New purchase, current tenant is not current on rent
David BowlesPro Member
Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votesNew purchase, current tenant is not current on rent
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6yShe probably pays late because the Seller allowed her to. Let her know you're aware of her payment history and that you want to start off on the right foot. She needs to pay "on or before the first day of each month" period. Learn your late fee and eviction laws and be prepared to hit her the moment she violates. You don't have to be mean about it; just be factual. If you're allowed to start evicting on the third day, do it.
I would also keep her on a month-to-month lease. If she continues to screw up, give her notice and try again with the next one.
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- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Josh C. I’m not sure if you’re trying to be condescending to me, or the other posters on here. Maybe I’m misunderstanding what you are trying to say.....regardless, it isn’t appreciated. I am trying to be as professional as I can on here, and would appreciate that same respect in turn...
I know absolutely nothing about the tenant, except what the owner is telling me about her. My fear is that he is not being up front and honest about the current tenant. The point of this post was to try and get some differing perspectives on how to proceed down either the path of keeping a potential problem tenant, or starting fresh with a tenant I place. Thank you for your opinion. I’ll take it under advisement.
Less directed at you and more directed at some of the replies of ensuring broom swept at closing or demanding rent on time or else you serve papers. As a property manager who manages hundreds and hundreds of homes and personally own some I can tell you without a doubt that homes with 4 year tenants that care about and treat the place like their home are very profitable, plus the tenant is happy and feels at home. About as win win as can be had in the rental business. To not only lose that situation, but add a turnover and vacancy cost, additionally during the current climate is a poor financial move. I don't understand the mentality sometimes of the group being so quick to kick out long term tenants over smaller infractions. It's contrary to cashflow. Our company works very hard to find long term tenants and understand their value to the ROI of the property. Now, we file several evictions per month at our company and don't tolerate bad behavior, but that is not the picture you painted. You painted a great tenant who is late on rent often. If cash flow is your goal I'd strongly recommend you get a spreadsheet out and calculate your current situation over the next 4 years (assuming she stays) vs 2k turnover and 6 weeks vacancy that happens every 2 years.
I see you are newer and I’d like to give you the perspective of this really is a people business and taking small concessions here and there and getting a good working relationship with your tenants is good for the tenant and extremely good for your bottom line.- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Josh C. Thanks for clarifying that. I do value your opinion and appreciate your input!
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes6y
Originally posted by @Josh C.:
Less directed at you and more directed at some of the replies of ensuring broom swept at closing or demanding rent on time or else you serve papers. As a property manager who manages hundreds and hundreds of homes and personally own some I can tell you without a doubt that homes with 4 year tenants that care about and treat the place like their home are very profitable, plus the tenant is happy and feels at home. About as win win as can be had in the rental business. To not only lose that situation, but add a turnover and vacancy cost, additionally during the current climate is a poor financial move. I don't understand the mentality sometimes of the group being so quick to kick out long term tenants over smaller infractions. It's contrary to cashflow. Our company works very hard to find long term tenants and understand their value to the ROI of the property. Now, we file several evictions per month at our company and don't tolerate bad behavior, but that is not the picture you painted. You painted a great tenant who is late on rent often. If cash flow is your goal I'd strongly recommend you get a spreadsheet out and calculate your current situation over the next 4 years (assuming she stays) vs 2k turnover and 6 weeks vacancy that happens every 2 years.
I see you are newer and I’d like to give you the perspective of this really is a people business and taking small concessions here and there and getting a good working relationship with your tenants is good for the tenant and extremely good for your bottom line.Well, let anyone who is wondering about hiring a property manager know how a potential property manager thinks.
As a former property manager who never let a tenant get behind on rent, I think your model is a disaster as far as a problem-free tenant who actually pays on time.
And yes, it's not difficult to find one.
Most property managers who do so for a profit for other people actually make more money when there is a problem tenant. So, it's not surprising that you wouldn't find a problem tenant like this to be a problem as far as you are concerned.
But, as an on-site property manager who managed 25 units for over 8 years - I'm telling you that there is absolutely zero reason to deal with a tenant who doesn't want to pay on time. You can easily find tenants who will both pay on time and take care of your property.
And if you are paying a property manager who says otherwise - you should absolutely fire them. And not pay them the fee to fire them that is in their contract. Most PM contracts include fees that make them money whenever there are problems. Read those contracts! If someone gets paid whenever there are problems, then do you think they will want a problem-free property? NO! They don't care about your profits!
