In this week’s episode, Podcast Host, Andrew Schultz, chats about renting to companies that would like to provide corporate housing for their employees. Discover the stipulations for this type of arrangement.
What should you do when a tenant with poor credit offers you a year’s worth of rent upfront? Sounds like a pretty sweet deal at first, but is it really? The answer may surprise you.
Last, but not least, we’ve all had that one contractor that wanted their money upfront before ever finishing the job. But, how many of you have had the contractor that did finish the job for a pretty penny, but your expectations were not met? Find out how to handle this particular situation.
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Andrew Schultz: (00:00)
Hey everyone. Welcome back to another episode of the Rent Prep for Landlords podcast. This is episode number 362. And I’m your host, Andrew Schultz. On today’s episode, we’re going to be talking about what to do when a contractor performs subpar, would you rent to tenants who offered a year’s worth of rent upfront and renting a property to accompany for the use of their employees? We’ll get to all that right after this.
Voice Over: (00:25)
Welcome to the Rent Prep for Landlords podcast. Now your host, Andrew Schultz.
Andrew Schultz: (00:30)
Before we jump into today’s episode, don’t forget to check out the Rent Prep for Landlords Facebook group. It’s a great free resource for you to network with housing providers from around the country. And if you have a question or a situation that you’ve never dealt with over 12,500 members, chances are someone in the group has been there before and can lend a helping hand if you haven’t checked it out yet, do it today. Over at facebook.com/groups/rent prep. Don’t forget to mention the podcast when answering the questions. So we know how you found us.
Voice Over: (01:02)
Forum quorum, where we scour the internet for ridiculous posts from landlords and tenants.
Andrew Schultz: (01:09)
We’ve got some interesting topics this week. We’re going to go ahead and jump right into our first forum quorum. This week’s first forum quorum is the discussion about the contractor who just could not get it together. Work-Wise let’s go ahead and jump right in here. This one comes to us via the Rent Prep for Landlords Facebook group. I have a contractor whose rehab work is not turning out to be acceptable. I have brought this to who is to attention and he is past his contractual deadline to complete the work. By five days, I owe him the remaining amount of 1800 when the work is completed of which I gave him until Friday at 5:00 PM. I gave him this deadline and a time for a walkthrough and then gave him an additional eight hours for touch-ups beyond that. Would you not pay the $1,800 if the issues are not corrected and have the contractor Sue would you pay a partial amount to do substandard work?
Andrew Schultz: (01:57)
The quality? Isn’t just not what I paid for. So we’re gonna go ahead and jump into this one. This is a pretty interesting one on a couple of different reasons because it gives us an opportunity to talk about how to ensure that you work well with a contractor, as well as maybe what to do or some options in this particular instance. So the first thing I would immediately come to would be, what does the contract say here, and what change orders exist beyond the original contract? Are they in writing things of that nature? You’ve mentioned that you specified on the contract, that there was a date that the work that was supposed to be completed, obviously that data now come and gone as well as a couple of other deadlines by the sounds of things. But I’m wondering if there were any change orders written to the original contract for either adding or subtracting any other work that may have been done on the property at the same time.
Andrew Schultz: (02:44)
And if those change orders would include plus or minus days when it comes to completing the work, I know anytime we do a change order that we expect is going to cause a significant amount of time, even if it’s more than just a day or two, we typically write that change order and make note on the change order that it’s going to increase the amount of time needed on the site for X number of days or whatever the case may be. Just so that we understand that as we’re adding work or as we get into something and the job’s not what we thought it was, we uncovered more damaged during rehab or something like that. Everybody needs to be on the same page in terms of timelines. And that’s one of the ways that we do it is by ensuring that we have those change orders and that the change orders will either add or subtract time from the job, depending on what we’re doing and whether we need more or less time as a result of whatever we’re doing.
Andrew Schultz: (03:33)
So the first discussion in anything like this always has to be, what does your contract say? And then are there any change orders beyond the contract? The more specific a contract is the more discussion that there is to have. So for instance, if you say paint the wall, okay, well, how many coats, what color are we doing? The trim too? Are we doing around the windows? Do we, you know, what’s included in paint wall. It’s a very vague statement to just say, yeah, go paint that wall. You need more information than just paint wall. You, you get what I mean there, there’s, there’s multiple things that go into a contract that you may not think of when you think of, okay, we’re going to go in and paint this entire room and put down some new carpet or whatever. You know, you need to make sure that you specify paint the walls and the trim you know, remove the existing flooring, install the new flooring and install shoe molding so that the flooring, you know, everything edges out the way that it’s supposed to, there’s more to it than just scribbling some stuff on a piece of paper and signing it.
