Podcast 347: Rental Application with Federal Tax Liens

What should you do when you find an old federal tax lien on a rental applicant’s credit check, but it’s been over 20 years since the lien first appeared? Podcast Host, Andrew Schultz, explores this particular situation in this latest episode.

Plus, Andrew will go over the very basics of how to start the process of selling your rental property.

Last, but not least, home warranties for your rentals, are they worth it? Find out in our latest podcast.

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Show Transcription:

Andrew Schultz: (00:00)
Hey everyone. Welcome back to another episode of the Rent Prep for Landlords podcast. This is episode number 347, and I’m your host, Andrew Schultz. On today’s episode, we’re going to be talking about federal tax liens on credit checks, how to sell a seasoned rental property, and home warranties for your rental. Good or bad idea. We’ll get to all that right after this.

Voice Over: (00:23)
Welcome to the Rent Prep for Landlords podcast. Now your host Andrew Schultz.

Andrew Schultz: (00:28)
Before we jump into today’s episode, don’t forget to check out the Rent Prep for Landlords Facebook group. It’s a great free resource for you to network with housing providers from around the country. And if you have a question or a situation that you’ve never dealt with, chances are someone in the group has been there before and can lend a helping hand. As of this recording. We’ve just Crested 12,000 members. Thank you all so much. If you haven’t checked it out yet, do it today. Over at facebook.com/groups/rentprep. Don’t forget to mention the podcast when answering the questions. So we know how you found us

Voice Over: (01:02)
Forum quorum, where we scour the internet for ridiculous posts from landlords and tenants.

Andrew Schultz: (01:10)
This week’s forum quorum comes to us via the Rent Prep for Landlords Facebook group. Let’s jump right in upon doing a credit check for someone who seemed very solid. I discovered that they had a tax lien that says something along the lines of federal tax lien, wage, and investment over 100,000, the applicant says it’s due to her divorce. Would you guys still consider renting, even though she has a good job for over 20 years and makes good money? So we’ll get to the tenant selection criteria piece of this in a second. But while I was doing research for this segment, I actually discovered that federal tax liens back in 2018 it was decided by the major three credit bureaus being Experian, Equifax, and TransUnion, that they were no longer going to publish federal tax liens on credit reports. So it’s actually interesting to me that you came across a federal tax lien on somebody’s credit report.

Andrew Schultz: (01:57)
And I almost wonder if it’s been given to a third-party collection agency, and that’s why it’s showing up or something like that. Because by the sounds of things, typically a federal tax lien wouldn’t show up on a credit report otherwise. So that’s kind of an interesting tidbit to consider there from the beginning is how, why is it even being reported? But at least now, you know that it’s there. So now you have to deal with the situation regardless. And if you’re unfamiliar with what a federal tax lien is essentially, it means that you had an unpaid tax bill that the federal government eventually decided that they wanted to collect either the bill got too large or it went on for too long without having some kind of a payment plan in place or something like that. The IRS basically has two tools at their disposal, the lien, and the levy.

Andrew Schultz: (02:43)
The difference being a lien is basically the IRS saying, okay, we’re now going to take priority over your property. We’re going to take priority over pretty much everybody. And we’re moving to the top, the front seat, whenever there’s a debt, that’s going to be paid off whenever there’s to pay off a debt, the IRS gets paid first, essentially, that’s what a lien would be. That’s different than a levy where the IRS would come in and say, okay, we’re going to seize money from your bank account. We’re going to seize assets that you own and sell them to pay off the debt, things of that nature. So they’re two very, very different things. The difference between the lean and the levy, what you’re dealing with here is a federal tax lien, which essentially means that the IRS has a debt that’s owed to them and they want that to be paid.

Andrew Schultz: (03:27)
So now that we understand what our federal tax lien is, let’s talk a little bit about the tenant selection criteria that we would be looking at if we were going to be underwriting this tenant. So we’re talking about a federal tax lien here, which is obviously going to have an impact on somebody’s credit, at least in this instance. And again, I’m still confused as to how I wound up on their credit, to begin with given the the decision in 2018, not to list those on credit reports. But all that being said, we’re only talking about a small piece of the puzzle here. When we look to screen a tenant, we’re looking at several different categories, such as what is their total income? What is their credit score? What is their payment history like on their credit? You know, are they missing payments left and right.

Andrew Schultz: (04:04)
Things like that in New York state, we can do a criminal background check. We do talk to previous landlord references to determine number of late rent payments or a number. If they have a mortgage and they’re moving into an apartment, we look to see if maybe they have late mortgage payments, talk to a landlord, reference things of that nature. And then the one thing that we can’t do here in the state of New York, but you may be able to do in your state is an eviction search. So we have several criteria that we’re looking at when it comes to making a tenant selection decision and the criteria are all weighted. They’re all equally important. We use a scoring matrix here in our office to make sure that we’re considering things on an equal basis. And that’s another discussion for another day, but realistically speaking, having a good set of correct selection criteria is critical to your process.

