fbpx

Get weekly money tips, strategies, and resources. 

Truth

Why I Don’t Believe Tenants and What I Do Instead

TruthIt doesn’t take much digging to find complaints about landlords: the guy’s a jerk, doesn’t ever repair anything, doesn’t respond to my calls, only cares about money and so on. Some landlords really do behave badly vis-a-vis their tenants and they certainly deserve our wrath.

Today, though, I want to talk about what it’s like to be a landlord because I think it’s important to add some perspective to the discussion. And for those of you who are landlords, I have a few lessons to share.

I have been investing in real estate for ten years now and in that time I have come across all kinds of tenants. Some are fantastic people who treat my properties well, pay their bills on time and respect the by-laws. While they rarely improve my properties, they don’t devalue them either.

Then there’s the other extreme: people who live in squalor, frequently miss rent payments, lie to us about when they’re going to repay, ignore all the rules and leave the place in a horrible state when they bail in the night.

And of course, there are a lot of people who fall in the large middle-ground between these two extremes.

The problem, you see, is that I can’t necessarily tell who will be a problem. Even after a decade of experience dealing with every conceivable type of character, I still don’t get it right all the time regardless if they’re regular tenants or tenant buyers in my Rent to Own program.

Consider the following three examples:

Mr. Nice Guy

David* first approached me about my Rent to Own program. He and his wife had been renting for years, dealing with noisy neighbours, and they were fed up. They came to me with a good down payment however their credit was shot because of a recent bankruptcy. What they wanted most of all was to get into a home of their own and they wanted me to help them accomplish that.

He seemed like the perfect candidate: Always calm and pleasant, organized, honest, forthcoming with documentation and proof. He had a stable job after an unsuccessful stint at self-employment that ended in bankruptcy and his record prior to the bankruptcy was spotless – bills paid on time, no delinquencies, reasonable spending patterns.

It all looked very good so I agreed. When it was time to shop for a house, he selected one in an iffy neighbourhood; the area has a mix of retirees, young families and low-income housing. I had some serious reservations about the house but Dave implored me to approve it. They could afford it, it had all the features they wanted and was well-located for his work. Plus he was a man of his word; he would honour the agreement just as he always had in the past.

I believed him. He was providing enough of a down payment and would accrue enough credits on a monthly basis that surely he wouldn’t walk away from that. Not Dave. Not given his strong record.

Three years later he was ready to buy out. He had done everything that I had asked of him to improve his credit and he was now in a position to obtain his own mortgage. So he did. The only problem, as we learned roughly six weeks before he was set to buy out our house, was that he had purchased another property. When he left, the house was a disaster – filled with his junk, reeking of cat urine, disgustingly dirty and badly damaged. It cost us nearly $20,000  and hundreds of hours of our time to restore the house so that it could be sold.

“Sorry.” That’s what he said to us. Sorry. We are about to take him to court if he doesn’t pay us back for the damage. Ironically, that would wreck his credit profile and endanger his ability to renew his mortgage.

The Rough Couple

When we received an application for one of our properties, our property manager wanted to talk to me.

– This couple looks great on paper. Modest but stable incomes, great history as tenants, long-term tenants in their previous place with good, plausible references. When you meet them though they look and sound a bit rough.

– How rough?

– Think biker gang couple. They have no record of issues as tenants from what we can tell though. It’s your call.

I looked at their financial details. They really did look like great, stable tenants on paper but I couldn’t get over the image painted for me by my manager. I decided to take a chance on them despite deep misgivings, reminding myself that my first husband looked like a bum the day that I first met him and he turned out to be a fabulous guy. But I clearly thought I was making a mistake because I actually wrote a note to myself in their file: “I hope I’m not being an idiot.”

They have been in our property for years now and they are one of the best sets of tenants we have ever had.

