What’s a One-Year Lease Really Worth?

by | BiggerPockets.com

BOULDER - FEBRUARY 19:  Boulder County sheriff...When landlords sit down with prospective tenants, they typically say something like this:

“You’re signing a one-year lease.  This is a contract for you to pay $9000 in 12 monthly installments for the use of the apartment.  In other words, it’s a one-year commitment.  You are responsible for the entire amount, even if you leave before the year is up.  If you don’t pay the full amount, your credit will be affected and you’ll have trouble borrowing money or renting another apartment in the future.

“Are we clear?”

“Yes, of course I understand,” says the prospective tenant.  But he may be thinking: blah blah blah.

Prospects don’t pay attention to the “commitment” speech because many landlords don’t follow up on their threats.  If a tenant splits before the lease is up, too often the landlord simply lets him go with no followup – even if the tenant is already behind on his rent payments.  I’ve been guilty of this many times myself.

However, we have the same rights as any other businesspeople to enforce our contracts.  We can use collection agencies and the courts, get judgments against deadbeats, and report them to credit bureaus.

How to do it

If you don’t know how to arrange a court-ordered eviction, learn now so you’ll be ready.  The laws are different in every state and even in many cities.  Not only that, if you screw up the procedure, all your efforts may be in vain.  Here’s an example: in New Hampshire, there are two documents: the Demand for Rent and the Notice to Quit.  The first says “you have to pay the rent.”  The second says, “you have to go.”  The state requires that you give the tenant the Demand for Rent first.

However, often a late tenant is impossible to find, so instead you can post the notices on the door.  Here’s where things get weird.  The Demand for Rent must be posted on the upper left of the door.  The Notice to Quit must be posted below it and to the right.  The idea is that since people typically read left to right and up to down, the tenant will see the Demand for Rent first, and the Notice to Quit second.

That’s how things work in New Hampshire.  I have no idea how things work in, say, Minneapolis, so if I ever buy property there, I’ll get in touch with a Minneapolis real estate attorney first.

Collection agencies and credit reporting have their own set of rules.  We cannot submit information to credit reporting agencies such as Equifax ourselves; the information must be submitted by a licensed collection agency or a court.  In either case, you will incur costs.

With a collection agency, you pay either a flat fee or a percentage of the debt owed on contingency (only if they collect).  You must submit documentation such as the lease and any written attempts to collect.  To get a legal judgment from a court, you will again have to submit documentation.

When you shouldn’t enforce the contract

There are many times when you will not insist on strict enforcement of the contract.  If your tenant isn’t paying because he simply can’t afford it, you may want to try the “let’s part friends” option: the tenant leaves the unit in broom-clean condition by a certain day and you will not pursue him.

Another reason not to pursue the tenant is if you haven’t been an angel yourself.  Review the lease and your own behavior with the tenant.  Has your maintenance fallen short?  Could the tenant make a legitimate case that you haven’t lived up to your own obligations?  If so, then pursuing him in court or through collection will probably waste your time.

Sometimes you’ll let a tenant out just to be a nice guy.  I did this a few years back when my excellent tenant fell in love with a woman from Vermont.  The two got married and naturally wanted to live together – in the Green Mountain State.  Who was I to stand in their way?

I hear they are now divorced.  Maybe I should have held Bob to his lease – it would have saved a lot of trouble later.

Image by Getty Images via Daylife

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