Real Estate - Problems Of Management
( Originally Published 1911 )
Divisions of management business.—The management of real estate is really housekeeping on a large scale, and includes not only the deriving of income, but also the keeping down of expenses. The difference between a good manager and a poor manager lies in two elements: First, the ability to keep tenants, that is to say, to get through with the fewest possible vacancies; and, second, the keeping down of expenses, still giving the tenants all that is due to them.
The work of management has five divisions:
First : Renting, that is, the securing and retaining of tenants ;
Second : Collection ;
Third: Purchases and expenditures upon the property;
Fourth : Accounting ;
Fifth: The physical care of the property.
Renting.—The first thing a renting agent must understand is that he cannot regulate the price. The price is regulated by the law of supply and demand. There is practically no building so unique that the rent-able space in it cannot be duplicated in some other building. There is practically no building so advantageously situated, either for business or residential purposes, that there is not another practically as good. All the renting agent can get is his share of the prospective tenants by showing his building in its most attractive form, by calling it to the attention of the most people by proper advertising, and by so framing his business transactions with them as to get from them the most advantageous contract for the owner.
There are a hundred different ways by which the good renter brings his property to the attention of possible tenants. One of the most effective of these is by keeping his building attractive, particularly outside and in its public parts. The most important thing in the getting of tenants is the first impression a person gets when he enters a building.
The renting agent should make his contract upon a fair basis, and should not attempt to write a, cut-throat lease in favor of the landlord. The man who tries to use a lease with too many clauses will never be a successful renter. The contract should be simple and understandable. The renting agent should not be afraid to tell a prospective tenant what the landlord's requirements are; if the landlord will not rent for less than a year, it is not worth while wasting time with a person who says he is only a monthly renter. It is not wise to try to change misunderstanding into understanding after the negotiations and when the parties should be ready to sign the lease.
Collection.—Having gotten the tenants and installed them, the next proposition is the organization of a collecting force. This force ought to be devoted, not only to collections, but to the care of the building. Collectors should be instructed, not only to go to the property and collect the rent, but also to watch the physical aspect of the property, and report its condition. When they meet the tenants, if any comments are made with regard to the property, whether by way of commendation or complaint, it is the duty of the collectors to make note of these comments and report.
The collection force is the eyes of the office. The collectors see the property most frequently, and upon their discretion in handling tenants, a great deal of the success of the business depends. Where the force is large, it should be adapted as far as possible to the character of the property.
Rent and collections together are the usual entrance into the real estate business, and the quickest road to-ward the other parts of the business. They are not the easiest, for the renting and collection business involves practically all the discretion and care that are required in the rest of the business.
Purchases and expenditures upon the property. —The man who does a renting and collection business also, usually, has the care of the property itself. This includes the purchase of supplies and the care of the other expenditures of the building, and it is here that the difference in results can be shown. The man who makes his purchases with care will be able to show a profit, as against the man who buys at random without giving any thought to the matter. The man who knows qualities, and is careful to get sufficient quantities, can at the end of the year show a difference in net profit over the man who is careless with regard to these subjects. The man who scrutinizes his expenditures, who comes the nearest to collecting all his telephone bills from the tenants, who keeps a good janitor happy and contented at no more salary than his neighbor has to pay, is doing a great deal for his landlord. These things reduce themselves really to a housekeeping problem—care in purchasing and economy in expenditure.
Accounting.—The form of rent accounts varies in different offices. It reduces itself to a simple debit and credit ledger account. The rent account is usually kept as a single entry account, and does not get into the double entry system of general bookkeeping until the results are obtained. It is a book in which there are columns : First, the designation of the floor or number of apartment which is occupied; second, the name of the tenant. Then, running across the page, there are columns, very often for as many as six months, for the rental. The larger the folio used, the less often the names of the tenants have to be transcribed. In the proper column for each month the full rent is charged, and a note made of the day from which the rent runs; then in the parallel column is credited the amount received. If the full rent is not received during the month for which it is charged, it is customary, in addition to the charge for the next month's rent, in the next column to make a new charge by carrying over the unpaid balance. That gives with regard to each tenant for the current month the whole amount that he owes. The column is closed for each month at its end and carried over so that the agent can tell how much his collections have been, and what his arrearage is.
