REAL TALK RENTALS

Leasing a Property: What First-Time Renters Need to Know

Ben Bailey: Coming up on today's episode of Real Talk Rentals, we're going to talk writing the perfect lease, everything that needs to go into it and why you need to make sure you have one. Welcome back to Real Talk Rentals, a podcast brought to you by Oncue Property Management. We're going to give you all the behind the scenes of everything that goes into owning an investment property. I'm Ben. I'm your host. And with me, as always, Mr. Eric Dixon, the go to expert on property management and real estate. Today we're going to dig into leasing. We talked in the past a bit about finding a tenant and all the different things, but we're going to get into the nitty gritty of the actual document today. What goes into a lease, what's important, what's not important. So, Eric, I'm going to start this off with really high level question here. What is a rental lease? We kind of take for granted that I think everyone we all know what it is, but what is it?

Eric Dixon: Yeah. So the and I, I thought I knew kind of what my definition was. I was like, oh, it's a contract between the tenant and the owner or the landlord, right? Yeah, which is correct. But looking it up and actually this is more the legal definition that I that I looked up. So this is a better answer to your question. A lease transfers the owner's rights to exclusive possession and the use of the property to the tenant for an agreed upon period of time. And so it is it's a legal contract. It is between the landlord and the tenant, which some of our owners even, and clients, they're they're maybe even surprised. They're like, wait, I hired your management company to do this. Isn't the lease between you and the tenant? And then the owner's agreement that we signed is between us and you. And it's like, no, no, no. We facilitate and represent the landlord. You still.

Ben Bailey: Own the house, but.

Eric Dixon: You still own the house. You know, the contract goes between the landlord and the tenant. Furthermore, we deal with it all the time too, where we're helping clients buy and sell properties that are rented. Sure. And these contracts stay with the property. And so it's one it's one more thing to know that, yes, it's a legally binding contract. The owner's rights for possession are the tenants, but it stays with the property. So if I buy Benz property that's occupied by a tenant, I have to abide by that contract, that lease right on the house.

Ben Bailey: We see that all the time where we'll take over, you know, somebody, you know, had a different property management company and then they switch to us and it's like they're like, Oh yeah, let's, let's get on your rules. And it's like, no, they they signed a legal document that's good for a year. You can't just say, Yeah, you have to.

Eric Dixon: You have to kind of inherit and abide by those rules, like you said.

Ben Bailey: Yeah. Um, one of the things I think that's like super important in that what you just read was the, the exclusive possession and use of the property. And it's like you really have to understand when you're leasing your house to someone, it's, it's not your house anymore. Yeah. For the duration of the lease at least. Yeah.

Eric Dixon: And there even have been examples, right, where we're talking to clients about maybe an issue that comes up and they're like, you know, it's my house, I can show up whenever I want. It's like, well, actually, it's not, you know, you gave up kind of you gave up some of these occupancy rights and it's your property.

Ben Bailey: You might own it as an investment, but you don't live there.

Eric Dixon: Absolutely. So. And the tenant, it goes both ways, right? You know, the tenant by getting these rights and they also have responsibilities. They're held to a different standard than if if they didn't sign a lease. You know. So, sure, the lease, it is it protects both sides. It's not just there to protect the landlord. And it's certainly not just there to protect the tenant. Um, and so the, you know, it is essential we'll even have questions about, um, you know, hey, want to hire your management company, but will you use my lease and, and we, we always use our lease but it's not because ours is necessarily better or worse or indifferent. It's just that it hits all the bullet points that over years and years and years and years, we've been able to compile all those things and make it so it protects both parties really well.

Ben Bailey: And nothing in it then catches us by surprise. Yeah. Where someone says like, Oh no, I told them they could dig their own pool in the backyard. Hey, I've had.

Eric Dixon: That done like two years ago. Yeah. My tenant, one of our maintenance techs, went in the house and he calls it. He facetimes me. It's Collie shouting you out on the pod. Um, and he's like, Hey, dude, did you know that your tenants are digging a pond in your backyard?

Ben Bailey: Wait, are you being serious?

Eric Dixon: That's serious. Yeah. No, this is like, three miles north of here. Uh, and so he's like, No, dude, they're, like, tweaking out and digging a pond. And she's like. And then the tenant's like, No, no, no, no. We're digging a pool.

