Michigan: How to safeguard myself against high Risk Tenant?

Rehabbing, Fix and Flip, Rental Properties
1

I have a potential tenant that has terrible credit; filed for bankruptcy 7 years ago.

This potential tenant, was COMPLETELY honest with me. Was totally upfront about the bankruptcy and about the plan that has been put in action to straighten out the credit issues.

I ran a credit report, it’s BAD. But it indeed shows that a plan has been put in place and is being followed.

There is one new issue that is being cleared up by an attorney.

The history is a big red flag here, but the honesty and the proof that a plan to put the tenant’s life back together is in place and being followed make me want to rent to this potential tenant.

So here’s my issue, in Michigan we can only charge 1.5x the monthly rent.

How can I protect myself with more money up front?

This is what I am thinking:
a) charge more rent
b) have the rent pre-paid
c) automatic bank draft or CC payment.
d) change to a m2m lease

Any other ideas?

Thanks.

2

I assume you mean 1.5x the rent for security deposit. thats correct in MI. Read the landlord tenant laws and run a criminal/sex offender check. Also some sites track tenants payment records. Last thing is a friend of mine on here (redhawk) has a bunch of rentals in SW MI. Click on him and send him a personal message. Herbster

3

I wouldn’t sweat the credit issue too much. That’s a lot of the reason why renters are renters. 7 yrs is a good amount of time and you found out from the applicant rather than finding it on your own.
I would not charge more rent based on bad credit. Market rent is market rent.
Rent should always be pre-paid. I wouldn’t consider that to be anything special for this situation.
Many drafts or CC payments cost you extra money. I’m happy with our tenants mailing checks or money orders to our PO Box.
I personally like M2M leases for local properties because you can simply elect to not renew the lease if there are problems.
How does the applicant’s income match up with the rent amount? What is his/her criminal/civil background?
Those are the things I would be worried about.

4

It has to be reviewed on a case-by-case basis, but generally speaking I would be leary of renting to former bankrupts again. When I’m dealing with the history of a potential tenant, there are a couple other things I note. If they don’t have a good paying job or a really low paying job, I’d definitely pass. If they don’t pay rent, collecting your eviction costs will be a write off. I’ve been burned too many times on welfare or low income tenants with a bankrupt on their credit report.

Also, what’s their rental history like? This is a HUGE sticking point. One thing I’ve found is that former bankrupts tend to move often. I would focus in on how many places they’ve lived at in the past 7 years. Was it one spot in seven years or 3 in a year? If it’s three places, then you’ll have to deal with higher turnover costs because it’s most likely they will move out of your place in a few months. And, a lot of them don’t care about the condition of their apartment or keeping it clean when they move out. You want to spent six hours cleaning out an inch of grease from a stove, repainting a smoke faded apartment and replacing wrecked flooring as well as having an empty apartment while you’re cleaning it and then readvertising it after they’ve only lived there for three months? It’s not worth the cost.

And, what’s their reason for moving? Did they say something negative about the previous landlord or was it something legitimate like they moved from out of town? If they said something negative, I would be leary as they’ll probably say something negative about you a few months down the road. When you let a negative person in your building and you have to evict them for non-payment of rent and they counterclaim you, I can guarantee you it won’t be a fun experience when they get free duty counsel or a legal aid lawyer, make up negative things about you and tell the judge.

I’d forget about bank drafts or credit card payments. Those cost money to do and with apartment buildings you need to keep your expenses down so you can reappraise those buildings for more money. You’re in this business to make money, not lose it. Personally, I offer to collect the rent myself and talk to them for a few minutes just so I can maintain some level of ongoing rapport with my tenants. In the long run, building rapport will keep the same tenants there longer. But, you still have to maintain respect and serve them if they’re a day late with rent or disturbing other tenants with loud noise.

I realize you may be living in a more challenging area of the city and think some money is better than less, but in the longer term and for your own sanity, it’s much better to properly select who you let into your building. It’s more than just the money they give you up front. But, always first and last. If they can’t even come up with that, forget it.

David
Realtor & Investor

5

Good credit bad credit is important but what is most important is how he pays his rent. I have had tenants with bad credit that never missed a rent payment. They just had a mindset that where they lived was important and credit cards were not. Those kind of people tend to have the same mindset with their cars too. So his credit would look like no evictions and no repossessions.

In Texas every time the landlord files for eviction it shows on the background. I had an applicant hat stayed in an apartment 2 years and had 18 filings for eviction overt that 24 months from the same complex. That means that they always pay but they always pay late. Don’t count on the present landlord’s recommendation because he could be just trying to move a problem along.

