The good times continue to roll on. Inventory is down and prices are stabilizing and…
There Is a new bill, Residential health and safety act, that will drastically alter rental properties both single family and multifamily properties. Are you ready? The bill’s title sounds innocuous, but the true intent of the bill is lurking in the details and will impact every rental property owner. What should you do now to get ready for the proposed changes? 3 steps every rental property owner should take
What is in the bill? 3 profound changes for rental owners
In 2008, Colorado passed a law whereas the “warranty of habitability” is implied in every rental agreement for a residential property. The current law provides remedies for tenants where a current property uninhabitable, unsafe, etc… The new law makes 3 major changes
- Withhold rent: Under the current law, residents can withhold rent, but they have to deposit the money with the court, so residents have to first prove that they have the rent before they could withhold it. Under the proposed law, residents don’t have to prove that they have the funds and deposit them with the court. A tenant under the proposed law, can withhold the rent in their own bank account, which now brings up a major issue, is the resident withholding the rent because of a warranty of habitability issue, or is it because they didn’t want to pay the rent in the first and/or didn’t have the funds
- Appliances: A lease can be in default if the premises lack functioning appliances that conformed to applicable law at the time of installation and that are maintained in good working order. If a fridge breaks or a washing machine breaks this is now a breach of the lease by the property owner. What happens if the tenant doesn’t have funds for rent? There is an easy solution shove 20 towels in the washing machine ultimately causing the machine to malfunction.
- Mold: A lease can be in default if the there is mold that is associated with dampness, or there is any other condition causing the premises to be damp. Just from reading the language.. any other condition causing the premises to be damp.. attorneys are salivating over how great of a bill this is for litigation. For example, let’s say a tenant does not put the shower liner inside the tub when showering, water gets onto the floor creating dampness this would allow the tenant to not only withhold rent but ultimately terminate the lease even though the tenant is at fault.
Why is this bill so impactful?
The Colorado Apartment association said: “ The current bill would open the door to minor complaints being used to avoid paying rent, a situation that the 2008 legislation specifically tried to avoid while offering a viable path for repair and remedy. “ Furthermore, this bill will create a path to more litigation over mold and the definition of habitability. This bill will substantially increase expenses for property owners. Who is going to absorb these new expenses?
How will the market react?
Money doesn’t grow on trees! Someone will be impacted by the expenses of the new law. Although the law is well intentioned, it is ironic that this bill was designed to protect lower income tenants, but the exact opposite will occur as the expenses and risks associated with this bill will have to go somewhere. Lower tier tenants will feel the pain the most as property owners no longer provide appliances and raise rents to help absorb costs from the new regulations.
What should you do? 3 steps every property owner should take
- Not provide appliances: The way the new legislation is written the risk vs reward of providing appliances is not there. A washing machine malfunction can cause litigation and rent to be withheld. Lower cost rentals typically have older appliances, it would be wise for property owners to remove these items since the risk of malfunction is high.
- More carefully screen tenants: With the new legislation it will be considerably easier for tenants to withhold rent for minor items. It will be imperative for property owners to thoroughly screen tenants to avoid issues. Looking at a credit report will not be enough, thoroughly checking references will be critical to mitigate risk to the property owner.
- Update properties to have higher caliber tenants: The costs/liability associated with the new regulations will more than likely make it beneficial for property owners to update the property in order to mitigate their risk. For example, it might be worthwhile for owners to buy all new appliances and increase the rent to compensate for the costs, this would be substantially more profitable than taking the risk of having rent withheld when an older appliance breaks down.
On paper the bill looks well intentioned, but the unintended consequences will be profound. This new bill will do just the opposite of its intent hurting lower income tenants. The market will adapt to the new legislation and rents will increase to compensate.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the state.
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