This post stems from a current issue we are facing in our business. Let me elaborate:
We had a new tenant-buyer move into one of our mobile homes and land properties in June of this year. The previous tenant-buyer could no longer afford to pay the rent, so we offered “Cash for Keys” to avoid going through the formal eviction process and the result was the home in better condition than the day we sold it. However, there was a minor issue with the central A/C so we turned the electricity on so that our A/C guy could fix the issue.
If the electricity is still in our name on the day of closing (like it was in this case), we ask the tenant-buyer to put the electricity in their name within a week of moving in.
Fast forward to three months later and the electricity is still in our name. We have been paying the electricity and then adding that amount to the tenant-buyer’s monthly rent payment. I should add that they have been paying on time. It hasn’t harmed us financially but obviously we are not a utility company and would rather avoid this accounting headache.
In our rental agreement, it states that the lessor (us!) are not responsible for the electricity; however, this is a bit vague. I have since added that if the electricity is turned on in our name, they have 5 business days from the date of closing to get the electricity transferred in their name or we’ll shut it off (be sure to check your state laws.)
We also do a better job of reinforcing this verbally now at the closings.
You may be thinking: “Why don’t you just have the electricity turned off?”
My initial recommendation was to have it turned off within the first couple of weeks after closing. My dad and business partner believed that we should give them a little more time. We finally agreed that the latter was a better decision and here was our logic:
You have to know your tenant/buyer. Ours have steady employment/income but have little in savings. After this tenant-buyer had made a down payment to us, they had little left to make the deposit for the electricity and owed the electrical company a few hundred dollars in unpaid bills. Without electricity, they weren’t going to stay in the home. We also wanted to start the relationship on a positive note.
Looking back this definitely isn’t our problem and we should have been firmer. The reality is that they didn’t do what they had agreed to do.
(**Quick detour: Even though we probably chose the wrong decision in this case, there have been countless times where having differing opinions from each other has helped us evaluate the best decision. And this isn’t just limited to partners. BiggerPockets can be a great source of bouncing ideas off of your fellow investor.**)
Let’s Look at an Overview of This Situation:
- We have learned our lesson which will prevent future mishaps like this from happening with a better lease and better verbal expectations.
- We haven’t lost money, but we have lost time in keeping up with the current balance.
What to Do?
We had decided to tell the tenant-buyer that we are turning off the electricity one week from our notifying them and it would be in their best interest to have the electricity switched over into their name before this date.
The power was turned off on Monday and was not expected to be reconnected until Friday (they needed time to come up with the money to pay the electrical company and were using a generator in the meantime.)
They submitted their online rent payment on Thursday so it appears that they are going to stay.
How have you handled similar situations?
Photo Credit: aturkusBeing Too Easy-Going on Your Tenants: A Case Study of What Not To Do by Aaron Kinney