6

In my area, the gov’t took away the ability to do eviction searches because I guess it violated the Human Rights Act? So, it’s not an option in a lot of areas. Credit checks still are.

Anyway, the scenario you described, if all the evictions are for “non-payment of rent”, sound most likely something an inexperienced landlord would do or an outsourced property management company. I bought an apartment building where most of the people were paying rent late because word got around the tenants that it was ok with the previous landlord. After I handed out two eviction notices for non-payment of rent for the first two months, I served a third on everyone for persistently late with rent. A couple moved out, but the rest took it seriously and paid rent on time thereafter. A landlord can’t just sit passively on the sidelines. To be successful in this field or any role of leadership, you have play the role of the lion and the fox and switch roles accordingly.

18 non-payment filings in 2 years? If that tenant was in one of my buildings, they would be out of there a lot sooner than that. It’s more indicative of a bad management style than a bad tenant.

It could also mean a property management company had them on a long term lease and the tenant couldn’t break it to move out so they kept being late with rent and the notices were not to kick them out, but to get an order to collect rent. This is what property management companies do all the time and bill extra service charges to bankrupt the landlord. This tends to be encouraged because PM companies try to sucker landlords into thinking they can have a better fill rate by locking people into 1-2 year leases by not charging people last month’s rent and offering incentives like first month’s free or free big screen TV or something else. This is a recipe for disaster and I see PM companies do it all the time.

Using incentives to lock people into long term lease are a mistake and encourages the behaviour like you described above. First/last month’s rent always. If someone was willing to sign a long term lease, I might consider changing the carpet or other upgrades to the unit, but that’s it. I have no problem taking people in on month to month as long as I get first/last and they give me a 60 notice to move out and I have been quite successful at it.

I can tell you right now that it would be highly unlikely for me to get such a tenant even though I can’t do the searches because a) I don’t offer those incentives and don’t waive or accept payment plans for last month’s rent so those kind of tenants are not attracted to my buildings, b) I do credit checks and put very high value on their ability to pay, c) I’m a good interviewer and don’t take on candidates who look like they can’t stay in one place too long or contradict what they say in their interview vs. their application or credit report.

Also, just because a tenant fills out an application doesn’t mean they haven’t filled out applications with 10 other buildings or would accept your building if you approved them. Charge an application fee to process the credit check to find out if they are serious. If they are serious and ok with no incentives, they’ll gladly pay it.

It might be a good idea to keep an eye on that building that tenant came from as it may be coming up for foreclosure and have a highly motivated seller.

David
Realtor, Landlord & Investor

7

Definately use a month to month.

Here’s the problem I see: The bankruptcy was long enough in the past that I would ignore EXCEPT that the tenant is doing it again. He learned nothing about managing his money except that he can spend and not pay.

The tenant has a lawyer-- never good news.

The bankruptcy was far enough in the past that the tenant can file for bankruptcy again. Add that to the fact that he already has a lawyer working on his financial problems, and I would give this guy a pass.

If he files for bankruptcy again and stops paying rent, you can get him out, but it is a lot more complicated. You have to get permission from the bankruptcy courts to evict him AND HE HAS A LAWYER!!!

Also, you might check and see what sort of time lag you have to even get a hearing at the bankruptcy court in order to get permission to evict him.

8

Also, it depend upon where in MI you are located, but some of the landlord tenant courts in MI are extremely slanted in favor of the tenant, and the judges will buy any sob story and disregard the law.

You might want to be sure of your local eviction judges before you allow some poor unfortunate downtrodden victim into your unit, where you, the fat rich hard-hearted landlord, are trying to throw the poor innocent victim out on the streets. After all, everybody needs a place to live and it is society’s fault that the tenant had to file for bankruptcy.

9

David the landlord doens’t pay these costs. That is paid by the tenant or it is part of the eviction process and only paid once.

My leases state the all funds collected apply to fees first and then rent, because the judge will evict for rent but not fees.

10

I’m not in Michigan, but right across the Detroit river n the province of Ontario. Yes, you can collect the application fees that you pay to the court and the court charges. Judges rarely let you recover anything above that, for ex, the extra service charges the property manager charges or the legal fees paid to your lawyer or paralegal. Never happened in all the times I went to court. Even if it’s written in the lease, the judges won’t let you enforce it. It might be different in Michigan. But, I highly doubt it.