CREATIVE SOLUTION NEEDED!

Buying & Selling Real Estate
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CREATIVE SOLUTION NEEDED!

David Jayne
Real Estate Investor · Stuttgart, Germany · Member since 2013 · 40 posts · 5 votes

BP Experts,

I have a tenant in a property nearing the one-year mark of a two-year lease. She just contacted me and told me she and her husband are getting a divorce, and she will no longer be able to afford the rent. She has asked if I could lower the rent to something she could afford, which would be another $250/month from what I would consider a very favorable rent.

The good news is, I've been kicking myself for signing a two-year lease on the property, as this summer would have been a good time to sell. The property is costing me money every month. Not a lot, but it was an accidental rental. It was a former residence that I turned into a rental with the intention of returning to live in it at some point. That potential option is now off the table, so I would like to sell it and reinvest in a property with positive cash flow.

So, I'm looking for a win-win solution here. I'm considering accepting a reduced rent and not enforcing the lease in exchange for assistance in getting the property ready for sale (basic touch ups, paint, small repairs, etc.), always having the property ready for a potential buyer to visit, and moving out as soon as the property is sold. I would help out on the move if possible.

The only potential problem I see is there is basically no incentive for the tenant to put in 110% effort to help me sell the property since she is getting a reduced rent (I'm having flashbacks of the movie "Stepbrothers" when they pull all kinds of shenanigans in order to keep their parents' house from selling!). The other option I was considering was offering whatever is left of their security deposit after repair costs and whatever costs are incurred due to the reduced rent (the difference in their lease rent and the agreed to reduced rent) as an incentive. Thus, the sooner the house sells, the greater portion of their deposit they would get back.

Not sure if anyone else has done something similar or has any recommendations for me, but I would appreciate any wisdom you have. Thanks!

David

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y

    @David Jayne - In this situation, discounting the rent is a BAD idea, especially if the property already operates at a loss. I think you are going to have to stand strong, but have a few options that could be offered. Being $ 250/month off on the budget is a lot, no matter how much the rent is. This should be a warning sign that your tenant is headed for financial trouble and you don't need to get dragged into it.

    You didn't mention how neat your tenant is. If she is "less than ideal" in her living habits, I would simply offer her the chance to get out of the lease in 30 days (maybe a touch longer but don't get taken advantage of!). If she agrees to leave the place in clean/rent-ready condition, refund her full security. That should be all the incentive she needs. If it is left dirty or beat up, then she will have to pay damages out of her security.

    On the other hand, if she is cooperative and very neat by nature, you may benefit more by showing the house as occupied. I don't know that I necessarily embrace the idea of a tenant doing any repairs, including painting. Quality control is difficult. Having furniture/personal property inside will help to distract from many surface blemishes. I don't know the current property condition, so you are in a better position to assess that. I would DEFINITELY renegotiate and sign an amendment to the current lease switching it to a month to month lease before listing the house for sale, which can be cancelled by you with 30 days notice. Get it signed by you and her as well as her husband if he is on the lease. This needs to be done now while everybody is getting along and facing reality. I still wouldn't offer a $ 250 concession, but maybe more like $ 100-150 if you really feel you have to give something up. The goal is for her to "feel the pain" a little bit so that it is relatively easy to get her out for the next owner. If you give her the full concession, then she has no incentive to leave.

    In her current situation, I am sure she is doing much soul-searching and dealing with a lot of life altering decisions. This is the perfect time for you to "be real" with her and simply tell her that you, personally, are not in a position to give up on the monthly rent amount. Unless she is mentally unstable, I would go so far as to tell her what your situation with this property is, that you lose every month and the best option for you is to sell the property. Present this as a win-win for both of you. You are helping her by allowing her a smooth escape out of a lease she can no longer afford, and she is helping you grease the wheels to a sale.

    Worst case scenario, if the house doesn't sell, you are set up to get her out of the way so you can put somebody else in her place that can afford it. A lease can be cancelled pretty easily if both parties agree and sign-off.

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  • Tom Goans
    Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
    13y

    @David Jayne,

    This would be my approach, which is based on my many years of experience. Every person is unique and so is the situation. So this may not work for you.

    Have a casual, yet informative, conversation with the tenant. Discover, without interrogating, what her financial situation is or appears to be. If she is getting a divorce, she will not know for sure until the ink is dried on the divorce papers.

    I have always used two rules of thumb:

    1) Avoid being more than 25 percent of the NET income.

    2) Make sure the tenant/borrower has the ability to enjoy life and still pay the rent/mortgage without sweating bullets. They should be able to go to out for dinner occasionally or to a movie without it busting the budget. If buying a tub of popcorn is challenging, you have challenging times on the horizon.

    Your conversation will help you to understand her financial position better - and she will have a better understanding herself by saying it out loud. Now, both of you have a better understanding of the stability of the future. Both of you can better plan your future - and budgets.

    While it sounds like a good idea, NEVER enter into an arrangement with a tenant to do work for you. It almost never works out and generally winds up causing more problems than good.

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  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    13y

    @David Jayne

    If you are already losing money, agreeing to lose EVEN MORE money sounds like an EVEN WORSE proposal. Let her know that you simply cannot do that based on the market. However, you will be gracious and as long as she leaves the property in good condition, willing to let her out of her 2-year lease with no penalty.

    Talk with a real estate agent and see what you can sell the property for. If you can sell quickly, and have a tenant leave on good terms, then it's a win-win.

    Podcast Guest on Show #29
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  • William CollinsPro Member
    Investor · Rocky Hill, CT · Member since 2013 · 373 posts · 299 votes
    13y

    I would agree with @Dawn Anastasi that the win-win is a sell scenario which allows the tenant to stay until the point of sale. Some requirements would be a staged ready house as a condition of the discounted lease @David Jayne . The other condition would be to quit to the house in broom swept condition early in consideration for return of the security deposit. This gives her an early lease leave, time to find another abode, and a path to return of security deposit. For you this lets you sell the house, have it staged, and have the tenant help cover and minimize the loss until the sale.

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  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    13y

    One consideration is that if the house is vacant, it's slightly easier to show as you're not disturbing the existing occupant. Plus you can stage it any way you want for selling.

    Some Bigger Pockets blog articles on staging:

    What is Home Staging

    Home Staging - Why you Can and Must Do it

    Podcast Guest on Show #29
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  • David Jayne
    OP
    Real Estate Investor · Stuttgart, Germany · Member since 2013 · 40 posts · 5 votes
    13y

    Thanks to all for you inputs. I will let you know how it turns out.

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  • Billy Rogers
    Investor · nowhere, TX · Member since 2012 · 242 posts · 84 votes
    13y

    I'd forget about asking her to paint and fix up the property, but I don't think it's a bad idea overall. It depends on your financial situation. Can you handle an empty property for several months while waiting to sell? Is she a slob? Personally I probably would lower the rent if she was willing to let people into the house for showings and would be willing to move out with 30 days notice.

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