New Tenant Turned Bad or TK Company Screening Issue??

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New Tenant Turned Bad or TK Company Screening Issue??

Ekaterina Stepanova
Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes

Hi Team,

I've just started investing in RE 5 month ago thru a TK company and now facing tenant eviction and really need your input please! 

So, what happened was, I got a great 3/2 SF property in a solid B class neighborhood from a highly regarded and up-sanding TK provider back in March. They have great references on BP as well. Once the reno was completed I was told that they've accepted a deposit for my property and told me that a qualified renter is ready to move in. They explained that she/the tenant is coming with great references, income in 4X the rent, works in medical field, her relative is a long time tenant in one of their properties, so seems like a perfect match! To my request to review her credentials prior to approval i was told that its not the practice and I need to trust TK company expertise as they make sure she complies with requirements (3 times rent, references, no evictions, W2s, etc.).

Five months forward this perfect tenant missed 2 payments and stopped answering her phone in past 2 weeks or so... I just found out about it on Friday, which is 1 month and 10 days after her 1st missed payment! You would ask, how come I didn't notice rent not coming in, right? Well, seems like TK company applied her deposit for the past month and sent me statement as if everything was fine .. This month they just sent me a note saying that "unfortunately we need to evict your tenant for non-payment". I was shocked! For which non-payment? I just got a statement (not yet the money, takes a couple of days) that was stating that everything is OK. 

Well, it is all very confusing to me and I, honestly, not sure how to proceed with this company. I will now, of course, will need to evict the tenant, but what about the TK company? Was it a screening issue or just a tenant "turned bad"? How do I know and do I just eat up all these costs? Is it a normal practice not to have a "say" in your tenant selection when working with TK companies? Why did they cover up a non-paying tenant?

Really appreciate your insights!! 

Thank you!

1Reply
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y

First - as a matter of community service, I think we would all benefit from knowing which TK provider you are dealing with. I am not a fan of TK, since even in the best-case scenario, mathematically turn key just doesn't pencil out.

Having said this, there are several issues. One - security deposit are escrowed funds to be dispersed at termination in whatever way allocated in the lease. This money should not be applied to rent. If you have a statement which proves that the provider applied deposit moneys to rent, you've got a case that at the very least your TK provider is negligent...

Now - the whole notion that you cannot review tenant qualification criteria is wrong as well. If it's your tenant, you should have input. If not, then it's their tenant, which runs close to SEC.

Understand - what they've said is - Don't worry Ms Buyer; pay us the money, and we will take care of everything. Doesn't that sound like you are a limited partner - without control, and just along for the ride...?! To me it does...

But, if you can make a case that you are being treated as a limited partner, then you can make the case that the provider is breaking SEC regs. Limited partnerships are exclusions in the SEC code, and require specific mechanisms and paperwork. Reg D is the most common, but there are others. These were created to protect the consumer - why - precisely because you do not have operational control.

Having said this, the letter you received says "...unfortunately we have to evict YOUR tenant", meaning that now they are clearly drawing the line that even though they wouldn't let your input as it relates to tenant screening, they clearly consider the tenant YOUR problem. YOU have to evict. 

The way I see it, if you cannot pick your tenant - if you are releasing control to them, then it's not your tenant, it's their tenant. Doesn't this make sense? This is precisely the conflict of interest with the TK model. 

This provider is trying bake the cake and eat it too. They are trying to allocate the responsibility for the asset and tenant to you, while at the same time limit your control and participation, which is to allow them to run their business the way they see fit, meaning without you butting in. 

Whoever it is, they are not the only ones. This is the business model, and it's flowed as all hell. The privilege of RE relative to any other vehicle is CONTROL - you've released it to them. It sounded good to you, because you really never wanted to manage tenants. But, there is a price...

Finally, I bet you can't sell out now. You've paid them all of the equity, and in order to get out would have to take a loss.

That's how the story goes. Fire them. Sell the house. Realize if it smells too good, it is too good. Call it school of hard knocks, and go do better!

Tell us who this is. The community needs to know.