Andrew Schultz: (04:53)
Now it’s mentioned in the post that the applicant does have a good job of over 20 years and makes good money. That’s all well and good, but you didn’t really say how much money. So we don’t know if like our criteria is we look for three times the income, I’m sorry, three times the rent in net income. We don’t know if you’re meeting that criteria based on what you had posted. So it sounds like she probably does, based on what you had posted, I’m not going to draw that conclusion based on that, but that’s one of the criteria that I would be looking to get some additional information on. Essentially, if you haven’t already, I would recommend having a conversation with the employer to try to verify employment that’s especially important nowadays, especially with the amount of fake pay stubs and things like that that are being passed around.

Andrew Schultz: (05:33)
I would certainly try to get in touch with somebody from her employer to verify that she works there as well. There was no mention of anything else on the background check, nor was there any mention of what the remainder of her credit looked like? So it’s kind of hard to make any conclusions there. You did mention that actually, I guess you don’t mention the state that you’re in, so I’m not sure if an eviction searches is available to you there or anything like that. Essentially what I’m saying is you’re looking at one criteria or one piece of information and trying to make a decision that really should involve multiple criteria is, is really what I’m driving at here. So would the federal tax lien be enough for us to say no to this applicant? I’m actually gonna say no. A lien of any variety is not necessarily the the breaking point on one of our applications, because everything gets scored out in a certain way and they may still qualify even having a lien.

Andrew Schultz: (06:24)
So if they have that solid income, their credit is good. Other than this lien, they’ve got good payment histories and things like that, you know, there there’s other factors to consider other than, Oh man, there’s a lien. What do we do now? So would I approve this application or not? I don’t know. I don’t have enough information to really make a full say. But I would say that just because there’s a lien, you know, listed on somebody’s credit and background does not necessarily mean that that’s the end of the line for their application. At least here in our office, your mileage may vary my recommendation as always as to have a good set of written criteria and follow that set of criteria every single time that you screen a tenant to keep yourself safe, make sure that your criteria are fair, housing compliant as well. That’s super important, especially nowadays with the, with all the legislative changes and things like that, make sure you have good criteria and follow them every time.

Voice Over: (07:13)
Water cooler wisdom, expert advice from real estate pros.

Andrew Schultz: (07:22)
We have two water cooler wisdoms for you this week. Our first one comes to us via the Rent Prep for Landlords Facebook group. Let’s go ahead and jump right in here. I’m looking for tips about selling a rental property next year, after owning it for about 30 years. I’m not sure where to start and what kind of information or paperwork I need to compile I’m in Pennsylvania. So this is actually a pretty straightforward one. There’s a few pieces of information that you’re going to want to start compiling. And then there’s a few recommendations that I have for you since you’ve got some time before you’re getting ready to list the property for sale. As far as paperwork goes, I would recommend that you look for your deed, your title search, and your survey. Those are going to be three of the most important pieces.

Andrew Schultz: (07:59)
And actually, if you can find those three pieces, it’s going to save you a tremendous amount of money in the sale process, especially when it comes to things like title, search and survey. If you don’t have those, those have to be redone basically from, I think the title search in Western New York, I think goes back 40 years. It might be 60. I can’t remember off the top of my head that you would have to have that title research back. If you can’t find your title search and then the survey, if you can’t find your survey, they have to redraw a brand new one, which is generally more expensive than just having an existing survey updated. You know, those especially are important documents to try to get your hands on because there’s a direct tie to how expensive your sale is going to be versus whether or not you have those documents.

Andrew Schultz: (08:42)
Outside of those documents, I would look for some of the more important things that people might expect to see when they purchase a property. So if you have records of any updates or capital improvements, those are great pieces of information to be able to provide to the incoming purchaser. Especially if there are any warranties associated with things like maybe you had a new roof put on and there’s a 20 years transferable warranty. That’s huge. Somebody’s going to want that when they go to purchase the property. So that’s definitely something that you’re going to want to keep in mind as well. If your property happens to be in an HOA, you may want to consider getting your HOA docs prepared as well. Just knowing where that stuff is. Because again, a lot of that stuff transfers from one owner to the next. You’re gonna want to start getting that information ready so that you have it when it does come time to sell.

