The Landlord Predicament

THE LANDLORD PREDICAMENT

The Landlord Predicament Suggestions for Employers with Transferees Who are Considering Renting Out Their Homes


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Economic Overview In January, the Mortgage Bankers Association predicted that rates will rise to an average of 5.3 percent in 2011 as compared to 4.7 percent in 2010.

American’s have undoubtedly suffered through an unprecedented recession since 2006. Businesses, consumers and politicians alike are eager for a turnaround and hopeful that 2011 will bring some sustainable recovery. Surely, some economic indicators give reason to be optimistic - the economy is experiencing real growth in critical areas including the GDP, income increases, production levels and retail-wholesale earnings. Despite these reports, however, lingering issues in housing and finance are expected to prevent a robust recovery in 2011. In fact, most economists agree that the housing market remains in jeopardy – and may even double dip in 2011. RealtyTrac reports that while foreclosures have slowed in the first half of 2011, it’s hardly indicative of a recovering economy. Experts believe that banks are stalling the foreclosure process to prevent taking in more housing inventory, which is masking the true state of the housing market and, subsequently, the economy. At this point, any increase in foreclosures, or the release of shadow inventory, combined with the glut of housing already on the market, will push supply way beyond demand, causing home prices to drop even lower. While this is good news for potential buyers who want to take advantage of low prices, it’s a major setback for sellers hoping to minimize their losses. Even worse, any decline in home values will increase the number of homeowners in a negative equity situation, which could lead to more bankruptcies, abandoned homes or homeowners who simply cannot afford to sell their home. In addition, mortgage companies are increasing their rates. The Mortgage Bankers Association predicts that rates will rise to an average of 5.2 percent by the end of 2011 as compared to 4.7 percent in 2010. Many people are already having trouble obtaining mortgages with new, stringent requirements. A rate increase may deter potential home buyers – or push them towards lower priced homes. Given these recent housing updates, most companies will continue to face relocation challenges in 2011. Relocation managers should evaluate their policies now so that they know what solutions, if any, they can provide to sustain another housing dip. They should also prepare themselves for an increase in the number of transferees who are reluctant to sell their homes at a loss or, worse, managing an underwater mortgage that may prevent them from moving at all.

Renting as an Alternative to Selling More transferees are turning to rental arrangements in hopes to wait out the market and secure a better price. Since renting the home is rarely a quick financial fix, and the housing market is unlikely to turnaround quickly, employers should understand the commitments involved in renting a home so that they can educate transferees on the pros and cons of becoming a landlord. Renting challenges are far more pronounced in a relocation situation, so relocation managers may want to consider offering additional benefits that either prevent the employee from entering a rental arrangement or provide adequate support to minimize their time commitment and manage their stress. Ultimately, transferees and their employers should consider the following factors prior to making a final decision about renting or selling.


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Maintenance Expenses are Costly Renting a home requires regular maintenance which is expensive and time consuming. Transferees should understand the commitment involved in renting their home and the employer must realize the burden that the employee will face without rental support. Some homeowners will want to assume the landlord role without any help because it is the only option that affords them the ability to get somewhat settled in the new location at a minimal cost. However, most homeowners do not know what it takes to manage a property for rent. Regular upkeep is required by law and it includes everything from home repairs and snow removal, to pest control and landscaping. A transferee considering renting has to be honest with themselves about whether or not they have the resources available to maintain the property and manage service providers without third party support. At the same time, employers should know that property management is often a daytime job and that the employee may be taken away from work during regular hours to find contractors, set up appointments and handle tenant calls. Since the transferee will not be near the home, its best to retain a rental management company to oversee the property and mange the tenant. Rental management companies will do everything on behalf of the landlord including finding a tenant, collecting rent, responding to complaints, setting up routine maintenance (lawn care, managing contractors, handling repairs, etc.) and more. Hiring a third party will reduce the amount of stress on the transferee and limit their time commitment, but it comes at a cost. Typically, rental firms charge the landlord for the first month’s rent and an additional 10 percent of the rent payment per month. Further, all of the repairs and contractor payments are charged to the homeowner, usually in the form of rent check deductions. As such, landlords who use a rental service can only depend on a fraction of the rent check to help with their monthly expenses. Transferees who are considering renting because they are underwater on their mortgage are unlikely to make enough from the monthly rental income to cover their payments. Those who are looking to rent in order to avoid a loss on sale may find that making up the difference is difficult, depending on the balance of the mortgage. In fact, with the economy still sputtering, it might be years before the housing market bounces back to a level where the transferee can break even on the home. Homeowners will need to run the numbers based on their own situation to see how it will impact their bottom line. This tally should be part of the bigger equation to see if renting will help save money in the end, or if it is better to take the loss upfront on the home.

