Rental payment in full up front?

23 Replies

I have a possible tenant that would like to lease my property for 2 years.. and pay in full up front. Obviously I am ok with this..  no chasing rent and such. But, would there be any negatives to this? And what type of clauses should I include in the lease?

Is the property in AZ?  You need to see if your state has a duty to mitigate law.  A duty to mitigate comes into play if the tenant breaks the lease.  Most states have one.

So, what can happen is, the tenant breaks the lease, then, under the duty to mitigate the tenants' damages, you have to try to find a new tenant asap using reasonable means.  You can only charge the leaving tenant rent until rent starts coming in again.

So, let's say you accept 2 years worth of cash from this tenant, and the tenant breaks the lease after 6 months or whenever.  You then look for another new tenant, and you have to reimburse the leaving tenant all of that money they pre-paid, less rent and advertising fees to find the replacement.  

And in the meantime, you probably rented to a problem tenant.  There's a reason someone offers to pay up front.  They are either trying to hide assets from a bankruptcy judge, or social security, or some agency that limits the assets they can have on hand.  Or they can't find someone to rent to them because they have horrible credit or evictions, or a criminal background.

So, which is it?  And I'm always amazed at the applicants who have terrible credit, evictions, etc., who have that kind of cash lying around.  Why is that?  Where would someone like that get that kind of cash?  Maybe from manufacturing meth?

And you would have to probably reimburse all of their ovepaid rent, and then only use the security deposit they paid to deal with damages, if they trashed your place, and be required to then try and sue them to recover damages over and above the damage deposit.  But, good luck ever collecting what they owe you, because they just took all that money and pre-paid rent to the next landlord, which means they have nothing you can collect on.

My advice: run the other way.

I agree with Sue, but I would have asked them "why" they want to do this.

Something isn't right.  Did they tell you why?

Yikes that sounds a little scary.  I would definitely not go through with it.

 

Thanks for the responses. The property is in Phoenix Az. The story goes... a family friends daughter and boyfriend attend ASU. The boyfriends uncle is apparently wealthy and is paying for them to live while in school. Awesome, nice uncle. They are 19/20 years old and very clean cut. I have yet to do a background check but doubt anything will come up. Why pay in full for 2 years? I just assume they don't care about the money, as it's not theirs, but get secured living for 2 years. The whole thing seems great, just a little too great right?

Originally posted by @A Schweda :

Thanks for the responses. The property is in Phoenix Az. The story goes... a family friends daughter and boyfriend attend ASU. The boyfriends uncle is apparently wealthy and is paying for them to live while in school. Awesome, nice uncle. They are 19/20 years old and very clean cut. I have yet to do a background check but doubt anything will come up. Why pay in full for 2 years? I just assume they don't care about the money, as it's not theirs, but get secured living for 2 years. The whole thing seems great, just a little too great right?

 Translation: Two young kids with no credit, no responsibilities, no references, and nothing to lose if they trash your place.

And an uncle who can afford to sue you.

I wouldn't rent to them.  If you do, though, I'd do a month-to-month with them with uncle as co-signer, and tell the uncle he can just send a check every month.  And get the biggest deposit you can legally get.  Because these kids will be living in the party house.  Clean cut or not.

Whenever I hear of someone wanting to pay so many months in advance with a wad of cash I think of the movie "Pacific Heights".... not to say there are any sociopaths involved here, but you need to be cautious. A month-to-month rental agreement will give you more flexibility if things go south. The uncle can set up auto pay and not need to worry about the rent being paid on time. We don't take co-signers, but we do require larger security deposits if we are taking on more risk. Good luck!

I doubt this will help, since I am in FL, however according to 2014 statute 83.49, 

"(1) Whenever money is deposited or advanced by a tenant on a rental agreement as security for performance of the rental agreement or as advance rent for other than the next immediate rental period, the landlord or the landlord’s agent shall either:

(a) Hold the total amount of such money in a separate non-interest-bearing account in a Florida banking institution for the benefit of the tenant or tenants. The landlord shall not commingle such moneys with any other funds of the landlord or hypothecate, pledge, or in any other way make use of such moneys until such moneys are actually due the landlord;"

the next bit specifies a different interest bearing account that pays the tenants. 

Basically the way I interpret that (and hopefully the correct interpretation) is that even if they prepay the full year, I just have to let it sit in an account and draw it month by month.

I guess that is better in some respects that waiting for them to mail or otherwise deliver the rent, but the main reason I would like prepayment of rent is to USE it, not just let it sit. However based on my state laws I cannot do that, so prepayment of rent means little to me personally.

