Co-Signers On Rental Property Leases 101 (Podcast #352)

by Stephen Michael White

Author

April 5, 2023

Last Updated

Podcast

Can you do us a solid?

Our podcast has grown over the years because of listeners like yourself. One way you can help us grow further is by leaving us a review of our podcast. It will only take a minute and you can find detailed instructions by clicking here.

Resources Mentioned on this Episode:

Show Transcription:

Andrew Schultz: (00:00)
Hey everyone. Welcome back to another episode of the Rent Prep for Landlords podcast. This is episode number 352. And I’m your host, Andrew Schultz. On today’s episode, we’re going to be talking about how to handle co-signers on leases. What’s the best way to manage complaining tenants and drug testing, tenants. Is it legal? We’ll get to all that right after this.

Voice Over: (00:22)
Welcome to the Rent Prep for Landlords podcast. Now your host Andrew Schultz.

Andrew Schultz: (00:27)
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 before with over 12,200 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/rentprep. Don’t forget to mention the podcast when answering the questions. So we know how you found us

Voice Over: (00:55)
Water cooler wisdom, expert advice from real estate pros.

Andrew Schultz: (01:03)
We’re going to start things off this week with our water cooler wisdom. We have two of these for you this week. And this first one comes to us from the Rent Prep for Landlords Facebook group. This one is all about co-signers. Let’s go ahead and dive right in here. How do you handle an applicant that might have two co-signers working with an elderly applicant who has two relatives who plan to supplement the income needed to qualify? I have never had co-signers on a lease before, so I need advice on how to determine if they can afford to help. So essentially a co-signer is also called a guarantor. In some instances, depending on your market, they basically act as a buffer in case the tenant defaults on some aspect of their lease. Typically it’s going to be, they stop paying the rent. That’s the main default that co-signers are kind of there to prevent against if you will, or to ensure against if you will, you might want to co-sign co-signer for any of a number of reasons, maybe your applicant doesn’t meet one or more of your criteria.

Andrew Schultz: (01:53)
Maybe this is their first time renting. Maybe they’re a college student and they simply don’t have income or they’re supporting themselves on loans or something like that. So you want a guarantor to protect yourself from that aspect, whatever the case may be. There’s a multitude of different reasons that you might want to consider using a guarantor. When you’re talking about leasing an apartment, you may also make the determination that you don’t want a co-signer. And I don’t believe that there are many States that require you to accept co-signers. As a matter of fact, I don’t know of any States that require you to accept a co-signer. That being said, I’m not an attorney check what your state laws are. But I don’t personally know of any States that require you to accept a co-signer and you may not want a co-signer because it does add an extra layer of paperwork, an extra layer of screening, and extra layer of administration that you have to deal with throughout this entire leasing process.

Andrew Schultz: (02:40)
And you may just decide that if you have an applicant that just doesn’t qualify for the apartment on their own merits, that you don’t want to worry about having a co-signer and then having all those other concerns that go along with it. In most instances, you’re going to be fine. Like I said, check your state laws, see what they require of you. But I don’t know of any States that require you to accept a co-signer. So if you’re deciding that you’re going to go forward with a co-signer, the way that I would screen the co-signer would be exactly the same way that I would screen the tenant. I have them fill out the application just the same as I would, the the actual tenant that’s going to be living in the unit. We screen them the exact same way. They have to meet all of our same criteria.

Andrew Schultz: (03:17)
But with the exception of income, and the reason I say that is because their income needs to be higher than what you would be looking for on just your average normal tenant screening. They need to have decent enough income. We look for at least a total of four and a half times the rent in net income so that they can afford the extra burden of this place if the tenant defaults on their lease. So they have to have enough money to pay their own bills, their own rent, their own mortgage, whatever the case may be, vehicles and food and utilities, whatever the case may be. They need to have enough income to cover their own bills and be able to step in in the event that this tenant defaults because that’s essentially what they’re guaranteeing you against is the fact that this tenant is going to default and not payout on the rent.

Andrew Schultz: (04:02)
So if you go through the process and you don’t screen your co-signer thoroughly and you find out, Oh man, this co-signer can’t actually afford to cover this rent for this tenant. And then now this tenant is in default. You basically have a pile of paperwork. That’s not worth the ink that’s printed on it. So you have to screen your co-signers just the same as you would your applicants. And in that regard, I would recommend that if you’re going to go through that process, make sure that you’re getting enough income out of the co-signer to make it worth your while, at least four and a half times the rent net income, so that you know, that they do have the ability to step in and pay that rent in the event that the tenant defaults. So now let’s go ahead and say that you have screened your co-signer you’ve screened your applicant, and you’re ready to move forward.

