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What To Do When Tenants Stop Paying Rent?

by Kevin Perk on December 3, 2012 · 18 comments

  
When Tenants Stop Paying Rent

Sometimes life happens. Despite our best screening efforts, we sometimes end up with a tenant that can no longer pay.  Perhaps it is not even the tenant’s fault.  The tenant may have lost their job, been in a car accident or divorced.  While I can sympathize with the tenant, as a business person and landlord, I need to get someone in my unit who can pay as quickly as possible and as easily as possible.

Notice I said “as easily as possible.”  That almost always does not involve the eviction process.  Here in Memphis, TN an eviction can cost over $1,000 once all is said and done.  There are easier and less expensive ways.

Talking With The Tenant About Their Late Rent

Many times all it takes is a heart to heart talk with the tenant.  Letting them know that you understand their situation can go a long way.  But also explaining and helping them to understand your position as well.  That the mortgage payment is still due and the bank does not care if the tenant is not paying, thus if the can’t pay they can’t stay.  Say something like:

I understand your position, but please understand mine.  If you can be out by this week end and sweep the place clean we can call it even.  I will not file for eviction and I will not sue for back rent.

This works surprisingly well.  Plus it is simple and easy.

Cash for Keys: A Controversial but Effective Technique

Sometimes however the tenant may be really down on their luck and out of money.  In these circumstances I may actually pay the tenant to leave.  In the heart to heart discussion mentioned above, I usually can find out what is holding the tenant from moving on.  Many times they simply can’t afford to move.  So spending $250 to allow them to get a truck and get their belongings out is much easier than spending $1,000 and going through the courts.  This “cash for keys” technique may rub some the wrong way, especially when the tenant owes you back rent, but I can either pay the tenant or pay the attorneys a lot more.

I have only had to file for eviction a few times.  Most were on tenants that we inherited when we bought a property that did not go through our screening process.  And despite your best efforts, sometimes it does take that notice being posted on their door to motivate people.  Even here I will still try to make things easier.  I will let the tenant know if they leave by a certain date, remove their belongings and sweep the place clean I will withdraw the case. It works!  I have actually withdrawn cases because tenants have left as agreed.

Remember I said “as easy as possible.”  I want to spend the least amount of money, but I also want the least amount of stress and confrontation.  And honestly, I do not want to beat someone with the courts when they are down.  I just want them to move on so I can get my property re-rented.  Screening is your first answer to avoid non-paying tenants, but nothing is 100% full proof.

The Key To Success When Rent Isn’t Paid

The key when a tenant stops paying is communication.  You have to be the “squeaky wheel” with your tenant to get things moving.  Do not let them get into denial mode, keep on them until they make a decision.  Usually, they will see the writing on the wall and move on.  Yes the courts can force them to move on, but it is the least easy way to do it.  So I try my best to avoid it.  For me they are a last resort.

Finally, if you do use any of the techniques discussed above, save yourself some trouble and get a signed “Release to the Rights of Possession” form as a part of any deal you make.  You will be glad you did.

Photo: Steven Depolo

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{ 18 comments… read them below or add one }

Brandon Turner December 3, 2012 at 6:17 pm

Hey Kevin –

I also use the “Cash for keys” technique when dealing with difficult tenants. It hurts the pride a little bit – but saves a lot of money. I think the key is, like you said, requiring that the place be super clean in order to get the money.

Thanks for the post! I know a lot of landlords could save a lot of headaches (and dollars) by listening to the advice you give.

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Kevin Perk December 3, 2012 at 9:01 pm

Thanks for reading and commenting Brandon and thanks for the kind words.

Sometimes the right thing to do feels so wrong. You want your rent! But it is better just to let them go.

Congrats on your new position with Bigger Pockets.

Kevin

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Charles Perkins December 3, 2012 at 8:29 pm

Excellent points. An eviction can be a long and costly ordeal especially in some states. If you can work with the tenant so that they voluntarily leaves it can be a win-win.

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Kevin Perk December 3, 2012 at 9:04 pm

Thanks Charles,

Here in Memphis it takes a little over a month to evict a tenant assuming all goes well. I hear horror stories about the months long process in other states and cities. And don’t get me started about the bankruptcy lawyers that can stop your eviction in it’s tracks.

Always better to talk them out.

Kevin

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Shanequa Jones December 3, 2012 at 8:32 pm

Has anyone ever agreed to do cash for keys and then refused to pay the tenant?

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Brandon Turner December 3, 2012 at 8:40 pm

I haven’t – but I suppose there are crappy landlords out there who would. Anyone heard of that happening?

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Joshua Dorkin December 3, 2012 at 9:02 pm

Shanequa – As payback for non-payment? Ouch — that’s cold. I can see the logic behind such a thing, but I think doing so would make you as bad as your non-paying tenant. That said, I’m doubtful any landlord would publicly post that they did.

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Kevin Perk December 3, 2012 at 9:09 pm

Shanequa,

Thanks for reading and commenting.

I, unlike my deadbeat tenants, will keep my word. And yes, it is hard to do.

Plus, most of the time for me at least, the tenant has lost their job or some other unfortunate circumstance. They did not just decide to stop paying they simply could not pay.

I guess if I stiffed them I would be afraid to wake up the next morning and find spray paint all over my building :).

Anyone else have any thoughts on this?

Kevin

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Seth December 3, 2012 at 8:54 pm

Great post Kevin. I’ve dealt with a few of my borrowers (land contract deals) who have stopped paying over the past few years and it is incredibly annoying. I can definitely see how communication can go a long way in helping resolve some of these issues.

