Tenant or a Professional Bum – Do You Know How to Tell?

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A go-to favorite in the Leybovich household is a romantic comedy Hitch starring Will Smith, Kevin James, and Eva Mendes.  In one of the scenes early in the film Hitch, played by Will Smith, is shooting pool with a buddy at one of New York City’s high-class up-town bars.  Hitch takes a shot, which rattles in and out of the pocket, at which Hitch shows frustration and tries to convince his friend that the shot should count. In response to this, his buddy gives one of the most profound “Hollywood” monologues I have ever heard; it is short but makes a lot of sense and goes something like this:

You know what your problem is, Hitch? You’re all about the short game.  You pick your shots based on what you see first, and not what’s necessarily best for you in the long run…

For landlords both new and experienced, there is no better piece of advice to take to heart than the sentiment expressed in the above.  In an article from a few months ago entitled It’s Not My Fault They Keep Trashing My Unit – Actually it Is, I brought forth the notion that our capacity to attract great tenants is a function of the building more so than our qualification standards or management systems.  But having said this, management can definitely impact our chances of success, which is the subject for today.  I am going to tackle this by describing to you a situation that I was involved-in a few weeks ago.

Those of you who have seen my article entitled How I Bought a 10-unit with 1.5% Down – Case Study know that I purchased a 10-unit apartment building on February 4th, 2013.  There was a bit of delayed maintenance, however I recognized early on that the real reason the building was being sold was because the owner was completely burnt-out on landlording.  In the middle of negotiations people usually try to be “cool and nonchalant” and tell you that everything is honky-dory at the building; that everybody pays on time, and nobody is out of line in any way.  But this seller told me right away that he was tired of cleaning-up every time people trash his units, which he said happens consistently.  He told me that he was tired of having to do evictions, and tired of knocking on doors to get the rent check.  He said that he just wanted out…

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If it’s not the building’s fault, then it’s yours!

As you know, and as I’ve discussed in other articles on the BP Blog, trashed units and evictions are symptomatic of either the unit itself attracting the wrong kind of tenants, or lack of proper management and qualifying process.  In this case knew that there was nothing wrong with the building.  It was situated in a perfectly desirable location and the units were entirely comfortable both in size and amenities.  This meant that if there were problems with the tenant base it was because the previous owner was mismanaging the application process; one way or another he was choosing tenants unwisely and they were causing grief in his life.  This was my theory and I soon became convinced that I was right.

Upon my review of the standing leases as part of the due diligence process, I noticed that 6 out of 10 tenants had been in the building for less than 12 months.  This could just be a simple coincidence, but turn-over did seem high for a building such as this in this location…

Who are the Troublemakers?

In my experience, there are two types of tenants who tend to be largely responsible for high turnover at a building.  Some are well-meaning folks who, for the lack of better phrase, simply don’t have their “stuff” together.  Due to unforeseen circumstances that should have been entirely foreseeable, they are eventually unable to fulfill their lease agreement and move-out early, either voluntarily or upon eviction.

The other type commonly responsible for high turnover is simply unscrupulous folks who choose to live very close to the edge of what you and I would consider morally corrupt.  They find a way to dupe an unsuspecting landlord into giving them possession, but they have every intention of screwing the landlord from the very get-go – their moral compass allows for this type of thought process and behavior.

Well, thankfully I’ve learned that there are several red flags that expose both types, which can be seen by following-up on the information they disclose in their rental application.  Thus, in an attempt to thoroughly prepare myself for what I would be dealing with after closing, I requested that the seller make available for my review the rental applications on file for each of the tenants…

The Reason He was selling

His answer confirmed what I had suspected all along.  Although the seller was indeed an honest, friendly, well-reputed, and fair guy, he had made major management mistakes which were causing him terrible stress.  My proof was in the discovery that he did not use written rental applications!!!

