Redbook Blues: The "I" Word
The cost of essential consumer goods continues to rise, gas prices are up, and food prices continue to climb. Inflation is real. As our companies, industry, and residents slowly begin to emerge from the personal and economic impacts of the COVID pandemic, supply and demand rental-housing market fundamentals reappear.
Rental housing supply slowly increased over the past twelve months, but operational costs (insurance, taxes, materials, labor, products, and services) rapidly increased. These economic factors and growing interest rates have forced AATC owners/operators to peer into their crystal balls, trying to decide when and how much to increase rents.
Whether you have been aggressively pushing rents in 2022 or are considering starting to move-up rents in the second half of this year, expect residents to resist and tenant activists to scream!
Most of us have encountered a resident that believes with all their heart that: 1) there is a legal cap on the amount rent can increase upon renewal; 2) they have three days after signing a lease to void the contract; 3) income is all that matters; and/or 4) landlords cannot require renter’s insurance. Generally, the resident is basing their claim on their super reliable family friend who is married to a cousin of an attorney.
Following is fact-base information to help you overcome these misconceptions about the “I” word: rent increases.
Rent Increase Caps: When it comes to rent increases, there is no law-mandated cap on rental increases in the Lone Star state. In Texas, the free market, aided by modern software, still sets rents. Unlike New York and the Peoples’ Republic of California, Texas does not have rent control except under extremely limited circumstances.
Unfortunately, many onsite employees are abused and bullied by residents that falsely claim rent increases are illegal. Residents argue that the pandemic has waived all landlord-tenant laws, including laws that cover contracts. They have been told that rent can only increase $50 or less but no more than 5% or only on odd Thursdays in leap years ending in twenty-one.
During the pandemic, when times were tough, selling a rent increase was hard. Now, with all prices going up, it’s a little easier – but still a challenge. Rent increases are a function of supply and demand. Bottom line, the market dictates rent—not the resident.
Three Day Rule: Stop me if you have heard this one: “I’m giving you my keys back and moving out of my new apartment that I moved into over the weekend because it is too __________ (fill in the blank) and I was told that it had _________ (fill in the blank) and I’m returning my new pillow covers to Target because they no longer match where I’ll be living.”
A common misconception in our industry is that the resident has a statutory right to change their mind and back out of a lease or an application agreement within three days after signing.
Not so. The resident is signing a contract, not buying a pair of pants.
Texas law defines a “consumer transaction” as goods or real estate sold to a consumer in the consumer’s home by a door-to-door salesman. The definition does not include residential dwelling unit leases and does not include sales contracts signed outside of the consumer’s place of residence at the time of signing. Therefore, residential leases are not subject to any three-day right of rescission.
Bottom line: within three days, the resident can return the pillowcases to Target but not the keys to their new apartment.
Able and Willing: An applicant’s income is their ability to pay; their credit score is their willingness to pay. As owner/operators, we must emphasize to our onsite employees that they do not pressure a prospect into committing to a financial arrangement they cannot meet. Closing the sale is essential, but not at any cost. An unhappy, regretful, and resentful resident will make their feelings known to current and future residents.
We want residents that want to live at our properties. Our assets are their homes. We desire residents who look forward to being in their homes. We do not want miserable residents carrying a grudge against our staff and our company.
Your rental criteria help mitigate any potential financial risks. While a prospect’s income is a mere snapshot of their current ability to pay, their rental history informs us if they historically met their obligations. Of course, past performance does not equal future performance, but it does enlighten owners/operates to a prospect’s integrity. They either pay their bills, or they do not. They do what they say, or they do not.
Let me address a potential problem: debt owed to the landlord. We anticipate that some prospects will have significant unpaid obligations to landlords after the pandemic. Therefore, it is incumbent on us to ensure that these obligations are met before entering a new lease contract.
Insure/Ensure/Assure: I never get those words right!! If you work in this business long enough, you will have a resident cause a fire in the kitchen that spreads to several units. You will also experience overflowing second-floor toilets or sinks that cause water damage to first-floor units. Or once in 100 years, a major winter storm will put DFW in the deep freeze for three days!!
This fire, flood, or freeze (new “F” words) will cause thousands of dollars worth of damage. Even worse, neither the offending resident nor the offended resident has renter’s insurance. Neither one has enough personal assets to pay for the damage, even if the landlord can recover a judgment against the resident in court.
The National Fire Protection Association estimates that there are approximately 100,000 fires in multifamily buildings annually and that a resident’s negligence causes 70 percent of all fires. The solution: requiring renter’s liability insurance.
The TAA Lease Insurance Addendum is a tool that you can use to help limit your liability and manage your risk by requiring residents to purchase renter’s insurance. This addendum also includes liability coverage to cover your out-of-pocket expenses in the event of resident negligence. While some jurisdictions in some other states, such as New York and Massachusetts, have enacted restrictions on the ability of a property owner to require renter’s insurance, Texas has not done so.
Operational tips:
- Research various renter insurance provider company premiums.
- Share this data with prospective residents.
- Do the work for the resident upfront – it will save you time and effort in the future.
As always, I am not an attorney, and if you need legal advice, be sure to call one of AATC’s Legal Services Program lawyers. I’m also not an economist, so I do not know when inflation gets under control, but I do know that as a rental housing owner/operator, the free market is the best solution to the “I” word: rent increase.
Nicole Zaitoon, Allied Property Management, is AATC’s 2022 Government Affairs Committee Chair and a member of AATC’s Board of Directors.