The Execs

This couple appeared to be set – positions of influence, large incomes, substantial down payment. The only thing they were missing was a good credit score. They had been through a bankruptcy but their story was plausible; every detail was accounted for. We looked into their financial documents and it all added up. It didn’t hurt that they were charming, witty and seemingly open about their difficulties. After all they had been through, they just wanted to rebuild, put their past behind them and begin anew in a home for their family.

We approved them and bought them an executive house.

Three months later their rent cheque bounced; it was the first of many such incidents. For the first two years, we got detailed stories explaining every payment issue. The only problem was that the stories were getting more extraordinary and they were also contradictory. By the end of the second year the gloves were off and they didn’t even bother with the pretense of excuses, they just bounced their payments and refused to pay until minutes before the Landlord and Tenant Board Tribunal hearing. They gave us notice after three years just as we obtained an order to evict. We were left with rent in arrears and more than $12,000 of damage.

I could go on with countless examples on either side, but you get the point. Even after a decade of experience, I still don’t know for certain who will be a great tenant or a lousy one. Just when you think you’ve got a read on people, they surprise you.

My Strategy Today

I no longer believe tenants when they tell me that they are great people who will honour their obligations. Nor do I disbelieve them. The big “aha” checklistfor me has been to discover that belief has nothing to do with it. Instead, I have developed a process and policies that move beyond emotion or anything personal. Sure, my gut still plays a role but I no longer let it play a  positive role. That is, if the paperwork doesn’t add up, I don’t allow my gut to tempt me into “helping them out”. However, if my gut throws up red flags I do not proceed even if all of the paperwork lines up. I would rather walk away from a good tenant than take on a bad one.

The way I now go about approving tenants for my Rent to Own business, for example, is simple: I follow my rules.

I leave you now with a few of my rules in the hope that they help you if/when you are faced with an application from a tenant:

Rule #1 – Stick to the provable facts

All clients come to me with a story and while their stories definitely matter, they are rarely provable. Maybe her ex-husband really was a jerk who racked up a ton of debt on their joint credit card and then left the country, leaving her with the kids and the debt to deal with on one income. Maybe not.

When you hear one side of the story, that’s all you’ve got. Think of the last time you had a dispute with your spouse. Did you both agree on the “facts”? Probably not. There are always two sides to every story (except when my husband argues with me) and if you’re only getting one side, it’s hard to judge.

I take note of the stories and look at the documentation: the credit bureau report, the spending history, the work history, the ability to save, the bankruptcy statement and so on. The paperwork tells a story of its own.

Rule #2 – Look for accountability

The people who worry me are the ones who come to me with stories about how the world has done them wrong. When the problem is always “out there” or “someone else”, that tells me that the potential tenants are not at all accountable for their results. Sure life happens and we are all dealt some terrible blows at different times in our life but there has to be a point where we look in the mirror and ask, “OK, what did I do that may have contributed to this situation?” or “What choices did I make that perhaps weren’t the wisest?”

One guy came to me and actually said this: “When I got out of university I was offered a bunch of credit cards so I took them all and went on a spending spree. I was an idiot and now I’m paying for it.” OK, that I can work with. That I get. Who hasn’t made really stupid mistakes in their life? This guy took ownership of his behaviour, which is the first step to turning things around. No ownership, no can-do for me.

Rule #3 – Follow every step of the process every time, no exceptions

Every single time that I made an exception for someone who came to me with a good story, I lived to regret it. Not just a few times, every time. It seems that the people who ask the most of you regarding special consideration or concessions are the ones who are most likely to renege on their commitments, or at least that has been my experience. Some day, just for fun, ask me about my experiences with tenants and pets.

I have developed a process in my business over the past decade. There are key steps that I go through from qualifying a candidate to buying a house for them using investors. The same goes for my regular tenants. I do not by-pass steps. I learned this one the hard way and I don’t recommend you do the same.

Rule #4 – Do not break Rule #3

Ever.

Until next time, Survive, Thrive and Grow.

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on email

Leave a Reply

Your email address will not be published. Required fields are marked *

join the club

Yes, please send me money tips, strategies and resources every week!

No spam, ever. Unsubscribe any time.