On Maintenance Deductibles

By: Wojciech Kic

One of the most popular methods of controlling expenses for a rental propertyinvolves the use of a so-called “maintenance deductible.” In a nutshell, a maintenance deductible requires a tenant to pay to the landlord a fixed portion of most maintenance expenses at a property.The amount of the maintenance deductible is typically defined as a whole dollar amount, and it is reflected in the lease agreement.

How does a maintenance deductible work? For example, if the tenant’s maintenance deductible is $75, and the owner’s expense for repairing a faulty A/C unit is $400, the tenant would reimburse the landlord $75 upon completion of the A/C repairs and presentation of the final invoice.

Landlords use the maintenance deductibles to prevent nuisance, nickel-and-dime expenses.The concept behind the use of a maintenance deductible assumes that if tenants only knew the pain and responsibility of ownership, they would learn to be better tenants. In addition, landlords are expected to benefit by fewer, time-consuming interactions with tenants.

But exactly why would a tenant voluntarily accept a maintenance deductible? Does the tenant’s desire for a well-functioning property outweigh a desire to control his personal expenses? Would the tenant pay a maintenance deductible to repair a leaky roof? Would the tenant be concerned about active termites?

Tenants do wish to control their expenses. Therefore, at the very least, the use of maintenance deductibles now transfers the decision-making about the repairs to the tenant.

During the lease, the tenant is in the sole and unique position of observing the performance of the property in which he resides.The daily physical changes occurring at the property accumulate over time and result in the need for periodic maintenance and repairs.Will the tenant share his observations with the landlord? Under a penalty? Not likely.

Without the landlord’s lead to provide repairs when faced with the discomfort caused by electrical failures, for example, tenants will control their exposure to maintenance deductibles the best way they know how. Sparky wall plug? No problem. A six-pack and Monday Night Football is the perfect time for an in-law to provide a needed repair. Quick fix? Not quite up to code? As long as it will last until the end of the lease, the quick-fix will do.

Unreported repairs provide the illusion of a respite for the landlords. No phone calls from the tenant and no expenses confirm the validity of the decision to use the deductibles. If the landlord only had a maintenance deductible in a prior lease!

When using the deductibles in lease transactions, the unintended consequences typically surface at the end of the lease. As a first sign, the perfect tenant suddenly moves out. The forwarding address for the deposit refund is a rental property nearby.

What happened? The accumulation of unreported yet necessary repairs, the knowledge of quick and unsafe fixes, and the prospect of huge deductibles to make the house comfortable, again prove insurmountable in the tenant’s imagination.The scales are tipped. Moving to another, sometimes more expensive property, provides the tenant with a cheaper alternative.

Before placing the property on the market for rent again, the landlord faces a burden of discovering unreported maintenance.The cost of hidden maintenance increases the make-ready expenses. The realized savings quickly evaporate. Poorly completed repairs must be undone at a higher cost. The cost of vacancy adds to the landlord’s losses. In addition, the previous tenant always paid the rent on time. The risk of new tenants selection pays an unwelcome visit. Are we going to be so lucky again?

The marketing process to secure a new tenant is not off to an easy start.The landlord is faced with uncomfortable questions about lack of maintenance with previous tenants. How did that information spread so quickly? Did the landlord take care of all the repairs this time around?

New tenants may reluctantly accept the landlord’s reassurance that everything is now fine. The expectations of better service disappear, however, when the new tenants discover old maintenance issues. How could the landlord miss it? The pattern continues.

The landlord’s poor reputation increases. Bottom fishers make their calls. Uninvited purchase offers appear out of nowhere.The blame game heats up.The property sells at a loss.

The use of maintenance deductibles is a trip to the black hole of the rental property universe.The solution to profitable ownership and effective management is a zero deductible. Zero deductible encourages the tenants to fulfill their responsibility and provide reports to the landlords about the condition of the property. No strings attached.The reward to the landlord for listening to his tenants is a pattern of lease renewals and the confidence in ownership of a well-maintained property.

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