Property Type: Apartments
Famous Last Words: “Sure, I can do a favor for an old friend.”
Ken’s friend Finley called him up and asked him to rent an apartment unit to his daughter, Stephanie. Ken and Finley had been golf buddies for 25 years and Ken had no qualms about renting to Finley’s family.
“Can you make an exception to your standard practices and not screen her though?” Finley asked. Ken hesitated. He’d been in the business for fifteen years by that point and he’d never made an exception to this rule.
He even had the following detailed rental criteria posted on his website: “Applying tenants must supply the following information with their rental application:
- A complete application for each adult 18 years or older – (unfavorable information for any individual applicant may result in denial of all applications for that group)
- A three-year residency history including the names, addresses and phone numbers of previous landlords. A three-year employment history including the names, addresses and phone numbers of previous employers
- Verifiable gross monthly income that is three times the amount of rent (verifiable income my been but is not limited to salaried work with paystubs, self-employment with tax return, alimony/child support, trust accounts, Social Security, grants or student loans
- If income is not verifiable, a current bank statement with a balance of five times the rent
- Two pieces of identification, one from each group below:
- Group A: Passport (foreign or U.S.) , a U.S. driver’s license or a U.S. state-issued ID card
- Group B: Social Security card, U.S. birth certificate, Resident Alien card, work visa or student visa
- Maximum occupancy of no more than two people per bedroom.
- Tenants may be asked to pay a higher deposit (up to twice the rent) if the following circumstances apply:
- No credit or poor credit (including slow pay or discharged bankruptcy more than one year ago
- No landlord references (roommate and family references are not enough)
- Less than one year of rental history
- Tenants will be denied and will forfeit their application fee if the following circumstances are true:
- Incomplete or misrepresentation of any information on the application
- Insufficient income
- Past eviction judgments
- Past felony charges and/or convictions, or three or more misdemeanor charges
- Discharged bankruptcy within the last twelve months or any open bankruptcy
- Negative landlord reference including money owed to a prior landlord; three violation notices issued in a one-year period (such as seventy-two hour notices, insufficient funds, noise or disturbance or unauthorized pets or occupants); excessive damage upon move-out or if a landlord refuses to give a reference
- We accept the first qualified applicant
The Big Mistake
Hearing Ken hesitate, Finley filled in, “She’s just new to this whole renting business and it intimidates her. I’ll cosign and you know I’m good for the money.”
That was true – Ken did know Finley was good for the money. “You’ll pay the deposit too?” “Of course”, he replied.
Before long, Finley was having furniture moved into the apartment making it move-in ready for his daughter, but Ken’s on-site manager noticed the unit still seemed vacant for the first six months. If he’d rented it to anyone other than Finley, he would’ve been worried. But, because it was his friend, he pushed the matter to the back of his mind. Finally, Ken heard that Stephanie had moved in – with her cat. For that, he had to call Finley.
“Oh, I’m sorry I forgot to mention that,” Finley said. “How much do I owe you for a deposit?” With that, the issue was closed and Ken went on to other business again.
Things went well for a while. Then Stephanie’s boyfriend showed up and soon the drama started. It seemed minor enough – just some noise complaints from the neighbors that Ken’s on-site manager took care of – until Ken got a call from a police sergeant.
“Could you come down to the apartment complex? We’re evacuating the tenants and planning a full-scale assault on one of the units.” Ken raced his car to the complex. Sure enough there were four police cruisers and an armored personnel carrier in front of the building, all facing the apartment where Stephanie lived. But ken was too late to try to coax her out – the police had already lobbed tear gas into the apartment. Damage was visible even from the street – shattered windows, broken siding – and Ken wondered what the inside would be like.
The police ran inside and came out with a man, probably Stephanie’s boyfriend, but not Stephanie. Once the man was loaded into a cruiser, Ken demanded to have more information. “What’s the meaning of this? Did you find what you were looking for?” “What about the damage to my property?”
“I understand you’re upset, sir” the officer tried to calm him. “This man is arrested with charges of methamphetamine abuse and murder.” He looked grim. “That’s dangerous stuff, meth.”
“What about my tenant? Wash she involved?” The officer explained that although Stephanie had quite a criminal history, they had no open warrants for her at the time. “I’d probably be a good idea to keep an eye on her, though.”
Ken asked Stephanie to move out claiming the unit was not habitable. As Ken and his staff toured the apartment to assess the damage, Ken had hard time breathing and knew he’d have to hire a professional clean-up crew to get the tear gas residue out of the ventilation system, wall and carpets. Ken also smelled the cat urine. I should have asked Finley for a bigger pet deposit, he thought. When he walked into the kitchen and saw stains on the countertops, though, it dawned on him that the cat urine smell wasn’t from the cat – Stephanie and her boyfriend had been cooking meth.
Ken hired experts to clean the unit up as well as an industrial hygiene company to test and confirm the apartment was safe for the next tenant. It took two months to clean up before the new tenants could move in. Fortunately for Ken, Finley had agreed to pay all costs of his daughter’s tenancy. Unfortunately for Ken, his friend’s family was going through a rough time.
“I’m sorry about your daughter,” he old Finley, not sure how much he would be seeing his friend for a while.
The Good News
The good news was that Ken learned from his lesson. From then on, he screened all tenants before they could be approved to move in. It was a painful and costly lesson, but an important one – not just for the financial success of his business, but also to ensure a safe community for his tenants to live in.
- Screen everyone. And if they have a roommate or significant other move in, insist on screening them too.
- Stick to your ethics even when a friend is asking for a favor. It’s much easier to say, “I’m sorry, but we have to put everyone through the formal application process” than it is to lose thousands of dollars and put that strain on your friendship.
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). This article is an excerpt from Cliff’s book, Successful Real Estate Investing – how to invest wisely, avoid costly mistakes and make money.