Front-loaded rent payments?
I have an applicant with bad credit, but high income (and under contract). He is willing to be flexible with a lease structure. I would appreciate any feedback on the idea of setting up an 18-month lease with the first 6 months @150% rent, next 6 months 100%, and final 6 months 50% rent.
I'm just looking for creative ways to protect my side of it. Have any of you done a lease similar to this? Is this legal?
Thanks for helping me through this...
I don't know how investors operate in Wentzville but that type of lease structure seems risky. It's complicated for the tenant and complicated for you. If the applicant doesn't meet the requirements what's wrong with screening one more? You're just bending the requirements to get a tenant. What's next? That's just my 2 cents.
It's a B+ SFH, 3/2.5, @$1500/month. So my lease would look like this:
Months 1-6: $2250
Months 7-12: $1500
Months 13-18: $750
It all totals the same over 12 months, but I benefit if he breaks the lease early.
His bad credit tells you what you need to know about his (lack of) respect for adhering to agreements he makes. Even if you collect all the rent upfront, there's no guarantee that he will follow the other terms of your lease. It's entertaining that he has high income - but doesn't pay his obligations. He's high risk...I'd hold out for a quality tenant.
Originally posted by @Jaron Walling:I don't know how investors operate in Wentzville but that type of lease structure seems risky. It's complicated for the tenant and complicated for you. If the applicant doesn't meet your requirements what's wrong with screening one more?
Yes, he is below my credit score requirements, but whole-picture I would take him - as I have had success with others in similar situations. I'm just trying to be creative this time and see if there are ways to build some insurance into the agreement to where I've already collected a bulk of the rent if things go south.
And, yes it's a bit complicated, but this particular applicant is bright, and I am confident the two of us could work through it smoothly.
I once had a divorcee with poor credit who wanted to rent for a year while she figured out what to do next. She understood that her credit was a problem and offered to resolve it by...
...paying the entire year's rent up front.
I considered that level of risk acceptable.
Originally posted by @Patricia Steiner:His bad credit tells you what you need to know about his (lack of) respect for adhering to agreements he makes. Even if you collect all the rent upfront, there's no guarantee that he will follow the other terms of your lease. It's entertaining that he has high income - but doesn't pay his obligations. He's high risk...I'd hold out for a quality tenant.
Thanks for the advice. I will consider you thoughts on holding out for a better tenant.
But to further the discussion and at the risk of sounding like I'm defending him... his low credit is the result of collections on school loans. He has recently entered a repayment plan for this. Otherwise, everything else checks out on his credit and income, and background. And, yes, his income is entertaining.
@Patrick Rose
Make your agreement straight forward, if you make a game, they will too.
@Patrick Rose
I would rather collect a larger security deposit than deal with more complicated lease terms. In Texas you can collect an amount equal to two months rent as a security deposit
With your front loaded rent are you going to set money back every month to cover expenses that come up during the back half of the lease?
Originally posted by @Michael Sloan:@Patrick Rose
I would rather collect a larger security deposit than deal with more complicated lease terms. In Texas you can collect an amount equal to two months rent as a security deposit
With your front loaded rent are you going to set money back every month to cover expenses that come up during the back half of the lease?
Yes, I would not touch the rent money over the term of the lease, so I'm not concerned about not having funds saved at the end of lease. I thought about an increased security deposit, but I thought that SD could only be used for damages, and not be used to cover unpaid rent. Is that not correct?
Originally posted by @Arsenio Braza:@Patrick Rose
Make your agreement straight forward, if you make a game, they will too.
Thanks for this perspective. I had not considered that this structure might alter his attitude.
@Patrick Rose
Be careful there are people who rent the rest of their life, I call them "professional renters" and they know how to go around, make sure your agreement is straight forward,firm but just, because they will sense if you are a real deal landlord, I am a landlord for 11 long yrs. Hope this help.
Originally posted by @Arsenio Braza:@Patrick Rose
Be careful there are people who rent the rest of their life, I call them "professional renters" and they know how to go around, make sure your agreement is straight forward,firm but just, because they will sense if you are a real deal landlord, I am a landlord for 11 long yrs. Hope this help.
Thanks for the advice. I'm about 4 years into this and always learning!
Originally posted by @Patrick Rose:Originally posted by @Michael Sloan:@Patrick Rose
I would rather collect a larger security deposit than deal with more complicated lease terms. In Texas you can collect an amount equal to two months rent as a security deposit
With your front loaded rent are you going to set money back every month to cover expenses that come up during the back half of the lease?
Yes, I would not touch the rent money over the term of the lease, so I'm not concerned about not having funds saved at the end of lease. I thought about an increased security deposit, but I thought that SD could only be used for damages, and not be used to cover unpaid rent. Is that not correct?
The short answer, no that's not always correct. In some states landlords can deduct from the security deposit for things like attorney fees, or eviction costs. Possibly even past due rent. Check with an attorney in your state to verify what you can and cannot deduct from the security deposit.
@Patrick Rose
I did this twice and got burnt. Will never do it again..
I would only do it for a foreign student..
Sometimes you get desperate finding a tenant but its always worth the wait.
Originally posted by @Hai Loc:@Patrick Rose
I did this twice and got burnt. Will never do it again..
I would only do it for a foreign student..
Sometimes you get desperate finding a tenant but its always worth the wait.
Thanks for sharing your experience. Were you burned because of the bad candidate? Or did the structure of the lease cause a problem?
Originally posted by @Patrick Rose:Originally posted by @Hai Loc:@Patrick Rose
I did this twice and got burnt. Will never do it again..
I would only do it for a foreign student..
Sometimes you get desperate finding a tenant but its always worth the wait.
Thanks for sharing your experience. Were you burned because of the bad candidate? Or did the structure of the lease cause a problem?
Bad candidate. I was kinda desperate for money at the time and they offered 4 months rent up front. I couldn't resist. At the end of the day he put his rent in escrow and I had to battle in court to kick him out a wasted about $1000 in legal fees.
Well, I guess what I'm hearing here is that if I have a good candidate, I don't need to get creative with the lease structure. After reading your comments and speaking with some trusted advisors locally, I've decided to cut this applicant loose. Maybe I was trying too hard to make it work. Thanks everyone for keeping me focused!
Two thoughts come to mind here, as I know what it's like to try to find a place while I have bad credit. First, there was a Bigger Pockets podcast just recently, where the gentleman spoke about actually and going to where his potential tenant currently lives to see how they care for that property. If it's not in the condition you would want to see your property kept, don't rent to them.
Second, in taking up front money, you set a precedent with them. Depending on the laws in your state, getting a squatter out can be lengthy and spendy.
another option you could consider depending on what you want to do with the property, is a seller financed purchase option, at a slightly higher monthly rate, as you are carrying the note. If he backs out a you still have the same issues as before, but you don't have to worry about how he takes care of the property as much, as that sense of ownership tends to make a person care a little more for it.
Whatever you do, the hoops that you show your willing to jump through at the beginning will become expected of you later on. Is that time you would invest worth the income received?
Originally posted by @Jason Hammond:Whatever you do, the hoops that you show your willing to jump through at the beginning will become expected of you later on. Is that time you would invest worth the income received?
Thanks for this perspective.