Involved In Real Estate · Potomac Falls, VA · Member since 2012 · 203 posts · 31 votes
I have an applicant who has just ok credit (average) but had a few late payments on last lease due to something or other. He told me a story, but I generally don't invest in "stories". However, he said to make up for that, he would just pay the entire lease period up front. Assuming i clear all his other criteria (employment verification, references etc), is this something NOT to consider? I'm having a hard time finding the negative.
Andres Piedra Just out of curiosity, what would the total amount for the lease term be?
I would be suspect of someone with poor rental history and average credit throwing down a large lump sum of money for a lease.
I wouldn't discount it entirely, but I would definitely ask a lot of questions.
i think its still important to do your research when screening the tenant. he might be able to pay full year lease now but what about after the lease is over. what debt does he have, and whats the deeper reason for paying up front, does he have a stable job. treat this as you would any potinial tennant dont just see the big check.
I actually have some tenants who do things like this. One paid 2 months rent every month for the first 6 months. It is fine to take their money if they pass your due diligence. If the only problem was paying late, great do it, if the problem was evicted because he got drunk and trashed the place, then do not do it.
All great points! Thank you! I'm going to verify this guy like crazy. His source of income is Veterans disability. I'm going to have to scrutinize this greatly. I'm 80% Veteran Disabled and that would just barely cover the rent on this property. Even if he is 100%, I doubt it would meet my "income = 3x Monthly Rent" requirement.
If I ask you where you got your money would you tell me you get the picture what will landlords think of next. If he passes the test collect for one year, and you want to have to worry about rent for one year.
I have a good friend who is a renter (not my tenant) and he pays his rent in six month segments. I think he just prefers it because he doesn't have to think about it every month. He is also self employed and the money stream is kind of erratic, so he just saves up the rent for the next period and sets it aside.
Now if your guy is getting a regular disability check that's a different situation. But maybe he's just frugal?
I've never gotten a year up front, but I did have a tenant who's mommy paid the rent six months in advance every time.
I currently have a tenant I rented to with no job, but an 800 credit score and a fat bank account. She also paid six months in advance. No problems.
If this applicant passes your screening, I would go for it. You might want to add a stipulation in the lease that the tenant is VOLUNTARILY paying for the full year in advance. In my state, it's illegal to charge more than a month and a half for a security deposit and they consider anything that could be refundable a "security deposit". Since a tenant could die or get out of the lease due to a domestic violence situation, the rent could be refundable. It's a gray area, but I deal with it.
Like you said screen very carefully. I would be surprised if he actually applies once he finds you are actually going to screen. The full year rent in advance is the head fake for the landlord to see dollar signs and not screen applicant. After all what could possibly go wrong, I have a whole year's rent? The answer is more than you can imagine. If you want some suggestions as to what could go wrong post back.
I wouldn't take a year's rent upfront as they can have other issues and I can't show the source of funds and you may have tax issues on quarterly payments as it is received. See if you can put the funds in escrow to be disbursed upon request subject to compliance with the lease terms and have him pay any related fee. And, as mentioned, I'd still check him out. :)
Who came up with the 3x Monthly Rent" idea? Was it in a book at Wal-Mart.
Joe Gore
Ha Ha.
It's what HUD uses for Section 8 tenants! 30% of Section 8 tenant's income is supposed to go toward rent; 3x is roughly that but the math is easier to do in your head with 3x.
I've done this before once. The guarantor was rock solid and the tenants were their in-laws coming for an extended visit from overseas, so no rental history. The guarantor offered a year upfront in exchange for a modest discount, which I accepted. I had a credit card balance at the time for a similar amount at a few percentage points higher than the discount, and I used the money to pay that off, so it was a win-win. They've been model tenants.
On a slightly different angle, check with your jurisdiction's tenancy laws first. Here, on a residential lease, we are not allowed to request or accept rent further in advance than the next rental period. The only avenue available to us in such a situation is Bill Gulley suggestion of having the funds placed in escrow and rent distributed from them monthly.
This happened to me. Verified the employment and income from her 'boss' who later turned out to be a pimp with a Tax prep company on the side. Tenant moved in and proceeded to turn tricks in the rented condo. The neighbors complained about the noise. I had to buy her out of the lease.
I now prefer tenants who have enough to pay rent, write checks from their bank vs. cash/money order, and who don't have enough for a down payment.
I'd be skeptical why someone would pay so much up front. It is business dumb so I'd seek a very good explanation.
We currently have tenants (a couple with three kids) who paid a full year rent up-front in addition to one month Security deposit - $1150 x 13 = $14950 cashier check when signing the lease. They just immigrated to US so don't have any employment, credit or rental history. The father seems having his own business in his native country and fly between US and his native country often. The tenant's brother-in-law and mother-in-law bought houses in the same community so they would like to live in the community as well.
