What If a Buyer Destroys My House?

This is a question we get from both sellers and students alike. Here are three things you can do to lower your risk.

One of the most common fears that people have when they get into involved in the terms business is the idea that a tenant buyer will come in and destroy their house, then leave. We get asked about this a lot, both from sellers and our students who are doing these deals.

The answer for each is slightly different, but the mentality is the same…

I’ll start with the answer for sellers. If a seller asks you, “What happens if your tenant buyer destroys my house?” your answer to them is simple. “It’s on me! I’m the buyer, and I’m responsible. So it’s my headache—not yours.”

You are ultimately responsible for handling that situation, which can be scary. But that’s also why you’re getting paid!

For you, as the investor, you should know that between 2 and 5% of the time these deals will default. Now, do all those defaults lead to a trashed house? No, of course not. Sometimes people even clean the rugs and paint the walls before they leave! But sometimes this will happen.

Here are three rules you should abide by that will lower the risk of this happening to you and minimize the damage if or when it does happen.

1. Use a proper screening process (and trust in it)

Everyone knows they should use a proper screening process when vetting potential tenant buyers. But there will come a time where you are getting antsy because things aren’t moving as fast as you’d like...and you’ll become less stringent with your screening process.

Don’t do this!

Trust in your screening process and stick with it. If you have a third party do this for you, let them handle it and trust what they tell you. Don’t ever let your guard down or lower your requirements, even if you’re having a hard time finding a qualified tenant buyer.

The other part of this is the face-to-face meeting. I always tell my students that your gut feeling is incredibly important. Are you going to be okay working with these people? Did they communicate well with you? Did you like how they conducted themselves during your meeting?

Even if a prospect drives up in a messy car filled with trash...that might not be a great sign!

So make sure you have a proper screening process and trust in it. Beyond that, always have a face-to-face meeting and trust your gut. It doesn’t matter if they have to drive three hours to see you, they’re not getting into that house without a face-to-face meeting.

2. Higher down payments

Almost every time we’ve had a headache during a deal, there’s been a low down payment. Now, I’m not talking about life events—because those can’t be prevented—I’m talking about when someone tears up the house and leaves unexpectedly. We’ve noticed that those incidents crop up more and more frequently in deals with low down payments.

Here’s why this happens.

When you have a small down payment, you’re going to get a glorified tenant who probably won’t buy that house. Don’t do that!

Instead, screen them as if they were a buyer, get a big down payment, and you’ll dramatically lower your risk. This one is simple.

3. Put aside some money

It’s always a good idea to set aside some money for emergencies. Oftentimes when these things happen, you’ll end up making more money in the end as long as you can get through a few months on your own.

Here’s an example showing what I mean…

An Associate of ours had just collected a $25,000 down payment from a tenant buyer on a home in California. The tenant buyers moved in, and within the first six months they were late on their payments. A couple of months later, the wife passed away—and this was a young couple, so this was a bit concerning!

The tenant buyers didn’t trash the house, but they did grow some illegal substances in the house without the proper permits. Our Associate had to dispose of all that and deal with this whole situation himself.

Did he panic? No, because he had put away $8,000 before doing this deal!

He was able to use that money to keep things afloat while he (literally) cleaned up this mess and got the house back on the market. Then, he was able to collect another $25,000 when the next tenant buyer came in.

That’s a win! But it wouldn’t have happened if he wasn’t prepared.

Here’s the reality. You’ll never be able to completely remove the risk of these things happening, but these three strategies will help safeguard your business, lower your risk, and mitigate the damage if or when these incidents occur.

Have you ever ran into an issue related to one of these three rules? Would following them have prevented or mitigated the damage that occurred? I’d love to hear about it.