How would you respond to this tenant question?

Question

I have a tenant with 6 months remaining on a 2yr lease. I received an e-mail last week asking me what the renewal rent would be for a 1yr lease and for a month-to-month tenancy. I have never had a tenant ask for this info so far in advance. I gave numbers that would be acceptable to me. I don't really care too much whether they stay or go as I don't anticipate any downtime or repairs (perhaps some light touch-up on paint and some cleaning). They have been very good tenants - it just seems odd to be looking that far ahead. I assume that they are house hunting.

btw - do you normally let the lease convert to month to month OR do you require a 1yr renewal? I normally require a 1yr renewal. I think a month-to-month tenant should pay more as I could get stuck with them leaving mid-Winter.

btw - do you normally let the lease convert to month to month OR do you require a 1yr renewal?  I normally require a 1yr renewal.  I think a month-to-month tenant should pay more as I could get stuck with them leaving mid-Winter.

Steve Babiak · Answer

First off, I have to qualify my comments with the statement that I do not have the really low income types of units where many BP landlords insist they must only do month to month; my units are in areas where I can fill them with tenants who will sign up for a year lease and not move out in the middle of the lease.  Just to give context to my comments below.

I have a couple of approaches to this.  If the tenant has been there long term, say for 5 years min, I haven't had vacancy in that unit for a while, so I would be OK with going month to month without a big increase.  Since they've been there that long, I try to be fair and not lock them in to having to stay a full year in case some life event happens.

For tenants who have not been in the unit very long, I do a couple of things.  First, I set up the first lease period to be an abnormal number of months (if necessary) so that the lease ends in May or June when the market for tenants is hot.  Then I have a lease clause that stipulates a 6% to 8% increase at renewal of lease, with the renewal being month to month.  Prior to renewal, I send my renewal letter with at least 2 offers to the tenant.  Offer #1 is the default, with renewal of the existing lease for month to month at the 6% or 8% increase in rent.  Offer #2 is a new one year lease with a smaller (or zero) dollar increase, with all other terms in the lease the same as in the expiring lease.  Offer #3 might be a new one year lease for a bit more money but giving the tenant something they have wanted and asked for - to see if they'd be willing to pay for that "bonus".  People who are ready to move pick offer #1 - so I don't feel bad about them paying a bigger increase because I will have a vacancy soon almost certainly; I have even decided that the next time somebody picks month to month I will send a termination letter to get that vacancy in the "hot" tenant season.  Because I don't want that mid-winter vacancy either ...

Bill Gulley · Answer

edited, Steve, I looked it up and found it, you posted first and I didn't see your post, you're correct. Thanks, now to go clear all the moentions, lol.

Dion DePaoli Cheryl C. and all others! I made a mistake as this has changed, the due on sale applies to any lease for a term greater than THREE years! My appoligies, but looking it up I found this has changed from a leasehold interest greater than one year. Also, state law may not have any preemtive restrictions to the due on sale.

That's my second mistake this year, already...LOL!

Steve Babiak · Answer

Bill Gulley - That is not quite correct; here is a link to the relevant code:

http://www.law.cornell.edu/uscode/text/12/1701j-3

Upon reading that, under the "Exemption of specified transfers or dispositions" section, you will see the following text:

So for 3 years lease or less, there is no violation of "due on sale" from the federal perspective.  Granting an option, as in a lease option, is another matter (as that does violate the "due on sale" provision).

Dawn Anastasi · Answer

Sometimes if you want to find out information, like if they are looking to buy a house ... is to just ask.  Literally.

I had a tenant let me know they were going to be leaving because they were going to buy a house.  I said congratulations and something to the effect of "Well then getting your security deposit back will give you extra money to buy all sorts of stuff for the new house!"

I think they got the hint because when they left, I only had to deduct like $12 for a couple small issues.  And then I re-rented the unit out for $5 more per month.

Cheryl C. · Answer

Steve Babiak, anything coming from Cornell is the "Gold Standard" in my book! (class of 1980)

Steve Babiak · Answer

Cheryl C. - thanks for the vote - turns out it was your 200th BP vote, and it put you onto this list of others with the "Judge" award:

http://www.biggerpockets.com/awards/200_votes/detail

Cheryl C. · Answer

Bill Gulley, do you have a cite for the 1yr restriction?  I have never heard of it.  I imagine that it would be in the DOT(?).  I have some 3 yr leases.  I've never given it a thought.

Prashant P. I reguire a minimum 60 day notice on all my leases.

Dawn A., they usually tell me and ask for some flexibility.  I normally don't ask where they are going once I get notice.  I just go over the "move-out" requirements.

Bill Gulley · Answer

Dion, a leasehold interest given for more than one year under an initial agreement or an automatic right to renew by a tenat is passing an equitable interest under federal regulations that allowed and instructed lenders to impliment a due on sale clause. This only applies to residential. Commercial terms are different but generally are not to exceed the term of the loan if longer than one year.

We can start another thread, but this is an issue with lease-options as well. I won't clog this thread with mortgage issues...  :)

Prashant P. · Answer

When replying with your numbers, I would kindly remind the tenants for your policy for early termination of the lease.  That way they know exactly what timeframe they have if they are considering moving.

Dion DePaoli · Answer

Bill Gulley, can you expand on the term of the lease being a violation of DOS?

How would you respond to this tenant question?

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