13Reply
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  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    10y

    Sounds like you got sucked in and played . You let someone else handle your affairs 

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    Don't feel bad. I have a tenant that looks VERY good on paper. She has been a total pain in the artery. I have looked trying to find out where I made a mistake. My broker looked at this applicant as well and said she looked great. A good tenant CAN go bad...just like an upstanding person with no criminal record can go rob a bank tomorrow. Sometimes, you never see it coming. I would be emailing the TK company for a clear explanation of everything. I would also question them applying the deposit for rent and NOT informing you immediately. You probably have NO option except to get this person out and possibly YOU look over the next app, etc and make the final decision if you want to accept them. Can you terminate you agreement with the TK company if not satisfied?

    Your issue could be both...the TK company and someone that was good now gone bad.

    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Matthew Paul

    Lots of investors have no choice but to hire others if they are absentee owners. If you get a poor manager, fire them fast.

    0Reply
  • Ekaterina Stepanova
    OP
    Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes
    10y

    @John Thedford!

    thanks so much for the comment! I can terminate the agreement, its really not an issue. I was just shocked by the way things were handled by the well regarded company ... Can there be possibly a good explanation for this?

    John Thedford Private Lender, Realtor, Investor from Naples, Florida

    0Reply
  • Ekaterina Stepanova
    OP
    Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes
    10y

    @BEN LEYBOVICH

    Would appreciate your input!

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    Ask @James Wise for input. 

    0Reply
  • Ekaterina Stepanova
    OP
    Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes
    10y

    Yes, please!!!! I was just about the 2nd property from them. I'm not saying anything yet, just trying to make sense of it all.

    0Reply
  • Ekaterina Stepanova
    OP
    Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes
    10y

    @James Wise would you please comment?

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    First - as a matter of community service, I think we would all benefit from knowing which TK provider you are dealing with. I am not a fan of TK, since even in the best-case scenario, mathematically turn key just doesn't pencil out.

    Having said this, there are several issues. One - security deposit are escrowed funds to be dispersed at termination in whatever way allocated in the lease. This money should not be applied to rent. If you have a statement which proves that the provider applied deposit moneys to rent, you've got a case that at the very least your TK provider is negligent...

    Now - the whole notion that you cannot review tenant qualification criteria is wrong as well. If it's your tenant, you should have input. If not, then it's their tenant, which runs close to SEC.

    Understand - what they've said is - Don't worry Ms Buyer; pay us the money, and we will take care of everything. Doesn't that sound like you are a limited partner - without control, and just along for the ride...?! To me it does...

    But, if you can make a case that you are being treated as a limited partner, then you can make the case that the provider is breaking SEC regs. Limited partnerships are exclusions in the SEC code, and require specific mechanisms and paperwork. Reg D is the most common, but there are others. These were created to protect the consumer - why - precisely because you do not have operational control.

    Having said this, the letter you received says "...unfortunately we have to evict YOUR tenant", meaning that now they are clearly drawing the line that even though they wouldn't let your input as it relates to tenant screening, they clearly consider the tenant YOUR problem. YOU have to evict. 

    The way I see it, if you cannot pick your tenant - if you are releasing control to them, then it's not your tenant, it's their tenant. Doesn't this make sense? This is precisely the conflict of interest with the TK model. 

    This provider is trying bake the cake and eat it too. They are trying to allocate the responsibility for the asset and tenant to you, while at the same time limit your control and participation, which is to allow them to run their business the way they see fit, meaning without you butting in. 

    Whoever it is, they are not the only ones. This is the business model, and it's flowed as all hell. The privilege of RE relative to any other vehicle is CONTROL - you've released it to them. It sounded good to you, because you really never wanted to manage tenants. But, there is a price...

    Finally, I bet you can't sell out now. You've paid them all of the equity, and in order to get out would have to take a loss.

    That's how the story goes. Fire them. Sell the house. Realize if it smells too good, it is too good. Call it school of hard knocks, and go do better!

    Tell us who this is. The community needs to know.

    13Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    As always, @Ben Leybovich made very valid points. His post is exactly why I have stayed away from TK. Thin margins are usually the case. No control. Yes, post their name. His comment about the security deposit is right. Your comment that they applied the deposit to rent sounded REALLY wrong. They may have violated state laws. Where does this leave you? If they DID violate state law, this is even more reason to FIRE THEM TODAY. And remember, they are YOUR agent. I don't know if you have liability but you might.
    @James Wise..input please?