Andrew Schultz: (04:32)
Your contract should be as detailed as possible because that’s going to help you to say, okay, well, you didn’t specify you didn’t complete the contract to the contract terms, but essentially all of this just leads us to the actual question, which is how do you handle a situation like this? And from where I’m sitting, you essentially have three options. You can pay the full boat, pay the $1,800 and walk away knowing that you’ll never use that contractor again, you can pay that contractor, nothing. In which case, he’s probably going to go through the process of putting a mechanics lien against your property at a minimum, we literally just covered something. I think it was last week on ask a property manager. We covered an article where a contractor that went unpaid, literally went back into the house and stripped out an entire brand new bathroom that they had just finished remodeling.
Andrew Schultz: (05:23)
Obviously, that’s an extreme, I don’t think that’s going to happen in most circumstances, but you know, if you tell someone you’re not going to pay them, you do need to be prepared for whatever the consequences of that action may be. And the third option. And I think the option that makes the most sense in this situation is try to find a compromise. My recommendation is obviously work on the compromise, explain to the contractor what happened, where they fell short of the expectations and why, and work on them with coming up with some sort of a reasonable amount that you feel is worth paying to the contractor, to just get them done and out of your hair. Or if you think that it doesn’t make sense to pay the contractor. Anything, if the work was so bad that you need to hire someone else to come in and fix that contractors work, what I would do would be to have that other vendor come through first, get your estimate from the other contractor as to what it’s going to cost the fix.
Andrew Schultz: (06:14)
The first contractors work and be armed with that knowledge. When you meet with the contractor that you’re letting go so that you can say to him, look, it’s going to cost me two grand to fix the $1,800 worth of work that I owe you for. I can’t pay you for this. Are you still going to wind up in court at that point? You might, but if you can justify the reasons as to why to the contractor, I think that they’re going to try to compromise with you or work with you in some capacity. Some contractors won’t, there are a lot of hot-headed contractors out there in the world, and some of them just will not work with you once you tell them that you’re not going to pay them, they’re going to go scorched earth, right to the courthouse to file that mechanic’s lien.
Andrew Schultz: (06:54)
And at that point, now you can go to court and deal with it through the court system. But realistically speaking, I think the goal here is for everyone to try to avoid the court system if you’re at all able to do so because obviously, the court system is going to tie up both time and money for both sides, which generally isn’t even worth the added cost. So here’s state may require you to do certain things in certain ways when you’re disputing work, that a contractor does do some research on that, find out what you need to do by law to dispute the fact that this work does not meet your standards, keep it legal, keep on moving forward and good luck to you. As you sort out your contractor. Our second foreign quorum deals just a little bit with tenant red flags and what to do when you find yourself in a situation where a tenant is waving a great big red flag right in your face.
Andrew Schultz: (07:40)
This one comes to us via the landlord subreddit. We’re going to go ahead and jump right in here. I have a single-family home listed in Los Angeles, California. The applicants have poor credit around five 50. Otherwise, their earnings check out based on the bank statements provided they’re offering a year’s worth of rent in lieu of the poor credit. And they’re willing to sign a one-year lease. If they plan to continue. After the first year, I plan to have them sign another six-month or one-year lease. What are the potential risks in a situation like this? Is it even advisable to enter this sort of Elise agreement? So I’m going to start this one off with a great big legal warning, right at the very front of it. And let you know that some states New York included no longer permit a landlord to take an entire year of rent upfront.
Andrew Schultz: (08:26)
Different states are starting to handle this in different ways. In some states, there’s no rules at all. You can take an entire year of rent upfront. If that’s what you want to do, feel free in some states, do you can’t do it. You simply cannot do it in New York state being one of them. They say that you were only allowed to have one month of rent at any given time in on deposit. And that’s your usual, generally speaking, going to be your security deposit. You can’t have additional rent, unpaid rent above and beyond that in some states, the money has to be kept in a special escrow account. And then it can only be drawn down on a monthly basis as the rent is due, or, you know, however, frequent the rent is due. You can only draw down as rent is rent costs are incurred, which basically means that you have another accounting headache that you need to take care of.
Andrew Schultz: (09:08)
So you possibly have some options here, but double-check your state laws so that you understand what the laws are in your state, or even in your municipality when it comes to taking a large sum of rent upfront before you even move somebody into the unit. So getting into the actual meat of the question here, you did have a couple of questions. The first was, or actually, I guess I have a couple of questions. You mentioned a credit check and a credit score coming back around five 50. That generally tells me that these tenants have some sort of serious delinquency or collections on their credit profile, or there’s something eating into their score. You simply don’t get a five 50 credit score by paying everything on time. Every month, that credit score is far too low to be the credit score of somebody who’s meeting their obligations.
