How To Handle Non-Performing Rental Properties & Tenants
What’s the best way to handle tenants and rental properties that aren’t performing as well as you had intended?
In spite of the best planning, rental properties just don’t perform as expected. Some perform far better than expected, but then there are always the laggards. There can be many reasons for renters failing to pay or breaching leases. That said, there is one question that remains: what can you do about it?
One of the most common, yet unexpected, scenarios landlords are running into in areas like Southern California, South Florida, and many places in between is discovering non-performing tenants or ex-owners in the property after purchasing.
Dealing with Inherited Non-Performers
Some properties are purchased with existing tenants. In these scenarios, one of the best ways to ensure there aren’t issues immediately after takeover is to make sure leases and the status of leases and rents are verified prior to closing. You don’t want to just take a seller’s word for it and then find the tenant proclaiming they had $5,000 in deposit money that wasn’t transferred at closing, or they claim they were promised 5 months of free rent due to an undisclosed repair problem. If there are existing tenants that aren’t performing before you buy, the smartest move is probably to ensure they are out before your walk-through.
In other cases, and frequently when purchasing short sales, foreclosures, and REOs, ex-homeowners can be found still living in the home after the closing. This is not a great scenario. If they weren’t paying before, the odds are they are not going to perform very well as tenants. There are cases when a little compassion and help may be deserved. However, it is almost invariably wiser to move them to another rental than to hope things will go well in their old home, with you as their new landlord. Be friendly and helpful, but expedite the move as quickly as possible.
When Renters Stop Paying
Tenants can stop paying rent at any time, and for a variety of reasons. It can be a couple years down the road, or even the first month. It could be because a property management company in place has been doing a poor job. It may be a misunderstanding, temporary hard times and family emergencies, or it could be ‘professional tenants’ working the system.
Before jumping to conclusions, and getting too carried away it can pay to find out what the issue is. Late payment should be addressed timely, and the landlord’s legal rights protected. Even otherwise great tenants can slip into bad habits if they are allowed to cost forever. Sooner or later they get too far behind to catch up. It there has been an emergency; especially a medical problem, death in the family, or a job loss, there may be good reason for leniency. This doesn’t mean to stop filing notices with every excuse you are given as a landlord, but think about the big picture, and put yourself in their shoes. Could cutting them some slack, coming up with a creative way to work the numbers, or changing the lease be the best win-win versus having to get the out and find a new tenant, when the problem could have solved itself in less time, and with less of a financial loss.
When the scenario involves a rent-to-own, lease option, or seller financed arrangement landlords and sellers need to be even more careful. If not there can quickly be big legal squabbles over equity. Sometimes occupants should be given a second chance given what is on the line. However, over a period of years if they still consistently fail to perform and the property has gone up in value significantly; with a lot of pent up equity it could be time to step in.
The one exception is when occupants and non-performing renters appear to be malicious and out to work the system for all they can get. These situations can quickly run out of control and have the potential to get very expensive. In some cases, it can be best to sell problem properties and tenants and replace them.
Non-performance can also apply to withholding rent for repairs, refusing to allow landlords and contractors access, property damage, and breaking local laws. Look for an amicable solution where tenants are willing to work with you, and move swiftly and decisively (and legally) when they won’t.
Smart tenant screening procedures can go a long way toward preempting these issues, and many landlords may never run into an issue. However, it does pay to have more income producing properties than you think you might need to account for these blips in performance. When they do occur, tackle them quickly, with care, but firmly.