5 Ways to Protect Yourself When Allowing Rental Cosigners [With Sample Cosigner Addendum!]
A cosigner is an individual who agrees to become legally obligated for the payment and condition of a rental. A cosigner is used when the tenant cannot qualify by themselves, usually due to income or a lack of rental history. Whether or not you choose to accept a cosigner to help bolster your potential tenant’s qualifications is up to you, but if you do, be sure to:
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1. Screen the cosigner like a tenant.
They should fill out an application and be screened thoroughly, including background, income, employment, references, etc. Since the cosigner is guaranteeing the terms of the tenancy are consistently met, the landlord needs to be sure they are financially able to meet that requirement and that they exhibit the same responsible characteristics that are sought out in a tenant.
2. Be sure the cosigner owns property and lives in the county in which your rental is located.
By having these standards of a co-signer, you have a much higher likelihood that you will be able to locate them in the event that you need them to perform, since their address isn’t as likely to change compared to a cosigner who is also a renter. Renters move much more often than homeowners, so there’s a good possibility you will not be able to locate your renting cosigner when you need them.
Related: Tenant Screening: The Ultimate Guide
3. Require an application fee from the cosigner as well.
It is the applicant’s responsibility to meet your minimum standards for qualification. If they are unable to on their own, you should have no qualms about requiring the application fee to make it work with a cosigner since you have to incur the time and expense qualifying that person as well.
4. Fully explain to the cosigner that they are financially responsible for the property.
Let them know that you will hold them responsible should the tenant cause damage or refuse to pay rent. They need to understand that they are entering into a serious responsibility and not simply signing on the dotted line. You will need to have them sign a Cosigner Agreement, which will be included with the lease or rental agreement that states that they guarantee performance of the lease or rental agreement. You can find an example of a Cosigner Agreement at http://www.BiggerPockets.com/LandlordBookBonus.
Related: The Completely Free Way to Produce Customized Lease Agreements (& More!)
5. When using a cosigner, some landlords will also require that the cosigner pay a “performance fee.”
The performance fee is in addition to the normal security deposit and acts as the cosigner's personal skin in the game. They will receive the performance fee back when the tenant fulfills their lease, minus any amounts not covered by the tenant's security deposit. The performance fee gives the cosigner additional motivation to ensure compliance by the tenant since they will have to pay if the tenant does not.
When considering a cosigner, just remember that no cosigner, not even a great one, can stop a bad tenant from destroying a property. Avoid using a cosigner as an excuse to put in a terrible tenant that will just cause you headaches.
[This article is an excerpt from Brandon Turner’s The Book on Managing Rental Properties. To get more tips on successful landlording and crucial elements to include in your leases, be sure to check out the full book.]
Do you allow cosigners on your leases? Why or why not?
Let me know with a comment!