Andrew Schultz: (09:52)
I would say, take a look at the obligations that are current and not current on. At least in my eyes, medical debt is very, very different than utility debt. And also the age of accounts. If someone just got their first credit card, then they probably won’t have an 800 credit score, though. It should still be above five 50 if they’re making payments on time. So there’s a couple of other factors that you can look at when you’re talking about credit. That’s not just the credit score. And I would encourage you to add those criteria into your written set of criteria for future screenings. The next thing I want to mention here is that you mentioned a credit report, but no criminal background check. And I reason I raised that is make sure that you, you want to make sure that you are getting one on everybody over 18, who is going to be living in the home.
Andrew Schultz: (10:39)
You also want to make sure, you know, who’s going to be truly living there. You don’t want somebody else sneaking in after approval. If you can try to avoid that, make sure that you’re getting those criminal background checks though. And the reason I say that is because you want to make sure that you understand who’s living there and what their past is going to be. If you’re going to be renting to them, you mentioned checking bank statements, but you did not mention pay stubs. One thing that you can do to verify income is you can look at it both ways. If they have direct deposit, you can look at the bank statements, and then you can tie the bank statements back to the pay stubs. Even still, if you have the bank statements, even if they don’t have direct deposit, you should be able to tie, you know, a deposit for a larger amount into their bank account at the same time as their paychecks are coming through.
Andrew Schultz: (11:18)
So, you know, that’s just another way of being able to verify that they still have positive employment. You can also call their employer to try to get some sort of a verification, but we’re finding more and more often that employers are just not offering employment verification for the most part. So I say all of that just to get to my actual point when someone is waving a year’s worth of rent in your face in cash, it’s a very, very tempting situation, but more often than not the reason that that person is waving, the year’s worth of cash in your face is because their application is less than stellar, which you’ve already said here on their credit profile. They, application’s not real great. And they’re looking for somebody who is going to overlook the sins of the application and just kinda not ask too many questions and, and move somebody into a building.
Andrew Schultz: (12:07)
This can be incredibly problematic when you’re taking a large sum of rent upfront. There’s a few things that you’re going to need to consider here. Number one, what’s the underlying issue that they’re trying to get you to ignore. And are you willing to ignore it? We have a written set of criteria that we use every single time. I encourage everyone else. Who’s doing rental property who is renting rental property out to do the same, have a set of written criteria and follow that criteria every single time. And then that way, when you do find out what the unexpected headache is you can rate that against your criteria and say, okay, I can deal with this or no, this is outside of the scope of something that I want to deal with. Something else to consider. When you’re talking about having rent prepaid for such a long period of time, is that you may have a situation where it becomes very difficult to evict because you’re holding prepaid rent.
Andrew Schultz: (12:55)
Are you even able to evict, do you have to refund the unpaid portion of the rent? How is this entire scenario going to play out in court? Can you even evict due to the eviction moratorium? I believe that you mentioned you were in Los Angeles, California. I know that New York has a moratorium still. I don’t know as though California does, but I would not surprise me if they still have some sort of a moratorium in place that might prevent you from evicting these tenants, even once they do move in, you know, there’s a lot of landlords out there right now who are willing to give less than truthful landlord references simply to get rid of bad tenants because they’ve been going so long without being paid during COVID that they just want this to be someone else’s problem. And they’ll say anything to get rid of a bad tenant. So you even have to be cautious about the landlord references that you’re going by. There’s a lot to consider here a lot, a lot to consider here. A full year of rent upfront is great, but you really need to understand who you’re renting to and why you have that nice, solid written set of criteria and follow that criteria every single time. Make sure that your criteria are compliant with fair housing guidelines and you should never have any headaches,
Voice Over: (13:59)
Water cooler wisdom, expert advice from real estate pros.
Andrew Schultz: (14:07)
Our water cooler wisdom this week also comes to us via the Rent Prep for Landlords Facebook group. This is an interesting situation on how to go about leasing an apartment to a company that wants to then rent the apartment so that its employees have a place to stay. We’ll go ahead and jump right in here. I have a local company that wants to rent my apartment for its employees. The company would be providing housing for their workers. Can I stipulate the number of tenants per apartment? And can I ask them to provide me with the tenants’ names, copies of identification, clearance checks, things of that nature? I’ve never had this type of arrangement before. I appreciate any insight or input. So this is something that we’ve actually done in the past the way we did it. I’ll kind of explain how we screened it so that you get a feel for how we set it up on our end.
Andrew Schultz: (14:50)
And you can probably apply some of the same knowledge on your end as well. So what we’ve done in the past is put the lease in the company’s name and had the CEO of the company act as a personal guarantor. We basically screen the CEO as if he was a normal tenant and he was going to be living in the apartment. And that’s basically what we use to determine in this instance, if the company if you will, could qualify for the apartment, we based it off of the guarantor in this instance, the CEO’s personal income, and we had the CEO on the hook using a guarantor agreement, such that if something went wrong with this apartment and his employees caused a bunch of damage or were having huge parties or the police were there or something like that, they can come back on the CEO of the company and say, Hey, we need this straightened out.
