Security deposit up front only option?

45 Replies

We have a potential renter who is offering to pay 100 dollars more per month for the 1st six months until the security deposit is paid.  She is currently staying in a extended stay for $250 per week.  She said she found another property to move into but it was rented out from under her.  Our property is a 1/1 but has a extra room that could be used as a bedroom.  She has a 17 year old daughter that will be living with her.  Also she has a couple kids in college.  Is this a normal offer to let a renter pay the security deposit over the first 6 months instead of all up front?  We were thinking about making it nonrefundable to allow her to do that.  The property is in a C class neighborhood so it is not the best quality tenants interested in renting.

I think its a huge red flag.  The times I've done this I've always regretted it.  There was always some excuse for why the deposit couldn't get paid.  If this is really your best option, get whatever you can for a deposit and then increase the rent to give you some additional income.  For instance, get $300 up front and increase the rent by $50 a month (indefinitely, not just six months.)

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We are not in a jam.  The property has been vacant for 2 weeks which is how long we have owned it.  We have had many people interested but not many make it past the first step of responding to the listing.  We had a few stand us up to look at it and a couple say they like it then we cant get them to fill out the app online.  When dealing with a C class property I guess this is expected.  Also this is our first experience with being a landlord and vetting potential tenants.

@James Wise    My partner is supposed to be meeting her at the property as we speak to show it to her.  So we will see how that goes.  I would like to make sure our first experience with rentals are a good one.  I don't want to be in a situation where the tenant is creating issues right after they move in.

My advice is don't do it.  If someone's looking for a place they know that the deposit is going to be needed.  If they can't get their financial act together to have both the deposit and the first month's rent they really aren't ready to rent.

Also a few other tidbits.

1) The best option is to sign the lease, hand them the keys and collect the money all at the same time.  Folks sometimes sign a lease ahead of time then the tenant backs out.

2) I will only hold a unit for a week or so.  At this date (Dec 3) you're going to get lookers who want to move in Jan 1.  I would not hold the place for a month.  Rather, if I had an acceptable applicant I would offer them the right of first refusal and continue to market the unit.  That is, if another qualified applicant came along and wanted the place on Dec 10, I'd offer the first applicant the option of signing a lease on Dec 10.  If not, the second applicant gets it.   Our market is very tight and I'm pretty confident I could put up a for rent sign today and have a new tenant this weekend.  Yours may be different.  

3) The initial payment is for the FULL deposit and one FULL months rent.  In cash or equivalent.  No checks, not even cashiers checks.  Any prorations are for the next month.  So, if I had a new tenant on Dec 10, on Jan 1 they would only have to pay 2/3rd's of a months rent.

4) I only show once a week.  I tell everyone the same date and time.  Hopefully they show up at the same time, but its unusual.  I also tell them to call me ahead of time or I won't be there.  I tell them 30 minutes, that's about how long it takes to get to my properties.  I do not call them.  That doesn't work.  If nobody calls (rare, if I have at least three scheduled) then I don't go.  This is for an upcoming vacancy.  I might be a little more aggressive with a vacant unit.  But I long ago gave up on running over ASAP for everyone who wants to see the unit.

@James Wise is on the money here - just don't do it. You are a new landlord and you are dealing with a wily tenant here. Someone who is saying they don't have a security deposit up front is either living on a razor's edge cash wise or is playing you for a fool. Neither are good scenarios. Frankly I wouldn't try to negotiate anything better with this tenant. Anyone who suggests paying the deposit over time is simply telling you that they are not qualified to rent the unit. End of story.

As you will see in posts here on BP time and time again, tenant screening is pretty much the most important decision that landlords make (after that its selection of properties in my view). Miss the warning signs with prospective tenants and you end up with all sorts of headaches. But this tenant is doing you a favour, they are giving unequivocal signs that they will be trouble from the start. The decision is easy, move on to the next applicant.

@Ryan Billingsley I should add I know whereof I speak. I had a tenant a couple of years ago who could not pay first and last month's rent up front all in one go. I ask for it early on partly to test their cash reserves. If they can make the payment all up front then they have savings, and that is a good thing. This guy suggested a payment plan and I had been trying to lease the unit for quite a while, so I said yes. He paid in three installments prior to moving in - quite different from the plan that is being proposed to you. But once he was in he turned out to be the biggest pain in the neck. A truly unpleasant individual, and I could have avoided him if I had paid attention. Sometimes the best advice is advice which you did not follow yourself, and so it is here. I would follow @James Wise and @Jon Holdman in taking heed of these warning signs. A tenant that cannot or will not float required monies up front is a tenant to be avoided. You really can't afford to make this mistake with your first tenant acceptance decision.