Andrew Schultz: (04:43)
How do you actually go about securing that co-signer and making them responsible as a party on this lease? There’s a couple of different methods that you can go about doing it a couple different ways that you can use to secure the tenant and secure the guarantor. Either putting everybody on a lease or putting the tenants on the lease and putting the guarantor on a guarantor agreement. We actually delve into this a little bit more on episode 67 of a property manager, you could find that on the Own Buffalo YouTube page, over at youtube.com/ownbuffalo. And again, that was episode 67, I’m ASCA property manager. We do talk about guarantor agreements, but I’ll tell you outright here in our office, we prefer a separate guarantor agreement versus putting that person on the lease. But we get into all the reasons why and why not in that episode.

Andrew Schultz: (05:26)
So I would recommend checking that out. And then going forward from there, once you actually have the tenant and the guarantor both secured on the lease, what happens if the tenant defaults like what’s the process like at that point? The first thing you’re going to want to do is make sure that the tenant and the guarantor are both aware of the default, usually by sending your typical notice letters or whatever the case may be for your state, you’re going to want to know what that process looks like, and then pursuing both parties to try to get that debt repaid. In some instances, that’s going to look like a small claims action. In some instances, that’s going to look like sending them both to collections, whatever the case may be. Essentially, you’re sending the tenant and you’re sending the co-signer because they are both fiscally responsible for that lease agreement. So generally speaking, having a co-signer, if you have an application that might be a little bit on the weak side, it’s not necessarily a bad thing. It can help you to mitigate some of the financial risk that you would be encountering by accepting a tenant that might not meet all of your criteria. But the one thing that a co-signer is not going to stop is bad behavior.

Andrew Schultz: (06:35)
If you have a tenant or an applicant that is applying for an apartment, and they’ve had issues in the past behavioral issues in the past or something like that, that’s something that a co-signer is not going to stop. They’re basically there to mitigate your financial risk, but it doesn’t mitigate all of your risks. So you still need to make sure that you’re screening everybody all the way through, just to make sure that you’re covering your bases that way. So co-signers can be a good thing. They can also be a bad thing, especially if the co-signer turns around and defaults after your tenant defaults, you want to make sure to protect yourself from those instances as much as you possibly can. And that would be my recommendation is make sure that you are looking at the entire situation before you sign on the dotted line with anybody and understand what everybody’s situation truly is before you commit yourself to that applicant. And to that, co-signer our next water cooler wisdom is actually a really, really good one. And if you’ve been in the game for any period of time, I can almost guarantee that you’ve had a situation like this before this one comes to us via the Rent Prep for Landlords Facebook group. Let’s go ahead and jump right in. I feel like mediation between tenants is part of the job as a property manager, but I’m beginning to wonder if this is wrong. I manage a complex wherein two units do not get along and they are constantly complaining about each other. To me, really petty, childish stuff.

Andrew Schultz: (07:46)
Tonight, they both called me after hours complaining. I guess one was playing their music too loud. The other, ask them to turn it down. They got defensive, yada, yada, yada. This is absolutely burning me out. How do people deal with immature tenants? Like this issue violations to everyone? I had ordered them both to leave when their leases were up. If I could, but state COVID restrictions won’t allow it. I can not allow the few hours I get off every day to be swallowed up by this nonsense anymore. What would you do? And again, this one comes to us via the Rent Prep for Landlords Facebook group. And then, like I said, if you’ve been managing rental property, or if you’ve owned rental property, especially multifamily for any real period of time, this is definitely something that you would have encountered at some point. And it’s not something that’s isolated to just multi-family, we’ve had it with single-family rentals that we have as well.

Andrew Schultz: (08:32)
And a lot of times that’s even more difficult to deal with because only one of those people is generally your tenant. The other, person’s probably just a member of the general public. So that makes it difficult on whole new level disputes between tenants are a headache because you’re generally not there to see what’s going on 24 seven, three 65. It sounds like what you have here is your typical neighborly dispute. Something that, you know, two consenting adults should be to deal with on their own. My first thought here is try not to get involved. As I just mentioned, these are consenting adults and they need to learn to deal with it like adults, part of living in a multi-family situation or part of living in a neighborhood. If you’re running a single-family house is learning to live and co-exist with your neighbors.