Andrew Schultz: (15:35)
It’s a good position. If you can find yourself in a position like that, where if you’re dealing with a company, you can get a higher up in the company personally, liable personally, on the hook for the lease. That’s a good scenario to find yourself in. If it’s a smaller local company, get a guarantor. There’s no reason to rent a smaller company without some sort of a guarantor in place. In this instance, we went with the CEO of the company, if it’s a larger national company or even some larger regional companies, this may not be as feasible. I don’t think that Jeff Bezos for instance, is going to sign a guarantor agreement for some of his employees to stay in an apartment so that they can work at the new Amazon distribution facility. It’s just simply not going to be a, a viable option that way, if it’s a larger national company, you may just have to trust that they have the resources in their, in their pocket to be able to take care of these leases in the commercial world, there’s lease guarantees and things like that that you can jump into, but we’re not, we’re not going to jump into all that for the sake of this conversation, but definitely if it’s a smaller local company, get a guarantor, make sure that you feel comfortable with the situation on who you’re renting to first and foremost.
Andrew Schultz: (16:41)
So then we talk about the actual occupancy of the apartment and the way that we handled this was we ran background checks on everybody who was going to be occupying the apartment. And we added them onto the lease as an additional occupant. And we took IDs. I don’t think that we did credit background or credit checks. We didn’t do credit. We didn’t do income verification because we had the CEO. So I think we had them fill out our rental application and we just ran the criminal background check portion. And that way we knew who was living in the unit, we had a good feel for who was living there and put them on the lease, such that we knew who was supposed to be staying there. And then over the course of time, essentially what happened is they would have some staff that would swap in and out as they finished up on a project, you know, the, we no longer need the electrician, but we’re going to bring the plumber from, from one area to another.
Andrew Schultz: (17:32)
Now they’re going to stay here. We would just swap one tenant for another and just do the background check. At that time, the company paid for all of the background checks, they never questioned it. They were very, very good about making sure that we knew who was staying in the space. Because we laid out on the front end that, Hey, you’re going to have a lot people in and out of here. This is a residential apartment complex. We don’t want there to be headaches. So we do need to know who’s here and when, and they were pretty good about it. The situation in question, essentially it was a downstate company that had just purchased a real estate asset, commercial real estate asset upstate, and they were using their own crews to do the work. So they were basically sending a crew up on Sunday night to stay in this apartment until Friday after work.
Andrew Schultz: (18:16)
And then everybody would leave Friday after work and come back on Sunday night. So there were never there on the weekends. It was literally Jade. They just needed someplace for their people to stay while they were working on the building. And it was convenient because the building was like right across the street from the apartment complex. So it worked out really well. So it can be done. You know, it’s not a bad option. It’s actually a pretty good option because generally, these corporate rentals are pretty secure. They don’t generally have a lot of headaches over the course of the tendency and things like that. So if this is a situation where you can get into it and you can get a guarantor, if it’s a smaller company, or if you feel larger of the company is large enough to be able to take care of their lease obligations without a guarantor, then go that route as well.
Andrew Schultz: (18:58)
But you do have some options here and there are a few different ways to set this up, such that you are protected. And the company that you were renting to is protected as well. Tenants that no longer have an active lease, but are still calling your rental property. Their home can cause quite a bit of a headache, visit the Rent Prep blog over at rentprep.com slash blog today to find out how to best handle a holdover tenant. So that’ll pretty much wrap things up for this episode of the rent prep for landlords podcast. Thank you all so much for listening. We truly do appreciate it. Our goal with the podcast is to help as many people as possible make educated decisions when it comes to real estate. And you can help us to reach that goal. If you heard anything in this week’s episode or any other episode that will help someone, you know, do us a favor and share it with them.
Andrew Schultz: (19:42)
If you’re looking to get in contact with me, I can be reached over at whatsdrewupto.com from there, you’ll find links to everything going on with me at Own Buffalo, as well as other projects that we’re working on. We also just launched a free investment property deal analyzer, which is available on that site whatsdrewupto.com. It’s truly free. There’s no obligation whatsoever. And there’s also a companion video to teach you how I analyze deals using our deal analyzer. If you’re looking for top-tier tenant screening services, head on over to rent prep.com, there are multiple products to choose from including tenant-paid options. And if you’re over 50 doors, ask about the enterprise-level programs and pricing. I’ve been an enterprise user of rent prep for years now, and it’s definitely changed the way that we screen our tenants. Check that out today, over at rentprep.com. Again, thank you all so much for listening. We’ll be back in two weeks with an all-new episode that you won’t want to miss until then I’m Andrew Schultz with Own Buffalo.com for rentprep.com. And we’ll talk to you soon.