Points to Consider for the Rental Agreement Part 1

The rental agreement: The rental agreement specifies how long the tenant will rent the home and how much they will pay each month in rent to me. During the rental period they can purchase the home, unless otherwise specified. A rental agreement also comes in handy if ever taken to court, so that no matter what the tenant hs put into the property, the judge will let me evict if necessary rather than foreclose.

The rental agreement gives the tenant the right to occupy the property during a specified time period. It is similar to the rental agreement you signed with the owner/seller, except obviously your rental agreement with the tenant will be very pro-landlord (pro-you).

The rental agreement needs to be separate only for selling on an option. If you are the buyer, you certainly can put them into one document, but when turning the option around, you’ll want to use the three different documents. The reason is that if the tenant doesn’t pay, or the deal goes south, you will want to be able to evict them as quickly as your state allows. If you have all three agreements in one contract, some judges will look at the lease option as a sale rather than a lease, and therefore make you go through a full foreclosure or forfeiture process versus an eviction. This will take much longer, be more expensive, and may require an attorney.

Anyone who will be residing on the property over the legal age must sign the rental agreement. This includes children of legal age (determined by the state).

A cosigner can be an important safeguard if you have a weak applicant and they have a strong parent or friend who is willing to sign with them on their rental agreement. It works well for giving liability to someone else who will come through with the payments. I have a situation where a mother cosigned for her daughter. It was just a rental but the daughter had terrible credit. The mother, however, had worked for General Motors for 25 to 30 years and made a good guarantee person for me. The daughter stuck me for nearly $5,000 in unpaid rent and damages, and now the mother is paying for itout of her GM checks. In another case, the mother was a local Realtor in Michigan, and she asked me to help her daughter get a house. Her daughter had been through a rough time, and the mother was willing to cosign. I probably didn’t even run the daughter’s credit because I knew the mother was a well-known Realtor and was good for whatever might happen. The mother paid the $5,000 option fee, and the rent was $1,300. Eventually, the daughter left, owing me $3,000 in unpaid rent, and the mom had to pay if off.

I like to make all rent due on the first day of the month. If a tenant moves in on the seventh, I prorate the rent for the month. My rental agreements specify late fees of $25 for the first day late and $5 per day afterwards, and the tenant, of course, must sign the agreement to this. I can’t reiterate enough how necessary it is to have everything in writing, spelled out in detail. That way your tenant can’t say, “I never agreed to that.” All you have to do is point to the contract and say, “Here it is in black and white, and there’s your signature underneath it.” I also like to add an incentive to encourage my tenants to pay on the first of the month. My contracts state that if they make their monthly payments on time, inlcuding any unpaid option fees, then I will credit them with $100 towards the purchase price of the house.

Your other fees on the property can include a pet deposit, security deposit, cleaning fees, and the like. In a lease option, I usually do not require a security deposit, because if they have an extra $1,500 for a security deposit, which is refundable, I’d rather have them apply that to the option fee, which is nonrefundable. There are some good reasons and areas of the country where even a small security deposit is recommended. It gives the tenant something they can get back if they don’t purchase. Some judges like a small amount showing as a security deposit. None of the option fees, however, show up on the rental agreement, as the option agreement is a separate document.

Your rental agreement should state the total cost to move in. For example, if there are fees, you will add them to the first month’s rent to get the total for the rental agreement, but that is not the total overall cost since you also need to add in any security deposit. The rental fees plus the security deposit make up the total move-in costs. The rental agreement must also show the total amount of anticipated rent for the contracted period, including prorated months.

You can also state in the agreement that if the rent is more than 10 days late, the agreement may revert to a month-to-month rental (nullifying the option) at the discretion of the landlord. I generally don’t do this unless I want to get rid of the tenant, because when this alternative plan is set in motion it allows the tenant to move out at any time. Be sure your rental agreement states that the keys are due back within 24 hours if the tenant does not exercise the option and/or moves out.

Payments should be postmarked by the post office rather than a Pitney Bowes machine, as these machines can have their dates changed. In my rental contracts I also specify that any bounced checks are subject to an additional fee. Although I start out trusting my tenants and allowing them to pay with personal checks, if one check bounces, all payments after must be paid in certified funds or bank checks only. I also tell them that if their rent is late twice within a 12-month period, their monthly rent will increase by $25 per month.

You should specify to the tenant how their payments will be applied, and in what order:

1. Outstanding dishonored check fees.

2. Outstanding late fees chargeable to tenant.

3. Outstanding legal fees, court costs or both.

4. Outstanding utility bills that are the tenant’s responsibility.

5. Any damage caused by the tenant.

6. Collection agency fees.

7. Costs for re-letting the property, if applicable.

8. Option fees owed.

9. Rent.

You should apply their payment toward rent last because it is easier to evict on unpaid rent than on unpaid utilities. So use their money to pay for unpaid utilities, and if the rest doesn’t cover the rent, you can begin eviction proceedings in most states. Again, check with your local investor group or a local real estate attorney on landlord eviction laws.



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Stay tuned for Part 2 of “Points to Consider for the Rental Agreement”.



Excerpt taken from Investing in Real Estate with Lease Options and “Subject-To” Deals, Chapter 13, Pages 183-187.





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