As an active real estate investor there is very little chance that every renter or buyer you work in the future with will be 100% headache free. Prudent real estate investors perform multiple checks on anyone and everyone over 18 years old looking to move forward in their vacant investment property for rent or for sale.
The fact that you or your property manager will be dealing with both great and mischievous tenants, tenant-buyers, and buyers is a simple fact of investing. The fact you are dealing with renters and buyers means that you are actually investing in real estate and have potential investments/homes for your customers.
Whether you're investing in mobile homes or mansions people are people. Your renters and buyers almost always do what's in their best interest. A renter's credit history, rental history, criminal history, and work history may likely predict this renters future.
Below are 5 Actions to consider when a tenant or tenant-buyer defaults.
1. Repayment plan: If a tenant defaults and does not make their monthly payment to you, then you are in the driver seat to contact the tenant and alert them of the coming eviction, a possible repayment plan, or when they plan to vacate the property.
Good tenant: If a renter has been paying on-time, kept the home clean, and they let you know in advance if they will be late, then by all means you and your renter will want to establish a clear and logical repayment plan for the amount past due plus late fee.
Bad tenant: If a renter has been giving you headaches, paying late, occasionally breaking other parts of the lease it may be wise to simply use this last late payment or no payment as the catalysts to finally remove the occupants. Realize that bad things happen to good people sometimes, and if your renters start showing effort and keeping their repayment plan current this is a good sign they are serious about keeping the home.
Experience teaches that repayment plans are slippery slopes. Many times if a renter or tenant-buyer needs to create a repayment plan it is only a matter of time before this resident defaults completely and must move out. While we never want this for any of our residents it is important to act quickly and take immediate action if/when a resident misses his/her payments or simply defaults.
2. Pre-Eviction Process: The pre-eviction process is the point when you post a 3-10 day notice on the residence's door instructing them to pay or vacate the property. I wanted to make a separate note of this step because over the years many tenants understand they do not want to be evicted from the property or have an eviction filed on their record. This demand letter is often times the wake-up call needed for a renter to pay or pack-up. In many states this 3-10 day demand letter is necessary to start the filing of a legal eviction.
Make sure to always know how your lease agreements, for sale agreements and addendum's read with regards to late payments, defaults and evictions.
3. Eviction: In many counties, and depending on how the property is owned, the owner of record can simply walk into the local courthouse with paperwork and pay a fee to begin a legal eviction removing the occupants from the home.
Over the years I have only had to perform a very small number of evictions. Many renters or tenant-buyers will not want an eviction on their record. Most renters in default will leave your home clean and in a timely manner with kind words, a few days worth of time, and even a little cash to see them on their way.
Many investors will have a higher than needed sympathy for their residence. Often times we may delay an eviction weeks or months longer than we should because we simply want to continue giving our renters the benefit of the doubt that they will pay, treat you right, and stay in the home. Remember that you are running a business and if an occupant cannot pay then they cannot stay.
4. Press Charges: Did your renters or tenant-buyers leave your home damaged or destroyed? Do they still owe you hundreds or thousands of dollars? Were your renters or tenant-buyers vindictive or personally angry with you or your company?
Over the years I've come to find that by treating people fairly and listening to their concerns you will rarely take a property back in worse condition than when you sold it or rented it. If you do receive a property back in worse condition than when you rented it or sold it then the choice is yours to press charges for damages or simply move along and consider this a lesson learned.
Always aim to get current employment information and bank account information from your occupants. If a judge settles in your favor you can often times garnish wages if you know where an ex-occupant works.
5. Swallow Your Pride: In almost every situation whether good or bad there is something to be learned, some silver lining to take from every lesson. Whenever we sign legal papers to sell or rent our investment properties we may incorrectly assume that everything will go according to plan. This often times is not the case. As investors we create value, we make profit, and we learn from our mistakes (and the mistakes of others).
If you decide to press charges on an ex-renter due to damages or an amount owed to you then make sure the time, money, and mental energy is worth the fight. Besides the monetary compensation your understanding of why this happened, what fault you are at, and how you can prevent this moving forward is often times the biggest value gained.
In conclusion, with proper due diligence and thoroughly screening all of your buyers, renters, and tenant-buyers you can eliminate the vast majority of your future headaches. I would much rather keep my property vacant than have a high-risk occupant in the home causing me frustrations and possibly damage to my investment home. Make sure you are properly prescreening every adult who lives in any of your investment homes. A person who has had very good rental history in the past, good credit history, and no evictions will likely be a low-risk and smart choice for you to rent or sell to.