What Do I Do If a Tenant Buyer Stops Paying?

If you think this won’t happen to you, think again. Get prepared in advance for life events.

In a perfect world, all of your deals would go through without any hiccups or issues and you’d get paid on time, every time.

But, unfortunately, we don’t live in a perfect world. And I’m not here to sugarcoat things and tell you that everything’s always going to work out. There will be situations when things go wrong, and I feel obligated to help prepare you for those moments. “Those moments” I call “life events.”

In this case, I want to talk about one of the most common questions we see from our audience: “What do I do if my tenant buyer stops paying?!”

There are a few simple ways you can handle this situation. By getting ahead of these problems and understanding how to address them before they happen, you’ll be miles ahead of everyone else.

Safeguards can only do so much

Before I get into what you can do when a tenant buyer stops paying, let me first say that you should expect this to happen a few times per year.

There are a lot of safeguards you can put in place to help prevent this from happening, like higher deposits and extensive background checks. We recommend using all of those safeguards, but the reality is that there is nothing you can do to COMPLETELY prevent this from happening. To think that this will never happen to you because you put a few safeguards in place is foolish.

So prepare yourself for this way ahead of time! You should already have a plan in place when a tenant buyer stops paying. Which leads me to the actual plan…

Evict, replace, or sell

If the day comes where a tenant buyer stops paying, don’t panic. Here’s what you’re going to do.

First of all, some of the buyers amicably leave - especially if a life event occurs - because our agreements and the process leaves no ambiguity. If not, you need to have your attorney evict the tenant buyer. You should be using an attorney that has experience doing this and you should be using agreements that allow you to evict them. We specifically write this into all of our agreements, so if you’re using those—which you should be—you’ll be all set.

But that’s only half the battle. Now you have a vacant property, which means you don’t have any payments coming in. You now have two options.

Option #1 is to find another tenant buyer to fill the house. There are a lot of ways to do this—and that’s a topic for another article—but once you find another tenant buyer, you’ve got some options. You can start a new term, finish the old term, or change the term depending on how much you have left on the seller side (and sometimes you’ll get an extension there as well).

The best part about this option is that it can actually work out in your favor! Since you’ve already got the deposit from the original tenant buyer, you may actually make more money in the end than you would have with the original deal, despite your efforts to set them all up to WIN.

Option #2 is to put the house on the market with a realtor and sell it. This is a quick and easy way out for both you and the seller. Since you’ve already gotten the deposit, you’re basically just skipping Payday 2 as you lose out on the monthly spread going forward. But you’ll still get Payday 1 and 3, and the seller gets to sell their house earlier than expected.

The cash flow issue

Now, I know what you’re thinking…

“Chris! That’s great and all, but what do I do about the months where I’m not getting paid?!”

The simple answer is that you need to build up some resources for yourself. If you’re getting into real estate, you need to prepare for these things in advance—and that means building a nest egg.

Here are three strategies that I’d recommend. You can use one or two, but I personally recommend using all of them so that you don’t even break a sweat when situations like this arise.

1. Save the profits from all of your Payday 2s

Payday 2 is the monthly spread you’re receiving on terms deals. This tends to be a relatively small amount per month, so it’s not going to make or break your finances. That’s why we always put our profits from monthly spreads into a separate account and let it build up over time. You barely notice it, but soon you’ll have a nice nest egg.

2. Save a percentage of the profit from your Payday 1s and 3s

Paydays 1 and 3 are both large lump sums in the form of a deposit or the back-end profit you make off of the sale of the house. I would highly recommend putting a percentage of that lump sum into a nest egg account. When you first start out in real estate, that percentage may be small—but as you do more and more deals you’ll be able to increase the percentage and that account will grow massively.

3. Set up lines of credit

This is a great failsafe measure to have in place when you’re starting out or in case you aren’t able to save as much as you’d like from options 1 and 2. If you haven’t set up lines of credit already, you should. We have many resources for this on our investor resource section of our website if you need some guidance.

It’s always best to set this up before you need it. In some cases, lenders may deny you—and you don’t want to hear that right after a tenant buyer leaves or stops paying. If you don’t get approved for a line of credit, be sure to ask the lender what you need to get approved.

Have you ever had a tenant buyer stop paying? What did you do? Are you going to implement any of these tips?