At a convenient period of the month, usually toward the end, accounts are made up and carried over into the general ledger, and rendered by the collecting officers to the landlord. The account rendered to the landlord is again a simple debit and credit account. He is given an account of the receipts of his building in detail, and also the expenditures, with vouchers. It is usual for the agent either to get duplicate vouchers, or to send the originals to the landlord, trusting to get them back. Some offices do not submit vouchers, but merely an account of the expenditures, and have the vouchers ready for examination in case any items are questioned. It is uniformly customary, however, to render specific ac-counts of all income and expenses and to accompany that report by check to balance. It is usual to deduct commissions upon collections at the time of rendering each account and sending in each monthly check. Those commissions are then credited over into the profit account of the firm. Commissions are computed upon the gross rental.
Physical care of the property.—It is the duty of the man in charge of a property to keep it in good physical condition for two reasons: First, for the purpose of attracting tenants; and, second, for the purpose of avoiding liability to action for damages by reason of persons being injured upon the property.
As a renting proposition, it pays to take good care of a property, not only when trying to get new tenants, but all the time. That does not mean that it is necessary to be extravagant. It means that the property should be kept in as good condition as the tenants reasonably have a right to expect, having regard to all other property in the neighborhood of similar character. There are more tenants lost in houses in which the mere matter of removing dirt is carelessly done than by any other means. The janitor's service and the cleanliness of the building are most important matters.
Care should be taken to repair all evidences of wear as soon as possible. In the upkeep of a building the maxim that, "A stitch in time saves nine" applies with as much force as in any other pursuit. A little paint, a little cheap carpenter work or a little work that the janitor can do, if properly and quickly done as soon as the trouble is discovered, will often save a very trouble-some and expensive job later on.
The janitor should be carefully instructed and held to account for obeying all the little regulations which are put upon owners by municipal ordinances. He should see to the removal of garbage and ashes promptly; he should see that the fire escapes are clear of obstructions ; he should report to the office as soon as possible whenever any representative of the municipality calls to make a complaint, or to give any directions with regard to the property. As part of the duties of managements, whenever any report of that sort reaches the office, it is the duty of the man in charge of the building to follow it up. If there has been cause of complaint against the building, it is best to remove the cause. If an inspector has called, and it is not known whether or not he has found any violations of the law, it is not advisable to wait until the owner has been served with a notice of violation : it is better to find out from the department if any violations have been reported.
If a building operation is going on in the neighbor-hood, the janitor should be instructed to report immediately, as soon as any construction is commenced; and it is the agent's business to watch his building carefully to see that no harm comes to it, and, when necessary, to report the facts to the owner immediately, so that he may take such steps as he may think advisable to protect his interests.
It is also necessary to keep a building in such condition that it will be safe for people to resort to it. The question as to who is charged, as matter of law, with liability to third persons resorting to a building and suffering injury by reason of improper conditions, is to be solved in the first instance by the question, "Who is in charge of the building?" The person who has charge of the building, or of the part of it in which the injury occurred, is the person who is primarily liable.
If an owner is conducting an apartment house, he has charge of the public halls, the sidewalks, the cellar, the janitor's apartment, the roofs, the plumbing fixtures, all the general appurtenances of the building, and the elevator. He has charge also of the water pipes running through from one part of the building to another. The tenant has particular control over his apartment. The fact that there are tenants in the building does not excuse the landlord from liability for accident happening or damage done in any part of the building which is under his control. If there be overflow of water from one apartment to another, doing damage to the second apartment, if the damage was caused by one tenant letting the water run in his apartment from an outlet which was in good condition, and by reason of his act alone, the tenant would be liable. But if the overflow, for instance, should be by reason of a failure to repair, if the water pipe was out of order, the landlord having general charge of that utility in the building would be liable, the test being, "Who was in fault?"