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Kevin Perk December 3, 2012 at 9:10 pm

Seth,

Thanks for reading and commenting. Glad I could help.

Kevin

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Callum Kerr December 4, 2012 at 11:16 pm

Thanks for the article Kevin. I too find myself much more compassionate with my tenants and have found very few problems compared to many of my colleagues. The BP forum also appears to be predominantly inclined to give little to no slack and strictly adhering to contracts. Although I agree with the basic functionality, I also realize that no contract will ever replicate real world situations so like you said, communication is always the best solution. With respect to how I should handle them, I try to look at my tenants as a different niche than many of the BP’ers but sometimes I wonder if I am just being ignorant and haven’t been burned yet. This article is a breath of fresh air for those of us wanting to have a friendly (supplier/client) vs. cordial (landlord/tenant) relationship

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Kevin Perk December 5, 2012 at 9:03 pm

Callum,

Thanks for reading and commenting.

I would say that my attitude with my tenants is friendly with firm but fair thrown in as well. I try to be understanding to their situation and I understand that I cannot get blood from a stone. So I try to work a deal that is best for everyone. They get to move on with their lives and I get my property back with as little disruption as possible.

Hopefully you will never get burned as you say but sometimes tenants can drastically change when their circumstances change. You can’t really see it coming all the time but you need to be prepared for it if it happens. Hence the need to be firm but fair. Even then, sometimes you just need to get out the eviction hammer.

Thanks again for reading,

Kevin

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Brenton Hayden December 5, 2012 at 2:16 pm

Some property management softwares like Appfolio allow you to report to Experian on their rent history. As a property manager I was able to reduce my delinquent rents numbers significantly just by implementing this. Many people tend to prioritize their rent too low, and when you help them to see that this should be prioritized higher, results begin to be seen.

Also, payment plans are a good way to get a tenant to make progress. When one is established, make sure they follow through, and never let your tenants go over 30 days past due without some serious soul searching. As a manager of 2500 units, I have seen less than 2% of tenants past 30 days ever get caught up. The author is spot one, this is a business and should be treated as one. Leave emotion at the door. This doesn’t mean be cold, but means business first.

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Kevin Perk December 5, 2012 at 9:16 pm

Brenton,

Thanks for reading and commenting.

Yes, you can report some tenants to the credit reporting agencies, some will care about that but others will not. Depends on who you are renting to.

We do tell people upon move in that rent gets paid first. Then everything else. Does it sink in? Seems to as we do not have to do many “evictions.”

We have also used payment plans with success. Sometimes tenants do lose their jobs but bounce right back the next month and they just need a little time to catch up. No need to beat somebody when they are down and we are glad to help a good tenant over a short rough patch. It is much more costly to have the unit go vacant and lose an otherwise good tenant than to lose a little bit of rent.

The key is communication, both from the tenant and the landlord. As long as the tenant is telling us what is going on and showing progress we will try to work with them. But you are correct, if they get too far behind they will likely never catch up, so you the landlord have to be the “squeaky wheel” and stay on top of them.

It is hard for newbies not to feel like they are being “cold” in these situations. Just remember if you do not get the rent, you do not eat. So you are not being cold, but professional. Landlording is a business and it has to be treated that way.

Thanks again for reading and commenting,

Kevin

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Tammy Sanders December 6, 2012 at 11:03 am

The day I give a deadbeat tenant money to vacate would be the day I quite the business. That doesn’t say much for the Property Manager’s ability. If you have to resort to giving cash, you should fire the Property Manager and if you manage your own you should fire yourself and secure a Property Manager who knows what they are doing.

I have been in the business for over 27 years and I would never even consider cash for keys.

I was just in court on Nov. 28th, where the tenant filed action against me. I explained to his attorney that they would dismiss the action. He said, in a cocky tone, we’ll see! SIGH! Another attorney who doesn’t know the law! Within about 20 minutes the case was dismissed. I purposely schedule my action against him the next day on the 29th. NOT a counter suit! The client settled first thing on the 29th. He left the property Nov 30th. In addition he paid Dec rent, agreed to pay rent until I secure another tenant. Paid my owners 500.00 for the emotional stress, all court cost and my fee for attending and filing the action. That day I collected 3,331.00.

A good Property Manager knows how to stay within the law, remove tenants quickly and make it advantages to the owner and tenant without giving them any money except the security deposit less damages. Now this case isn’t typical but I’ve removed 99.9 percent without even going to court. This included 2 tenants that were running drugs from the property.

I live in NC and our laws are no different than other states.

I hate for my post to be so stern but I was just so floored by the cash for keys. I couldn’t let this one go!

Merry Christmas to all!
12/8/12

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Kevin Perk December 6, 2012 at 11:38 pm

Wow!

From “a breath of fresh air” to “I should fire myself.”

These comments demonstrate some of the really great things about real estate investing. Namely, there is no one way or right way to do it. You can tailor your investing technique to meet your own personality and style and still be successful. What other line of work lets you do that?

Tammy, I am glad you have found a system that works well for you. Mine works well for me.

Thanks for reading, sharing and commenting,

Kevin

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Remrie Arrie December 9, 2012 at 8:35 pm

Might I recommend posting audio files of example (not real/private) conversations or statements. A lot can be said about the poise and delivery.

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Kevin Perk December 13, 2012 at 11:46 pm

Remrie,

Very true about how the words are delivered. I will see what I can do in the future. Thanks for reading and commenting.

Kevin

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