Most tenants don't have bank accounts and what is wrong with money orders. Rick there is nothing to be skeptical of someone wanting to pay one year in advance unless you are a new landlord.
If I ask you where you got your money would you tell me you get the picture what will landlords think of next. If he passes the test collect for one year, and you want to have to worry about rent for one year.
Joe Gore
I would want to know the source of income , whether it be savings , lottery winnings , or rich uncle . I have a customer who owns a lot of low income rentals , he accepted 6 months up front only to find the remnants of a meth lab on the 7 th month .
I have another tenant who for the last eight years has only paid in cash. Since she'll probably not leave for another eight years, I'll tolerate it, but I don't prefer it. It is a red flag.
On the other hand, tenants who pay with auto-bank draft on the due date seem to stay longer and I have fewer issues with them.
Paying a year in advance is dumb. As some others have noted, it's not a deal killer but a red flag. Often, it can be explained. However, sometimes it's indicative of issues.
I disagree most people don't trust banks anymore. Why should you worry about someone paying their taxes, and I know a few landlords that will hire a CPA to get them out of paying taxes? I understand it might raise a red flag with new landlords when someone wanting to pay one year in advance.
I've had literally hundreds of tenants. I've heard a lot of BS stories, like I'm driving a Benz but can't pay the security deposit. I've heard the I'll pay a year in advance line many times. The last time that I heard it was only a couple months ago. Prospect said I know my credit is not so good but its due to going through divorce and the debts run up by my ex. But I'll pay you a years rent in advance. I ran the credit and it was not good, but I said that I would only rent to this prospect if a years rent was paid in advance. Drew up the lease as such and made arrangements for meet prospect. At the meet the prospect tells me that only 3 months rent would be forthcoming and that I was asking for too much. I didn't ask for anything, I was rejecting this prospect and the prospect initiated the idea of paying a year in advance. Come to find out that the prospect would have had to liquidate a 401K to pay that years rent. No thanks.
The one time that I did get the year in advance, a prospect, also ready to be rejected by me said that they could pay a year in advance. That was after I asked what the source of income was and was told EBAY. Not exactly a steady form of income. The prospect didn't have any other job, but the person did have a large inheritance. I rented, took the check to the bank, but later ended up evicting.
There's that old saying if its too good to be true, it probably is. If somebody can afford to pay a years rent in advance, there's probably some reason why they are not buying a house instead of renting.
Most tenants don't have bank accounts and what is wrong with money orders. Rick there is nothing to be skeptical of someone wanting to pay one year in advance unless you are a new landlord.
Most tenants don't have bank accounts? What? Mine all do. Responsible (financially and legally) have bank accounts. If they can't get approved for a bank account (bad credit, in ChexSystems, not legal), that's a red flag. It's not a good sign to not have any sort of bank account or even pre-paid debit card.
People that say "I can pay one year's rent" before screening are a huge red flag. They want you to not screen them-- they're giving you a carrot and dangling a year's rent in front of you hoping you bite and not ask many questions.
They want you to say "Oh, lots of cash upfront ... this person must qualify" when really they're likely either unemployed, hiding something, in a cash business (hooker, drugs, something sketchy), or don't want you to run their credit/references to see their previous evictions and unemployment.
Some people are rich and can afford a year in rent. Most financially responsible, well-off people don't want to pre-pay a year's in rent when they could invest that money and earn interest on it. If they have a large cash sum, you also have to wonder why they're not buying a house.
Or, why they're offering something that's not necessary- pre-paying rent. If you qualified for a rental apartment, why "give" your landlord "free money" for a year that you could invest and gain a return on? Why dangle a carrot if you're not hiding anything?
Occasionally you get someone who has stellar credit, a verifiable job, and impeccable rental references with great income that just doesn't want to have to remember monthly rental checks. Those applicants are few and far between. Or you get someone who wants to pre-pay rent for, say, their college kid or special needs adult child. Maybe you even get a retired person that travels often and wants to pre-pay. In some instances, pre-paying makes sense.... but verify everything on their app even more for dangling an unnecessary carrot upfront.
It's not the pre-paying in and of itself that's the largest red flag here-- it's a tenant offering to pre-pay a year's in advance before you even run their application. They're dangling a cash carrot in front of you for a reason. If they were well-qualified and well-off, they would just let you process their application as normal then simply mail you a check for the year later on without mentioning it to you during the screening process.
Check your state laws. In Florida, advance rents must be held in a segregated account and cannot be used until earned. So, a guy pays $12,000 rent and you can only pull $1000 per month from the segregated account. I see no value under those terms.