Andrew Schultz: (09:15)
It’s just a fact of life. Other people exist in the world outside of our little bubbles. And I think sometimes we forget that. So that makes my first recommendation very, very straightforward. Try not to get involved and tell the tenants to talk to each other and see if they can work this out themselves. People sometimes forget that they can simply talk to one another, work out their differences, and move forward. So I would start by encouraging that sometimes that doesn’t work. Sometimes the tenants are just, you know, too aggravated and with on another to even be willing to sit down and talk to each other. And at that point, if it gets to the point where it’s harassment or it turns physical, it then becomes a police matter and they need to handle it through the police department. It’s outside of the scope of what you’re able to handle as a landlord or as a property manager.

Andrew Schultz: (09:58)
You know, I’m certainly not looking to break up a fistfight between two people. It’s not really in the scope of what I am attempting to do on a day-to-day basis. That’s a matter that needs to be handled by law enforcement or someone else. That’s outside the scope of what you can handle as a, as a landlord or a property manager when their leases come up for renewal, explain to them that, Hey, here’s the situation you hate your neighbor, your neighbor hates you. It’s probably best if one of the two of you goes, or if you guys figure it out, usually, they figure it out real, real quick. When they realize that they’re going to be inconvenienced because they’re going to have to move. Most people will find that I’d rather figure out how to deal with my neighbor, or I’d rather stop complaining about my neighbor and just get on with my life rather than have to go through the process of packing all my stuff up, hiring movers, or putting everything on a moving truck, moving it to a new location, unpacking everything, you know, finding a place even there’s a lot that goes into a move.

Andrew Schultz: (10:51)
Most people when presented with the option of you guys need to figure out how to resolve this, or somebody’s going to have to go miraculously. They figured out how to make it work between one another. So it’s not the greatest option I’ll give you that. It’s certainly an option of last resort, I think. But like I said, normally the tenants will figure it out very, very quickly. When they realize that somebody is going to be inconvenienced with a move at the end of the day, you’re not a babysitter. You’re not a therapist and you’re not the police. You shouldn’t have to act like it based on what was in this post. This is a situation that the tenants can handle on their own. This is a dispute that the tenants can deal with between themselves. And it doesn’t sound like you need to be involved at this stage in the game.

Andrew Schultz: (11:31)
As I’d mentioned, if it does get to the point where the tenants are harassing each other, or it gets physical again, it’s past where you can interject anything at that point, it’s time for somebody else to be involved. Usually, law enforcement, if it’s getting physical, you know, more often than not, these types of situations will resolve themselves. If you let them play out, it’s going to be inconvenient. You’re going to get phone calls, you know, tenants going to be unhappy. But really this is a situation that’s best handled at the tenant level. We have had a couple of instances where we have actually gone out and met with both tenants and a duplex, for instance, and we’ll stand right on the front porch with both sets of tenants and let them air their grievances with each other, let them get it all out, you know, and try to get them to see the other side, try to come to some kind of a resolution.

Andrew Schultz: (12:16)
Sometimes it works. Sometimes it doesn’t. We prefer not to jump into those situations because honestly, the ratio of works to doesn’t work is, is not real great. Typically speaking. Yeah, you might seem like you get a little bit of understanding there and then, but generally speaking within a day or two a year, you’re right back to at each other’s throat. So that’s kind of where I would be out on it. If it’s a situation where the tenants can’t resolve it amongst themselves, and it continues to be an ongoing issue, my recommendation would be talked to the tenants and explain to them, Hey, you know, lease renewal is coming up. You’re not happy here. Maybe it’s time for you to go. I understand what you say when you are talking about not being able to do a lot due to the COVID restrictions and things like that. But if you give a tenant an out, sometimes the tenant may just go ahead and take it.

Voice Over: (13:07)
Forum quorum, where we scour the internet for ridiculous posts from landlords and tenants.