This meant that there were no Social Security numbers, which in turn meant that there were no criminal background checks; there was no income and employment verification; there were no references; there was no verification of previous residence…there essentially was no information by which to qualify tenant-worthiness.  Is it any wonder that the poor guy’s stress level warranted that he should bring money to the table in order to sell a perfectly good building for less than what he paid a decade ago?!

Food for Thought:  We get burnt once in a while even having done it the right way, but doing what he did virtually guarantees management heart-ache.

Segue one Month

In March, which was the first full month of my owning this building, I performed my first eviction of a tenant who decided that paying rent to the new guy was a suggestion and not a contractual obligation – don’t you love these kind of tenants?  But get this.  My attorney called me after having filed the eviction paperwork to tell me that the clerk at the courthouse took one look at the defendant’s name and said:

Oh yeah, we see this name come through here about every three to six months…:)

It’s a Pro…Cool!

The previous owner managed to place a “professional bum tenant” into one of his units, and now she was my problem.  I had called her; I put a note on the door; I served her with a 3-Day Pay or Quit notice – all to no avail.  She did not show-up in court for the hearing, and did not make any attempt to contact me.  Until, that is, four days before the bailiff was to show-up at her door – she suddenly called to let me know that she had all of the money…

She was absolutely stunned and amazed when I refused – I don’t think she’d ever met a landlord that she couldn’t play this way before.  She is a pro at playing this game, and here is my best guess at what her methods are:

She skips a rent-payment.  She does not answer the phone, open the door, or respond to any attempts of contact.  She certainly does not initiate contact, but simply waits to see what the landlord will do.  A lot of less experienced can become intimidated by this tactic and procrastinate dealing with the issue, which buys her time in the dwelling free of rent.  Often, by the time the landlord files for eviction and the case makes its’ way through the system, she can easily be in a dwelling free of rent for two, three months or longer.

Her primary exit strategy is to find another dummy landlord to let her in prior to the bailiff showing-up at her door.  And if she can’t find another place, her back-up plan is to call the landlord and offer money, which in her experience is too much for those “greedy landlords” to say no to…

But, things did not work out for her exactly as planned this time.  Her behavior has finally caught-up with her – I said NO!

Having answered the call, I politely explained to her that had she reached out early on, I would have more than likely chosen to work with her.  In fact, I told her that I allow all of my tenants 2 payment-pledges per year without any late fees or penalties of any sort, so long as they act responsibly and make arrangements with me ahead of time.  But under the circumstances, because she avoided me and because she only called me when it finally became apparent to her that nobody else would take her, I told her that I now believe that she is not a person with whom I can have a business relationship!

How Did She Ever Get In?

This woman’s winning formula is to FLASH the CASH.  In her mind and in her value system, cash moves people more so than any other motivator.  Therefore you might want to right this down:

Biggst_NONO_in_Landlording

I’ve said for a long time, and I will continue to say that real estate is not about money – it’s about people!  It was beyond her comprehension why in lieu of taking her money, I would choose to assume the costs of the eviction and a remodel.  But, I have my reasons.   Had I chosen to accept her money (she was offering all that she was behind, plus another month upfront), I know it would only have been a matter of time before we were dancing this dance again.  This proposition never appeals to me – it’s not how I run my business.

But more than this, I simply chose to deal with honorable people; they don’t have to be rich, nor do they need to be fancy, but they do need to have a clear moral compass if we are to do business together, which is precisely how I see this relationship.  In short, I prefer to deal with people who know wrong from right.  These are the people who pay on time, who call when something breaks, who plant flowers, who wouldn’t think of trashing my units.  A building full of tenants like that constitutes stable passive cash flow today and tomorrow.

This is why I did not take her money.  I realize that in picking a tenant, I am establishing a long-term relationship, and just because someone hands me the money, doesn’t mean that taking it is the best thing for me in the long-run.