Don't be gullible. Read contracts. Expect the worst case scenario to happen according to the contract and don't believe what they say that's not in the contract. Don't believe the "Oh, don't worry, it's just standard, but that won't actually happen..." because it will happen.
Go search the threads about how landlords have been ripped off by property managers and believe them.
Your logic and math are completely off. Actually backwards.
Won’t the management company make less money when there aren’t turnover costs and no lease up fees to collect? And wouldn’t the owner make more money with additional income from late fees and lower turnover expenses. Love to see how you think extra turnovers are good for the owners. PM companies make less money when they have to chase rent and go through evictions. I wish all the tenants never moved out and paid rent on the 1st. I wouldn’t have to hire staff and would just play golf all day. Lol
Additionally, problem tenants aren’t the owners problem anyway, they are the PM companies. So your PM company has to call and text the tenant a couple times to collect? Why would the owner care? He/she still gets paid, and then some added revenue with late fees. They don’t charge by the hour, it’s a flat fee. To think every tenant needs to fix in this perfect box is short sided thinking and not 5 year cash flow thinking. This is the exact “Boss” thinking that doesn’t capture real bankable dollars and instead captures your ego. Now if this was a newer tenant or dirty tenant I’d probably agree with you, but not a 4 year who takes great care of the place which is this situation.Side note since you brought up rip off, what sort of property demands on site management for only 25 units? Assisted living or the like is reasonable I guess, no idea and not my space, but surely not a normal rental.
I also really get confused reading threads here where folks always talk of booting tenants, having (rentals no less!) delivered to them with no tenants, that the first thing you need to do is get the tenant out!
The above makes little sense. Vacancies are the killer of cash flow.
If I were in the OPs shoes, I would first, check with my lender to see if what the seller is proposing is legal (my guess is no) .... then, once I purchase the property i would ask the tenant to fill out an application and go from there....
then join your local rental property owners association, take a new landlord boot camp class and use their forms so you can be sure to have the correct forms for your locale oh and also read the local landlord/tenant laws
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Sue K. Your experience in real estate shows. Thank you so much for all of the info! I too have heard that PM companies make loads of money due to problem tenants!!!
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Mary Mitchell Good advice! I have already spoken to a local credit union that has no issues with it. I’m also considering just paying cash as that’s an option (why add more complexity up front. I can always refi later?). After all this discussion, it turns out the tenant doesn’t want us in the property right now due to COVID-19. The moratorium is supposedly lifting on May 1st, so I’ll see if I can get in there on that day. I certainly don’t have my heart set on this house! If for whatever reason, I need to move on to the next opportunity, I’m ready!
Originally posted by @David Bowles:
@Sue K. Your experience in real estate shows. Thank you so much for all of the info! I too have heard that PM companies make loads of money due to problem tenants!!!
I self manage, but the idea that PMs put in problem tenants, on purpose makes little sense. They dont make money each time an issue arrises, they make money leasing units and also on the monthly fee.. the more issues they have, the more work it is.... why would they want problems?
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Mary Mitchell Don’t they also take the first months rent on a new tenant? To me, that sounds like a great deal if they need to place 2 or 3 tenants a year! I also plan to self manage starting out. I feel like I will learn valuable lessons which will help me “manage the managers” once I build a larger portfolio.
- Member since 2020 · 1 post · 1 vote6y
We have the rent set at $50 more per month however, they can get a reduced rent if paid by the 1st of the month. We have not had a late rent check sense we have implemented this in the month to month lease. Prior we had one tenant who seemed to be always late until I questioned why they always added $50 to their rent. They then paid on time. I haven't received a late check in years. Rental is in North East Michigan along Lake Huron.
@David Bowles
PM companies do collect a fee for placing new tenants. The exact reason you shouldn’t kick out your tenant of 4 years. It’s very likely she’ll stay another. Not sure how the conversation got to this point, but my point was added income for you. No turnover costs and extra late fees are good things for you the investor and not good for the PM company. I’d have never guess that statement was so controversial. Lol.
Anyway, I have a personal rental I’ve owned 6 years that had the tenant in there for 5 years prior so 11 total. He’s probably paid late 10 months a years throughout that entire 11 years. I haven’t had to replace carpet or paint that unit that whole time. Little maintenance things here and there but in general tenants who have been there a while tend to deal with the place as is after a year or two. Has been one of my most profitable rentals.
