications far beyond the task at hand itself. Issues include (1)
whether to use licensed or unlicensed vendors, (2) whether a vendor is really an
independent contractor or instead an employee, and (3) how to find qualified
vendors.
Licensed or Unlicensed
Most landlords probably use unlicensed
vendors more often than they use licensed contractors. The reason for this
is simple - they're often cheaper. There is probably nothing inherently
wrong with using unlicensed vendors for many routine non-critical tasks so long
as you are aware of the risks and take the necessary precautions to protect
yourself.
Many states that license contractors set maximum
dollar limits for which a license is not required. For examples, in
Arizona, a license is not required for work performed where labor and materials
total less than $750 dollars, for which a building permit is not required, and
the work is not part of a larger project. An unlicensed vendor doing work
not meeting the conditions of that exemption is in violation of Arizona law.
In California, the limit is only $500.
There are certain advantages to using licensed
contractors. Sometimes these advantages outweigh the one major
disadvantage - cost. However, sometimes
an initially perceived lower cost turns out to not be lower after all because
the unlicensed vendor may also be less skilled and less experienced.
Although not every advantage applies in every
state, the advantage of using licensed contractors usually includes the
following
-
Provides access to a state Recovery Fund in the event of
poor work done by the licensed contractor
-
Provides assistance to consumers in resolving conflicts with
the licensed contractor
-
Provides procedures for filing complaints, with penalties of
license suspension when the licensee is found in violation of laws and
regulations
-
Requires that licensees be bonded
-
Requires that licensees carry liability
insurance
-
Requires that licensees carry workers
compensation insurance for employees
-
Requires that licensees obtain required permits
-
Require that licensees do the work per building
codes
In many states, the vendor cannot
file a mechanics lien against your property, or, in some states, even sue you if
he performed work that requires a license without being properly licensed. Other
than this unique circumstance and the fact that unlicensed work is often cheaper
than licensed work, a licensed contractor should usually be preferred over an
unlicensed vendor.
Independent Contractor or Employee
Whether you are hiring a licensed or unlicensed
vendor, it is very important that the vendor be legally considered an
independent contractor rather than your employee - unless you do in fact intend
for
him to be an employee. There are times when it is an advantage for the
person to be an employee, primarily because an employee can be fired, whereas,
firing an independent contractor can leave you owing him for a job not done.
The fact that a vendor possesses a contractor license does not per se make him
an independent contractor.
The fact that the vendor might be considered an
employee, even though that was not what you intended, can become an issue in a
number of ways. Among those ways are the following three scenarios:
-
IRS or State Equivalent - The vendor is audited for
non-payment of income taxes and to protect himself, claims that he was your
employee and he thought that you were withholding payroll taxes on his
behalf.
-
Workers Compensation - The vendor is injured, on or off the
job, and makes a claim for worker compensation, stating that he was your
employee and he thought that you were carrying workers compensation for his
benefit.
-
Unemployment Benefits - Business falls off, and the vendor
makes a claim for unemployment benefits, stating that he was your employee
and he thought that he was covered.
In the above scenarios, there is
a real chance that the associated government agency will find in the vendor's
favor and that you will be liable for the following:
-
IRS or State Equivalent - You could be found liable for
taxes that should have been withheld, penalties for failure to report and
withhold, and interest and late penalties until paid.
-
Workers Compensation - If you had a policy in force at the
time of the alleged injury, you may be covered as to the vendor, but the
insurer may seek penalties and cancel your policy because you failed to
report properly, making it more expensive to find replacement coverage.
If you did not have a policy at that time, you could become liable for all
costs related to the injury if it were decided that the injury occurred
while working for you..
-
Unemployment Benefits - You could be found liable for the
cost of his unemployment benefits as well as be assessed significant
penalties for failure to report and pay the tax.
So, how do you avoid this risk?