My game is more about what’s good for me in the LONG-RUN, is yours?!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

38 Comments

  1. Very good article, Ben!

    Regarding your quote, “In fact, I told her that I allow all of my tenants 2 payment-pledges per year without any late fees or penalties of any sort, so long as they act responsibly and make arrangements with me ahead of time.” I use a similar strategy with my tenants. With you mentioning it here, it reinforces my understanding of what a true working relationship between landlords and tenants is.

    • Absolutely Tony!

      Bad things happen to good people and I believe in treating people the way I would want to be treated. I will always give people the opportunity to do things right. The trick to staying in the game long enough to benefit to the fullest from all that real estate has to offer is to not become “disillusioned with humanity” and just give up – the way my seller did…there is an art and science to this 🙂

      Thank you so much for reading and commenting Tony!

      • Hey Ben,
        I always say:
        “I’ve never had a Bad Tenant go Good on me!”
        I can work with anyone but when someone lies, cheats or steals from me, I use all my resources to help them out (of the door).
        Except for giving them a good recommendation to get rid of them, no way!
        In all the years I’ve done this business, with all the Tenants I’ve had, I have only received 3 calls for a Tenant reference. Yet everyone who moves into any of my units, gets a credit, background and reference check.
        Good luck investing, Mike
        PS What happened to the red hair?

        • Thanks Mike! I am with you on the 3 sins. The red hair is Brandon Turner’s doing – what can I say, boy’s got style…:)

          Thank you for reading Mike!

  2. Great article, Ben!

    Would you mind sharing specific criteria you’re using to find “people who pay on time, who call when something breaks, who plant flowers, who wouldn’t think of trashing my units”?

    These are common screening filters:
    – credit report
    – criminal history
    – rental history (no evictions, late payments)
    – job/income verification
    – references from prior landlords and employers

    I would also add:
    – drug test (don’t want to rent to drug addicts)
    – tobacco test (only for non-smocking units)
    – immigration status verification (don’t want to rent to illegals)
    – ability to understand English language (a prospective renter must be able to understand the lease he/she is signing)

    Anything else I am missing?

    Thanks
    Nick

    • Nick,

      I’ll tell you this – when you asked me about a post I made a while back on one of the threads referencing a certain nurse and drugs, well her credit report was flawless…what does that tell you?

      There are a lot of things I look for and notice, but the vast majority of them will not be found in a database 🙂 Remember this Nick –

      Conventional wisdom is almost always wrong!

      Thank you for reading Nick!

      • Ben,

        Credit report was not the only one of the criteria I mentioned and I realize that all bankrupts had perfect credit at some point. So, good credit is a necessary but insufficient condition. Yet, IHMO, a good renter must have it.

        But what about other items? What about drug test specifically? If you had asked that “nurse” to take a drug test as a part of an application process, would that scare her away? And in case she did not do drugs herself, would walking around her car with a sniffing dog help? 🙂

        Thanks
        Nick

        • I am pretty sure that the test would have come back clean. This was a business to her, not an addiction – get the difference? Besides, she was a registered nurse with the state; I am rather positive that requires a clean test. The test would have done nothing. Furthermore, I’ve never really heard of a drug test being part of the qualifying process, nor have I heard of it needing to be. But try it if you want – I would talk to an attorney first though.

          Thanks Nick!

  3. Another great article with substance. I always learn from you. I’m beginning to see your RE style and like it! You offer a different perspective especially how you drive the point that the ability to attract quality tenants is the function of the building itself over the quality of management. I never thought of that until the bigger pockets podcast 14.

    Signing up at your Just Ask Ben Why website tonight.

    • David,

      I got up at 7 to write. I made coffee for Patrisha, kissed the twins and ran out by 9 to collect a rental application for one of my units. 9-10 I spent on the phone with one of my CFFU students analyzing several deals that he is doing due-diligence on. I had to get off the phone with him by 10 to take a call from a publication who want to feature me and would like me to write for them. And on, and on, and on…

      I love it, but today was a good day. There are days that are not so good; days when I wonder if I should just hang it up. The fact that you’ve just told me that my thoughts as expressed in a few articles make a difference in your life means a lot. When I have one of those, I will re-read your comment and others – and I’ll keep at it…Thank you, and it will be my pleasure to work with you as part of CFFU!