Andrew Schultz: (09:25)
Now that’s more on just the general property level. When we’re talking about specifically units like a rented apartment, for instance, you’re going to make sure that you have the lease, the rental application. There may be some information you want to redact on there. But if you do have the original rental application, you might want to supply that to them. Let’s see, what else moving documents, any sort of a move-in condition sheet would be incredibly useful. Any photos or video for moving. That’s also incredibly helpful. That’s really great. When somebody goes to do a move-out inspection, they know what the property looked like at the time of moving any sort of tenant ledger, showing security deposits and any rent payments that have been made since the tenant moved in. That’s huge. It’s good to know what a tenant’s payment history looks like.

Andrew Schultz: (10:09)
Obviously, you’re gonna want to have contact information for the tenant prepared name, phone number, email address things of that nature for everybody in the property that you have that information for. And if they happen to have a caseworker, if you can provide caseworker contact info, that’s huge too. And then the other thing that a lot of people forget about is appliance manuals. A lot of times you’ll put a brand new refrigerator into a unit, you know, and you’ll have the manual. You know, that information never seems to find its way to the buyer. So if you have appliance manuals, that’s another great thing to include on a unit by unit basis. So I think that covers a good amount of the paperwork that you’re going to want to try to find and have handy for the transaction. I do want to spend a couple minutes talking about preparing for the transaction.

Andrew Schultz: (10:50)
Since you’d mentioned that you’re not going to be selling until next year, this is a good time to start thinking about what needs to be fixed and repaired on the property before you list it for sale in order to maximize your sale price. This is a good time to do an interior and exterior walk, looking for common issues like chipping and peeling, paint wear, and tear things that are just worn out. Loose doorknobs is one that gets me every single time. If I walk into a place and I find a loose doorknob, I automatically assume that there’s other maintenance items that have been neglected. I know it’s probably silly to do that, but I just, it’s something that sticks in my mind. You know, the little things represent the big things. So definitely something to consider. You may also want to consider having a pre-list home inspection done.

Andrew Schultz: (11:32)
This is something that we’re starting to see a lot more, at least here in the Western New York market. And I think it’s starting to happen in other markets as well, where you’ll have a home inspector come in and do a pre-inspection before you list the property for sale. That way you might uncover some of the big, bad, scary things that would scare off a buyer. And you can take the proactive steps to deal with those situations prior to somebody coming in to make a purchase offer. You know you could even provide them with a copy of the pre-list inspection, showing what work you’ve done and what other issues might remain on the property that you just haven’t specified. So, you know, it’s not a requirement by any means, but I am starting to see a lot more people is starting to do the, the pre-inspection sorry, the pre-listing inspections, just so that they can get a baseline for what the property truly is.

Andrew Schultz: (12:16)
And if there are any concerns that need to be addressed prior to listing it for sale. So that’s something to consider. You know, it might not be something that’s happening in your market, but it might be something that sets you apart from other properties on the market. So keep that in mind that those are the things that I would do. That’s the paperwork that I would get ready in order to have a successful transaction. You do have quite a bit of time here. If you’re thinking about selling next year take advantage of that time, make sure that you have everything squared away before you list it on the market. Our next water cooler wisdom comes to us via the landlord subreddit over at reddit.com. Let’s go ahead and jump right in I’m inherently wary of any sort of warranty or insurance situation, but I’ve had a few friends who own rental properties say that they have home warranties.

Andrew Schultz: (12:58)
One is neutral about it saying that there are really long wait times for service and that it hasn’t helped a ton. The other two say that having it has saved them more than once on high-cost repairs and replacements. I’m looking for other input or experiences from landlords who have it or have had it in the past. So I’m going to go out on a limb here and say every home warranty company is trash. I don’t think that that’s going to be too much of a shock to most people who have dealt with home warranties. In the past, we have dealt with a variety of different home warranty companies through our management company here at own Buffalo. And I can tell you that every single one of them has been a nightmare to work with. And I know that this is pretty much a commonality across the property management industry.

Andrew Schultz: (13:37)
I know that I see comments on various groups on Facebook time and time again, about how difficult it is to deal with home warranty companies and things of that nature. And there’s a variety of reasons that they just kind of suck at what they do. The first point that I’m going to bring up is service times. You may call your home warranty company because your furnaces out or your tenants’ furnaces out, and it might be three or four days before they can even get a technician over there to begin to diagnose the issue. So now you’re immediately in a position where you have a tenant that’s without heat, and it might be several days before somebody can get over there to even see if the heater can be fixed, or if you need to work on a replacement or something of that nature. It’s a very, very long timeline to get anything actually accomplished with a home warranty company is really the point that I’m driving at here.