Insurance Premiums will Increase Insurance companies tend to raise premiums on a homeowner policy if the home is being rented because they believe that the renter will not care for the property to the extent that the homeowner would and, if the property is rented, the homeowner will visit less frequently to monitor the condition of the home. Further, if the conditions of the home are not well-kept, or if the tenant is irresponsible, the risk of personal injury on the property increases. In the event of an injury, the landlord and insurance company are likely to get sued. Landlords that have a lot of tenants will tend to have more insurance claims on the property, which may affect the availability and cost of future homeowner’s insurance policies. Overall, the premium increase can be a significant percentage, in some cases even double, of the original policy, depending on whether or not the home is furnished and where it’s located. If the property is rented unfurnished, the insurance premium will be less. In a relocation situation, however, a transferee may not have space available in the new location for their furnishings. In this case, the employee will need to sell their items, incur storage fees or pay a higher insurance premium.


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If the home is rented unfurnished, then the tenant’s belongings are not covered under the homeowner’s policy. Generally, it’s a good idea for all landlords to require that tenants have rental insurance, especially since it’s inexpensive and can save future headaches in the case of an emergency. Since upgrading insurance policies can come at a great expense, it’s critical that transferees contact their insurance companies for more information before they decide to rent the home.

Legal Requirements add Risk Landlord Tenant Laws In addition to regular maintenance and insurance requirements, there are laws and regulations that landlords must obey in order to protect themselves and their tenants. These laws vary by location, so would-be landlords will need to research the rules specific to their state and county in order to understand the rights of each party involved. Landlord-tenant laws typically cover the required time frames for repairs, code violations, rent collection, property maintenance requirements and evictions. Failure to understand landlord legal requirements can lead to lawsuits, court appearances and hefty fines. Since most homeowners are not well-versed on the legal requirements involved in renting a home, becoming a landlord can be risky. This risk is compounded for transferees because they will not be close enough to the home to monitor the property (or tenant) and may miss opportunities to mitigate a problem before it escalates. Further, in the event that something does go awry in the home, the employee will need to return to origin to deal with officials and, in some cases, the courts. Permits Many states require that landlords have a permit prior to renting. Again, every state and country is different, so the homeowner will need to contact the appropriate authorities to find out if they need a permit and, if so, what steps they have to take to acquire one. Usually, the home will need to pass an inspection for a permit. If the home does not pass the inspection then the homeowner will have to make any necessary repairs and coordinate a re-inspection at their cost. Homeowners can also expect to pay a permit fee. Some states require annual inspections so homeowners should budget for annual fees. Condo/Co-Op Bylaws If the home is a condo or co-op, there may be bylaws that prevent homeowners from renting their properties at all. If this is the case, and the homeowner rents the property anyway, the association or co-op board can evict the tenant at the owner’s expense. Since the owner entered a rental agreement with the tenant, they will have to find and pay for a suitable temporary home for the tenant and possibly refund an appropriate amount of rent money, depending on the specific situation.

Conflict Resolution is Stressful and Time Consuming In a perfect world, every landlord would find a tenant who respects the home and pays their rent on time. Conversely, every renter would find a landlord who maintains the property and makes timely repairs. Unfortunately, it’s a far from perfect world. Landlord-tenant relationships are often fraught with tension, misunderstandings and disagreements. Most landlords will agree that the hardest part of the job is managing tenant requests and complaints patiently and efficiently. There are varying degrees of tenant problems. Home and plumbing repairs are among the most common and are, fortunately, relatively easy to manage because they are fixable and the landlord’s responsibility to fix them is clearly outlined by landlord-tenant laws.