  4. Ben,

    “Oh yeah, we see this name come through here about every three to six months…:)

    It’s a Pro…Cool! ” Thanks for the laugh!

    Good article, thank you. I am currently going through a screening process with my one and only unit (my duplex). People…well…they are very interesting…to say the least!

  5. excellent article Ben, It took me couple of years of landlording to understand this, its important to train tenants and make sure they understand you mean business.
    Love your posts keep them coming.

  6. I never saw the movie but I love that quote. I didn’t intend to be a landlord when I first started investing but it happened and my brother and I got a great deal on three fourplexes on the same lot in a great area. And then we found out why we got such a fantastic deal and about our new tenants when not a single rent check showed up on the first of the month.

    Well we got an instant education on land-lording but the tenants got an instant education that there were landlords that had friends they never wanted to meet and it was not a good idea to think every landlord was a mark.

    The police Lt who interviewed my brother and I could barely keep a straight face about the reports the tenants filed about our collection practices. He was familiar with many of the tenants and preferred it if they were to move to another town but we just smiled and said he would have to talk to the people who bought the debt from us and the right to collect it.

    For some reason the tenants all decided to leave one Sunday night, just moved right out and we never heard from them again. Turned into a great investment after all. Really taught us to screen new tenants because as a local investor said to us at the time I am handing over a $10,000 asset to them to care for and feed. And of course we learned to screen and review existing tenants before we inherited them.

    Just a side note the collection people told us they collected every single dime and that was good news, but gave me the thought that those tenants would now screen landlords better and right that moment some landlord was getting a massive migraine..

    • Nancy,

      My management can best be described as “iron butterfly”. Everyone knows to be proper and respectful, or I don’t play.

      To answer your question, I don’t really see any reason to cause unnecessary grief in tenant’s lives ever. I move the due date to a later time if I see payments coming in consistently late. People live paycheck to paycheck and if they have to continually d extensions this means that likely the way they get paid at work doesn’t line up with when their rent is due. I tend to accommodate that. If this doesn’t solve the issue, then there is a structural problem and we have to part ways…

      I don’t like charging late fees. My rents are at the top of the market for my type of units as it is. I know I could make additional ROI but I don’t think it’s necessary and places undue strain on tenants. Either we set something up whereby they can be on time, or we can’t…

      Thanks so much for your comment!

  7. I have several tenants who pay in what my wife calls “dribs & drabs”. Some of them are farmworkers who bring in cash when they get paid. As long as they keep up, we don’t mind. We are set up to accept payments very efficiently, and it’s not that much work for us.

  8. We got into this “business” accidentally. After finding our first home too small once our baby was born, we bought another home. We didn’t sell the first because the market had plummeted and we had already invested so much.

    Our most recent tenant fail was with a superior professional scammer! Because we are not business people (although now much more savvy about the possibilities of people and their moral standards now), we came off nice and naive. Now, about 14 months later we have paid a high price. We are now about 30,000 in the hole all because of this bank guru who makes over 14,000 a month. He got in after a credit check (superior credit) but had two broken leases in other states. It was a good story: high powered banker being relocated for work and company paid off leases. This info was verified by more recent landlord. For the LL just previous there was no ph number… Being naive we let it slip. Seemed like a really nice guy with what sounded like a nice family.

    In the end, he filed suit against us and now as defendants who make very little money, we don’t know what to do! His claims are completely false and we know if we can stick it out to trial, we will win. (He broke the lease 4 months early and then filed a business fraud case against us!!). Problem is the costs of getting to a trial are do far beyond our income, and then stress and sick feelings that we housed this creep, now fully for free and then much more, makes us sick every day.