Ben Bailey: Oh, that's fine then. Yeah.

Eric Dixon: It's like, okay. And it's like, holy, whatever, dude. It's probably just like a kiddie pool, like, yeah, underground or whatever. He sends pictures, dude, and it's like six feet deep. They're like, they're ready to put tarps in and just fill it with water. And I'm like, Oh, geez. So anyway, it's funny that you said that because I'm like, No, no, no. That happened not not only to one of our clients, but to me.

Ben Bailey: To you. To you. All right. All right. Um. Real quick, what are the different kinds of leases? So like I know here at Oncue, we typically do a one year or two year depending on the thing, but there's other kinds that that exist, obviously. Yeah.

Eric Dixon: And so the duration typically and this is pretty standard, at least in Arizona is a year minimum. So if you're looking online like, hey, it's a 12 month plus lease, will the owners consider less? Maybe. But you got to call and say, hey, could I do it for six months? We have a lot of these like, Hey, my house flooded, The contractors are going to be rebuilding it for six months, you know, So I just need a six month rental or I'm waiting for a house to be built for six to 9 to 12 months. Can we do six months and then month to month, You know, so there are scenarios, but usually it's 6 to 12 months or more. And then there's the other style of lease. That's really your kind of vacation rental. It's less than 30 days, which gets super interesting because you think about it. And just as we were preparing this, a thought came to mind that I'm like vacation rentals through like Airbnb, VRBO, maybe a self managed, you know, vacation rental, furnished property. They don't do background checks. You know, you go to like the Marriott or Motel six, it doesn't matter. Yeah, you could be a criminal, you could be whatever. And you're just like, No, I just signed up for three nights and I'm staying right next door to you that you have no idea what their background is. No idea. At least if you're staying in like, a reputable apartment complex, you know that there's minimum standards, right? Sure. Criminal history, sex offenders, you know, that sort of stuff.

Ben Bailey: Serial killer living next to you. In theory.

Eric Dixon: Super interesting. Yeah. Next time I'm at a hotel, I'm just like, Dude, no one did background checks. Yeah. You know? Yeah. So. And I guess that's the nature of the beast, right? But also realize you didn't sign a lease either, you know? So you're doing day to day or week to week occupancy and there's different laws that protect you and protect the hotel or motel or or vacation rental. In fact, it is getting to where it's kind of getting out of control. Where. Instead of signing a 12 month lease because don't want to do background checks and hold you to that that standard, I'll just say, Hey, let's just do week to week for a year or something. That's insane. And so the city of Mesa actually starting February 1st was that yesterday? Yeah. You know, this month, I guess it doesn't go live. Dude, we're recording this in February. Nobody knows. Anyway, February. City of Mesa is starting to charge for registering your vacation rental because they want to know where the occupants are that don't have background checks, don't have credit checks, staying night to night, week to week, and you have to register for 250 bucks a year. And then I think it's the fines are like 200 bucks. 500 bucks. A thousand bucks. Yeah. It just gets crazy. So my.

Ben Bailey: Uh, the HOA in the neighborhood I live in started doing that. Oh, yeah, Because there's so many people, especially right now, not to date this episode even more, but the Super Bowl is here in Arizona. Oh, yeah, dude, in a couple weeks. So everybody is like, how much can I Airbnb my home for my house.

Eric Dixon: My house is an hour and a half away, but I could still get four grand for the week, you know? Yeah.

Ben Bailey: So, I mean, everybody is like clearing out know, it's crazy.

Eric Dixon: I went off on a big tangent, but the biggest, to answer your question, the different types of leases, it's kind of your long term vacant unfurnished rental. That's what your third party property managers like us do the most, 6 to 12 month minimums. And then, you know, as you're renewing them, you'll do a year or two at a time. Yeah. Or there's the furnished short term that's more hotel style, Airbnb style. Sure. That you don't actually sign sign a lease, but you're agreeing to terms right of your.

Ben Bailey: I've heard the term rental agreement used with that a lot. Yeah. So it's kind of.

Eric Dixon: Like lease for the longer than 30 days and rental agreement for less than.

