Unique situation with a possible Tenant

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Unique situation with a possible Tenant

Stephen Bruce
Investor · Greenville, SC · Member since 2022 · 36 posts · 16 votes

Hello to all! Here is the scenario. A young couple (both 25) are relocating to my area and are interested in renting. The monthly rent is $2050/month. Their combined income is 90K. I did an in-person walkthrough, and the couple is very nice, responsible, clean and are extremely interested in renting. With their combined income, they barely meet the 3x criteria (when taking into consideration HOA and utilities) but they said the home they are selling will be giving them a large lump sum of cash. Here are the few areas where I don't know what to say:

1. They offered to pay the entire years rent upfront. Do I take that? Is that a bad idea? They said they'll have enough from the selling of their current home.

2. Their tentative move in date works great with our schedule but it is contingent on the sale of their home. In the lease do I write a clause that backs me up if they have to back out because their home didn't sell? How much do I charge them to get out of their lease? 


Overall, I'm very confident they will make great tenants! I hope to work with them, I just need advice on the above mentioned. Thanks! 

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y

@Stephen Bruce

1. Don’t take the year upfront

2. When is their home selling, do you know if there are any contingencies?

3. Have them sign and put deposit and first month- if they back out keep the first month and continue to market it - if you lease it then give them their deposit back and charge them the month, if it goes to month 2 keep the deposit but after that I would not hold them responsible any longer. Just my 2 cents

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Stephen Bruce

    1. Don’t take the year upfront

    2. When is their home selling, do you know if there are any contingencies?

    3. Have them sign and put deposit and first month- if they back out keep the first month and continue to market it - if you lease it then give them their deposit back and charge them the month, if it goes to month 2 keep the deposit but after that I would not hold them responsible any longer. Just my 2 cents

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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    4y

    Advance Rent Dangers: 

    Copeland Morgan LLC4.770 Reviews
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  • Mark Csongradi
    Rental Property Investor · Kansas City, MO · Member since 2022 · 15 posts · 4 votes
    4y
    Quote from@Chris Seveney:

    @Stephen Bruce

    1. Don’t take the year upfront

    2. When is their home selling, do you know if there are any contingencies?

    3. Have them sign and put deposit and first month- if they back out keep the first month and continue to market it - if you lease it then give them their deposit back and charge them the month, if it goes to month 2 keep the deposit but after that I would not hold them responsible any longer. Just my 2 cents

    Chris, I'm new to landlording. Why would you recommend one not taking a year of rent upfront?

    Thanks in advance!

    0Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    4y

    What is your criteria for income; 3X rent? If so then 'barely' or greatly exceeding that doesn't matter, they meet it and I'd evaluate and rent to them based on everything else. Or if allowed in your area choose the most qualified tenant whether this one or another. 

    Also you mention HOA and utilities. First I would never make the tenant responsible for HOA, the HOA cost is an underlying LL responsibility just like property tax. If they don't pay you will be the one with the fines etc. The 3X rent criteria generally also doesn't include utilities that is already accounted for when you do 3X rent....instead of adding these other things in there if you want more security just raise your qualification to 3.5X rent and then rent to whoever meets that more stringent standard.

    I'd not rent 'contingent' on their sale. The two ways I'd handle it would be to collect a option or holding fee of some sort $1K or something similar. If they back out you keep the money, if they move forward then the money converts to SD. The other option would be to come up with a 'first right of refusal' if you find another tenant before they commit you'll give them a final opportunity to move forward with you. The reality is if they want you place and are committed then they should put a few $$$ at risk. Otherwise they can keep all their $$$ and just look for a place when they are actually ready to move. 

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  • Greg R.
    Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
    4y

    Agree with the other comments. If they meet the criteria, they meet the criteria. Doesn't matter by how much. 

    I personally would consider taking the entire year upfront. You need to be very clear with the lease agreement though, and lay out the terms for returning the funds (in the event they want to end the lease), etc. But yeah, I was just reading another thread about a new landlord having an issue with a tenant not making rent, trying to make partial payments, not answering calls, etc. 

    I don't know why you would turn down a full year of rent upfront. 

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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    4y
    Quote from @Mark Csongradi:
    Quote from@Chris Seveney:

    @Stephen Bruce

    1. Don’t take the year upfront

    2. When is their home selling, do you know if there are any contingencies?

    3. Have them sign and put deposit and first month- if they back out keep the first month and continue to market it - if you lease it then give them their deposit back and charge them the month, if it goes to month 2 keep the deposit but after that I would not hold them responsible any longer. Just my 2 cents

    Chris, I'm new to landlording. Why would you recommend one not taking a year of rent upfront?

    Thanks in advance!


    Check out this video: Advance Rent Dangers

    Copeland Morgan LLC4.770 Reviews
    WebsiteView Page
    1Reply
  • Greg R.
    Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
    4y
    Quote from @Jeff Copeland:
    Quote from @Mark Csongradi:
    Quote from@Chris Seveney:

    @Stephen Bruce

    1. Don’t take the year upfront

    2. When is their home selling, do you know if there are any contingencies?

    3. Have them sign and put deposit and first month- if they back out keep the first month and continue to market it - if you lease it then give them their deposit back and charge them the month, if it goes to month 2 keep the deposit but after that I would not hold them responsible any longer. Just my 2 cents

    Chris, I'm new to landlording. Why would you recommend one not taking a year of rent upfront?

