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Would You Rent to This Tenant?
Friday, July 10, 2009 | Ethan Roberts
There's an old relationship adage of "I'd rather be alone than wish I were." When you own rental properties, the same attitude of not settling for just any tenant in this tough economic environment and waiting "till the right one comes along" can pay off big for the discerning property owner.
This month, a couple of my rental properties are going vacant. This is something every landlord has to deal with once in a while, but recently the task of finding good-quality tenants has become -- well, shall I say -- a bit more challenging.
For example, I received this e-mail recently, in response to an ad I had posted for one of the rentals:
"My lease is up where I'm currently renting at the end of this month, and I'm very interested in renting a home. We are good, responsible tenants with no pets, and we are non-smokers.
"We don't have the money upfront for first-month's rent and security deposit. Is there any flexibility with the security deposit? We could pay a couple hundred a month extra for the first four or five months, if that's an option."
This gentleman must think I am clueless! Oh, I see, they are "responsible," but they don't have enough in savings for a $900 security deposit? Won't they get back their deposit money when they leave their current rental? If not, I have to wonder why.
This woman probably thinks she is 'responsible' too...
So I responded, as politely as I could -- something along the lines of:
"Sorry, but I won't assume the risk of taking someone on who does not have the first month's rent and the security deposit. If tenants are so low on savings that they can't come up with first-month's rent and security, then they are just one emergency (expensive car repair, job cutback, illness, etc.) away from not being able to pay the rent at all."
Furthermore, the chances of my getting the security deposit a few hundred at a time over four to five months are slim to none. Believe me, I have been there. Who needs that?
A Changing Dynamic
These days, I am noticing a big difference when I interview tenants in comparison with years past. Now, not only am I interviewing them, but they are interviewing me back!
Prospective applicants now routinely ask me things that tenants have never asked before:
- Are you going to sell the house?
- Is it going into foreclosure?
- Are you behind in your mortgage payments?
These are all valid questions, for sure, but they really took me by surprise when I first heard them. Tenants may not realize that -- even if the home is sold -- because they have a valid lease, they cannot be evicted.
The new owner simply becomes the new landlord, and must follow the terms of the pre-existing lease, until it is finished. However, at that point, the tenant could be asked to vacate.
Additionally, there are landlords who are taking payments from tenants without telling them that the home is going into foreclosure. Some of these landlords are upside-down on their mortgages, and they simply pocket the tenant's money without making any mortgage payments.
Then, one day, there comes a knock on the door, and a local authority or process server is telling the bewildered tenant that the home that they just moved into, is soon going to be sold at auction.
Tenants' Rights Can Actually Benefit the Owner
The good news for tenants is that the law is now looking out for them a bit more. Recent federal legislation requires banks to give tenants at least 90 days' notice of any pending foreclosure, and if there is a signed lease in effect, the bank must honor the length of the lease.
In my home state of Florida, a bank previously had the right to remove a tenant from a home in default within 24 hours. If the tenants balked at leaving, they would face a forced eviction. What a terrible plight for an innocent tenant who has been making their rent payments regularly to their landlord!
One weakness of the new law is that it does not require the owner to disclose foreclosure proceedings to prospective tenants.
On the one hand, this is great for the owner, because no tenant in their right mind would want to lease from them under the threat of removal. It's also possible that the owner could be behind in his mortgage payments and needs the rent to help him catch up and stave off foreclosure.
On the other hand, there is an ethical problem (at least in my mind) with an owner setting up a tenant for an eviction by not divulging the possibility of the foreclosure. Unless he asks, the only way a tenant can find out this information on his own is to do the research through the county clerk's office, to see if a lis pendens (first notice of foreclosure) has been filed against the property.
But most tenants are unaware that they can or need to do this, or how to even find out that information. So, some of them have taken to asking the landlords now before they sign the lease.
Timeline from first missed payment through foreclosure auction...
Some property-management companies have now begun asking the property owners to attest that they are not behind in their payments or facing foreclosure, before signing an agreement with them to manage the property.
However, unless the property management company were to send the owner an updated notice every few months, they would have no way of knowing if at any point in the future the owner were falling behind on his payments.
How Can You 'Secure' the Right Tenant?
As an owner, you've got some research of your own to do.
In these tough times, when I am looking for a new tenant -- in addition to the usual things that I look for, such as having decent credit and a job -- I need to find out, how secure is that tenant's job?
It would be better to have an empty property for a while longer, than to have a new tenant lose their job shortly after moving into the rental and then stop making, or start being late with, their monthly payments.
While very few jobs are 100% "guaranteed," there are some jobs that are more stable than others. In my area of Northeast Florida, we have several navy bases. Military jobs are about as stable as one can expect. I have one tenant who is in the navy, and her monthly rent check arrives on time like clockwork.
For landlords who are concerned about the stability of their tenants' jobs, I would recommend doing a routine check of their place of employment. Another option would be to rent to tenants on the Section 8 program, in which case the government guarantees a large percentage of the monthly rent to the landlord.
However, the Section 8 program can be risky for many other reasons, such as unlawful activity or damage to the home. So, one has to weigh the risks against the potential rewards.
Military personnel make excellent tenants...
'Because I Said So!'
Successful landlords have always had to be tough, because the landlord-tenant relationship tends to mimic the parent-child roles. Tenants can behave like small children at times. They will test you time and again to see how much they can get away with, before you have to put your foot down.
Landlords who are afraid of being assertive with their tenants will quickly find themselves on the short end of the financial stick. Overall, tenants do not care, nor want to hear about, your mortgage payment or your other expenses.
'Tenant' reacts to landlord's pleas of needing his overdue rent to pay the mortgage...
Incidentally, a landlord should never rent to friends, family or co-workers, because it becomes much more difficult to take the necessary actions if and when the rent is not paid. Personal relationships can be ruined over disputes, whether related to rent, repairs, property condition or anything else that occurs.
Landlords should never befriend their tenants, either. I knew a landlord who would go over to his rental property and watch football with the tenants on Sunday afternoons. They would have a few beers and enjoy the game together like old pals.
But a few months later, when the tenants couldn't pay their rent, they were sure that their new "buddy," the landlord, would understand and cut them some slack.
Soon thereafter, this landlord lamented to me that he still wasn't getting his rent money, but he admitted that he didn't want to be "mean" to the tenants.
MEAN?!
So, during the next week, this tough landlord and Tycoon writer is looking for a few tough tenants. I want a tenant who is tough enough to have learned the discipline of saving a few bucks in the bank in case of emergencies. I want a tenant who is tough enough to do his job effectively and competently, so he becomes the last guy the boss wants to lay off during a recession.
However, if he does get laid off, I want a tenant who is tough enough to go out and deliver pizzas or work at McDonald's -- anything rather than sitting on his keister awaiting his unemployment check, while he whines to me that he can't pay his rent.
I consider myself to be a high-quality landlord, one who provides his tenants with a pristine, clean property that's in good repair. The quid pro quo that I expect from the tenants is for them to simply pay their rent on time and take good care of the home for the length of their lease.
So here I am, looking for a few tough men and women to rent my properties during the tough times ahead...
A 'sign' of the times...
Tycoon landlords: Have an interesting recent story to share about your tenants? I'd love to hear it.
See you next week!
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