In discussion, not under contract though - legally obligated?

Question

All - I have a moral and business conundrum.

I have been in discussions with prospective tenants. They meet my credit score, income, reference checks. We haven't signed the official contract yet, but they have a copy we've been back and forth about.

I received a call from another person asking about the property who asked me if I had the ability to back out with tenant #1 if they paid me an extra $200/month above asking rent.

Morally I feel horrible about backing out on the original tenants. The prospective tenant #2 makes more money, and is willing to pay me more for the property.

Is this something I should even consider? What would you do?

Nathan Gesner · Answer

First, you should have a written policy on how you screen applicants and how the applicant can secure the rental. This keeps you straight on your own policies and it protects you if someone ever complains. My policy is first come, first served and I do not take the property off the market until the security deposit is paid and paperwork is signed. If the applicant keeps going back and forth instead of making a decision, they may very well be dragging the whole thing out while shopping for other deals. Until they are willing to commit, your property stays on the market and they run the risk of losing out.

Second, I agree with @Peter MacKercher about the other applicant. If they are chomping at the bit to pay $200 above the advertised rate, I see three possible reasons:

• 1. You priced the home too low for the market;
• 2. They are offering more in an effort to blind you to deficiencies in their application; or
• 3. The market is so tight that they can't find anything else (similar to #1)

I see a lot of owners burned by #2. Someone walks up flashing rolls of bills and offering to pay extra rent or even several months in advance. The owner's eyes glaze over and they don't screen the applicant very well (or at all) because they don't want to lose the money. But the applicant lives outside their means or exaggerates their abilities and everything falls apart within a few months. In the end, the owner loses more than if they had gone with a tenant willing to pay market price.

Call the first applicant. Explain you have other people interested. Give them 24 hours to pay and sign the lease or it stays on the market and goes to the first qualified buyer to complete the process. Then work on your application screening/approval process and put it in writing so you can avoid this problem the next time.

Peter MacKercher · Answer

@Angela S. I'm curious -- what have you been going back and forth with the potential tenant about? That raises some concerns since they could be a needy tenant after you've signed the lease.

I'm not licensed in Colorado, but as things work in Missouri contract law states that without a deposit and a signed, dated lease, there is no agreement. The first applicant to execute the lease agreement has the right to occupy, plain and simple. If you're negotiating with one potential tenant and someone else meets your qualifications, puts down a deposit and signs the lease, the first tenant took too long, no discrimination. It's all too common for someone to say they're interested, apply, get approved, then vanish. Nothing is in effect until they have skin in the game.

Something else to think about: Why is the second applicant willing to pay $200 more in rent? Are they over-qualified, is the property highly-desirable (in which case I'm curious why the first applicant would be spinning their wheels in negotiations), are they hoping you'll overlook something in their application (running away from an eviction)?

Hopefully I'm not throwing too much shadow over what would otherwise be a great problem to have for a vacant unit, but without more details the situation sounds odd on both counts to me.

Angela P. · Answer

You are all so wonderful. I love this site. First off thank you all for your advice and opinions. Sorry it's taken me all day to respond back.

To answer most of your questions:

I don't yet have a deposit from them, but that was more a delay on my part. The "back and forth" I mentioned was getting them to answer additional questions I had on the credit check that came back, as well as better contacts at their prior apartment complexes. I was not in negotiations about the lease contract. Mine is solid (reviewed and approved by 3 different lawyers) and I have no intentions of changing it.

I've never had to deal with tenants who were prior renters (my other tenants were home owners prior to renting from me) so checking on apartments I've found is cumbersome and time consuming!

All of their information checks out and they seem like solid tenants.

As for why this other potential tenant is willing to offer me more $$, I suppose I could be slightly under market on price, but do feel like I've done decent homework to price the property correctly. It's in Thornton, CO and it's a 2/2 @ 1296sf. I am getting $1,650 for it which honestly at first seemed on the high end, but I've gotten 45 calls/emails on it so you all might be right. Might be under priced.

My non-written policy, but will be written now going forward (thank you Nathan G.) has always been first come first served that meets my requirements.

I also haven't taken the listing down as some of you advised, since I don't have the lease signed and deposit in hand. I plan on finishing up / getting the deposit in the next 24 hours.

I was excited about the extra $200/month, but I think sticking with Tenant#1 is best and I just do a better job scrutinizing my rent price -- would love you advice on how you do that / where you go for 'rent comps'.

Take care!

Angela

Mike Wood · Answer

NA Beard I agree, but how do you handle a perspective tenant that is not completing the process? For me, I do not take the unit off the market until the I have received the deposit.  I also take the most qualified tenant on a first come, first serve basis.  But I dont stop advertising and showing the unit until the entire process is complete, including the deposit.

People change their minds, and I have had applicants applying for multiple houses (only one was mine).

Jeff B. · Answer

I don't consider the application complete UNTIL I have the credit report, proof of income and talked to the prior landlord.

When I have complete applications, I take the prospect that completed the process first to avoid allegations of discrimination.

Bill S. · Answer

@Angela S. so I agree with Nathan G. about giving your approved applicants an ultimatum but I would say 12 hours and no more. I would hand an application to the ones that offered $200 more per month and tell them to apply. When I have the application fee and the application I would screen them. If they pass, then we can have the discussion about the rent amount.

So some big picture advise. It is not rented until it's rented. Signed agreement and money in your hand. Absolutely no exceptions. If someone asks the status. I tell them the truth but never more than they ask. If they ask if I have applicants. Obviously I don't have an application unless I have a complete application and the application fee. In those situations, I would say I have had people change their mind when I offer it to them and I've had people fail the screening. If they want to be next in line they should complete an application and pay the fee. Keep in mind most don't ask. I definitely don't offer this information.

Maggie L. · Answer

@Angela S. I understand where you're coming from, but you shouldn't feel guilty for considering other tenants.  I have a few questions to ask.  Obviously there are specifics to this situation, but I'm hoping some more general questions will be more helpful.

What is your policy for handling multiple applications? If you process it yourself you can warn the first applicant that you have another one incoming and the first to be approved, and signed with a security deposit gets the apartment.  If someone else processes it you may want to check the policy with them.  The organization I use will take multiple applications, but processes them one at a time in the order received.  That way an applicant doesn't send the fee unless they're actually being considered, but their place is held in line if something comes up.

Do you have a policy for how you handle advertising/prospectives once an application is processed?  Is it different than when it is approved?I try to be up front and tell people when I have an application being processed.  Some people decide not to view the place, but others do.  I have had applicants not work out after approval, but I ended up with someone who viewed the property when they already knew there was an application being processed.

How flexible are you with the content of the lease?If the first prospective is arguing over details but the other one has seen the lease and is good to go it may be a sign that the first person will be a problem tenant.

Sometimes we develop a plan beforehand, but sometimes it comes out of necessity.  If you don't have a system in place this sounds like a good time to figure out what you want it to be.  Always happy to PM if you think it will help to bounce off ideas.

Jeff B. · Answer

@J Beard I agree, but how do you handle a perspective tenant that is not completing         the process?

Incomplete == non-prospect, disqualified.

For me, I do not take the unit off the market until the I have received the deposit.

Nominating a prospect, I call, ask it they want the apt and make an appointment to sign the lease.  I ONLY take deposits from the tenant that signs the lease.

Mike Wood · Answer

@Angela S.Do you have a deposit? If so, I think you should stick with the original tenants.

If you do not, I would continue to show the unit, if the second caller submits an application and pass, rent it to them.  Just because someone calls, don't mean they will follow thru.

In discussion, not under contract though - legally obligated?

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