As you get into this game you’ll find out evictions and turnovers are the cash flow wreckers. Not getting an extra 50 or 100 bucks a month and not having a tenant “fall in line”
Final note. PM companies don’t make money off problem tenants. How could they? Honestly think through. It’s a lot of work to evict people, go to the property and takes notes and pictures. Tons of emails and time spent throughout this process. All of this work generates zero income. So lots of work for no money. Placement fees don’t cover all these costs. Why would a company want lots of work and no income? The fact is they don’t, and the people that think don’t understand the process. Personally, I’d rather get a tenant in there that stays forever and collect my $50/month management fees. Also, if all the tenants the PM company placed only stayed 3 months our clients wouldn’t stay with us so we’d go out of business.
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes6y
Originally posted by @Josh C.:
Your logic and math are completely off. Actually backwards.
Won’t the management company make less money when there aren’t turnover costs and no lease up fees to collect? And wouldn’t the owner make more money with additional income from late fees and lower turnover expenses. Love to see how you think extra turnovers are good for the owners. PM companies make less money when they have to chase rent and go through evictions. I wish all the tenants never moved out and paid rent on the 1st. I wouldn’t have to hire staff and would just play golf all day. Lol
Additionally, problem tenants aren’t the owners problem anyway, they are the PM companies. So your PM company has to call and text the tenant a couple times to collect? Why would the owner care? He/she still gets paid, and then some added revenue with late fees. They don’t charge by the hour, it’s a flat fee. To think every tenant needs to fix in this perfect box is short sided thinking and not 5 year cash flow thinking. This is the exact “Boss” thinking that doesn’t capture real bankable dollars and instead captures your ego. Now if this was a newer tenant or dirty tenant I’d probably agree with you, but not a 4 year who takes great care of the place which is this situation.Side note since you brought up rip off, what sort of property demands on site management for only 25 units? Assisted living or the like is reasonable I guess, no idea and not my space, but surely not a normal rental.
Are you saying that you don't charge any extra fees for turnover costs? For evictions? For finding new tenants? For maintenance problems?
If so, you are the only PM company on the planet who doesn't.
But, this is how most PM companies make their money. 10% of the rent is nothing. And if a PM company is "managing" hundreds of properties - how can they possibly do a good job?
There are plenty of suckers out there who are ripe to be ripped of by PMCs. I've been ripped off, my daughter has been, many of my friends have been. Lots of smart people who believed this nonsense that problem tenants aren't a problem.
But, I bet you charge your clients fees for dealing with tenants who pay rent late, and for kicking them out, and for finding new ones, and I bet you even charge a fee when a client wants to fire you. The contract my daughter had included such a clause. Even though they were ripping her off, the contract said if she wanted to fire them, it would cost her a month's rent. She threatened to sue for all of the costs they'd charged her that were completely unreasonable maintenance costs and lo and behold, they decided to waive the termination fee.
But, people should know that most PM contracts will charge them to find bad tenants, deal with bad tenants on a regular basis, deal with maintenance issues that are hugely overblown, then deal with terminating bad tenants, and then to find another bad tenant, and even to fire them.
No PM makes money on 10% of the rent. It's all the other fees that make them money. And, as I said, PMCs can't make money at 10% of the rent. It's just simple math. Does that make sense? Would anyone with reasonable skills do that kind of work for 10% of the rent? Of course not. Therefore, the industry has devolved into a mire of sneaky underhanded behavior so that they can make a profit. Truly, it's shameful.
If I had a property that needed to be managed now, I'd hire an employee and handymen who were beholden to me only, and self-manage. There really is no way to make a decent profit with a PMC, in my opinion, because there is no incentive for the PMC to make you a profit. Their fee is not contingent on you making a profit. They only make money when there are problems, which, of course, don't make you a profit.
So, just use your reasoning. Does it make sense that someone who can't make a profit unless you have problems - are actually going to help you make a profit? I someone taking care of hundreds of properties going to give your property decent attention?
If it doesn't quack like a duck or walk like a duck, then it ain't no duck. Even if it quacks real pretty.
- Member since 2018 · 3 posts · 0 votes6y
Josh post is interesting and helpful.
Sue post basically says all property managers are terrible... and its impossible to get good ones...
That is ridiculous! There are tons of great property managers out there and many owners don't want to deal with any of it. You can hire bad help for any service.
Back to original poster I don't see how you get a loan for 80% of 60k if the price is 45k. They take less of purchase price or appraisal. Also 5k loan fee on such a tiny loan is ridiculous, that's like 10% fee. I'd look into paying more cash and or do seller financing if seller doesn't need all the cash now.
If all the positives you posted of this deal are true I don't see why seller is getting rid of this property. Unless I personally trusted or had an explanation of why: that would give me skepticism that I'm overlooking something wrong with this deal.
