All Cash Offer for Entire Lease Upfront - Good Idea?

Question

Hey guys,

So a unique opportunity came about that I've never experienced in all my years renting. Someone in the neighborhood offered to pay cash (or cashier check) for the entire rental lease (10 month lease) upfront. I'm trying to think of anything that I'd need to do with a situation like this. My plan is to still screen/credit check etc...as I would any other tenant and ask for a set security deposit check and have them sign a lease just as I would.

Anyone ever have this happen and if so anything to look out for?

Thanks!

I'm hoping this will help me get more cash up front for more properties!

Nathan Gesner · Answer

Two things:

1. Paying up front is a red flag. Or at least a yellow flag. Many people wave cash to get a Landlord excited, hoping you'll skip the background check, offer a discount, or move them to the front of the line ahead of more qualified applicants. It should get your hackles up.

2. The money is not technically yours to spend until it's earned, and it's not earned until it's applied to the monthly rent charge. Say a tenant pays on January 1 for the entire year. The only amount you've earned and can spend is the January rent. February rent isn't earned until February rent is charged on February 1st. If the Tenant decides to break their lease after three months, you are legally obligated to find a new renter and then refund any unused portion of rent to the departing tenant. If you've already spent $15,000 and the tenant is owed money back, you'll be stuck borrowing.

Most experienced Landlords and Property Managers will tell you to be careful with this. There are tenants that pay for the full year in advance for various reasons, but I think a larger percentage does it with bad intentions.

Eliott Elias · Answer

The biggest problem with letting someone pay up front for a year, is that it's really hard to kick them out, if things go wrong. Depends on what your risk tolerance is, but people who usually pay up front can not get past a landlords screening process. Often poor money management.

Celine Crestin · Answer

I respectfully disagree with the above comments that it's always a red flag. You will 100% want to do standard tenant screening to verify credit score, income, employment, background check, etc. However, there are many jobs where income is variable (such as real estate) and some renters may feel a peace of mind and stability paying up front while they have the cash readily available. I personally know 2 different Realtors who have requested to do this for their landlords. They have excellent tenant criteria and references, etc - you would be thrilled to have them as a tenant. However, many landlords viewed them paying a year up front as a red flag as well and would not rent to them. In one situation, the Realtor had just gotten divorced and sold their home so he had a large lump sum and wanted to just pay for an entire year of rent so he could focus on getting back on his feet and have one less thing to worry about. It's not because he couldn't just manage that cash himself and pay it monthly. It was just a simpler solution for him personally.

If the tenant passes all the standard screening checks with flying colors and can show POF, I would personally consider accepting a year up front.

I would recommend holding this money in a separate account for your property.

Best of luck with whatever you decide. Just hoping to share a different viewpoint on the situation. :)

Reed Rickenbach · Answer

As most have stated, this is typically (not always) a red flag. Maybe this person is new to renting and thinks they need to be the highest bid!

If they pass your credit/background check I don't see an issue, just only "spend" the money that you have accrued.

Emily Menker · Answer

Hey Anthony!

I think there was an article somewhere here on BiggerPockets that explained the yellow/red flags of an upfront lump sum for rent; however, now I can't find it! Basically, as mentioned above by others, there are a lot of yellow flags for the following reasons:

-The tenant may want you off their back so they can participate in illegal activity

-The tenant may want to STR the property (not necessarily a bad thing--you can actually make more money this way by partnering with a tenant to do this--it's only bad if they are trying to do it without disclosing to you and obtaining your permission to do so)

There a couple a reasons why someone may want to pay rent upfront with good intentions:

-Perhaps they are a student who took out a loan for student housing (or their parents are footing the bill and wish to pay for the entire semester/year upfront)

-With today's housing shortage, perhaps they have had so many issues competing for houses they want to remain competitive with other applicants in this market by using this negotiation tactic

The way to protect yourself is to do exactly what you and others said: solid screening/background check and if it were me, I'd also ensure my tenants knew I'd be doing lots of (legal) checks on my property through the year. Good luck!!!

Anthony Simboli · Answer

@Celine Crestin Thanks for your response. I appreciate your point of view on this. I think one thing that is very common across all of the responses so far is continuing to make sure I follow my processes setup for screening and lease agreements etc. I'll keep all of that in mind moving forward. Appreciate your response!

Scott M. · Answer

Most property managers and landlords (myself included) consider this a red flag VS a good deal.  Often times (although not in your case by what was said) they will ask for a discount or a deal of some sort.  No SD or lower SD etc....

In those cases it is 100% no for us.  Never going to give a deal for cash up front because it isn't cash up front for the manager/landlord legally.  Any prepaid rent needs to go into your escrow account and only be paid out monthly when it is due.  Doing anything else with it will get you in hot water.  Also, if the tenant leaves early this causes issues for some landlords as they haven't followed the rules and now they have to figure out how to pay it back.

This isn't a 100% no for us, but a proceed with caution, follow the law (as you always should of course) and do all of your checks per normal.  Because they are offering cash up front and that is a red flag, I would scrutinize them more carefully as we would anyone who had a red (or yellow as the great @Nathan G. correctly said) flag pop up.

Eliott Elias · Answer

It's usually a red flag when they want to pay up front. Ask them why, and why they wouldn't just pay monthly. Who knows where that cash came from, they have leverage throughout the entirety of the lease when it's paid in full.

Anthony Simboli · Answer

@Reed Rickenbach thanks for the reply. I think that out of anything has been the most important thing I've learned in this post, making sure the rent has been realized each month before using it for future investments. Thanks!

All Cash Offer for Entire Lease Upfront - Good Idea?

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