I have done payment plans before and sometimes it worked out, ... usually it did not.  Do not do this.  If they don't have the money for the deposit they will not have the money for rent.  It is WAY better to leave it empty and get a good tenant than put a bad one in.  Be friendly but do not rent to them if they do not have the money.  I have rarely regretted leaving a house empty for more than a month at best.  I have regretted putting the wrong tenant in for years.

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A pretty simple formula is, "Show me a tenant who doesn't have full move in funds and I'll show you a tenant who not have full rent within six months." (And 6 months is unusual, it's usually the very next month.)

That being said, Jon is on the money, but if you want to take the risk, make sure you're being compensated.  Making the deposit "non refundable" does little to compensate you for your risk. Now the tenant has "nothing to lose" when she moves out.  I like Jon's idea of increasing the rent indefinitely, but there again, she has to "sucessfully" stay in the apartment long enough for you to profit from that increased rent.

Compare this scenario to an "average" situation. Qualified tenant who has full month's rent plus security and passes muster. What can you get from this situation for "compensation" that will offset the "risk" you're taking? If nothing, I'd suggest move on.

Hi @Ryan Billingsley  ,

The advice here from everyone is good advice, and I agree that it is a red flag.  However, I will take a different approach based on experience.  I have tenants currently that were not able to make the security deposit payment upfront.  We agreed to a monthly payment plan of a fixed amount over the 1 year lease term, payable each month along with the rent.

Important:  Get a signed contract that details the installment plan and attach this to the lease.  Make sure it is thorough and is signed by both you and tenant.

I include a 5% late fee in my lease and I had this apply to the security deposit portion as well.  So far, things have worked out just fine.  Again, if you can find a qualified tenant that has the full payment available then go that route - you don't need to settle if you have the room.

Good luck and happy investing,

Mike

Originally posted by @Account Closed :

If you just "have to"  GET A COSIGNER!!!!!

If they would be acceptable with a co-signer or a guarantor, then the co-signer or guarantor should put up that move in money before the move in. So a co-signer by itself is not sufficient IMO. 

Absolutely!  All persons should be on the lease including the Co-Signer.  

If a landlord truly wants this applicant bad enough, then get a Co-Signer.  The more people on the lease that is responsible and COLLECTIBLE the better.

Nancy Neville

A tenant will say and promise anything to get the keys. I have a tenant now, going on 3 years, in a Class C/D area who did not have the full security deposit herself at the time, but had a job. I told her up front there was no negotiation for the security deposit, and she was able the get the entire amount from her church. In these areas, sometimes tenants can get it from a social services organization or even Catholic Charities.

Let the tenant figure out how they can get the deposit - if you tell them no right up front, they will find a way. And if they don't, they'll likely not be paying the full rent either.

Be careful about making security deposits nonrefundable. I don't know the law in your state, but you should find out. Class C properties are challenging, and you'll get all kinds of scenarios.

Originally posted by @Ryan Billingsley :

We are not in a jam.  The property has been vacant for 2 weeks which is how long we have owned it.  We have had many people interested but not many make it past the first step of responding to the listing.  We had a few stand us up to look at it and a couple say they like it then we cant get them to fill out the app online.  When dealing with a C class property I guess this is expected.  Also this is our first experience with being a landlord and vetting potential tenants.

First time as a landlord and vetting potential tenants? Be sure to establish your minimum criteria to rent, place a decent ad that gives enough information so people can self eliminate themselves if they are unlikely to meet your criteria, prepare yourself for the onslaught of inquiries, ask good questions before taking the time to show the properties. Check out my podcast #83 for some ideas. Also, under the BP Resources tab, File Place, Other Documents, you can see an example of what we use for our Rental Criteria and Tenant Screening Questions. 

We establish a reasonable security deposit requirement to cover our risk. Our risk takes hold the moment we hand over the keys. If the tenant can't afford the security deposit, they can't afford our unit.  In our telephone screening we ask people " If you are approved to rent the unit, will you be able to pay all the move-in costs at the time of move-in?  Move-in costs include: rent for the first month, a non-refundable move-in fee, and a refundable security deposit." If their answer is no, then they are not ready and we will not rent to them.

Originally posted by @Marcia Maynard :

 If the tenant can't afford the security deposit, they can't afford our unit.  In our telephone screening we ask people " If you are approved to rent the unit, will you be able to pay all the move-in costs at the time of move-in?  Move-in costs include: rent for the first month, a non-refundable move-in fee, and a refundable security deposit." If their answer is no, then they are not ready and we will not rent to them.

Absolutely right, it's a critical question to ask and I learned to do that with the first phone call, before we'll even show the unit. You'd be surprised at tenants that ask if they can make payments once you ask this. We rent condos as well as SFRs, and all the condo associations have application fees, and some require their own move-in deposits in case of damage by moving trucks and furniture. All require refundable parking decals at $50 each, and sometimes key deposits for the fitness center or pool area. 

Moving isn't cheap. Tenants that are strapped before they even start are to be avoided.