First, understand the legal definitions of an employee and an independent
contractor as defined by these agencies. The twenty things that the IRS
looks at to determine status are discussed in detail on our Determining
Employee or Independent Contractor Status page. Second, if there is
any doubt about the vendor's status, require that he sign document regarding his
independent contractor status. Two samples of Independent Contractor forms
are provided on our Forms Web.
In many cases, there is no need for concern about
this issue. For example, if you ask Sears to send out a repairman because
your 4-year old Kenmore washer isn't working right, the serviceman drives up in
a Sears truck, and he hands you a bill on a Sears billing form, it's very
unlikely that there is any reason to even think about the issue. The same
would apply to most licensed contractors that you called out of the yellow
pages.
However, if you call an unknown unlicensed vendor
out of the local Penny Saver newspaper, he drives up in an unmarked pickup, and
he doesn't give you a written invoice, you should be somewhat concerned.
In this case it would be smart to have him sign the appropriate document before
he begins work. Two samples of Independent Contractor forms are provided
on our Forms Web.
How can a vendor possess a contractor
license and be considered an employee? One example is if you hired one,
currently laid off from his regular employment at a large contracting firm, to
be on site 4 hours each day and take care of all maintenance in you 100-unit
apartment complex. Depending upon the details of the relationship, it may
be impossible to make this person a legal independent contractor.
Selecting a Contractor
Selection of qualified contractor can
require a certain amount of time and energy. You cannot simply go to the
largest ad in the yellow pages. If you know people who have
utilized a contractor for the type of work you need done and they were
ecstatically happy with the results, the job will be easy. Try to find
recommendations from friends, real estate agents, lumber yards, hardware stores,
supply stores for the type contractor needed.
Ask the referral source who was a previous client
of the contractor the following questions:
-
-
Did the contractor show up on dates and at times promised?
-
Did he do the contracted work for the agreed price?
-
Was the quality of work acceptable?
However, if you
have no such contacts you will need to spend considerable effort to maximize
your chance of having good results. Depending upon the complexity and size
of the job, this effort can include some or all of the following tasks:
-
Understand licensing requirements of your state (gives some
idea of the value to put on the license)
-
Find potential candidates
-
Interview candidates
-
Verify credentials
-
Check references
-
Visit current work sites
-
Select 2 or 3 best
-
Obtain bids
-
Review contract carefully
-
Verify liability insurance and workers compensation
These issues and others regarding
hiring contractors are discussed in more detail on RHOL's Selecting
A Contractor page. Additional discussion regarding hiring vendors is found
on our Maintenance
Madness page. Finally, the Federal
Consumer Information Center provides information regarding hiring
contractors and filing complaints.
Employees
If an employee does their job improperly, you pay
the bill. Unlike using an independent contractor, where you may have recourse
when work is not satisfactorily done, the law requires that an employee be paid
even for unsatisfactory work However, you can fire an employee,
whereas, dismissal of an independent contractor can more easily lead to a
lawsuit.
Furthermore, if they commit a crime, or someone
is injured to improper repairs, you may be held financially responsible as well.
And, your liability may be even greater for an employee than for an independent
contractor because an employee is considered to be under your complete control
and direct supervision. Furthermore, insurance protection will come only
from that which you yourself carry.
Verifying education and experience is only the
beginning of the screening process. Courts have held that employers have a duty
to conduct a thorough background check too. Minnesota recently passed important
new legislation that now requires property owners to properly screen employees.
See: New L/T Law
and Updates.
Carefully selecting all employees, then clearly
spelling out the manager and maintenance staff duties will also help to prevent
expensive problems down the road.
Adequate liability Insurance coverage is even
more important when using employees rather than independent contractors because
with the latter you usually have a degree of protection from the contractor's
insurance, assuming that he had adequate coverage as you should have verified
before hiring him.
Employees require income tax withholding at
federal, state, and sometimes local levels, social security tax, unemployment
insurance, and workers compensation. Additionally, returns or reports must
be filed for all of items. However, employees often are often preferable
to independent contractors and sometimes absolutely necessary, particularly for
larger complexes where resident managers already require employee bookkeeping
functions anyway.
