I am in a very fortunate position right now. All of my 13 units are rented, and all the tenants are paying on time. It’s great! And it’s not going to last.
I know that because even in good economic times, I’ve had a couple of tenants every year who found that at some point, they just couldn’t pay their rent. And these are not good economic times. In fact, I am really amazed that my one retail tenant, selling antiques and other non-essential items in a very blue collar town, is still paying on time. And I have no idea how many of my residential tenants are dealing with impending layoffs, loss of overtime, or other issues. I certainly know that most of them don’t have financial cushions they’ll be able to use if they lose some of their work income.
I can handle the “can’t pay the rent” call in many different ways, but they boil down to three options. First, I can be hard, telling the tenant the rent is the rent – pay in full on time, or be evicted. Second, I can be soft – but that may mean that the tenant never pays, and I’m out of pocket forever. Third, I can find some middle ground – which is probably what I will do. There are a million variations on that “middle ground.”
Make your plan before the call comes
I’m a big believer in rules to manage my behavior and guide my decision-making process. In this case, rules will overcome an emotional reaction that might lead to a bad decision. They’ll also keep me from making a snap call that could turn out to be wrong. Remember, as landlords, our bad decisions have long-term consequences.
The emotional reaction can be anger (“How dare Carol not pay me when I depend on her money to pay my bills!”) or sympathy (“Poor John – $4,000 in medical bills!”) Which reaction will I have? That depends on the tenant’s story, and probably also on how the rest of my day is going. In other words, I should ignore it and concentrate on making the best business decision.
Finally, why the middle ground reaction – why am I probably going to make a temporary deal? Well, I already know I’m not going to go soft and let the tenant take advantage of me forever. And I probably won’t boot the tenant right away, either, simply because that leaves me with a vacant unit – which in a snowy, bitterly cold winter, along with a bad economy, is likely to stay vacant for some time.
Here are the hard and fast rules I’ll establish up front.
- I will never give a tenant an answer right away (upon the first phone call). Even though I may know what I want to do, I will sit on the decision for a day. Why? First, coming back with an answer right away, especially if I’m offering the tenant a generous deal, may mark me as a soft touch. Second, waiting gives me a chance to really think through my decision.
- I will insist on a written agreement. This is essentially a temporary change to the lease, signed by me and the tenant, which means if the tenant violates it, he can be evicted.
- I will not let the tenant get more than one month behind in rent. This way, if the tenant defaults on the special agreement, I’m only out one month.
- I will have a face-to-face meeting with the tenant to discuss any alternative ways he can get the money. The point of this is obviously to get the money. But the secondary point is to impress on the tenant just how serious a matter this is. “You can’t pay me $600 in rent, but you just bought a $800 TV? Sell the TV or return it.” This meeting should be at the tenant’s unit.
- I won’t offer a temporary agreement until the end of our face-to-face meeting. That meeting is my last chance to consider the tenant before I offer an agreement – and if I get a strong ssense that he’s not being serious, out he goes.
If the tenant violates the agreement, I will evict him – hard and fast. I will make this very clear at our face-to-face meeting and follow up if he violates the agreement.
The written agreement will have a confidentiality clause. My tenant talk to each other, and I simply can’t afford to have John tell Carol, “The landlord gave me a break.”
Do I have to treat everybody the same?
No, thank goodness. I can treat people differently, within reason. I can, for example, come down much harder on a tenant who has behaved badly in the past, or who has a history of late payments. Searching the Internet, I was unable to find a successful lawsuit in a case where a landlord made a special deal for one tenant, but not for another. That doesn’t mean such lawsuits don’t happen, but they are rare enough to not be a major concern.
Next week I’ll dig more into this, looking into some different “can’t-pay” situations and how they should be handled.