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes6y
Originally posted by @Mary M.:
Originally posted by @David Bowles:
@Sue K. Your experience in real estate shows. Thank you so much for all of the info! I too have heard that PM companies make loads of money due to problem tenants!!!
I self manage, but the idea that PMs put in problem tenants, on purpose makes little sense. They dont make money each time an issue arrises, they make money leasing units and also on the monthly fee.. the more issues they have, the more work it is.... why would they want problems?
Take a look at a PM contract. They charge a separate fee for many, many things. They charge a month's rent for finding a tenant. They charge a month's rent for getting rid of a problem tenant. They charge a month's rent for finding a new tenant again. They charge a month's rent for firing them. They charge separate fees for supervising maintenance issues, they charge you separate fees for their maintenance workers to do anything.
My daughter, for instance, had a contract where the PM could do any maintenance under $250 without getting her permission first, or for emergencies. So, they had their maintenance worker go change a lightbulb for $249. They charged extra fees for any work after regular hours calling it emergency, and then had their maintenance/landscapers go cut down a tree in her backyard on a weekend, charging a supervisor fee that was extra, charged extra for the landscaper calling it an emergency, to a bill to destroy a perfectly good tree for around $1,000. Because the tenant was afraid a limb might fall on her toy dog.
They hired their electrician pal to put in a new electrical panel for about $1,000 on a weekend, calling it an emergency, when the only problem was that the tenant was trying to plug too many things in at a time.
On and on, to the point that about $6,000 of reserve money was stolen over about a 3 month period of time. In a home she lived in, personally, without issue for several years.
I'm glad you haven't personally had any issues. Good for you. But, that doesn't mean they don't happen to others. And, if you are paying a PM, are you really sure it isn't happening to you? People who have inherited a lot of money, who aren't personally someone who has either been a property manager or owned income property and done their own books and discovered they've been ripped off - are some of the people most targeted.
Just, take a minute and look over a normal PM contract, and look at all of the ways that a PM can potentially steal from an owner. If they get a separate fee for supervising, for using their own maintenance people, for finding new tenants, for getting rid of bad tenants, etc. then you should expect they will.
Just simply, if a PM gets a month's rent every time a new tenant is found, alone, then they will make more money every time they have to find you a new tenant. That's really simple math.
And, you would have to wonder why a typical PM contract includes paying the PM a month's rent - to fire them. Yes, that's standard. They even make money when you fire them.
So, why wouldn't it be typical for a PM to be corrupt? And at best, if they don't rip people off with extra fees, how can they make money otherwise, by only taking in 10% of a client's rent? By having hundreds of clients. And how can they do a good job for you, then?
It just doesn't make sense. So, good on anyone who wants to believe in unicorns and fairies in the PM world, but it just doesn't make sense in the real world. Are there decent PMs, possibly, but everyone I have ever known who has used a PM company, including myself (who was an employee PM) was ripped off by a PMC, and royally.
Just read a PM's contract thoroughly before hiring one and expect to be charged every single fee that's in there and imagine the worse case scenario for everything that's in it, and then, if you're smart, you'll change the terms at least enough so that they can't spend any of your money without your permission - not even a penny, even if it's an emergency. Because otherwise, the only call you'll get is them asking you for more money because they blew through the thousands you gave them in reserves in a matter of months.
Believe this or not. But, remember you were warned.
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Michael A. The seller is a very good friend of (and partner on a few past deals) of a REA friend of mine. That is why he is willing to sell under current market value. He’s not looking to try and market a property right now with the COVID lockdown, and also doesn’t want to pay agent fees on a normal market sale.
I have decided that if I am going to buy the house, it will be cash. 30k down and the rest over (insert terms here). I’ll avoid the horrendous loan fees and everything else that comes with a conventional mortgage.
I do plan to have an inspection done to cover my own tail, but will most likely skip a lot of the things that a normal lender forces on you.
Thanks for the post!
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Sue K. I hear everything you are saying.
@Josh C. I also hear you!
Though I’ve never worked with any PMC nor managed any of my own properties, I know people that do both. The self managers are very happy with their decision, and the folks that go with PMs are generally happy with theirs!
I think it’s safe to say that with any service business (car repair/excavation/home repair), there are companies that are out there that will take advantage of the under informed and gullible.
My plan for my first few houses will be to self manage. I also realize that after I grow, a PM will be a necessity if I ever want to “step back” from growing and start coasting in the future.
By then, I’ll be much more aware of the industry and workings of maintaining a rental. I can only hope that I find a great PM like @Josh C!
Thank you both for your input! It is all equally valuable to see both perspectives!
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