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Unfortunately, not all problems that arise are defined as clearly. For example, vermin, rodent or bedbug infestations are far more difficult to mitigate because it is very hard to determine which party is at fault. Did the problem exist before the renter moved in? Has the tenant created an environment conducive to an infestation? Are the offending creatures coming from a neighbor’s home? Even though the landlord may not be technically responsible, most will treat the infestation at their own cost to appease an emotional tenant. Once treated, the homeowner will need to uncover the source to avoid any future invasions. There are some problems that the landlord simply cannot solve including noisy neighbors, nearby pets and traffic noise. While the homeowner can try to resolve conflict between parties, or insulate windows, they cannot change a person’s behavior or a city’s traffic pattern. Even though it they are not at fault, however, they will need to discuss these complaints with tenants which is stressful and time consuming. Further, if the tenant is truly unhappy, they may break their lease or skip out altogether, leaving the landlord in the lurch for rent and spurring a legal fight. The worst case scenario in any rental situation is an eviction. Tenants can be evicted for several reasons, but the most common are unpaid rent or conducting illegal activities in the house. In some cases, home disrepair due to psychological problems such as hoarding can lead to an eviction. In any case, the process is long and tiresome for landlords who have the burden of proving their case before moving forward with an eviction. First, they must know their rights as outlined in their landlord-tenant laws. Then, they have to file appropriate paperwork, taking care to be very precise about the reason for the eviction and correctly filling out all forms. Once the paperwork is filed, there is a waiting period for a hearing, which can take months. If the paperwork is not filed correctly, the hearing will be cancelled and the landlord will have to re-file and wait for a second hearing. Finally, the seller must be present at the hearing unless they have declared a valid representative for themselves prior to renting the home. Worse yet, the tenant is permitted to stay in the home throughout the process. Since emotions run very high in an eviction situation, homeowners should know that tenants may stop caring for the home, hold rent payments or even destroy property. In a relocation situation, conflicts can escalate quickly because the transferee has not been present to monitor and document problems in real-time. Without regular documentation of any issue, whether it’s a minor problem or an extreme situation, such as illegal operations in the home, it will be hard for the transferee to find a resolution or provide enough proof to justify an eviction. Further, if tenant issues escalate beyond normal home repairs and minor complaints, it’s likely that the employee will need to return frequently to the area, which will interfere with the quality of their work and their ability to settle in to the new location.

Tax Breaks and Deductions May be Lost There are significant tax implications for both renting a home and selling a home. Because each transferee is in a different situation personally, professionally and financially, there is not a one-size-fits-all answer when it comes to the tax ramifications of renting the home. Ultimately, given the complexity of the tax code and the many tax rules that impact a relocation, it’s critical that the transferee hire an accountant that specializes in home renting, selling and relocation issues. Below are just some of the tax rules that transferees, and employers, should investigate in order to determine the total financial impact of each option before making a final decision on whether to rent or sell the home.


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Capital Gains Tax Most people who have lived in their homes for at least two of the past five years will not be taxed on capital gains of up to $500,000, for a joint filing, and $250,000 for an individual filing, earned on the home sale. However, if the house is rented for more than three years (or past the five year mark) the homeowner will lose this tax break unless they return to the property for two more years after the rental period. Thus, transferees who want to rent the home until they can make a profit off the sale will risk losing the tax break unless they move back to the home. If the transferee is planning to rent the home, employers should know that this is a possibility before they invest in the relocation. Rental Income is Taxable Transferees should also know that rental income is taxable. That said, there are many tax deductions available to balance this out. Landlords can deduct most of the out-of-pocket expenses associated with maintaining the home including mortgage payments, maintenance, repairs, property taxes, advertising, some insurance and even management company fees. However, in order to claim deductions, landlords must require that all workers and vendors complete a 1099 form to be filed at tax year end. Any work completed without a 1099 may not be considered tax deductible. Further, there is also a considerable tax deduction for depreciation of the home. However, there is a catch. If the homeowner rents the home and later sells the property and qualifies for the capital gains tax break, he/she will then be taxed on the amount depreciated. Home Buyer Tax Credit Depending on when the home was purchased, transferees who bought a home to take advantage of the home buyer tax credit will have to pay back the credit if the home is rented. If the home was purchased in 2008, the entire repayment is due when the home ceases to be the principal resident. If the home was purchased in 2009 or 2010, the homeowner is required to pay back the entire credit if the home ceases to be the principal resident within the next three years. Some employers will reimburse the transferee for the credit, which can be as much as $8,000 for a first time buyer. Companies who are planning to reimburse for the credit should expect to gross up the sum by nearly $5,000 to make the transferee whole, edging the total cost of reimbursement up to $13,000.

Rent in New Location not Tax Deductible A transferee who already owns one home may not be able to buy another home in the new location and will have to rent. Rent payments are not tax deductible, which can be a shock to transferees who have grown used to deducting a large portion of their monthly mortgage payments from their taxable income when filing their tax return. Those who may have enjoyed a refund may now find themselves owing additional taxes.