    0Reply
  • Ekaterina Stepanova
    OP
    Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes
    10y

    John Thedford Private Lender, Realtor, Investor from Naples, Florida

    @Ben Leybovich @John Thredford

    Thank you very much for your input. I agree that not having a "say" isn't the way to go. I wont make this mistake again. 

    In terms of the deposit being used its my speculation at this point because money did come to my account and I know from tenant liaison that it was from the tenant ... so someone did pay me  from somewhere ...i wouldn't insist that is from the deposit as i don't have evidence. I realize that it was probably wrong for me to assume that as I don't want imply that someone knowingly broke the law. 

    What I am trying to understand is what would be the right course of action with this company and whether they have any responsibility in this whole situation .. eviction/turnover and the whole new tenant search is costly ...will put me in the hole, honestly, for this property.

    Please feel free to pm me for company details

    Thank you!

    1Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    I would think it makes sense to know more about tenants. They are the ones who pay you. So credit score, exact rental history, exact income/source, number of occupants, bank account balances, credit balances, background check... these are things you should be in the loop on. Hopefully you can review more details next time around as a normal course of action in overseeing your properties. 

    0Reply
  • Romeo Jeremiah
    Investor · Memphis, TN · Member since 2013 · 16 posts · 3 votes
    10y

    I agree with @Ben Leybovich. 

    If your cut says fire them, let them finish evicting the tenant so you won't have to deal with the process and then fire the company. Either way, no company can guarantee a good tenant. If they do, that's were liability comes into play. Tenant screening only measures risk, not guarantees against risk. 

    I good tenant can move in and lose their job within the same month. Life happens, so don't fret. Just remove tenant and place a new one. Life goes on. 

    Bank account balances, @Matt R.? I've never heard of such a request and would hesitate to over if I were a tenant. How does your tenants react when you ask for this information?

    2Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    10y

    @Ekaterina Stepanova @John Thedford

    As the owner of a large portfolio of my own properties and as the owner of Holton-Wise I have few thoughts that hit from the view point of the investor, as well as that of the property manager.

    In no particular order my thoughts on the situation and the thread are as follows.

    1. Sometimes tenants stop paying rent and they need to be evicted. This is an undeniable fact and anyone who is remotely interested in owning rental property needs to accept that fact. The nicer the asset and the neighborhood the less frequently it happens, but it can and will happen to all of us.

    2. Every tenant that has ever been evicted had to get evicted the 1st time. What I mean by this is that every tenant who gets evicted the first time has no eviction on their record when they were screened. 

    If the tenant has an eviction on their record and the PM places them in your unit then should you question their screening ability?

    Maybe, maybe not. The answer depends on the asset and the neighborhood.

    For Example: My company works A-C class assets and neighborhoods and we will not place anyone who has ever been evicted into our units. It is a company policy, no gray area 100% black and white. However there are certain neighborhoods in our town where your going to get what your going to get. We don't operate in those areas for a multitude of reasons but if I were to operate in those areas I would have to accept that if you buy a house on ABC Street your going to rent to people who have been evicted many times over, just how it goes. People who don't get evicted many times over and have a history of making better life decisions don't live in neighborhoods like that.

    3. Shame on the management company using the tenants security deposit to cover the cost of rent. That is poor business. The tenant is never going to make that money up once they have fallen behind and now you the owner are left in a vulnerable position as you have no money to hold onto to cover damages or legal costs if they need to evict the tenant when the tenant misses the next month of rent.

    The correct course of action for a management company is to have a set date that they file for evictions on all of the tenants who have not paid rent. No questions asked, black and white. It works out better for you and it works out better for the management company. I see no upside to the owner of the property or the management company to use the security deposit towards rent instead of evicting this tenant in a timely fashion. The only time it ever makes sense to stall an eviction is if it is cheaper to protect the property. 

    Example: Two unit property in a bad neighborhood that has one empty unit. It may make sense to keep the other tenant living there until you fill the empty unit as a vacant property will be stripped in days.

    4. A property management company is a lightning rod for lawsuits. Property Management is one of the most commonly litigated activities in the real estate industry. One can not, and should not expect a professional property management company to allow them to screen their own tenants. Many property owners using turnkey companies or property management companies do not live in the area, do not know the laws, or are not familiar with the exact type of tenant base they should expect to apply for and rent their units.