Ben Bailey: 30 days. Kind of like renting a car, you know, or versus leasing or leasing a car. Right. Where it's yours for all intents and purposes. Yep. Okay. So next question. One of the most common things I see is what is the cost of a lease? And I mean that in the sense of there's a fee associated a lot of times and to execute a lease for someone involved to put it together and have it signed. So what are the costs involved? Why is there that fee associated with it generally when you sign with the property management? Yeah.

Eric Dixon: So the I kind of maybe we'll just go how we do it and not saying the amounts, but kind of just the structure. We kind of separated into two different activities. And both of these activities require licensed, at least in Arizona. You don't have to be a licensed real estate agent. We separate it between marketing and then leasing it out. So marketing covers everything from the day you put the lock box on the key and then you get the pictures, the 3D tour mapped out, the marketing, get on all the websites and those, you know, the cost for that advertising and then generating the applicant or the the leads and applicant to actually apply online. Then once they have applied online, it kind of shifts over to the leasing team and they'll actually scrub the the applicants and do the criminal background checks, credit checks, eviction history, landlord history, sex offender, check, you know, debt to income ratios and all of that stuff. Landlord history, whether it's a management company or a or a self managing landlord. So they gather all that stuff and then they'll present it to the property managers, and the property managers will work with the owners to approve or decline the application.

Eric Dixon: And so the cost involved is really the marketing upfront is one flat fee and then the leasing fee is a commission or a leasing fee, right? And so there are so many hands, you know, touching. Yeah. That once you boil down like, hey, these are all the things we do, you go to the house how many times, um, and you're doing all the background checks, you're not charging the owner to run the applications, you're not charging them for the daily rate. We pay Zillow or Trulia or Rent.com or whatever. It's kind of just all encapsulated in there. And then they're like, Oh man, that would cost me more just to do myself, right? You know, to hire an attorney, just to write the lease, you know? And so the leasing team takes it all through there where they'll get the holding deposit, they'll get the lease, they'll get the move in funds, they'll facilitate the move in inspection. They'll do all of that stuff.

Ben Bailey: Yeah. I think what a lot of people don't realize, too, is, um. You know, you from the outside, you'd make an assumption. Well, they're just filling out this document online. And then, you know, a bot runs it through a system and then picks the highest scoring one. But there is a person that has to actually, you know, look at the driver's license photo and then look at the headshot they submit and make sure, okay, is this the person applying someone who has to look through the things and say like, oh, you know, actually this isn't an issue. You know, this whatever incident that happened years ago or whatever. So having those human eyes on it, you know, it makes a big difference. And I think that's a big part of, you know, what people don't realize is happening.

Eric Dixon: And property management is interesting. Whether you're self-managing or again, you have a management company, It's in that you're in the service industry. You don't think that everyone thinks, Oh, you're just in real estate. Sure, whatever. No, it's it's a very high touch service industry. So think of all the other services you do. It's like pest control or pool service. Could you self do your pool? Could you or, you know, self clean your pool? Could you self do your you could even.

Ben Bailey: Self pest control if you.

Eric Dixon: Want you could self dig it and self whatever service it your lawn maintenance all of those things you could do yourself get your lawn mower, get your pool cleaning stuff, learn how to do the chemicals. But every one of those services you have to justify what's the value and the cost. And property management is exactly the same technically. Could you do it all by yourself? Absolutely. We did. We did a whole episode on it, you know, a week or two ago. But the the risk, the time, the effort, the you're just like, dude, it's not worth it, you know, most of the time. So it actually I love it when our onboarding or sales department they bring on owners and then we hear back, they fill out the onboarding survey and they're just like, Did I should have done this eight years ago? Yeah, I should have done this a decade ago, you know, or I should have done this two months ago when I tried to do it myself. Right. Um, so all of that's kind of encapsulated in that that leasing fee. A lot of companies, as you're looking through your options, they could call it a leasing commission, a leasing fee. They could, um, some of them it's percentage based and some are flat fee. So you want to see like your higher, your rent is those percentage based ones are going to get pricey, you know. Yeah.

Ben Bailey: Some are taking like a whole month's rent. Yeah.

