Prospective tenant offering to prepay rent

16 Replies

Good Afternoon BP universe. Working on my first single family rental in Charlotte, NC. Wondering about a prospective tenant who is squeaky clean other than saying he is moving to the area recently to look for work, but hasn't found a job yet. He is willing to prepay 1 year of rent. I can think of no good reason to approve this person or why someone would be willing to do that for "legit" reasons. Read the BP book Guide to Managing Rental Properties, and it seemed advised against tenants of this prepaying nature. To me willing to prepay a year of rent without a current paystub offering job screams drug dealer. However background and credit checks and references do seem to all be clean and positive. Previous paystubs show his job had previously made well over 3x the monthly rent. My gut is to deny the tenant and cite the current monthly 3x income requirement, but was looking for a second opinion to ensure I'm not crazy.

Sincerely appreciate any advice,

Adam

@Adam Rey   Let me preface this with the fact that I am currently a Landlord of 8 doors.  I have also been the tenant in the situation that you are talking about, kind of.  After college my job moved me from the east cost to CA.  I got a 15k moving bonus and when talking to the property manager I offered to pay 6 months rent ahead of time to wave the deposit.  They agreed and it all worked out.  They actually charged me 250 cleaning fee when I left and I left it clean but since I paid no deposit I did not have to (chose not to) pay.   Now that I am a landlord I would be a little more concerned but I don't think I would automatically write them off.  What I would probably do now is see how long the average eviction takes in your area.  Lets say it takes 3 months.  I would tell them since you don't have income that is 3x the rent, here is what we can do.  You can do a 9 month lease with them and make them pay 3 times the deposit with the stipulation that they have to do another application after 9 months and provide proof of 3x rent.  This would be a total of 12 months rent presumably so it is not really any more than they are expecting to pay.  This way after 9 months if they stop paying or cannot provide proof of income , you have 3 months deposit to pull from if eviction occurs.  If they provide proof of income and all checks out, then it goes month to month and they keep paying.  Obviously you will need to make sure none of this breaks any of your local laws (deposit limits etc) as I am not familiar with Massachusetts property law.    

First and foremost trust your instinct...

I personally  love the idea of someone paying me in advance if everything else checked out. I like Ryan's idea too with the 9 month lease maybe with an option to extend with mutual agreement if they can provide proof of employment and income prior to expiration of the lease.

Since he doesn't have employment one way to make himself attractive as a prospective tenant is to offer to pay in advance. I see this with people who have poor credit.

Besides the one year rent, I would get security deposit; which would give you some leverage in case he doesnt leave and dont pay end of the term. One year rent otherwise sounds attractive option to me. Also would do a one year lease in this case, which would give you a right over the whole amount in case he decide to leave in the middle of the lease.

You could always offer something along the lines of 8 months rent, 4 months security. If he is able to provide appropriate income verification at the end of 8 months and is a good tenant, maybe reduce the security.

Unless your gut it telling you something is wrong with this person as a tenant, I see this as a very advantageous opportunity.

I see no reason to be wary. He is prepaying a year. A dream come true!  

I would get at least 3 months security deposit and go with the 9 month lease suggested above. If after 9 months he has a job earning 3x rent then you can apply 2 months security to next two months rent if you want or hold all 3 but I think giving some credit would be appropriate. Hopefully it works out if you decide to go this route. Many landlords fall for the pre-paid rent and think nothing can go wrong but it often does when landlords put blinders on and see only dollar signs. Since this person has no other red flags such as evictions or convictions, I would proceed and see what happens.

@Adam Rey I have two tenants right now that each pre-paid a year's worth of rent at lease renewal. One is 'self-employed' and may be a drug dealer for all I know, and the other is a union pipe fitter who is bad with money and doesn't want to worry about his rent. Heck, maybe he's a drug dealer too? I don't know, but I never get complaints about either one. 

I gladly took both of their year's rent. 

@Adam Rey , this is a great question! Everyone else had some good pointers in here too. As an investor and licensed Charlotte property management company here are some thoughts:

  • It's good to be careful of folks with no income who want to pre-pay rent. Those can sometimes (but not always) be folks who can run into trouble.
  • Make sure you have a robust screening mechanism and screen them very well
    • Current employment (length & earnings)
    • Evictions, foreclosures, bankruptcy, bad debt
    • Current & prior landlord references
    • Personal references (for down the road if they choose not to pay you)
    • Credit
    • etc.
  • People often rent because they are in transition, so if this person is qualified, I would think strongly about taking him as a tenant
  • I good strategy would be to get him on a 6 month or 9 month lease. You could charge a premium in rent for a shorter lease. Think about reducing the rent and transferring to a 12 month lease after they can show proof of new income
  • Regarding security deposit: be very careful with this one. You need to comply with the North Carolina Tenant Security Deposit Act which limits how much of a deposit you can take depending on the length of the lease (this act applies to DIY landlords too). The max is equivalent to 2 month's rent for any lease longer than month-to-month. Also, according to that act, prepaid rent is not the same as a security deposit so it has it's own stipulations that go with it.

I hope that helps. Reach out if you have any questions and good luck!

If everything checked out it seems like a dream come true. Some people know they are bad with money & if they pay rent up front they dont have to worry about their biggest expense. Ive seen people get law suits then go out & do this as well. I dont think its nothing to be wary about in this case. Sounds legit! 

Prepaid rent means nothing whether they qualify or not.  Do they qualify based on your screening criteria? If not, send them on their way.  Don't let the upfront money change your standards.

You CANNOT overlook what your instincts tell you. In my opinion all other logic is irrelevant if you instinctively see red flags. I was a landlord for 8 years.

I don't landlord my own properties, so I don't screen tenants or even know the laws and/or standard procedures (I use property managers for all of that), but can you ask for a proof of funds? I don't know if that would be allowed or even realistic, but like a lender checks for the source of all income within a certain amount of time, can you check for the source of the income that the tenant is proposing to use for the 1 year's rent?

(again, no idea if that's legal or not, just a thought)

Thanks a lot for the info everyone. He showed proof of funds and provided further references so we compromised on an 8 month lease with 2 months deposit, and will write a normal 1 year lease next summer with proof of job and a cleanliness house inspection. Also will have the advantage of having the house be available during the summer in the future versus the dead of winter.
Thanks again everyone!

If you are open to taking a bribe by all means ignore your gut and go against your screening standards. 

Take the cash, put it in a special account (remember it is not yours and legally you can not touch it), and hope he does not demand it back or that you do not end up having to try and evict him..

Roll the dice. 

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