10 Steps when your Property Manager or Coliving Provider Goes out of Business

Just like in any business - your property manager or coliving provider may run into hardship and suddenly cease operations. Sometimes you find out a little too late, when your rental income does not show up one month. In these situations, it’s important to have a plan and work through the step-by-step process with the end goal of minimizing any damages or unnecessary work and establishing both a positive tenant relationship and cash-flow. Here are 10 steps to follow if your property manager or coliving provider go out of business.

If you are considering using Hemlane as your new property management - immediately reach out and establish a relationship with your account manager so they can guide and provide feedback on the material in this article.

1. Gather all documents

First, get ahold of any all documents you have to facilitate the transfer. You can review our article here to understand what you’ll need to obtain. You will want to act quickly to get as many documents as quickly as possible while you can. Time of essence since the window to log into your owner portal or talk to your contact at your current management company may be brief if they are going through a liquidation/closure process.

The prior management may not be as organized as you, and therefore it is your responsibility to request and confirm receipt of the most important documents. Here are the major items you should expect to receive:

• Lease documents
• Tenants' names, emails, and phone numbers
• Original applications submitted by current tenants
• Security deposits
• Move in and annual inspections for current tenants
• Payment history and balance due for tenants
• Open maintenance requests, including their current status
• Past maintenance request history
• Inventory list for appliances owned by the property’s owners
• Important communications with residents
• State of current vacancies (any applicants in the pipeline, etc.)
• Pro-rated rent based on the property close date
  

Some past managers may provide high level spreadsheets with this information, to make your life easier as well. If you do not receive any of these items listed above, then have a plan on how to update your records on the item. For example, if there is not a move-in inspection for one of the rental units, then you should plan to perform a mid tenancy inspection. Refer to this article on the Rental Inspection Guides, as well as Privacy Concerns and Rights for rental properties.

2. Establish relationship with new property management provider

If you're using another property management provider, you’ll want bring them up to speed speed, get feedback on next steps and have them provide guidance on your action plan. An experienced real estate company should have no problem providing feedback and helping you navigate through this unfortunate circumstance. They may even help reach out to obtain documentation.

If you are using Hemlane, you’ll want to set up your account and work with your account manager to set everything up as much as possible to aid in a seamless transition and to avoid interruptions in collection and repair facilitation and use them as a resource in walking through these steps.

3. Review of current management agreement

If you have a signed agreement with your current property manager, there may be terms such as “you may not enter into a lease agreement with existing tenants upon taking over management.” Although these terms may no longer be enforceable, it’s best to check with an attorney if you feel there are clauses or terms which would impede your continuation of management. There will be termination clauses and fees that you should also consider.

4. Obtain tenant contact info

A key part of the transition from one property manager to another is to have your tenants' contact info ready to allow for communication with them. The first place to look is through the contracts and documentation your property manager provided for you. If it’s not there, then try requesting it from the prior property manager. If you cannot obtain it through these methods, you may also want (or arrange for someone) to physically visit the property to request this contact information with written approval. This may also be beneficial in establishing a positive relationship with a face-to-face visit to explain how management is changing the next steps of the transition as per this article.

5. Establish a positive relationship with the tenants

If the past manager has been stressed with their situation and unable to really provide the attention and care to the tenants, then the tenants are most likely not that happy. You’ll want to establish contact with tenants in a positive manner. They may or may not know that the property management company has gone out of business, so it’s better to act quickly before they find out. The things you’ll want to cover include:

• New point of contact for repair requests (emergency and non-emergency).
• Determine if there were any pending repair or maintenance items that were in progress. For example, a plumber may be due to return the following week to finish a project. If this is the case you’ll want to make contact with this vendor and continue the repair.
• Any other important/time-sensitive aspects of the tenant relationship. For example, the tenant may have just delivered notice of move-out 1 week prior to the prior property manager.
• Confirm status of co-tenants on lease. Have any tenants moved out that would like to be removed from the contract? Have new tenants moved in that will need to be added to the contract?
• Review terms of lease and ensure tenants are in compliance. (See below, #9, for the lease amendment.)
• New procedures for paying rent (where and when). If there are administrative delays with setting up new procedures for rent payments - you may want to forgive any late fees for that pay period.
• Confirmation on status of security deposit. (See below ,#6.)

Some words of wisdom: You don't want to be too aggressive initially, increasing rents or changing terms, until you have a strategic and fair plan for long-term success. For example, raising all of the rents for month-to-month tenancies during the transition could increase vacancy rates and hurt short term cash flow.

6. Reconcile rent and security deposits

Legally all rents and security deposits would have been deposited into a trust account and should not be affected. You should request from the property management company these funds be returned, or information on how to obtain them from the trust account. You may want to ask the managing broker this question. If you are owed any past funds, check your latest owner statement and prepare an invoice for tenants of past-due rents. Keep in mind, if a tenant paid rents to the property manager, but the property manager did not pay you, it counts as a rent payment. Ask your tenants to provide a receipt of payments to establish their payment history.

If the prior management did not collect on security deposits, then you should plan to require a security deposit during the lease renewal. Without this deposit, there is a high probability that you are chasing tenants in the courtroom to pay for turnover damages. It is better to be proactive than in that position.

7. Deal with tenants in arrears

Often when a property manager goes out of business, it is a gradual process that happens over time that your tenant may have been aware of. In this situation, they have chosen or thought they were no longer responsible for paying rent and may be in arrears. To determine this, check your owner statements or personal accounting records. If the tenant is in fact in arrears - ask for confirmation of payment through receipts to establish if they paid or not. If they have not paid, then request that payment be brought up to date either through a one-time payment, or on a payment plan (for example, $100/month until rent is caught up).

8. Recoup lost rents and security deposits

If you have established that you are in fact owned monies from your property manager your first step should be to reach out to them to understand if they have a plan to pay you back, or a recovery mechanism. If they have a plan you feel confident in, this may be a good approach to work with.

If the current manager is going through bankruptcy, then you may be eligible for recovery depending on the proceedings. Immediately get in touch with the appropriate parties managing the bankruptcy and file a claim to recoup monies owed.

Lastly, nearly all states have a “recovery fund” from their state's real estate bureau which are specifically set up to reimburse individuals who has been defrauded or had trust funds converted in an unauthorized way to recoup costs, such as the rents and security deposits. For example, here are the California and North Carolina recovery funds. To find your local fund simply search on Google - “[State] recovery fund” or call your local state real estate board and explain your situation to see if you qualify. This may be a good option if you cannot otherwise recover from the current manager.

9. Lease amendments and changing any terms

Generally, you as the owner inherit the tenant contract including all terms and are responsible to carry forward those terms. Therefore, these contract terms are “assigned” to you with the same terms of the agreement. If you are still on a fixed term lease (1 year for example), you will not be able to make any terms without the current tenant signing off on the change. If the contract is month-to-month, then you may effectively cancel the contract (after following proper notice rules) and propose a new contract with new terms. However, your tenant may also choose to not sign the new proposed contract and opt to move-out instead.

The most common way to officially notify the current residents is a lease amendment that mentions all terms of the original lease are intact but the management and/or ownership is changing (and providing the updated contact information). The notification should be delivered in person or posted on the door and also sent via certified mail.

10. General guidance on moving forward ... write off and establish positive cash-flow as quickly as possible

If after all this you have learned through documentation and other evidence (for example talking to tenants) that you are owed funds from the property manager that were never transferred, it may be simplest to write off the funds and focus on establish revenue generation for your property as quick as possible either in the form of placing a tenant in an empty property or renewing the contact with the tenants.