House 2: The Exclusivity Agreement

House 1 was purchased from a family member because we saw an opportunity when they were getting ready to sell their townhome. House 2 was purchased because we were looking for a way to make our profit from the sale of our first home to get to work for us. While in the process of purchasing House 2, the seller said he was interested in liquidating the house next door, which was a mirror image of House 2, and so that became House 3. Both House 2 and House 3 came with tenants, which was a big advantage, but delayed a few lessons in rentals for us.

After we sold our house outside of DC, we moved just outside of Richmond, VA. We spent a few months looking at the neighborhoods and analyzed the markets available in Richmond. I was more interested in the college area, where it’s a market I knew well, having been a college kid who rented in an old house that was sectioned into apartments. Mr. ODA was more ambitious (in my opinion), looking into neighborhoods that families would rent in. Many investors are looking to rent in areas of Richmond that fit the quintessential Richmond mold (e.g., walkability to restaurants and shops, bike routes). However, these houses don’t come close to hitting the 1% Rule.

We’ve purchased several houses on the east side of town, and they’ve worked out very well and most don’t have turnover. The value of House 2 since we purchased it has increased by about $70k as the neighborhoods in the area continue to decrease crime and increase value. Both houses are about 13 years old, 1200 square feet, and have 3 bedrooms and 2 baths. All of the rooms except bathrooms and kitchen are carpeted, which is something we’ve since tried to stay away from.

THE EXCLUSIVITY AGREEMENT

After we saw House 2 and wanted to make an offer, our Realtor relationship went downhill. We had a Realtor for our home purchase when we moved to the area, and we continued the relationship to have access to the MLS. After we purchased our home and started looking for rentals, we soon learned that our Realtor 1) had an agenda to get the most commission, regardless of the best deal or our interests, and 2) kept pushing areas she knew versus areas we were interested in. We had made it known that we wanted to buy several properties, and I believe by the time we wanted to make an offer on a house, she realized we weren’t looking to further this relationship after this deal. Since she had shown us a few houses, we expected to see this deal through with her. That’s when the straw broke the camel’s back. We received the offer to review, and it came with an exclusivity agreement.

An exclusivity agreement is a contract established by the Realtor to protect their interests. If the client signs it, then it means that the client is committed to that agent for the terms in the agreement (e.g., a single purchase, a period of time). We hadn’t needed one in Fairfax, and the one we had for our personal home contract covered a month’s time. When we received the contract for House 2, the exclusivity terms were until October 4, 2016, from the date of the contract, which was May 4, 2016. We requested the date be changed to match the “close no later than” terms in the contract, which was June 17. That’s when the bs-ing commenced. I’m sure the average buyer wouldn’t have noticed nor cared. We saw right through it, and she kept digging in deeper with holes in her story and guilt.

First, she claimed that she made it 6 months (although it was 5 months) so that it gets through closing and we didn’t have to sign again. We countered with three pieces of logic: 1) the field can accept an address, so change it to the house’s address to cover us for the entire time it took us to get to closing, whenever that may be; 2) the exclusivity period on our personal residence’s contract expired long before we actually closed (because it was a new build, and the contract was signed before construction began), but we never had to re-sign an agreement; and 3) we never experienced a 6-month closing on a routine purchase.

Instead of addressing that the field could accept the house’s details rather than a period of time, she said: I’m committed to helping you guys look for houses and make offers, are you committed to working with me? Red flag. When we said we wanted it changed to the house address, and that we didn’t mind signing on for each property we made an offer on, she furthered the guilt with: We have know each other for almost a year and I honestly didn’t think it would be such an issue. If you are not willing to sign it I am not going to be able to work with you. If it’s not supposed to be a big deal for us, why is it a big deal for you/your broker?

One of the first things we learned in the real estate market was to not sign an exclusivity agreement. It eliminates your rights as a buyer and ties you unnecessarily to an agent. On the Realtor’s side, I understand that a lot of time and effort goes into working with clients, and there is a possibility that one Realtor shows a client a house, but that client uses a different Realtor to sign the contract, which causes the agent who showed the property to lose the commission. However, I believe that if there’s a good relationship with the Realtor and client, it shouldn’t need to be in writing that they’re committed to each other. I also don’t believe that it’s routine that a Realtor shows several houses to a client, and then that client finds someone else to make an offer. I was also surprised that it’s at the contract stage in the process, and not at the showings stage.