If you accept rent in advance, doesnt mean its yours yet..( not earned until they actually live in the house for the months paid for)...in other words, if they successfully break the lease for uncompleted repairs u refuse to do, call in a month to month lease, etc...u may have to refund it. Interest earned on money would also be a consideration (though usually a nominal amount) and would have to be applied to rent owed. However, the reverse would also hold true, where if they damage something or had unpaid water bills etc, that could be a deduction from the prepaid rent, potentially.. Things to consider, but otherwise a good deal.

This question comes up a lot on here and often it is before the landlord has run a background check.  Run the background check and go from there.  Do not get into rent payment type subjects until you officially approve them for the unit.

Think of all the time you will have wasted if once you run the background check and they end up not qualifying.

The rich uncle story is classic though.  Tell them you want to talk to the uncle and have him co-sign on the lease.  That would be how I would approach this.

Michael Noto, Real Estate Agent in CT (#RES.0799665)
860-384-7570

Great comments. I have not looked into the interest bearing accounts law as of yet, but our thought was to leave it in a MM account and take monthly draws out for rent. We will be meeting them again tomorrow to go over the details... from there we will run the background check ect. Obviously this would be a much better situation than approving someone to rent the property.. and have to wait for payment every month, or chase it. 

Where would i find the information about gaining interest on the money for Arizona?

Since the mother of the potential renter is a family friend.. she does know the background of the boyfriend and uncle... which puts us at ease slightly. I do not see a down side to this, except no rent increase after the first year, and a little more money management in our part. I guess what worries me is, if they do break the lease, what exactly we have to give back. A property manager friend stated he charges a 2 month rent fee for a break in contract, which allows the owner to cover expenses of the property while he finds a new tenant. I believe Sue Kelly stated something very similar.

Originally posted by @A Schweda :

Great comments. I have not looked into the interest bearing accounts law as of yet, but our thought was to leave it in a MM account and take monthly draws out for rent. We will be meeting them again tomorrow to go over the details... from there we will run the background check ect. Obviously this would be a much better situation than approving someone to rent the property.. and have to wait for payment every month, or chase it. 

Where would i find the information about gaining interest on the money for Arizona?

Since the mother of the potential renter is a family friend.. she does know the background of the boyfriend and uncle... which puts us at ease slightly. I do not see a down side to this, except no rent increase after the first year, and a little more money management in our part. I guess what worries me is, if they do break the lease, what exactly we have to give back. A property manager friend stated he charges a 2 month rent fee for a break in contract, which allows the owner to cover expenses of the property while he finds a new tenant. I believe Sue Kelly stated something very similar.

 Oh, this is also the kid of your friend.  Also a really bad idea.  It's so true that you shouldn't mix business with pleasure. I also learned this the hard way.  If you end up having to evict, you also lose a friend.

I'm sad that you don't see the down sides that have been spelled out to you.  I'm afraid this will be a costly mistake for you, but I sincerely hope you are lucky with this tenant and you can thumb your nose at all of us naysayers.

BUT, you do really need to learn the laws for your state.  Or get an attorney who knows them - and then follow his advice.

While payments up front certainly exist (I have a friend who lives in New York who pays one year up front simply because she just came from a foreign country with no credit), unless you know someone you trust who plays this game as well, I will see if there are alternative tenants as well. 

These are usually not your Mr. and Mrs. Averages who you would want to mess with. Better to stick with your typical tenants.

I do appreciate the feedback from everyone. I cannot say i am an experienced landlord, but it seems renting the property to someone close to me knows, seems a better situation than renting to a random stranger. Also they are not friends of mine.. the mother is a family friend, not my friend ( Mother in law's friend). If we have to evict i could care less about the mother or daughters feelings. Business is business imo. If they do not have a negative background check, would it not be a better position than a random person passing a background check, and paying month to month?

Originally posted by @A Schweda :

Great comments. I have not looked into the interest bearing accounts law as of yet, but our thought was to leave it in a MM account and take monthly draws out for rent. We will be meeting them again tomorrow to go over the details... from there we will run the background check ect. Obviously this would be a much better situation than approving someone to rent the property.. and have to wait for payment every month, or chase it. 

Where would i find the information about gaining interest on the money for Arizona?

Since the mother of the potential renter is a family friend.. she does know the background of the boyfriend and uncle... which puts us at ease slightly. I do not see a down side to this, except no rent increase after the first year, and a little more money management in our part. I guess what worries me is, if they do break the lease, what exactly we have to give back. A property manager friend stated he charges a 2 month rent fee for a break in contract, which allows the owner to cover expenses of the property while he finds a new tenant. I believe Sue Kelly stated something very similar.