Eric Dixon: They're like 100% rent and you're like, oh that's not that bad. If your is 600 bucks. Yeah. What happens when your rent's three grand? You know? And it's like, for us, we offer the same level of leasing and property management service, whether you're $600 a month studio or you're an $8,000 a month, you know, Paradise Valley mansion, you know? So either way, it's going to be the same cost, you know, to lease those, depending on where you are. You know, when we're in Arizona and Texas, where you're required to have a real estate license to do all this and to negotiate price and terms, um, you know, you're part of what you're paying for is expertise, too. You're right that it's like some people are like, Oh, this is a template. You just put that in. Yeah, but they don't understand the last ten years of, you know, maneuvering through that lease and making it as robust as it is. Yeah. To make it plug and play took a lot of effort, you know, to get there. So you are paying for that just like you're paying for your pool service or your landscaper. They have ten years of experience that they've been doing so good that now they're able to offer that service to you.

Ben Bailey: I think, too, one advantage of using someone to do your lease that's also managing the property as opposed to like a third party service, which is fine, you can do that. But I'm really impressed by especially when I first started here. But, you know, after years, I still see it is how often the leasing agents get up and walk over to a property manager and say, Hey, your property on so and so. I have this applicant. Yeah, they said, No dogs. This is a great applicant. It's got a dog. Will you run this by the owner? You know, like how much of it is happening behind the scenes with everyone working together that, you know, otherwise an owner might have missed out on that, you know, like, really those special touches that only a person can do. You know, you can't have a program do that.

Eric Dixon: No. Excuse me. You're not the nail on the head. And that's where I was trying to get and I totally didn't get there is it's service based. It's so high touch like that that the human element is what makes the difference between certain property management companies. You know, some of them, it's like, hey, we don't we actually have one of our competitors. Um, I won't name names, but they charge per phone call with the owner or tenant and it's like it's basically you just do web forms and email and texting. It's like, we don't want to get you on the phone. But for us, it's like, no, those are our that's what really has the human element and the best, um, the cohesion with our clients, right? Yeah. Is that.

Ben Bailey: Um. So when we're talking about the actual lease, what? Makes a lease work. What is the perfect lease? What is it? Cover. And is there a danger in putting too much in there if it's, you know, 400 pages or something of all this and.

Eric Dixon: We've all been there, right where you sign even like a DocuSign online or you sign up with a service or like DirecTV, and it's like, why is this 82 pages? Yeah, like I just want this to my house or I just want this. So I don't know. Sometimes you're like, maybe they make it so long just so you'll click through it. Sure. Whatever, dude.

Ben Bailey: I probably owe Apple like, my first born child, and I don't know. Yeah, because I just scroll through that. Just scroll it until.

Eric Dixon: It turns green and you can press the.

Ben Bailey: Check and go, Yep.

Eric Dixon: That's it. Yeah. And so, you know, they're obviously you want it to be, I wouldn't say there is a perfect lease. For example, you know, as legislation changes, as the legislative cycle happens each year, like we have to make changes with the lease just to cover the landlord and cover the tenant, whether it's recently, it's medicinal marijuana use, It's there's different bedbug things, there's pool addendums because certain pool, you know, the height and the automatic close gates thing changes or. Right. So each of those things, I feel like, you know, the perfect lease would have and so annually or biannually we'll look at different things to to add to it but we'll even go back and say man that's so weird. This paragraph sounds horrible and we've had it for five years. Yeah. And let's just change how that sounds. Let's make it make it easier. So, um, one thing that, that we do lean on is every metropolitan area that I know of at least has a realtor association and the state like in Arizona, they have the lease and it's a good lease. But the problem is, is because we are segmented in just one part of the the valley or one metro area, some stuff either doesn't apply. It's kind of a blanket lease or we have some we'd have to have like 17 addendums, you know, to write on the end. So instead of using theirs and doing like Hey On has nine addendums that we add, we kind of just combine different things, had our attorneys review it and we feel like, yeah, it's the perfect lease for us today, but it's ever evolving, right? Like going through a lease review right now for this year, you know, because it's the first quarter and we're like, you know, man, we need to change these 14 things and it's not detrimental if we don't finish it soon. But it's like, no, that's important to get on the books, you know, here later.

Ben Bailey: Um, but if you're self-managing, say it's, you know that's a good place to start is those I mean you can just Google and find, you know like yeah.

