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Read Transcript for “What Happens When Your Tenants Moves Out? Do You Lose A Lot Of Money?”
Let me show you how you can actually come out ahead when a tenant moves out of a property.
“What happens if your tenant suddenly moves out for one reason or another? Are you then responsible for the payments or is the original property owner? Have you had this happen very often with your tenants?” – Darryl Spizer, Nampa, Idaho
Joe: I’m assuming you’re talking about when you buy it “Subject-To”. When you buy a property Subject-To, that means that the seller (the person who has an existing mortgage on the property) deeds you the property. The existing loan is still on that property and that loan has to be paid every month, so you put a lease option tenant in there. You take a lease option fee, so maybe you make $4,000 to $5,000 up front, or $10,000, depending on the price of the property. So, you make a chunk of money up front, plus you get the first month’s rent. They’re going to make payments to you every month.
Joe: By the way, the more money they give you up front, the more likely it is that they’ll make their payments on time and the more likely it is that they’ll exercise their option when it finally becomes ready to be exercised. But, don’t expect them to exercise the option.
Joe: As a matter of fact, it’s not necessarily a bad thing if they don’t because if you keep that property long term, it’s going to pay itself off and you’re going to have income for life. You can get these properties to pay off in 10 to 15 years because the rents go up and you can make the payments and pay them off faster. In 15 years, it’s normal to be able to pay off a rental property just by having a tenant in there.
Joe: You’ll want to have a tenant and to own the property. But let’s say you lose your tenant and suddenly you have this property and it’s vacant. You have a monthly payment you have to make and let’s say it’s $1,500. And you’re used to getting $1,600 a month rent but you’re not getting it now, so you have to come out of pocket with $1,600 and you’re going, ‘Oh, this is painful.’
Joe: Remember, though, you got this property with nothing down. You got a chunk of money when you put a lease option tenant in it and now you have a vacancy, and you have to evict them. It’s not hard to evict someone. I don’t like to do it myself. I hire somebody to do it for me. I have an attorney who does it for me who charges $100, or I have my property managers do it (because I don’t manage my own properties).
Joe: I wouldn’t ever suggest that you manage your own properties. Always find somebody that’s cheap. For $100 a month, you can get somebody to manage a property. Its 8% to 10%, 7% in some cases – it depends on what you can negotiate. You can get somebody to manage those properties. Don’t do it yourself.
Joe: Anyway, so you have this vacancy. Now, you can turn around and put a new lease option tenant in there and it actually makes you more money than you would have made on the rent – because you get another lease option fee. With the first lease option fee, you didn’t have to pay it back because its nonrefundable. With the second lease option fee, it’s probably more than it cost you to find that lease option person plus the lost rent that you had during that time. You have to make sure you have enough cushion to make that payment.
Joe: Let’s say you get into a situation where you can’t find a lease option payment and you can’t make the payment. What’s going to happen? What I suggest is that after 30 days, if you know you’re in that situation, then don’t just keep letting things go downhill. Go back to the original seller and say, ‘I’m sorry. I apologize. I can’t make this payment. Do you want the property back or do you want to make the payments on it?’ and then, they can make a decision.
Joe: If they want it back, you deed it back to them. The mortgage is in their name. If they don’t want it back, you say, ‘Okay, I understand.’ You try to continue to get somebody in it; maybe you can get somebody in there and make up the back payments with the lease option fee. Maybe you can’t. If you don’t, then that property’s going to go into foreclosure. The bank is going to take that property back, but your credit is not going to get damaged – it’s going to damage the credit of the original seller. But you told them that when you bought the property. They knew that going in.
Joe: The reason they sold it to you is because they had two options. One is that they had the certainty of foreclosure and two, they had the possibility of foreclosure. The certainty of foreclosure is if you didn’t buy the property or nobody took it over and they couldn’t make the payments over, they knew they were going into foreclosure, so that was happening. They took the chance that MAYBE they would go into foreclosure if they sold it to you. When you’re in a situation where you can’t make the payments, you go into foreclosure.
Joe: This doesn’t happen very often because you can usually find a new lease option tenant, make the payments, keep everything up to date and keep it on track. It’s never happened to me. I’ve never lost a property. I’ve never failed to make a payment. You want to be responsible and to do the best you can to protect your sellers, and it’s not the end of the world if it doesn’t happen, so don’t let it keep you from doing these kinds of deals. Daryl, I hope that helps. Thanks, now.