Question: I own an investment property in Phoenix, Ariz., and since summer 2005 I have been using a local management company. The first year and a half they had the property rented, but the rental home has been vacant for the last four months.
Late last month, I received a call from one of the property management staff indicating that they recently had a prospect look at the property but that person called back and told him that the kitchen cabinets were missing. I immediately told the agent that’s impossible because there were always cabinets in the kitchen. So I told him to send someone to go and check out what really had happened to the property as soon as possible. I received no further communication for a week until another agent called and again said his prospect told him that not only the cabinets were missing but the stove was missing as well. My first reaction to this was how could this be happening? So I asked the second agent please go check out to see what exactly is going on with this property. To my deep disappointment nothing has been done by either agent even though I have repeatedly requested them to find out what happened. I was so concerned that last week I sent an e-mail to a former property manager who is still with the company to help me find out why there was no response and no action was taken to answer my concern. The next day he called and told me that he was at the property and has filed a police report because he said the house has been broken into and burglarized. I wonder what recourse I have against this management company?
Property manager Griswold replies:
Most property management companies have contract language that will indemnify them from liability for third-party criminal acts as apparently occurred at your rental property. So unfortunately you are not likely to have much success in seeking recourse against the property management company unless it was involved in the illegal activity. It seems that your property was burglarized, and that can happen to any property. Your experience is one of the reasons why I strongly advise real estate investors to not invest in income properties that are more than one hour away by car, or unless the rental property is located where they have trusted family or friends or routinely visit on business. Phoenix has a very high number of investor-owned rental properties so it wouldn’t surprise me that criminals know this too and are targeting such unoccupied rental homes. You should file a police report and make a claim with your insurance company. Insurance companies often charge higher rates for rental properties in seasonal areas, or if they are unoccupied they will often cancel coverage so this is another good reason to find a qualified tenant as soon as possible. Your experience demonstrates the logic that a loss is more likely to occur at a rental property that sits vacant for several months. Clearly, having your rental property vacant for so long is tough on the cash flow and thus I would also suggest you hire a new and more aggressive management company.
Hiring a competent property manager is always important even in your own area but critical when investing across the country. You did not indicate why the rental unit sat vacant for so many months, but it likely was the inability of the management company to find a qualified renter at your asking price. I would ask you to consider the fact that it would be better financially to lower your asking rental rate until you find a qualified renter, as a vacant rental unit is only slightly better than one occupied by a deadbeat tenant. Never accept an unqualified renter, and remember that a good renter even at a below-market rental rate is better than a vacant rental unit earning no income and (in your case) actually suffering significant damage. I am sure your unfortunate experience will ring true with some of our readers and will be a reminder for those who brag about their success in investing in rental units in far-away places. Maybe they have great tenants or they just have been lucky so far!
This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of “Property Management for Dummies” and co-author of “Real Estate Investing for Dummies,” and San Diego attorneys Steven R. Kellman, director of the Tenant’s Legal Center, and James McKinley, principal in a law firm representing landlords.
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