 If you haven't already, consult your state statutes. Arizona State Statues Title 33 Chapter 10 looks like a promising start. Google is another viable alternative where you may find someone "plain speak" a statute but reference the legal info for your benefit.

He could end up being the world's worst tenants and you're stuck with him for two years. That's the big downside. I will make sure to run a credit check on him as well. He may give you a check in full for two years and that check may bounce and he's instantly a problem.

Originally posted by @A Schweda :

I do appreciate the feedback from everyone. I cannot say i am an experienced landlord, but it seems renting the property to someone close to me knows, seems a better situation than renting to a random stranger. Also they are not friends of mine.. the mother is a family friend, not my friend ( Mother in law's friend). If we have to evict i could care less about the mother or daughters feelings. Business is business imo. If they do not have a negative background check, would it not be a better position than a random person passing a background check, and paying month to month?

 Assuming everything goes smoothly, you may be right. Renting to people you have a quasi-connection with and are prepaying would be better assuming all goes well than renting to a stranger paying month to month. However, that is assuming an awful lot for that time period.

I went ahead and did some more research for you:

"33-1321. Security deposits

A. A landlord shall not demand or receive security, however denominated, including, but not limited to, prepaid rent in an amount or value in excess of one and one-half month's rent. This subsection does not prohibit a tenant from voluntarily paying more than one and one-half month's rent in advance."

Again, I am not a lawyer and this is my possibly incorrect interpretation: If you rent to them, and let them prepay, it can't say anything about it in the lease. They have to volunteer it on their own. So to your original post of 'what clauses should I include?', I don't see how you could include any without violating the above statue.

According to "http://landlords.about.com/od/LegalIssues/a/Arizona-Security-Deposit-Law.htm", regarding how to store deposit (and I assume this would apply to pre-paid rent):

"How Must You Store The Security Deposit in Arizona?

The state of Arizona does not have any specific rules for storing a tenant’s security deposit. It does not have to be kept in any financial institution. In fact, the landlord is allowed to use the security deposit during tenancy to cover situations that have been spelled out in the lease agreement.

The landlord must have the appropriate funds due to the tenant available to return to the tenant upon tenant move-out."

Again, all information is "take at your own risk", and if you really REALLY want to be right, go pay someone who does it for a living.

I don't know about AZ, but I think Maryland law prohibits the prepayment of rent in this manner. I'd check that too.

I just accepted 12 month of rent pre-paid from an existing tenant. It was apparently more convenient for them to prepay then have to worry about the monthly payment. I documented it and made sure they understood that the funds would be credited towards monthly rent when due. According to state law, the prepayment would function as a security deposit. If there was a fee due for tenant caused repair, it would also come with these funds. Also in the event of an early lease break, I would be obligated to rent early as possible but would mitigate the vacant obligation. I also told them that this doesn't change the world for me except some extra paperwork now. Extras or leniency on lease rules will not be any more likely with this arrangement. 

As far as the mixing business with pleasure. I like to associate with like minded folks. If I rent to a friend or family, they know and accept before we do business that this is my livelihood and I will operate as business as usual, even more like a father coaching their sons team, they will probably hold greater scrutiny. Hasn't been a problem on either points. My recommendation is to focus on providing and fostering extraordinary communication.

I personally don't want that much rent in advance. IMO it is a liability. Laws vary by state and you need to know your state laws. If you don't manage properly (I am not saying you do---I have no idea) you could possibly need funds and use the advance rent. Then..what if they break the lease and you don't have funds? If you do decide to accept advance rent, put it in a segregated account and don't touch it. Same thing with security deposits. If a situation arises where you need the funds, you will have them.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

Arizona law states you cannot require more than 1.5x rent as a security deposit. They can volunteer to pay more, which is fine according to the law. I have spoken with a PM friend who says everything is legit.. as long as you don't require more than that amount, and you hold the funds in reserve and take the monthly payments from the total amount. I have not received a check yet.. so the whole deal is still in limbo. But I will gladly take a 30k check without question. Never been one to turn money down.

I had someone offer to do this a couple of times. Each of them turned out to be less than ideal. I would not do it. My biggest question as I have seen on this thread already is why would someone want to do that?

So it turns out.. We did sign a lease with these tenants for one year. They did not pay in full up front, but will pay monthly. Just thought i would update. Although their intention of paying up front originally.. was because they were allocated living expenses out of a trust while they attended college. I would have taken a check for the full amount though :)

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