Psychological Impact of Renting in a Relocation Situation For the most part, both transferees and employers want the relocation process to be as quick, seamless and as easy as possible. The sooner the transferee is settled into the new location, the more quickly he or she will adjust to the new job and environment in order to resume a regular and comfortable routine. No matter how well executed, relocations are already stressful enough on transferees and their families without adding the angst and responsibility that comes with being a landlord. A transferee who is managing their old home while trying to move into a new one can quickly become overwhelmed and distracted, which will prolong the adjustment period and possibly cause misplaced resentment at the employer and the new location. Employees who grow frustrated, or don’t take to the new location right away, will be more inclined to move back if they know they have a place to live.


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Possible Solutions to Avoid a Rental Situation Ultimately, the decision about whether to rent or sell the home comes down three key factors – time, money and energy. In most relocation scenarios, especially in this economy, there is a shortage of all three. While renting may be a viable option for transferees with homes in certain markets, it’s rarely a silver bullet to waiting out real estate losses. If renting the home is part of the relocation discussion, especially in a loss on sale or negative equity situation, employers should provide adequate tools to help the transferee see the whole financial picture before either party agrees to the relocation. Pre-decision Assessments Conducting a pre-decision assessment that details the impact that the relocation will have on the employee’s financial situation is the best way for both parties to determine whether the move is a good idea. If the transferee is considering renting their home to avoid a loss on sale situation or because they will not be able to pay off their current mortgage with the anticipated sale price, a pre-decision assessment will show them their overall financial risk and responsibility. Ultimately, this will help the transferee determine if renting is a viable option, if it’s better to take a loss on the home or if they should try to negotiate a short sale with the lender in order to move on. Relocation managers should know that there is a down side to offering a pre-decision assessment. A potential transferee taking a hard look at their financial situation may make him or her realize that relocation is not in their best interest. While this may feel like a set back to the hiring manager, it is better to know this upfront, before a lot of money is spent on relocation benefits, new hire training and other costs associated with bringing an employee up to speed in the new position. If the transferee does not understand the full impact of the relocation upfront and decides later that it was not a good decision, they might leave and the money and effort involved in the relocation would be wasted. Duplicate Housing and Temporary Living Provisions Employers need to decide how much they are willing to spend to quickly settle a desired candidate in the new location. Depending on the magnitude of the employee’s financial situation, there are additional financial benefits that employers can provide to help their transferees avoid a rental situation, delay a home sale or turndown an offer to relocate. For example, employers may consider offering a duplicate housing provision. Here, the company would cover the monthly cost of the lesser of the two living arrangements – the cost of the transferee’s housing in the origin location or the cost of housing in the new location. This benefit will help move the transferee one step closer to severing the tie with the origin location because it will allow them to bring their family to the new location while the origin home is still on the market. Alternatively, if the transferee does not want to leave the home vacant, employers may consider offering extended temporary living. The company would cover the transferees housing in the new location while the family remains in the origin location until the home sells.

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Amended Home Selling Program (Guaranteed Buyout) One of the best, but most costly, solutions is for a company to offer a home selling program that includes a guaranteed buyout provision along with a grossed-up loss on sale component. Through this program, the transferee is guaranteed a buyer for their home (the company) at a pre-determined price. The loss on sale component will be activated if there is a difference between the original purchase price and the sale price. Depending on the program, the company will cover all or a portion of that loss. If the company covered loss is insufficient to cover a mortgage shortfall, the transferee may be able to present their guaranteed offer to their lender in hopes that the lender will agree to a short sale. However, the transferee needs to be willing to accept that a short sale will negatively impact their credit rating and possibly their ability to purchase another home for at least the next two to three years. Further, the employer should know that, depending on the lender's terms, the short sale may need to be completed in as little as 30 days. Thus, the employer will need to be in a position to pay off the agreed upon loan amount prior to finding an ultimate buyer for the property. Creativity is Key Even though another housing dip is disheartening, this is not a time to make knee jerk decisions about home selling and renting. Unfortunately, there is not a one-size-fits-all way to help transferees manage their housing woes. Each company, and each transferee, is different and will require a relocation program that caters specifically to their needs. All relocation managers should be prepared to explore creative ways that policies can help transferees manage a difficult housing situation, with as little interruption as possible, to the satisfaction of all parties involved. Those who are concerned about how the housing market will impact their program in 2011 should check in with their current providers to see how their relocation policies can be amended to cost effectively help the most transferees.

About XONEX Relocation Inc. XONEX Relocation is a 3rd party relocation services company that offers the right solutions for corporate clients – solutions that meet the demands of relocating families in today’s hectic business climate. We help corporate America move their valuable talent with minimal interruption and maximum satisfaction for everyone involved in the relocation process. Our knowledgeable and caring staff combine cost transparency with creativity to structure benefit plans that are sensible and targeted to each client’s needs.

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