Beware the overqualified tenants

16 Replies

Well I just had another experience with leasing out a single family home. My tenants looked to be perfect. They are an older couple, both working age with no kids, good credit, and enough earnings that the rent as a percentage of income was in the teens. Looks perfect right?

Well yes and no. These tenants are responsible people meaning that the rent was always paid on time, the house was kept in good order, and generally I didn’t get a lot of hassle. The problem is that they didn’t need to be renting. Before the end of the lease, I got the call that they had an offer accepted on a house in the area and wanted to break the lease. We worked out a deal where they would pay for the month that they move out giving me some extra time to get new tenants.

While I still rate it as a good experience, this is just one more thing to think about when selecting tenants.

Although many tenants could afford to buy a house, there are many reasons that people rent.  I just approved some tenants that will only be in place for three months, but that would get me into next year and perhaps they would stay longer.  I think we all want tenants that will stay in place for ever, however, that's not always the case.  I would prefer tenants that always pay on time & don't trash the place, even if I lose them every once in a while because they do buy their own home.

I have a similar couple in one house but added a buyout clause for the lease thinking they might move early. The house is a country home and although both easily can afford it they had never lived in the country and never lived together. I am happy if they stay the year because even so they were better fit they the other candidates.   It is good you could get a solution with these tenants. 

I also had a couple who wanted a house but asked before they went looking what the lease situation would be.  I think tenants are going to leave when they are going to leave regardless of the lease.  The lease discourages moving without notice and encourages moving during your preferred time period. 

Hope you can find some good candidates now.

@Nathan E.  

If you're open to it, something to consider to maintain tenants longer term is a lease option.   You can get a non-refundable option fee up front which definitely incentivizes tenants to stay longer.

So true!  I have one rental and have only been a landlord for three years, but have already had two sets of tenants leave because they bought a house.  In fact, my first tenants literally bought a house around the corner, lol.  They rented from me for 13 months.

The next set of tenants were up front they were looking to buy a house and so, because of that, they wanted a shorter six month lease instead of one year.  I was okay with that and they actually ended staying 13 months before they found the right house to buy.

My current tenant is in an advanced educational program that will last at least 4 years.  Of course, things can always change, but I know he emphasized before we signed a one-year lease that he is looking for a long-term, stable place to stay for the entirety of his program.  Crossing my fingers I can finally get out of the "13 month" rut!

Good luck @Jennifer T. ! This is a really good point about tenants. We have a property now for rent and have already had 2 potential tenants say they only want to rent for a year before buying a house. I lost a great tenant who wanted to buy a house, too.

I have a current tenant that I did a MTM (month to month) lease for because her plan is to work on her credit and eventually buy a home of her own.  She takes very good care of the house and pays her rent.  She doesn't bother the neighbors.  I'd rather have a tenant like that than someone who parties, is late on rent, and the house looks like a disaster.

Question for everyone that has lost a tenant for this reason.  Have you offered up the house for sale to the prospective tenants?  Seems like you might be able to work out a strong relationship from the beginning.  Ive never had to try it, that's why I ask.

Originally posted by @Jason Miller :

Question for everyone that has lost a tenant for this reason.  Have you offered up the house for sale to the prospective tenants?  Seems like you might be able to work out a strong relationship from the beginning.  Ive never had to try it, that's why I ask.

Well Jason, our business model is to buy and hold. If we have a residential rental property that is performing well for us, there is no incentive for us to sell it to the current tenant. We want the cash flow, so we will retain the asset that is providing this for us. We wouldn't sell the goose that is laying the golden eggs. If the tenant offered us a deal that was quite a bit more than the value of the property, we might consider it if we could 1031 exchange into a better property.  We expect tenants will move for whatever reason makes sense for their life plan. We are okay with that.

I have tenants now that could easily buy their own house.  On paper, the best ever.  Good incomes, good credit, came up with the deposit with no problem.  Pay early every month, not only take good care of the place but even have a cleaning lady in weekly, certainly not something I did when I was renting.

They're renting because she fairly recently started a job as an ESL teacher at our local high school.  Those jobs go away pretty often if you're the junior person.  So they are renting until one of the more senior teachers leaves or retires, and someone more junior is hired beneath her.  Could be tomorrow, could be 2-3 years.  

Well, well worth it.  

Ill take that situation all day

I like your business model @Marcia Maynard  .  Controlling your pace is a positive for a lot of reasons.  What @Jason Miller  is saying about the lease option to current tenants can also help you gain control of a sale in your 1031 situation.  If you structure the lease option so that you are given ample notice and the opportunity to extend for a period of time you just bought yourself some extra shopping days over the 45 day period.  You know the price and you control the date so you can shop for the perfect next property with much more confidence that you'll have a successful 1031 exchange.  Just something to think about.

Dave

So how would you like to be in a business where you had no tenant vacancies for 3 to 5 years?

Think of the scenario: you find a perfect starter home for millennials, good schools, safe neighborhoods, good place to raise a family.

You buy the house and updated it but not to a high standard,  to a medium standard.

Tenants pay market rent and they pay right of first right of refusal fee (ROFR). Their dream is to pay rent and save for a deposit - downpayment for either and FHA or conforming loan.

They fill out a 1003 app and see a RMLO.

The purchase price is tied to a new appraisal, and they have to agree to a minimum 24 month commitment.

They set up a for savings plan through their bank on a paycheck basis, so if they get paid every two weeks, a defined amount of money is pulled out of their paychecks directly into a savings account just for the home purchase. But the money is all in the tenants' control, they just agree to keep it there and not pay bills with it.

Every 12 months they see the RMLO and see where they are at as far as getting the home loan.

If you're buy-and-hold investor and want to avoid re-renting every 12 months, you might want to be in the home ownership coaching business.

You could even have a 60 month leasing requirement before they purchase.

Also the ROFR is not an executory contract, it is just a right to purchase, unlike the option to purchase. To best my knowledge there offer does not come under the Safe act or the Dodd Frank act.

@Bill G.  may want to comment

No, Brian, you don't want me to chime in. You know I have mentioned that options can't be based on a future price or appraisal or be accomplished with requirements, conditions or required performance of any kind by the buyer. You can renew an option, but be careful as the intent may be seen as a longer intended arrangement.

Other aspects are viable if you love holding hands and playing mom or dad with a potential buyer, this is what Habitat For Humanity or other non-profit housing organizations, been there, done that.

Savings accounts are good, they can and do walk away and take their money with them.

I only read Brian's post. if anyone is interested in the non-profit side, search profits from non-profits. Much of Brian's thoughts relate to those aspects. :)

Honestly I am finding over and over again that people are breaking the lease. So I have a buy out clause and my life has gotten much better. They still break the lease but at least I get paid for the time it takes me to resent. Highly recommend!

Elizabeth, what does your buyout clause look like?

Thanks

By creatively addressing the terms of the buyout you can actually increase your revenue.  Have a desirable property at a fair price, make the tenant pay a substantial buyout fee, turn it over quickly and move in a new resident.  The buyout fee has to be enough to cover the vacancy, make-ready, and admin costs, and should leave some extra for profit.  Don't get too greedy, you want the tenant to leave as a satisfied customer.  After all, you've just negotiated a way out of their legally binding contract and saved them a lot of money!

I think you have to be careful with your terminology ("extra month's rent" vs. "buyout", etc.) and I imagine the specifics will vary from one state to another.

Matt

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