Category Archives: Real Estate

3 Business Lessons I Learned in 2014

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2014For more than 22 years now, I end each year reflecting on what I learned from the past 12 months and how I can improve my business in the new calendar year.  In 2014, I cannot say that I learned anything new, but I was reminded of these important lessons-

#1-  YOUR PEOPLE ARE IMPORTANT

For my business, 2014 was full of issues caused by bad employees.  It took me nearly six months to flush the bad, reverse the damage and rebuild my team.  I was surprised by the degree of disloyalty and dishonesty displayed by a couple of my employees, and they had to go.  The transition from bad employees to a great staff was not easy, but we are better situated today to accomplish great things for our clients and our firm, having replaced bad staff with great staff.

These experiences tested my tendency to trust those closest to me and to treat my employees like extended family members.  While I decided that I am not going to stop treating my employees well. . .  truly like extended family- I am going to adjust some of my expectations and have contingencies in place to better address employee problems.  Here are some things that our firm is doing to make sure that we maintain a strong, dedicated team that is focused on our Mission to help clients solve problems, maximize opportunities and reduce business and legal risks-

  1. Mission Statement-   At least once yearly, each member of our team signs a pledge to live by our firm’s Mission Statement.  We talk about our Mission and Core Ideology.  We incorporate these important commitments into monthly training.  Our Mission Statement is an active component of our business operation, not just a stale document in an old business plan or a page on our website.
  2. Employee Manual-  At least once yearly, each member of our team signs a pledge to live by our firm’s Employee Manual.  The Manual sets expectations and gives clarity to how the employer-employee relationship will be managed.
  3. Team Driven-  My current staff is the best staff I have ever had.  They are dedicated, client-focused, smart, personable and focused.  I solicit their opinions and include them on certain decision-making processes, because we act as a team.  And, we are a better operation through this approach.  Although the “boss” has to make the final decision, the inclusion of employees in the decision-making process makes for better, more informed decisions.
  4. Nip It in the Bud-  We have a system in place to address employee challenges quicker.  Each time an employee performs in a manner inconsistent with our Mission, we have a meeting with the employee to address the issues.  Then, and this is the key to our new approach, we have the employee propose definitive ways the employee can correct the problems.  The employee completes a form we have created and signs the form as a pledge to correcting the problem.  This approach makes the employee the solution, not just the problem.

#2- SYSTEMS ARE ESSENTIAL

In 2014, we realized that we had become too dependent on the individual skills (or perceived skills) of employees.  A couple of our employees simply were not as talented as we had hoped.  Consequently, we had a gap between what our business required and what our employees could actually do to meet those requirements.  While we did upgrade our staff in big ways, the ultimate solution was to reinvent and reinforce the forms, systems and other operational processes that allow us to overcome the challenges caused when an employee is terminated or under-performs.

Also, those processes make it easier for staff to grow and develop new talents, because those processes make the daily, routine tasks easier.  More energy and time can now be devoted to personal and professional growth, which makes our business better, which ultimately helps our clients.  In the end, it’s all about helping more clients in better ways.

It takes time and effort to create these processes, but it takes even more time to solve problems in the absence of processes.  If you have not already, read books by Michael Gerber and Alan Weiss, Ph.D. and a book titled The Checklist Manifesto.  Then, build your processes.

#3-  MY WIFE IS AWESOME

Owning your own business or managing a business can be tough.  It can be stressful, fatiguing and frustrating.  Luckily for me, I am married to a very loving, strong and supportive woman.  It helps that she is a lawyer who once owned her own law firm.

The point here is that it helps to have a support system.  Everyone needs someone to listen and occasionally “push back” with helpful critiques, suggestions and advice.  I like to think that I can do it all alone.  The reality is that we all need help from time to time.  My suggestion is to have someone to talk to on a regular basis.  You can find a mentor, get a business partner, join a peer group, or meet regularly with an old college friend.  Whatever you do to improve your business in 2015, make sure you find someone to talk with on a regular basis.

Happy New Years!

Security Deposits & Carpet Cleaning Fees

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http://www.dreamstime.com/-image601928
Here’s a recent question from a property manager-

QUESTION-    We followed the 45-Day Letter Rules and deducted a $200 carpet cleaning and repainting fee that the lease clearly describes.  Yet, the tenant claims we owe her the entire security deposit back and that Indiana law does not allow us to keep from the security deposit anything other than damages, unpaid utilities and unpaid rent.  Is this tenant right?

MATT’S ANSWER-    No, the tenant is wrong for several reasons.  Your lease specifically states that you can withhold that $200 fee from the security deposit.  Secondly, the $200 fee is a form of damages called “liquidated damages.”  In essence, you and the tenant agreed to “liquidate” certain repairs costs – carpet and paint – at the set amount of $200.  Clearly, damages amounts can be withheld from the security deposit.

Additionally, the Indiana Court of Appeals and Supreme Court have held in prior landlord-tenant cases that a tenant is not owed a 45-Day Letter Notice for unpaid rent, because the tenant already knows that the tenant owes rent.  The purpose of the 45 Day Letter Rule is to give the tenant notice of what amounts and why the tenant is not getting all her security deposit back.  There is no point in sending a tenant notice to apprise her of her obligation to pay rent, as the tenant already knew about that obligation – it’s in the lease she signed.  So, the Courts have ruled against tenants in security deposit lawsuits where the deposit refund has been reduced by the amount of unpaid rent.  Here, the $200 fee is no different than the unpaid rent – in both matters, the tenant knew in advance that the tenant owed that amount to the landlord.  Accordingly, no notice in the form of a 45 Day Letter would be required.

