New Tenant Turned Bad or TK Company Screening Issue??

[Ekaterina Stepanova]

Hi Team,

I've just started investing in RE 5 month ago thru a TK company and now facing tenant eviction and really need your input please! 

So, what happened was, I got a great 3/2 SF property in a solid B class neighborhood from a highly regarded and up-sanding TK provider back in March. They have great references on BP as well. Once the reno was completed I was told that they've accepted a deposit for my property and told me that a qualified renter is ready to move in. They explained that she/the tenant is coming with great references, income in 4X the rent, works in medical field, her relative is a long time tenant in one of their properties, so seems like a perfect match! To my request to review her credentials prior to approval i was told that its not the practice and I need to trust TK company expertise as they make sure she complies with requirements (3 times rent, references, no evictions, W2s, etc.).

Five months forward this perfect tenant missed 2 payments and stopped answering her phone in past 2 weeks or so... I just found out about it on Friday, which is 1 month and 10 days after her 1st missed payment! You would ask, how come I didn't notice rent not coming in, right? Well, seems like TK company applied her deposit for the past month and sent me statement as if everything was fine .. This month they just sent me a note saying that "unfortunately we need to evict your tenant for non-payment". I was shocked! For which non-payment? I just got a statement (not yet the money, takes a couple of days) that was stating that everything is OK. 

Well, it is all very confusing to me and I, honestly, not sure how to proceed with this company. I will now, of course, will need to evict the tenant, but what about the TK company? Was it a screening issue or just a tenant "turned bad"? How do I know and do I just eat up all these costs? Is it a normal practice not to have a "say" in your tenant selection when working with TK companies? Why did they cover up a non-paying tenant?

Really appreciate your insights!! 

Thank you!

[Ben Leybovich]

First - as a matter of community service, I think we would all benefit from knowing which TK provider you are dealing with. I am not a fan of TK, since even in the best-case scenario, mathematically turn key just doesn't pencil out.

Having said this, there are several issues. One - security deposit are escrowed funds to be dispersed at termination in whatever way allocated in the lease. This money should not be applied to rent. If you have a statement which proves that the provider applied deposit moneys to rent, you've got a case that at the very least your TK provider is negligent...

Now - the whole notion that you cannot review tenant qualification criteria is wrong as well. If it's your tenant, you should have input. If not, then it's their tenant, which runs close to SEC.

Understand - what they've said is - Don't worry Ms Buyer; pay us the money, and we will take care of everything. Doesn't that sound like you are a limited partner - without control, and just along for the ride...?! To me it does...

But, if you can make a case that you are being treated as a limited partner, then you can make the case that the provider is breaking SEC regs. Limited partnerships are exclusions in the SEC code, and require specific mechanisms and paperwork. Reg D is the most common, but there are others. These were created to protect the consumer - why - precisely because you do not have operational control.

Having said this, the letter you received says "...unfortunately we have to evict YOUR tenant", meaning that now they are clearly drawing the line that even though they wouldn't let your input as it relates to tenant screening, they clearly consider the tenant YOUR problem. YOU have to evict. 

The way I see it, if you cannot pick your tenant - if you are releasing control to them, then it's not your tenant, it's their tenant. Doesn't this make sense? This is precisely the conflict of interest with the TK model. 

This provider is trying bake the cake and eat it too. They are trying to allocate the responsibility for the asset and tenant to you, while at the same time limit your control and participation, which is to allow them to run their business the way they see fit, meaning without you butting in. 

Whoever it is, they are not the only ones. This is the business model, and it's flowed as all hell. The privilege of RE relative to any other vehicle is CONTROL - you've released it to them. It sounded good to you, because you really never wanted to manage tenants. But, there is a price...

Finally, I bet you can't sell out now. You've paid them all of the equity, and in order to get out would have to take a loss.

That's how the story goes. Fire them. Sell the house. Realize if it smells too good, it is too good. Call it school of hard knocks, and go do better!

Tell us who this is. The community needs to know.