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Think long and hard before becoming a landlord

Dear Benny: I am an older person on a limited income but do own my home.

I was thinking of renting out a room to bring in some extra money. I was wondering if there are laws to protect me in case the roommate doesn’t work out. And what about coverage on my home insurance?

And do I have to claim the rental income on my taxes even though I will also live in the home?

The whole process scares me, but the way the economy is going, it may become a necessity. – Delores

Dear Delores: Being a landlord is a mixed blessing. It may bring in some additional dollars, but it may also be a major headache.

The rental income will be taxable, although you will be able to offset some of the expenses, such as a percentage of the utilities, real estate taxes and insurance associated with the rented room.

Landlord-tenant laws are state-specific. Some states’ laws are landlord-favorable. Others, such as in the District of Columbia, where I practice law, are extremely tenant-oriented.

Accordingly, if you wish to pursue this, please talk with a real estate lawyer so that you know all of your rights and responsibilities. For example, are there any licenses that you will need from your local government? Does the zoning in your area permit rentals?

While it is true that many people illegally rent out their basement — calling it a “mother-in-law” suite if they get caught — if the tenant gets angry and blows the whistle, life can get complicated and expensive.

Finally, you have to consider the personal impact of your idea. Do you really want a stranger running around your house, eating your food, etc.? You may find a great roommate, but you also may not.

When I am counseling prospective landlords, I usually suggest they watch the 1990 film “Pacific Heights.” While this is an extreme situation, it could happen to you.

Dear Benny: We own an oceanfront condominium. The HOA sued the developer for construction defects and has a $3 million judgment. Unfortunately, the developer is judgment-proof and long gone. He had no insurance.

His hard-money lender got a court-appointed receiver, who is marketing the remaining unsold units. The lender then paid the developer $80,000 cash, plus a promise of more money when the units are sold, for a proxy to vote those units and a power of attorney. The units are still in the developer’s name, and a judge ruled that he could vote those units.

The lender, with the purchased proxies — and a few clueless owners — was able to take control of the HOA’s board of directors. His motives are not the same as the vast majority of owners. He wants fast and cheap repairs so he can sell his units and be gone.

We have lots of attorneys involved and there are many issues to occupy their time. My question is: Is it legal to buy and sell proxy votes? – Dennis

Dear Dennis: First — and I am not picking on you — you said you live in a condominium but keep referring to “HOA.”

The latter is a “homeowners association,” which is legally different from a condominium. Although governance is usually the same with both legal entities, my pet peeve is when people refer to their condo as an HOA, or vice versa.

You also refer to “clueless owners.” They may be that, but they are owners. Community association living is democracy at its best — and its worst. So if an owner wants to vote as he or she desires (or give a proxy to someone), that is his/her absolute right.

Not to inject a “politically correct” concept here, but it really is no different from when people vote their choice for president of the United States. That’s their constitutional right, regardless of whether you disagree with their choice.

To answer your question about selling proxies, while I don’t like the idea, I believe it is legal. However, you or your cadre of lawyers should carefully review the legal documents of your condominium, specifically its bylaws. There may be proxy restrictions there. For example, some documents restrict the number of proxies that any unit owner can hold.

You should mount a good, old-fashioned political campaign, to get as many unit owners to protest the decisions of the lender. In fact, if you can muster sufficient support among the owners, you may even be able to throw the rascals out of office and elect your own board of directors.

And keep in mind that even though the lender controls that board, it still has a fiduciary duty to act responsibly on behalf of you and the other owners.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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