    The way I see it… It’s a moral obligation to see it through to court. The only other option we are learning, is to pay him off…. Many many thousands more. It is heart wrenching for us through and through.

    What would you savvy landlords (yes, I know… You wouldn’t have fallen for his scams in the first place)… But if you did, or were in our shoes, what would you do?

    • Jerry Kaidor on

      Ouch. It’s a tough world out there. Luckily, there aren’t that many super-pro tenants. I think most of us escape them – not only by checking – but just with pure dumb luck.

      I have no real solution for you, but just a few thoughts. Anybody can sue anybody for anything. What keeps most of us out of court is that lawyers are reluctant to file for free ( on commission ) unless it looks like a solid suit. Did this guy file Pro Per ( representing himself )? If so, you can surely defend pro per. I would be reluctant to try to defend myself with a high-powered lawyer on the other side. If he filed in Small Claims court ( $7500 max in California ), then you are guaranteed no lawyer on the other side. With or without a lawyer, my first step would be to countersue for every penny this guy owes you. If it’s superior court, I’d tack on $$$ for pain and suffering, which he is obviously causing you. In small claims OTOH, you’re pretty much limited to monies paid or owed with receipts.

      It sounds like this was a fairly small house – you had to leave it when you had a baby. And this guy was making $14K a month. It sounds to me like he didn’t fit the pattern of people who would rent such a house.

      I’ve been bit by this myself. I rented to someone with excellent credit/references/etc who did not fit the pattern. This person was operating two successful businesses and
      owned her own mobile home. References commented on how beautiful and clean her white carpet was. I wondered why she wanted to rent my little 2-bedroom apartment. Maybe business wasn’t that good? Turns out she never moved in. Instead, her drug-dealing auntie moved in. Big pain. Since then, I always WATCH THE PATTERN.

  9. Thank you, Jerry. Any support is helpful in this drawn out emotional and financially draining time. Unfortunately, you are correct. He did not fit the pattern. There were red flags immediately after he got the keys and the ones before that were sube enough I chose to ignore them. Sadly, he got us, his real intention and wants to win. He’s got multiple personalities which he pulls out depending on the situation. Has a solid lawyer, so of course, we do as well. He claims we owe him more than he paid in rent in the 9 months he lived there. The worst part; the evidence we already have is so glaringly obvious that he was manipilating us, the house (creating problems to try to say there were BOH violations -which there were none) and even probably his own lawyer, but so far this has been going on for 6 months and it still has not been dismissed. We have 3 lawyers on our side and just pray everyday that the legal system would step up and justify the situation. Unfortunately plans not to settle because he is determined just to ruin our lives. He not only has no moral compass, he seems to be a sociopathic narcissist. Our biggest hope now is that Kharma wil do due diligence.
    Thanks for lending an ear and I do hope these types really ae few and far between because it ruins faith in humanity!

    • Hey Pauline,

      This may not help you directly but why don’t you publish the name, address, phone #, and the photo of that tenant somewhere on BiggerPockets? This way other people will know who he is and may even come forward if he ruined their lives also.
      Create an account with his name and his photo and describe him as a professional tenant in his profile. Then post an introduction in one of the forums. That will draw a lot of attention to this guy.

      Mike

      • Mike- we really would like to do that but he’ll surely find it and then sue us again. We certainly can’t afford to ever deal with this guy again. Just keep your eyes out for this kind of story. As we’ve learned, this type preys on the unassuming and plans it all out from day 1.

        • Jerry Kaidor on

          The older landlord may have been under a court order not to give a bad reference. Generally, a negotiated agreement ( which gets converted into a court order ) includes
          a “no negative reference” clause. The only sensible thing to do is comply. Somebody
          calls for a reference, you tell them to send you a fax. You fill out the fax with basically nothing. Just the dates of tenancy and the amount of the rent.

          Hopefully the person who receives the reference can read between the lines. And if the former tenant says “You told….”, you just produce the fax and say “I said this, and nothing more”.

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