Doing It Yourself
Doing it yourself usually has the following
advantages:
- saves money
- not liable for another's actions
- done right - if you know what you're doing
- done sooner
Doing it yourself can have the following
disadvantages:
- need to learn how
- need tools
- takes your time
There are a number of excellent books on the
subject as well as many web sites that provide help. Most large home
improvement retailers, including the following, provide a lot of how-to-do-it
information on their web sites.
For specific subject, parts and materials
manufacturers and suppliers also provide detailed information about their
products and how to install or repair them.
There are also a large number of other sites with
useful information, including the following:
Records
The smart landlord maintains a detailed
up-to-date maintenance log. It should include detailed dated entries for:
- Original complaint
- Any oral or written response to tenant
- Action taken (e.g., called vendor, checked it out yourself)
- Reasons for delays (e.g., parts availability, vendor workload, holiday)
- Reported expected repair date to tenant
- Checked with tenant that repair was satisfactory after expected
completion
The fact that the last item is seldom done
sometimes leads to problems when anyone other than the landlord does the repair.
Sometimes the repair performed by the vendor didn't fix the problem complained
about and sometimes the vendor didn't show up to do the repair.
Tenant frustration regarding these events can be avoided by calling the tenant
the day after the vendor was to have scheduled the work and asking if the work
was completed and did it solve the problem.
Not only does keeping a maintenance log help to
eliminate most problems associated with tenant maintenance complaints, but it is
powerful evidence if you end up in court in spite of your efforts.
Tenant Repairs
Leases sometimes make the tenant responsible
for some or all repairs and maintenance, particularly for single-family homes.
Sometimes a tenant repairs items on his own even though the lease doesn't
require him to do so, either because he caused damage and doesn't want the
landlord to know about it or because the landlord didn't respond to a
maintenance complaint in a timely manner. Many times, tenant repairs are
not properly done. For example, tenant repair of holes punched in walls or
doors almost always require re-doing.
Assigning maintenance to the tenant in the lease
can lead to similar problems. The tenant often doesn't do repairs that are
his responsibility because he doesn't have time or doesn't know how. This
can result in additional problems. For example, a leaky supply valve in an
under-sink cabinet, if not repaired, may eventually result in the need to
re-build or replace the cabinet, a very costly project. Accordingly,
landlords should carefully consider which maintenance tasks should be done by
the tenant and which should not.
You must also be careful that the tenant does not
become an employee, as this can expose you to all the potential liabilities
discussed above, unless you are indeed intending to make him an employee and
follow all necessary procedures. In other words, the lease should make the
tenant responsible for maintenance of specific items and you should not let the
tenant do other work, whether for payment or in lieu of rent, without taking the
same precautions to establish independent contractor status as you would with
any handyman or you purposely make him a bona fide legal employee. You
should also keep in mind that you must be sure that your insurance covers you
against injury to the tenant or others and against damage liabilities resulting
from the uninsured tenant's actions.
You must also take into consideration that most
of the risks and liabilities that were discussed above under the "Hiring Someone
Else" topic apply to the tenant doing the work.
Whether you prohibit the tenant from undertaking
any repairs or you make the tenant responsible for certain repairs, the lease
should also state that "it often costs more to correct a bad repair than
for a qualified person to do the repair correctly in the first place," that
the "tenant will be charged for correcting a repairs that do not meet
professional trade standards," and that the "tenant should contact the
landlord regarding repairs that tenant is not qualified to perform in a
professional manner." In response to the latter, the landlord can
suggest vendors for the tenant to hire. Because bad drywall or door
repairs are such a common problem, these items should be specifically prohibited
in addition to any general prohibitions. When you chose to make the tenant
responsible for repairs and maintenance, it is best to list the specific repairs
for which he is responsible and/or those for which the landlord is responsible.
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