    Thanks in advance!


    Check out this video: Advance Rent Dangers

    Thanks for sharing. There were a couple scenarios laid out in the video, but I feel most of them can be managed by being very clear & specifying terms of the upfront payment in the lease. 

    I'm not advocating that accepting pre-paid rent is the best option, but I'm also not convinced that it's a bad option, especially if the lease agreement is buttoned up tightly. 
    0Reply
  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    4y
    Quote from @Greg R.:

    Thanks for sharing. There were a couple scenarios laid out in the video, but I feel most of them can be managed by being very clear & specifying terms of the upfront payment in the lease. 

    I'm not advocating that accepting pre-paid rent is the best option, but I'm also not convinced that it's a bad option, especially if the lease agreement is buttoned up tightly. 

    Point taken. But here's what many people don't realize: Prepaid Rent and Rent are not the same thing (I'm basing this on Florida law, but presume many states are the same). 

    Rent = My income for that month as the landlord. 

    Prepaid or Advance Rent = The tenant's money that is not due to me yet as the landlord. These funds must be held in escrow/trust just like a security deposit, and cannot be liquidated or commingled with other funds. So they don't really do me a lot of good as a landlord. They create an accounting hassle, and I have to move them over to current rent each month as they become due.

    Would your "buttoned up" lease be deemed valid by a judge if it actually violated state law?     That is the underlying question here.

    I am not naïve enough to think that most landlords don't just pocket the money and keep their fingers crossed, but an obvious scenario comes to mind that can cause big problems:

    The tenant signed a one year lease and paid in advance, but now they are transferring jobs through no fault of their own and need to move after six months, and they want the other six month's rent back.

    This is somewhat problematic if I am still holding the funds in escrow as the landlord. We just have to agree upon who gets the money (and that may very well end up involving a courtroom). 

    This become very problematic if I already spent the money on a new car!



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    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    NEVER take a year in advance. Look it up, do a search here on BP. You cannot use the money anyway, except to put it in a separate account and draw out one month at a time.

    More hassles for you, zero benefits. And it creates an overlaying feeling that they are special and you owe them.

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    4y

    @Stephen Bruce

    I would take them for sure. Send em my way if you don’t want them! Lol

    0Reply
  • Greg R.
    Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
    4y
    Quote from @Jeff Copeland:
    Quote from @Greg R.:

    Thanks for sharing. There were a couple scenarios laid out in the video, but I feel most of them can be managed by being very clear & specifying terms of the upfront payment in the lease. 

    I'm not advocating that accepting pre-paid rent is the best option, but I'm also not convinced that it's a bad option, especially if the lease agreement is buttoned up tightly. 

    Point taken. But here's what many people don't realize: Prepaid Rent and Rent are not the same thing (I'm basing this on Florida law, but presume many states are the same). 

    Rent = My income for that month as the landlord. 

    Prepaid or Advance Rent = The tenant's money that is not due to me yet as the landlord. These funds must be held in escrow/trust just like a security deposit, and cannot be liquidated or commingled with other funds. So they don't really do me a lot of good as a landlord. They create an accounting hassle, and I have to move them over to current rent each month as they become due.

    Would your "buttoned up" lease be deemed valid by a judge if it actually violated state law?     That is the underlying question here.

    I am not naïve enough to think that most landlords don't just pocket the money and keep their fingers crossed, but an obvious scenario comes to mind that can cause big problems:

    The tenant signed a one year lease and paid in advance, but now they are transferring jobs through no fault of their own and need to move after six months, and they want the other six month's rent back.

    This is somewhat problematic if I am still holding the funds in escrow as the landlord. We just have to agree upon who gets the money (and that may very well end up involving a courtroom). 

    This become very problematic if I already spent the money on a new car

    Yeah 100%. I've never done this and before and before you mentioned it I was already thinking that the only way this would work would be to put the money in an escrow account and only draw from it for each month's rent. Perhaps this would be a slightly better idea in c-class properties where people are more prone to miss rent. In any event, thanks for the info.

    0Reply
  • Mark Csongradi
    Rental Property Investor · Kansas City, MO · Member since 2022 · 15 posts · 4 votes
    4y
    Quote from @Jeff Copeland:
    Quote from @Mark Csongradi:
    Quote from@Chris Seveney:

    @Stephen Bruce

    1. Don’t take the year upfront

    2. When is their home selling, do you know if there are any contingencies?

    3. Have them sign and put deposit and first month- if they back out keep the first month and continue to market it - if you lease it then give them their deposit back and charge them the month, if it goes to month 2 keep the deposit but after that I would not hold them responsible any longer. Just my 2 cents

    Chris, I'm new to landlording. Why would you recommend one not taking a year of rent upfront?

    Thanks in advance!


    Check out this video: Advance Rent Dangers


     Appreciate it Jeff, it was very useful, makes sense now!

    1Reply
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