Every buy and hold real estate investor hopes for a long term tenant that pays on time and abides by the terms of the lease.
Unfortunately, this doesn't always happen and you need to be prepared in the event that you find yourself with a lease but no renter.
You may find yourself in a situation that is very costly if you are not properly prepared for such an event. There are actions you can take both before and after a lease is broken to protect yourself.
One way to deter tenants from breaking a lease is to set expectations before they sign on the dotted line.
Within the text of the lease you want to be sure that you are providing them with information about their responsibility under the lease. Additionally, you want to make sure that you outline what the repercussions will be if they fail to hold up their end of the lease.
You may not want to rely on them to actually read the lease papers. Sitting down with them to highlight specific points may deter renters from breaking the lease.
One option is to inform them that if they break the lease they will be responsible to locate a suitable and acceptable new tenant to take over the lease in their place.
Be sure to include, and point out, that they will be responsible for the remainder of the rent for the term of the lease if they break it and are unable to locate a replacement.
It is also important that you inform the tenant that if they break the lease you will need to keep their security deposit to help cover the cost of the unexpected vacanty. While this doesn't cover the loss you might suffer if the tenant leaves unexpectedly it can assist you in dealing with the carryover until you get a new tenant into the space.
When writing out the lease it is vital that you are clear about the expectations.
Include information about the legally binding nature of the contract and let them know that you will take them to small claims court if they fail to hold up their end of the bargain. Attempting to discourage the tenant from breaking the lease could save you a great deal of money in the long run.
2. Records are Vital
One of the most important things that you can do to protect yourself throughout the term of the lease is to keep excellent records.
This means that if the tenant sends you a written notification that they will be breaking their lease, you want to keep it on file. If they do not, and you have a conversation about it, you should make a note yourself – complete with dates and times. You should also request that the tenant give you a formal written notice as soon as possible.
3. Communication is Essential
Make sure that you send a letter to the tenant telling them that they have to pay the rent on the lease until the term expires or that they need to find someone to take their place as a tenant.
It is important that they understand that it should be paid on time until such time as you have a new tenant in the building. Remind the tenant that if they do not do this that you will be forced to take legal action against them.
Be sure that the letter is signed and dated. I suggest hand delivering the letter to the tenant as well in addition to sending a copy by certified or registered return receipt mail to the address that you have for them or the last known address.
4. Taking Account
If you are given notice that the tenant plans to leave the property it is urgent that you make arrangements to see the property right away.
It is preferred that you do this while the tenant is still there, if at all possible. You want to go over any repairs that might be necessary to the property in order to put it back up for lease. Photographs are always a huge help for you when there is damage to the property. This is especially true if the property is abandoned.
It is important that you keep copies of all ads that you place when trying to release the property. You also want to keep a solid list of potential new tenants and put it in the file for the broken lease.
Make sure you clearly note when the new tenant takes possession of the property. All of this information will be used in determining the amount of money that the previous tenant owes from the broken lease.
When making your calculations for money owed by your previous tenant you want to calculate the amount of rent owed from the time they last paid rent to the time that you rented it out again.
You then need to take the amount of money spent on advertising as well as the amount you used to repair any damage to the property. Take this total and subtract it from the security deposit you held for the tenant.
If the deposit was not enough to cover this number you want to contact the tenant in writing and let them know the amount you still need from them.
I would include an accounting with your letter so that they can see the full accounting and monies owed in addition to a timeframe in which you expect to be paid (i.e. 10 days from the date of your notice). The notice should be signed, dated, hand delivered and sent via certified or registered return mail.
6. What to Do if You Don't get Paid
If the tenant doesn't pay you within the allotted time or you have not made some arrangement for payment with them in writing, you can file a civil suit in the county where the property is located.
This will start the process of the court contacting the tenant and setting a hearing date. Bring all of the information you have collected with you to the hearing and present it to the judge in a calm manner.
7. What to Expect
You will need to wait for a judgment from the court.
They will notify you of the decision and will decide whether the tenant is to pay you a monthly payment until all is paid, whether to garnish the tenant's pay if they feel it is necessary, or if they will collect all the money at one time. It is important to abide by the judge's ruling in collecting from your tenant.
As an investor, you want to do everything you can to choose good tenants for your properties. Unfortunately, you cannot foresee the future and eventually you'll find yourself in a situation that requires the management of a delinquent tenant and/or broken lease.
While it may be uncomfortable to work through this type of situation, it's important to be prepared and educated so that you can protect yourself from potential monetary damages that typically occur.
Do you have a story where a tenant disappeared while still under a lease?
This article The 7 Actions to Take to Protect Yourself Against Run-Away Tenants originally appeared on the BiggerPockets blog.