What to charge up front.

Question

I have an applicant who looks like they could be a good renter, but has a few negatives (already discussed in the thread linked to below) and so I've decided to approve them, asking for first + last month's rent in addition to a security deposit equal to one month's rent. Normally I would charge first month's rent and a one month's deposit to move someone in.

However, they also have two dogs, so for someone with pets that would be an additional $250 deposit for the pets plus $25 extra/month per pet.
  
So they would end up paying first + last month's rent, a deposit equal to one month's rent, plus the $250 deposit for the pets. I could give them additional time to pay the amounts above first month's plus security deposit, but this seems like a lot of money up front? Their previous landlords have reported no damage from them or the dogs, though one changed management companies and didn't have full records. I suppose I could waive the pet deposit, but at the same time, this is a newly renovated house.

Second, my leasing agent suggested that I charge first + last month's rent in addition to the security deposit, rather than first month's rent and a two month security deposit. His reasoning was in the state of KY a deposit can't be used to pay rent. I believe he was thinking that if they get behind a month, they could use the last month's rent they already paid to catch up, but if it was in the security deposit, they couldn't do that. I can see his point, but doesn't that defeat the purpose of collecting a last month's rent if they use it before the last month?

https://www.biggerpockets.com/forums/52/topics/82075-do-you-consider-applicants-self-employment-income-if-business-is-new

James Vermillion · Answer

First I would not consider waving the pet deposit, after-all you have one in place for a reason (I never like making exceptions to rules, because the rules were put in place to protect you and your property).  Yes, it is a lot of money up-front, but it seems like you are taking a little more risk with these potential tenants, so that is to be expected.  Also, I believe according to Kentucky Revised Statute 383.580 security deposited can be used to cover unpaid rents (and that is how I would do it).

Amie D. · Answer

Yeah I know. The house has been on the market just over 2 weeks and I they are the best so far. The first couple who applied had credit in the 500's and probable fake prior landlords (both listed parents, separately).

I have another couple that just put in an app, they earn more and have been at their jobs longer, are older, but one has several older charge-offs that have gone to collections, and she is not paying on those collections now either, credit 607. The other has some older unpaid medical, but also has a $300 utility from this past year that has gone to collections as well as a smaller medical bill. They both also coincidentally list their parents as their past landlords so the only reference I have would be their current (ouch).

It's a lower income area and I'm finding the selection isn't as as good as with my other property which is better located in a college town. I was forewarned of this by my leasing manager, he said people in this price range tend to just buy if they have excellent situations.

... hence asking for the additional month in advance.

James Vermillion · Answer

Amie, I agree with you on that part...I would not allow them to use it as a buffer.  You are simply delaying the inevitable at that point, because what happens when that money is gone?  Then what happens if they do not pay the last months rent?

Are you sure these are the best tenants you can get?  It seems like you are willing to overlook a lot of issues for these people, which could cause more problems later.  Perhaps it would be better to keep looking for more qualified tenants.

Amie D. · Answer

Yeah definitely let me know - Thanks so much James Vermillion.

And also, when my leasing agent was talking about using it to pay rent, I think he was also referring to if the tenants fell behind in say month 5 of their 12 month lease - they could use the extra they paid up front as rent for that month if I termed it "last month's rent" versus security deposit.

I think if I let them do that, I am acting like a savings account for them rather than a security against my loss if they skip out, if that makes any sense. Still, my main concern with them is they have a lot of debt, which he is partially paying through a new self-employed business, and a low amount of liquid funds, so if the business goes bad - he may not be able to cover everything. They have ok credit scores/credit history, good prior references, good employment history with other jobs that they are working outside his business - are just out of college so half of it is student loan debt - so I am also trying to be sympathetic to the position they are in, too.

James Vermillion · Answer

Amie, I agree that is an odd wording...I am going to call my attorney on that one because I am really curious at this point.   I will let you know when I find something out.

Amie D. · Answer

James Vermillion, Thanks so much for the reply. My PM has a clause in their lease that reads:

3. Security Deposit.
A. Tenant agrees to deposit with Owner, prior to taking possession of Premises, the additional sum of $__________ as security to be held by Owner for the faithful performance by Tenant of each and every provision of the Lease, which security Tenant hereby authorizes Owner to use for any one or more of the following purposes: for payment of delinquent rent;

...

(5) If Tenant vacates or abandons the Premises prior to the end of the Team, for daily rent equal to one 30th of the Total Monthly Rent for each day rent is unpaid until the end of the Term, or until Owner re-rents the Premises, whichever event occurs first.

While the Kentucky Revised Statute 383.580 that you pointed out reads:

In the event a tenant leaves not paying his last month's rent
and does not demand a return of his deposit, the landlord may, after thirty (30) days, remove the deposit from the account and apply any such excess to the debt owing.

This seems odd to me - does this mean if a tenant skips out early without paying, yet then asks for his deposit back, then he would have to be given that if there is no physical damage to the rental?

What to charge up front.

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