    Logistically it would be to time consuming. When a tenant applies they expect an answer in a timely fashion. What if the owner is not reachable for days at a time? Remember the owner hired the PM because they can not or do not want to be involved in this business full time. If they do desire more involvement then they should simply self manage and only buy investments that allow them to do so.

    Another reason management companies need to do the screening is it allows the management company to provide the community with a more consistent product. Have you ever been to a McDonalds that has a different menu then the one 2 miles down the street? If each individual owner did their own screening you may have 5 properties in the portfolio that are otherwise identical and have 5 owners with different screening expectations. That is not a practical way to run a business. 

    1Reply
  • Ekaterina Stepanova
    OP
    Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes
    10y

    @John Thedford @Matt R.@Ben Leybovich and Romero!

    Thank you all for your notes!

    @James WiseAppreciate your explanation. My PM explaned your point exactly the same way at the beginning, thats how i wasnt given many details about my tenant in the first place. In other words, you dont find this situation anything out of a norm? Still 4 months? No? May be Im just wrong ... How would you recommend I proceed with them? Just evict and move forward as if nothing happened?

    0Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y
    Originally posted by @Romeo Jeremiah:

    I agree with @Ben Leybovich. 

    If your cut says fire them, let them finish evicting the tenant so you won't have to deal with the process and then fire the company. Either way, no company can guarantee a good tenant. If they do, that's were liability comes into play. Tenant screening only measures risk, not guarantees against risk. 

    I good tenant can move in and lose their job within the same month. Life happens, so don't fret. Just remove tenant and place a new one. Life goes on. 

    Bank account balances, @Matt R.? I've never heard of such a request and would hesitate to over if I were a tenant. How does your tenants react when you ask for this information?

     Seems normal out here maybe.  List all accounts and balances.  How else would you know if they had the money to pay the future rent in case they lose change jobs etc. But it is a competitive sport out here. Credit balance too, 3 x income does not mean much if their existing bills are 4x income. 

    3Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    10y
    Originally posted by @Ekaterina Stepanova:

    @John Thedford @Matt R.@Ben Leybovich and Romero!

    Thank you all for your notes!

    @James WiseAppreciate your explanation. My PM explaned your point exactly the same way at the beginning, thats how i wasnt given many details about my tenant in the first place. In other words, you dont find this situation anything out of a norm? Still 4 months? No? May be Im just wrong ... How would you recommend I proceed with them? Just evict and move forward as if nothing happened?

    Real estate is a game of scale, variables and averages. You should look at your entire portfolio over the long term. There will always be one off situations that will occur. The theory is that the better assets you buy the better class of people your property will attract and thus you portfolio will average fewer one off situations.

    You can't judge the validity of the investment based on 1 property's performance over a 4 month period. Sometimes 1st time investors or investors with small portfolios want to do exactly that when things aren't going well. Conversely lets look at it the other way. Lets say the turnkey operator sold you one property and the tenant paid on time every month for the 1st 4 months with zero maintenance calls or cost. Would one look at that investment and make the assumption that this property is going to have a 0% vacancy and a 0% maintenance/CapEx budget? Of course not. Which is why you can't assume this investment is a looser because of the current tenant's eviction.

    As for what you should do going forward that is a tough question to answer. If you are asking me if the investment is a good one or not I do not know what market you bought in nor do I know what type of asset you purchased. Even if you told me about the market I still wouldn't be able to really give you an expert answer as I am likely not familiar with that market. I put together 

    The Ultimate Guide to Grading Cleveland Neighborhoods as a point of reference so myself, my team of salespeople and the investors can all be on the same page when we reference a neighborhood grade. The scale you and your operator are using may be different from mine. What you consider a B I may consider an A, C, D, or F.

    If your asking me my thoughts on how the management company handled the situation I think the property management companies handling of the tenants security deposit is a cause of major concern. To me that is an incorrect or broken company policy. As property managers we attempt to limit but cannot prevent evictions, broken toilets and tenant problems but we CAN prevent broken or incorrect company policies. 