Andrew Schultz: (14:25)
In addition to the amount of time that it takes to get something done, you have to keep in mind that the home warranty company is hiring a vendor in your market to service whatever the device is that needs to be repaired. They don’t actually own the labor pool that they’re working from. So the home warranty company has at the interest of getting the repair done for as inexpensive as possible. The contractor has the interest of generating as much revenue as they on the tickets that are coming through the door. So you essentially have a conflict of interest right there in the middle of this entire thing. And what that leads to is a lot of back and forth between the home warranty company and the vendor, and you as to ultimately, what’s going to be covered by the warranty company. What’s not going to be covered under the by the warranty company because they consider it an upgrade or whatever the case may be.

Andrew Schultz: (15:15)
And then ultimately what the service technician is trying to get accomplished on the, on the job. So there’s, it’s just adding that many more spoons to the pot. If you will just makes it that much more difficult to get the job done. And you will find that most home warranty companies will not pay out for the entirety of a claim. You know, they’ll, they’ll find some sort of a code upgrade that, you know, they’re not going to pay for because it’s a code upgrade. It’s not because the appliance was damaged or whatever. So, and then in a lot of instances, you’ll find, Oh, they’ll find a reason to just outright deny the claim. You know, and sometimes it could be something as stupid as they find a dirty furnace filter when they go into do a furnace repair. And now they’re trying to say that, well, you weren’t maintaining the furnace properly.

Andrew Schultz: (15:56)
So the warranty is voided. So yeah, I’m not a big fan of home warranty companies. I have not yet found a single home warranty company that I feel is worth their value. I think that more often than not, they get in the way of actually getting things done and slow the entire process down. There are some alternatives. The one thing that I want to mention is that every state has some sort of a warranty of habitability. You know, every state’s a little bit different. Some States specify things that other States don’t specify and your home warranty company could be putting you in a situation where you’re in violation of your warranty of habitability, simply because they take forever to get something accomplished.

Andrew Schultz: (16:45)
So, you know, as an alternative, when you’re talking about something that like a warranty of habitability when you’re talking about something like a furnace or something like that, the alternative is very simple. Have cash reserves so that you can take care of, you know, expenses as they pop up. You should probably have enough cash on hand that if your furnace goes to go down, you can replace your furnace. If your hot water tank has to blow up, you can replace your hot water tank, things of that nature. You can’t own an investment property with zero cash reserves and expect that everything is going to go swimmingly all of the time with no issues ever. We all know that that’s just not the case. The alternative to a home warranty is responsible financial stewardship of the property. Simple as that, it really is. As simple as that, you know, when you go to purchase a property, understand how much time roughly you’re going to have left on your major devices, your roof, your furnaces, your hot water tanks, things of that nature, and understand that those things have a replacement cost.

Andrew Schultz: (17:31)
And those things have a replacement timeline and plan accordingly. That’s the best alternative to a home warranty situation. But as far as dealing with home warranty companies from a property management perspective, as far as, you know, having tenants that have had to deal with home warranty companies, it’s just a bad situation for everybody involved. My would-be, be a good steward to your property. Skip the home warranty, take the money that you would be paying them on a monthly basis and roll it into a savings account so that when something large does happen, you have the cash set aside to handle the situation. Run prep recently released their guide on how to evaluate a tenant to credit. If you’re currently sorting through tenants and want to know how to obtain a credit report, the average credit score ranges for tenants, common issues found on credit reports, and more visit the rent prep log today over at rentprep.com/blog.

Andrew Schultz: (18:19)
That pretty much wraps up this week’s episode of the Rent Prep for Landlords podcast. Thank you all so much for listening. We really do appreciate it. Our goal with the podcast is to help as many people as possible make educated decisions when it comes to real estate investing. And you can help us to reach that goal. If you heard anything in this week’s episode or any of our other episodes that will help someone, you know, please do us a favor and share it with them. If you’re looking to get in contact with me, I can be reached over at what’s drew up to.com from there, you’ll find links to everything going on with me over at own Buffalo, as well as other projects that we’re working on. We recently had a tenant move out in the middle of the night and trash a place on the way out.

Andrew Schultz: (18:55)
You’ll find that video right at the top of what’s drew up to.com. Take a look and don’t forget to subscribe. If you’re looking for top-tier tennis screening services, head on over to rentprep.com, there are multiple products to choose from including a tenant-paid option. And if you’re over 50 doors, ask about the enterprise-level programs and pricing. I’ve been an enterprise user of Rent Prep for several years now, and it’s definitely changed the way that we screen our tenants. Check that out today, over at rentprep.com. Again, thank you all so much for listening. We’ll be back in two weeks with an all-new episode that you won’t want to miss until then I’m Andrew Schultz with ownbuffalo.com for rentprep.com. And we’ll talk to you soon.