Andrew Schultz: (13:15)
This week’s forum quorum is a real doozy. This one comes to us via the Rent Prep for Landlord Facebook group. And it’s quite an interesting question. Has anyone required a drug test for lease applicants? Is that even something that you can require legally? This is an interesting one, especially given the current legislative landscape across the country. So for instance, here in New York state, we’re the 15th state to make recreational marijuana legal with some States becoming less restrictive on things like marijuana, but it’s still being illegal on a federal level. How do you make something like that work from a policy standpoint? Are you going to deny that tenant because marijuana is illegal at a federal level, or are you going to approve that tenant? Because marijuana is legal at a state level. And as an aside, these are questions that the entire real estate and property management industry is going to need to answer in the coming months and years, we’re going to be looking to the States that kind of started off first and said, okay, we’re going to, you know, legalize marijuana on a recreational basis.

Andrew Schultz: (14:17)
We’re going to be looking to those States for answers on how to deal and how to create policy going forward. Obviously not necessarily when we’re talking about drug testing applicants, but from another of other perspectives such as employment and things like that. There are a lot about unanswered questions when it comes to the legalization of certain drugs that used to be illegal. So that’s going to be an ongoing thing that I’m sure we’ll probably be doing a re-analysis analysis on this at some point down the road as things change. And again, once things change at a federal level, I mean, that’s obviously going to have a pretty substantial impact as well. So all that being said, obviously I’m not an attorney, but I don’t think that it’s legal anywhere to require your applicants to take a drug test. Even if it was, I don’t see many applicants that would be willing to do it.

Andrew Schultz: (15:02)
It’s just one of those situations where you’re already providing a fair amount of personal information to somebody just to apply for an apartment, asking somebody for a drug test might just be a bridge too far. At least in my opinion. And I don’t think that there are any States where it’s necessarily legal to ask for. I mean, I don’t know, I’m not an attorney, like I said you’re going to have to do some research on your own and find out what the rules are regarding drug testing in your state. But that’s quite a, quite a situation that you would find yourself in. I would, I would certainly recommend, even if it’s not illegal, I would simply recommend against this just as bad policy stick to your other written criteria, such as credit income, criminal background, things of that nature. You also run a massive risk of discrimination due to disability.

Andrew Schultz: (15:55)
In some instances, and I pulled up a resource on the housing and urban developments website. This was right on hud.gov, who is a person with a disability, federal non-discrimination laws, define a person with a disability to include any individual with a physical or mental impairment that substantially limits one or more major life activities, an individual with a record of such impairment or an individual who is regarded as having such an impairment in general, a physical or mental impairment includes, but is not limited to examples of conditions such as orthopedic visual speech and hearing impairments, cerebral palsy, autism epilepsy, muscular dystrophy, muscular sclerosis, cancer, heart disease, diabetes, HIV, developmental disabilities, mental illness, drug addiction, and alcoholism. So you could be putting yourself in a massive pot of boiling water by even considering something like this as a criteria right off of the HUD website, literally word for word, just read it to you.

Andrew Schultz: (16:58)
Mental illness, drug addiction, and alcoholism are all considered potential disabilities. Do you really want to be putting yourself in a situation where you’re trying to screen somebody for drugs when drug addiction is a disability, which would be considered a protected class under the fair housing guidelines? In my opinion, this is simply not worth it. As I mentioned before, even if it’s not illegal, it’s certainly bad policy to try to jump in and do something like this. My recommendation would be just don’t. For lack of a better term, just don’t stick to your other written criteria. As I’d mentioned, walk away from something like this. This is not a good idea. This is not a good situation to put yourself in as a housing provider. Just trying to place a tenant Rent Prep has released its landlord guide on how to finally get rid of your bad tenants.

Andrew Schultz: (17:52)
Here’s a hint. It has a lot to do with the cash for keys method, which we’ve talked a lot about on our show, check out the guide on rentprep.com/blog today. So that pretty much wraps 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, please do us a favor and share it with them. 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 over at Own Buffalo, as well as other projects that we’re working on.

Andrew Schultz: (18:35)
In addition to the Rent Prep for Landlords podcast, I also host a weekly show called ask a property manager. You’ll find a link to my YouTube page, right at the top of whatsdrewupto.com. And from there you can access our growing catalog of nearly 70 episodes. Take a look and don’t forget to subscribe. If you’re looking for top-tier tenant screening services, head on over to rentprep.com, there are multiple products to choose from including a tenant paid option. And if you’re over 50 doors, ask about 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 you won’t want to miss until then. I’m Andrew Schultz with ownbuffalo.com for rentprep.com. And we’ll talk to you soon.