If, however, the landlord has rented out his entire premises, and placed them in charge of a tenant, unless he has covenanted in his lease that he will make repairs, if the premises be in good condition when they are turned over to the tenant, then the liability for any damages accruing afterwards either to persons in the building or persons resorting to it, is upon the tenant.
In a case where the landlord has covenanted to make repairs, he would be liable only if he had notice of the defect, and an opportunity to make the repairs. In the same manner, if a person be engaged in construction upon his property, if he exercise reasonable care in hiring an experienced contractor, giving him charge of the property, the contractor becomes liable to all third persons damaged by reason of the operations, and the owner is not liable.
A person who receives property, whether by purchase or inheritance, is not liable for damage to third persons occurring upon the property, unless its defective condition has been called to his attention, and he has had an opportunity to repair. All of these questions of notice and opportunity must be treated reasonably. A man may very well be called upon to make immediate repairs in an apartment house in which there are tenants living, which he actually sees when he is purchasing, whereas a person who inherits a pier, to which he does not often resort, may know nothing of its defective condition until it is specially called to his attention.
An owner is liable to those persons whom he may reasonably expect to resort to his premises: they do not have to show that they were there upon proper business. An owner is liable only to keep his property safe for ordinary and customary use. A person who goes upon a freight pier has no right to expect it to be as safe as a pier used for the landing of passengers, and if he is hurt by reason of merchandise being rolled on him, or stumbling over inequalities in the pier, the owner is not liable. If, however, an owner invite the public upon his premises for his benefit, as, for instance, if he keep a store and invite the public to come into the store to do business with him, he is not only required to keep his premises in reasonably safe condition, but he is held to have made a representation to the public, that the property was a safe place of resort, and, if it be not in that condition, he is liable for damage. If a man conducts a theater, and does not supply all the necessary exits which the law calls for, and the appliances for safety which are not only called for by law, but which are customary beyond the requirements of the law, if there be a fire, he is liable for damages. If he has done his full duty he will not be liable. He is not held to a warranty of absolute safety, but to a representation that all has been done that can be done.
Another thing to be considered is how to cover oneself against loss, because no matter how careful an owner is, he cannot do it all himself. He has to leave his property in the charge of a janitor or superintendent; he does not always know the moment something falls into disrepair or someone gets in danger upon his property; and even though he exercise all the care which would exempt him from liability if sued, still no matter how well he will succeed in a suit for damage, he must hire a lawyer so that he may be successfully defended. For these reasons, the custom has arisen of taking liability insurance.
Liability insurance is covered by a policy under which the insurance company agrees to insure in an amount limited as to each item of loss, and undertakes, not only to indemnify, but also to defend an action for liability. The person who carries a liability policy is thus able to cover himself unless the action be brought for more than the amount of the policy, but the owner carries the risk beyond the company's limit.
A liability policy provides that the company must have immediate notice of any accident. Every time they do not get such notice—and it is very seldom they do—they will try to escape liability. Liability policies ought, in fairness, to be written so that the insured is obligated only to give notice within a reasonable time, and as soon as the owner learns of the accident: that is really all an owner can do. If the janitor report as promptly as possible, and the owner report as soon as he hears of the accident, that ought to satisfy the requirements of immediate notice. It does in every other kind of policy, and should in this.
There is also an insurance of boilers and elevators. The first use of the elevator policy is the inspection, which is a periodical and expert inspection of the elevator and its machinery, and after which the owner is told if he ought to make repairs. When he gets notice from the company, it is advisable to make the necessary repairs, because the company has nothing to gain by requiring them. If .they involve hundreds of dollars, it might be wise to ask expert advice, but, in small matters, it is the interest of the owner to do what the company asks.
In apartment houses the question of boiler insurance is not important, but in large manufacturing plants or office buildings, liability may be thrown on an owner by reason of a boiler explosion. Here again, the principal use of boiler insurance is the periodical inspection. If an owner employ a really expert engineer, he hardly needs boiler insurance. If he is not sure of the ability of his engineer, it is safer to carry a policy of boiler insurance.