When she wouldn’t write the offer without us signing an unnecessarily long exclusivity agreement (again, we were willing to sign it as associated with this offer/property), we called our old Realtor and asked if she could write the offer for us even though she didn’t cover that area. (An Agent’s license covers the whole state, but typically their access to the MLS is confined to local metro areas unless they want to pay for other regions.) She wrote the offer for us. She also introduced us to a loan officer who we have used for every property purchase since then, and recommended to others.

EXPENSES

This house is relatively new, so we haven’t had any major expenses. We had a couple of HVAC service calls, one was a legitimate concern and one was a misunderstanding by the tenant on how it works in extreme temperatures. What we haven’t paid for in physical house repairs, we’ve made up with in learning new things about tenants.

TENANTS

We had a tenant move in right before we closed on the house. She had gone through a divorce and was living on her own. At the end of the year, she got back together with her ex-husband and moved out. We touched up the paint, cleaned the carpet, cleaned the kitchen and bathrooms, and then listed the house for rent. We chose two ladies, one of which had a criminal record for forgery a few years prior. Other than that, they were the best qualified financially.

Our only issue in the first year was that they had a ‘friend’ look at our HVAC unit. We told them that it’s not their property, and had anything been wrong, it would have been on them to fix because we didn’t authorize tinkering with our very-expensive property. The issue was that it was 100 degrees outside, they had the thermostat set at 60, and it wasn’t getting to that temperature. That’s not surprising. Our technician went out, checked the unit, and explained to them that when it’s that hot, you can’t expect it to get to such a different temperature in the house. He suggested using fans.

They moved in June 1, 2017 and one of the ladies is still there.

At the end of their second year, we increased their rent by $50/month to $1100. This is still under market value for the house, but not having to turnover the unit was more important than a drastic increase in rental income.

In February 2020, we learned a new aspect of the law – domestic disputes. One of the ladies reached out to us and requested to be released from the lease because she had a restraining order filed on her roommate. We researched the requirements associated with restraining orders (because the two she gave us were expired) and then her rights as it related to being a tenant. She had paid her portion of the rent each month, so we weren’t aware of issues. We released her from any responsibility immediately and notified the roommate. Per Virginia Code, the remaining tenant is responsible for the entirety of the lease from then-on. We gave her the opportunity to vacate the property within 30 days if she could not pay the full lease amount going forward, but she chose to stay on the property.

The world shut down a month later. Other than an issue here and there with our other properties, this one has been the most affected. She doesn’t communicate up front anymore when she won’t be able to have rent on time. We received a letter from her stating that she had been furloughed, but things in the letter didn’t look professional and piqued my interest (recall the forgery charge). I called her employer who informed me that her hours were cut, but she was not furloughed; the woman who answered the phone sounded exasperated and indicated she had explained this to our tenant several times. I informed the tenant that I had done an employment verification and that we could be flexible, but rent was still expected. Then a few months later, after she didn’t pay rent or tell us what was happening, she claimed she couldn’t pay rent because of an issue with a check showing up. We requested her employment information again, and I verified she was fully employed. When I asked her what was going on, she stated that she wasn’t required to tell me where her rent was coming from and whether she was employed didn’t mean she could pay rent. Fun.

Then, a few months later again, I received an email from the Commonwealth of Virginia asking me for my tax identification number and other information because our tenant had applied for rent assistance. I was confused because the rent assistance program was for unpaid rent balances, and she was fully paid. I watched the rent assistance program training and attempted an application myself so that I could see how the process works before I questioned anything more. I verified that the program was indeed for past due rents and couldn’t be requested for future rent. I contacted the State office to gather more information, and the tenant had submitted that she didn’t pay January 2021’s rent, which she had. The State made a note in her file. I informed the tenant that the program was for past due rents, which she had none, and that she was not qualified for such a program, but we were willing to work with her if she had any problems paying rent timely in the future.

Each time she’s not paid full rent by the 5th of the month, she has paid rent in full before the end of the month. After she took full responsibility of the property’s rent and lease, we had her sign a new lease with just her name. That lease ends on June 30 this year, and we’re currently decided whether we’ll offer her another year at an increased rate (last increase was 2 years ago) or we’ll request her to vacate the property.

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