Eric Dixon: I think there's yeah. Even on like legal zoom and different websites. Yeah. The thing is with the realtor lease, it's like, oh well then you have to have an agent that's willing to give you their lease and there's a QR code at the bottom of every page with that agent's info. And so that agent is held to the standard. And so it's like you roping in an agent. Yeah. Without hiring them. It's, it's a weird, a weird thing. Um, another reason that, that we use a proprietary lease versus kind of the blanket is for our on specific perks and proprietary things like we have our lockers out front where people can use them 24 hours a day to pick up keys, drop off keys, pick up rent, and we're the only company that has it. So it'd be kind of weird to have the state issued state reviewed lease, right, With an addendum about on Q's locker system, Right. Yeah. You know, we want to make sure and, you know, our different insurance requirements or whatever they are you know are in that lease.

Ben Bailey: Right. Right. Everything's covered in there. Okay. So guess last question then. Is there a situation where you would rent out a property long term without a lease? I'm just thinking back personally, I know the first apartment I ever lived in. It was just like some guy who owned an apartment, like it was behind his house. And he was like, Yeah, it's this amount. Yeah, Yeah. And that was it.

Eric Dixon: Hey, you sound like me. When I. When I bought my first fourplex right there, like, Hey, my cousin wants to move into unit two. I'm like, Oh, yeah, send them to the website. And they're like, They don't have a smartphone. Okay, yeah, cool. Here's some cash. I'll just put down the deposit. Sure. Yeah. Move in. Dude, this is too easy. Fine. Just move in. Yeah. You know, but when you were saying that, I thought you said. Is there. Would you rent out without a leash? Yeah. And anyway, got a dog off the leash and was like. I was like, What do you mean, on a leash? And then anyway, I was going in my head like, did Ben just ask me if there's a perfect leash? Is there? I don't know.

Ben Bailey: But we've well established that we're not dog people. We don't. That's right.

Eric Dixon: That's right. So I would say the pros and cons of having a lease or not is there's no pros Like you need to have at least at least a bootleg lease. Yeah. Like we bought a property in Apache Junction like five years ago and you know, we closed or no, in the due diligence period, we got a copy of every lease and one of the leases was handwritten, not just handwritten, like filled out. The lease was handwritten in cursive, dude. And it's like, oh, it's from 15 years ago. But I'm like, well, 15 years ago was still like 2000.

Ben Bailey: Computers were still around. Yeah, okay.

Eric Dixon: But dude, it was handwritten. And I asked the seller and she's like, Well, I just put the terms that I thought would be important and I wanted something like I wanted something that I could, and that's probably better. It had the start date, it had the end date, it had the amount, it had the tax, it had the deposit. And I'm like, Dude, this is a relic, you know? Yeah. And we just renewed it. You know, we did our own lease as a renewal and the tenant was like, I haven't paid online or done DocuSign or any of that before. Yeah, this is crazy. So anyway, there are still leases in the wild, Wild West, right? But the, but the good thing is the seller did something, so it'd be better to do a bootleg handwritten lease than it would be to do a verbal agreement. A he said she said type thing. Um, and then, you know, the so there's no pros. The cons are I mean, there's a huge list, right? Yeah. Just the liability. I personally from experience, would not put anybody in the house without a background check, a credit check, their application on file, even if it's a family member. And it's like the family member may say, why do I have to apply? Said it's for your protection, you know? Yeah.

Eric Dixon: And like for us, we report good credit. So like if you're for on time payments, right? So it's like, hey, you got to apply. Hey, the good news is, worst case scenario, you pay on time every month and your credit score is going to go up. Yeah. And, you know, I would just do it. You know, there's there's so many issues We have had to evict sons and daughters of clients. We've had to evict brothers, a parent through the eviction process because there becomes there was never anything in writing. It was all verbal month to month payment stops. They let it go on for a year. Yeah, the only way out is to hire an attorney to evict your immediate family. And it's all because there wasn't a document in place, you know? So, yeah, um, so I would do that. And the only places I would again, I'm just thinking about how wild hotels are like, Yeah, no, don't suck on that. Like, I'm just like, Dude, there's no background checks. Yeah. And we just let our kids run down the hall at the Marriott or whatever. It's like you have no idea who was there. Dude, it freaks me out. I never want to go in one again.

Ben Bailey: Well, on that note, um, I think we pretty much covered everything that goes into a good lease and we're going to wrap it up then. So we'll catch you guys next time. Be sure to follow the podcast and leave us a five stars. Wherever you're listening, it really helps out. And we'll see you guys next time.