Read more about Indiana’s Security Deposit Laws.

 

Can I Collect Rent and Charge a Late Fee?

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rent sign

Here’s a recent question from one of the members of INreia– the Indiana Real Estate Investor Association, which meets monthly- SECOND TUESDAY- in downtown Indianapolis.

 

Hi Matt,

QUESTION-    I am a friend of Amy Siewe’s and I have attended a couple of the INREIA meetings as well.  I was wondering if you could answer a quick question for me regarding collecting late rents from tenants.  I have a tenant who is late on rent and owes a $75 late fee.  If I accept the rent without the late fee, will I legally be unable to pursue the $75 late fee in Indiana?

ANSWER-    No, you can collect the rent and add the late fee to the unpaid balance owed.  Just communicate that intent to the tenant, and don’t accept any “paid in full” check.  Eventually, take the late fee out of the security deposit.

USING LLC’S TO OWN INVESTMENT REAL ESTATE

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QUESTION FROM ONE OF MATT’S READERS-

What is the best way to structure our real estate business in which we own multiple properties to maximize our protection but minimize the operational headache?

I know I have asked you this before, but this subject has become more pertinent. One of my partners thinks the best way is to do it like this: say we have $500K worth of properties. You should have 5 “children” LLC’s that each own the actual properties ($100K in each). Then you have a “mother” LLC that owns the 5 children LLC’s. The mother LLC is the only one directly owned by my partners and me.

I’ve heard of a “series” LLC option which accomplishes the same level of security with layers as with the “mother and children” approach but is much easier from an operational/accounting point of view because you don’t have to operate 6 different LLC’s-just one.

MATT’S ANSWER-

Generally, I recommend that you hold investment real estate in an LLC- a limited liability company. That is unless you buy and sell properties frequently and might be classified as a “dealer” of real estate, in which case I would analyze whether you should operate as an S-corporation. So, let me assume that you are buying and holding these properties as long-term investments.

A series-LLC is not neccesary and may do some damage. A series LLC connects multiple LLC’s and subjects the business to “Affiliate Liability” risks. Affiliate Liability is liability that crosses over from one entity to another, because the two entities are so closely affiliated that the courts view them as one, inseperable entity. You want to avoid affiliate liability. So, there is no good reason to form a series-LLC for rael estate investing, generally, but there are many reasons NOT to form one.

You probably want to consider multiple LLC’s onwing “bundles” of properties with a centralized management structure. I often form a seperate property management company in a structure that looks like this:

DON’T AMEND YOUR LEASE FOR GHOSTS

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One of my old law partners and I wrote a great residential lease about 15 years ago. Over the years, I have made dozens and dozens of changes to that lease. For example, when a client calls me and reports a problem with a tenant that I had not previously experienced, I will consider the challenge faced by the landlord and will often address that situation by adding new language to my lease form. The lease grows each year by another sentence or two. Every year, I am surprised by the actions of irresponsible and reckless tenants who endanger themselves, their family, friends and property, not to mention the landlord’s property, by doing really dumb things. As long as tenants find new ways to pose risks to landlords, I will be adding new provisions to my lease form.

 

One of my favorite dumb-tenant activities involved the tenant placing a trampoline between the rental house and his unlawful above-ground pool. His children (young children) would climb a ladder onto the roof of the home, so that could jump off the roof, onto the trampoline and into the pool. Can you spell – L – I – A – B – I – L – I – T – Y?

 

It is impossible to predict or even react to every dumb thing that a tenant might do. So, it is impossible to guard against every liability risk in a good lease agreement. However, you should try to cover as many risks as are reasonable in a lease.

 

Last week, I received a call from a client about a risk that I do not think warrants a new provision in my lease form. Ghosts. Seriously, ghosts. The tenant called the landlord to complain about ghosts. I’m not talking about leaking noisy pipes or creaky floors. The tenant claims the rental home is haunted, and the tenant wants concessions from the landlord. And we don’t think the tenant is joking. It appears that the tenant is quite serious about the ghosts and the concessions.

 

While not every tenant demand, threat or crazy activity will warrant changes to your lease form, you should develop the practice of talking about such challenges with your lawyer and decide whether the threat warrants changes to your lease form or even to the rules promulgated under your lease form.

Asset Protection

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Basic Asset Protection for small business owners is not complicated. In fact, for most small business owners, asset protection consists mostly of three key components: (1) a limited liability entity (corporation or limited liability company), (2) a solid and sensible insurance plan, and (3) good business practices developed, in part, with your business lawyer’s help or review. In this blog, Matt briefly explores these three basics components.

Asset Protection Basics from Matthew Griffith on Vimeo.

SAFE Act Catches Lawyers By Surprise

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I have been writing and talking about the SAFE Act- which makes most land contracts in Indiana unlawful- for months now.   I thought that I was the only lawyer in town who had heard of the new law.  No one seemed to know about it.

That recently changed, as a wave of panic swept through the local real estate bar in recent weeks.  And boy oh boy, are there some shocked and angry real estate lawyers out there.  This is a horrible new law in that it makes it unlawful for many people to sell their own real estate on contract.

It has been such a rude awakening for so many lawyers that a Continuing Legal Education class was quickly organized for next Friday in a matter of weeks.  Usually, CLE’s are planned months and months in advance.

Congratulations to those of you who listened to my teleclass on the SAFE Act or who read my blog.  You knew about this crazy new law long before many real estate lawyers did.

If you want to learn more about the SAFE Act and the several new laws that have passed recently, register for the July 17 real estate class.  Details are here.

You can also listen to the teleclass on this blog.