Wednesday, November 4, 2009

Enforcing lease terms and payment of rent

Many real estate investors/landlords rely on rental income to cover most if not all of their monthly mortgage payments and association fees. If they cannot command enough rent to cover these monthly expenses,they of course have to come out of the owner's(s') pocket(s).

Two issues I have been recently discussing with clients are the benefits of "oral leases" verses written leases and protecting yourself when your tenant(s)checks bounce.

I see very few upsides to oral leases. Everything is he said/she said,from what the tenant's rent is to how long the tenant's lease is. The benefit to a landlord might be that he/she can successfully kick a tenant out in a swifter manner than a written lease might say. But if a tenant wants to leave early,then he/she could probably leave quickly without recourse. Any arguments are he said she said.

Some landlords have told me that they do oral leases because their tenants tend to be month to month so the tenants will leave soon any way. They also argue that it takes too long/is too much of a hassle to do the paper work. I also hear,well the tenant is a friend/friend of a friend. Well,month to month tenants could end up renting longer than he/she/you anticipated. To beat the dead horse again an oral lease has no terms. Treat your investment like business and have things in writing whether you know your tenants or not. Don't let people take advantage of your kindness and being lax because of relationships.

Let's talk about rent. Most written leases drafted have a clause saying that if the rent check is late or if the rent check bounces,that the tenant owes X + the rent check. That is pretty basic and if your lease doesn't have that,make an addendum to your lease immediately. What many leases don't address are other potential consequences of rent check bouncing and/or being late. One bounced/late check can have several consequences. The landlord will pay a bounced check fee if the rent check doesn't clear...ok,that is covered by the lease clause on bounced checks.

What many leases don't address is if a tenant's bounced check/late check causes you to be late on paying your monthly expenses,such as mortgage (if there is one),HOA/condo fee (if there is one)and utility bills (if your tenant doesn't pay these),or if the bounced check causes any or all of these checks that you wrote to subsequentally bounce and you pay the fee for each of those bounced checks and the late fees charged by each company. You might want to talk with a real estate lawyer and/or property management company about adding such a clause to your leases.

So one remedy to avoid bounced checks is to require your tenant(s) to pay rent with a cashier's check/money order. I have never heard of a cashier's check/money order bouncing. Some people like to see their rent checks/touch the money. Ok. The downside is you still need to make a trip to the bank to deposit the check no matter how light or busy your schedule is. A negative about receiving rent checks in the mail...if you are out of town and your rent check comes in,you won't be able to deposit it until you get back to town and if your cash flow for making other monthly payments relies on the rent check,then you may fall behind on the other payments and that is nobody's fault but your own.

Another thing to consider is seting up a direct deposit/paypal for your tenants to pay your rent. Your tenant's(s')bank probably won't let him/her pay bills if there aren't sufficient funds in his/her account. This is certainly a good and efficient method of avoiding bounced checks,but you should still consider setting up a clause if their rent checking being late causes you to be late on other monthly expenses related to your property. The other benefit of having tenants make such a payment is that there is no argument on a late rent check that the mailman must have been slow on delivering my check to you because I mailed it out several days ago. You have online documentation of when the tenant(s) paid their rent. You just have to make sure your online account information is secure and you have to be careful about online identity theft and/or online hackers. But having online payments does save you time on going to the bank,depositing the check(s)if you are busy and/or out of town when the check arrives.

So,I suggest to all the landlords out there to always and forever use written leases,add terms to protect you in cases where a rent check is late or bounces where the terms go beyond one bounced check fee and determine the best/most efficient method for you to ensure that rent checks clear.

Make it a great day!


Adam Bashein
Licensed in MD & DC

Weichert Realtors
7821 Tuckerman Lane
Potomac,MD 20854
301-718-4100 ext. 132

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