5 Warning Signs Your Renter or Owner-Financed Buyer Can’t Stay Much Longer

by | BiggerPockets.com

Fewer headaches are typically better than more headaches. As active real estate investors, we strive to sell/rent quality properties to qualified, low-risk occupants. A low-risk resident typically means on-time payments, the ability to pay, and reduced worries on your part.

Positives to receiving a property back through default include:

  • May be able to re-rent or resell the home for a greater profit
  • Gain more experience rehabbing and reselling the same home
  • Learn from the defaulted resident about what not to do in the future

Negatives to receiving a property back through default include:

  • Possible time wasted dealing with occupants who don’t pay and don’t leave easily
  • Stop what you are currently doing to reinvest more time/money with the defaulted subject property
  • Holding costs, repair costs, and marketing costs while property is vacant

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5 Signs Your Renter or Owner-Financed Buyer Needs to Go

1. They leave clues during screening.

In my first three years holding residential real estate, I experienced a 100 percent default and turnover rate. One hundred percent of the properties I sold via payments eventually made their way back to me over one to three years. The reason for this was my lack of approval process and willingness to fill my properties to anyone with a pulse. I look back now and see I was setting high-risk people up for failure.

Related: 3 Sneaky (But Legal) Ways to Screen Potential Tenants

Screening your applicants and understanding who you are placing inside your vacant investment homes is almost as important as purchasing the property correctly in the first place. Make certain to have a thorough process reviewing every adult applicants’ background, criminal past, and credit history. In addition, be certain to listen to verbal and action clues from the prospective tenant or tenant-buyer that may be red flags, such as:

  • Not showing up on time
  • Making excuses
  • Being a victim
  • Being too friendly or informal with you during a first interaction
  • Abusing their children or loved ones
  • Talking badly about a previous landlord or relationship
  • Anger issues or temper
  • Low pride of ownership in appearance and/or personal automobile
  • Inability to follow simple directions

landlord-lessons

2. They make a last-minute change to the move-in deposit.

When a down payment, move-in fee, or deposit is agreed to, it should be honored. Some large red flags for high-risk residents are their last-minute calls on the day of closing that they will not be able to bring the full amount to close. It seems that for one reason or another, the perspective resident needed the money they were going to pay on the home for some other expenses. If a prospective resident values other bills over a place to live, it may be a very wise idea to pass on this prospective resident.

Pro Tip: Do not let anyone move into your investment property until a full deposit or move-in fee has been paid.

3. You start receiving checks from churches or charities on their behalf.

Some churches and charities around the country provide assistance to low-income earners. When you start receiving monthly checks from a church or a request from a resident to contact a local charity on their behalf, it is typically a sign the resident is in a real financial hardship.

4. They want to make partial payments.

Partial payments are typically a sign a resident is in financial trouble. If their incoming capital monthly does not meet or exceed their outgoing expenses, it is only a matter of time before these residents will default and/or abandon the property. Make sure to truly understand your residents’ financial health. Understand how much money they make on a weekly basis, any extra jobs they have, and even when they receive checks, weekly or monthly. The more clarity you have on your residents’ income, the better you will be able to understand where this money is going monthly.

Pro Tip: Your residents are not stupid. They will know their finances better than anyone else. A resident should call you a few weeks in advance if they know they will be late. If a resident calls you the day a payment is due, this can show a lack of respect for your time and a lack of seriously wanting to remain in the home.

sheriff-sale

5. They want to establish a long-term repayment plan.

Your occupant asks you to establish a repayment plan for the amount they are past due. Common sense would tell us that if the resident was not able to pay last month, they would not be able to pay this month unless drastic changes were made. When considering a repayment plan, considered your residents closely.

  • Repayment plan due to one single hardship: Bad things happen to good people. A broken bone, down vehicle, minor trouble with the law, job loss, etc. can all lead to a temporary financial strain on your resident. Assuming that your resident has ample savings, this may or may not affect their ability to pay rent monthly. Depending on their length of time already in your property and their previous payment history, you may choose to create a repayment plan if you feel they have the logical ability to repay the defaulted amount and more.
  • Repayment plan due to lack of incoming capital: We mentioned the term “one single hardship” in the above paragraph as an example of when one single hardship causes a downward spiral with a resident needing a little bit of time to recoup his/her losses from this one single event. The above paragraph assumes the resident still has adequate income monthly to make payments. However, if a resident has lost their job and no savings are available, this is a recipe for long-term struggle that should be dealt with quickly and effectively. In situations like these, it is important to truly understand the resident’s financial situation. If no significant income will be produced in the next two weeks to more than make up for the defaulted amount plus next month’s payment, a plan and date for the residents move-out should be discussed. Do not be afraid to suggest the resident move to a more affordable property soon to avoid negative remarks on their credit or rental record.

Pro Tip: No one likes to be talk down to or intimidated. Do not point fingers or be emotional when having a financial discussion with a defaulted renter or resident. The number one priority is to first establish if the resident has suitable income to continue paying monthly, then to quickly determine a repayment plan with concrete deadlines or to encourage the resident to locate another suitable living arrangement.

In conclusion, make sure to have clarity on your resident’s financial situation at the beginning of your relationship and moving forward. Actions speak much louder than words. Remember that you are in the driver’s seat when it comes to accepting concessions or discounts with regard to your monthly payments. If something does not sound “logical” or something sounds “too good to be true,” it might just be.

What other signs would you add to this list?

Be sure to leave a comment below!

About Author

John Fedro

John Fedro has been investing in manufactured housing since 2002. John now spends his time continuing to build his cash-flow business in multiple states while helping others enjoy the same freedom he has achieved. Find John here.

3 Comments

  1. Curt Smith

    Hi John, Good post!!! Yes I’ve seen most of those too.

    The #1 predictor of success for low end rental tenant screening is: they have a bank account with the full move amount available. Full move in amount in cash is not nearly as good! Having a bank account with significant balance means they don’t have any bad debt collections problems and may never had else they’d be a fraid of having $$ in a bank account.

    Yes their car has to be neat inside. No trash. I actually prefer older cars, not brand new or expensive.

    2 incomes where one is almost enough to qualify.

    I made the mistake of qualifying the income based on a single parent and 1 23 yr old daughter. The daugher never moved in stiffing the parent who is now struggling. Never include income from kids!!!

  2. Rob Urban

    Landlords are not banks or lenders and payment plans are a great way to enable your tenant to take advantage of you. The deal is this: I give you a place to live and you pay me X on the 1st day of the month. It’s that simple. It’s the tenant’s responsibility to come up with the rent from family, their employer, whomever … as long as YOU aren’t their bank! This is a business not a charity.

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