    1Reply
  • Amy A.
    Portland, ME · Member since 2012 · 616 posts · 550 votes
    10y

    If they did, in fact, allow the tenant to use the deposit as rent, they do not know what they are doing and you should fire them.  If this is a misunderstanding, you should still have them give you their criteria for tenant qualifications.  An honest person never has to say "just trust me".

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    It can be really hard to pin if a good tenant went bad or the management company isn't good causing them to go bad.  The background check sounds good but it's hard to truly verify.  Tenants can go bad, but it is really important that the management company has consistent and reliable processes or else the tenant can become irritated.

    0Reply
  • Scott C.
    Bronx, NY · Member since 2014 · 25 posts · 34 votes
    10y

    My suspicion with turnkey is that since placing a tenant is a condition of closing (at least the ones I've done), property management has incentive to get a renter in there quickly, which can be counter-productive to getting the most qualified tenant in place. 

    Regarding placing tenants, I met with a (large - 850 units) property manager last week who explained that they could get in trouble for discrimination if a tenant meets all the 'criteria' but then the owner turns them down.  I've also heard from multiple property managers that they cannot share any of the confidential information they find in their screen, only summarize it for me, which only adds to the mystery.  Not sure how true these statements are.

    I would say that property management should be changed in your case after the eviction. If tenant truly did not pay, then you should have been aware of it within 10-15 days. Eviction for non-payment should not be your first notice that there is a problem.

    0Reply
  • Ekaterina Stepanova
    OP
    Rental Property Investor · Riverdale, NY · Member since 2014 · 216 posts · 62 votes
    10y

    @ @ @

    Thank you all for your comments! I see the point in not sharing sensitive information and I do get that tenant can "turn bad" at any point in time. My concern is company's actions in this case, I truly hope that that it was just some miscommunication, we can get to the bottom of it and resolve it. I will let you know once I get their response.

    0Reply
  • Josh D.
    Tampa, FL · Member since 2009 · 76 posts · 21 votes
    10y

    @Ekaterina Stepanova

    I would fire this TK company fast.  Keeping a tenant's deposit their 2nd month in is very poor business at best and against the law at worst.  As @Ben Leybovich pointed out, those are escrowed funds. If they did not get the tenant to sign something waiving their rights under Florida Statute 83.49 this is against the law (disclaimer: I am not an attorney and none of this is legal advice).  A tenant that has been evicted and owes you thousands of dollars can actually sue you for the deposit and win if the deposit claim letter is not sent within 30-days of them vacating the property.  That his how strict the law is regarding security deposits.

    One of the previous posters mentioned the SEC so I am a little confused on the ownership structure.  Do you hold title to this property or are you a limited partner in some kind of syndication?  If you hold title then this TK should be a licensed real estate brokerage as one can not manage other people's property without it.  You mentioned 4-months in one of your posts.  Has it been 4-months since they quit paying?  Has the eviction been filed?  What is the status?  You should be able to look up the case on the  county clerk's website where the property is located.  

    If the eviction has not been filed and its been over 1-month, that is another indication your TK is not a good operator.  I'm not sure I'd trust them to evict the tenant.  Good tenant's can definitely go bad, my friend had a tenant that was a pharmacist that just decided to buy a house and break her lease.  But being slow to evict and the whole deposit issue are big red flags.

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    10y

    @Ekaterina Stepanova As a turn key provider, I always try to look at these situations from both sides. Property Management isn't a perfect science and sometimes tenants that look great on paper can go bad. No matter how I look at this however, it looks to me like you were taken. I don't know what state this is in, but in most states it is illegal to apply the deposit to rent while the tenant is still in place. Deposits are required to be held in escrow and either retained or dispersed when the lease is terminated. As far as the PM not letting you have input on the screening of the tenant, that is wrong in my opinion. We always let the owner review the screening on new tenants if they so desire. It's YOUR property, not theirs!

    1Reply
  • Tom V.
    IA · Member since 2015 · 304 posts · 152 votes
    10y

    @Ekaterina Stepanova

    As several others have already suggested, it would be a community service to please disclose the names of both the TK company and the PM that has caused you so much grief. We need to help each other watch out for companies like this. Thank you.

    0Reply
  • Amir B.
    Rental Property Investor · Elk Grove, CA · Member since 2016 · 306 posts · 76 votes
    10y
    Ekaterina Stepanova What's the name of the company please?
    0Reply
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