It’s amazing to me how many people will pay an option fee and then walk away a few months later – knowing that they have just forfeited their fees. It is equally amazing to me how many people will try to get their option fees back, even though they are non-refundable.
The option fees paid are for the right and privilege to purchase a home. Whether or not the optionee (tenant-buyer) meets the terms of the option is up to them. My goal is to get people to buy and I’ll do whatever I can to help them, but I can’t make them responsible. I can’t make them close on the home either. Approximately half of my tenants ever get to the closing table, and some will walk away from their option fees after only a few months of tenancy. If they forfeit their rights, that’s their choice, not yours, but some buyers will try to get that option back in many sneaky ways.
One of the smallest houses I ever lease optioned was in Michigan. It was approximately 700 square feet. It had what is called a “Michigan basement” (kind of like a tall cellar – not something you would finish off as living space). I leased it to a man named Arnold. He and his wife actually moved from a larger house into this little one. You might say that Arnold was like a customer because this was at least the third home I’d leased to him, but he was a good renter, always paying his bills on time. However, it wasn’t but two weeks into the rental when I got the phone call with the four dreaded words, “We got a problem.” I braced myself and asked “What’s the problem?”
Arnold replied, “There’s a snake in the house.
I asked, “What kind of snake?”
Arnold said, “A big snake – like a boa or python. We found stool samples in the basement and took them to the pet store and that’s what he said they told us.”
Arnold and his wife now wanted their option fee back and said they were immediately going to move out. He asked me, “Wendy, do you know of any snakes in this house?”
I said, “Arnold, hold on just a moment.” I put him on hold and thought about it for a moment and then it began to come back to me that the previous owner, a big burly guy with a lot of tattoos, had snakes. I was a little fuzzy on it because I hadn’t been out to the house — my office manager, Amie, had done most of the visits to that home. I turned to Amie and asked, “Did the previous owner by any chance have snakes?”
She said, “Oh yes, don’t you remember? He had cages full of them in the basement. And on the day that we went to close and do the walk-though, I noticed that one of the big cages was empty so I asked him where that snake was and he said he gave it away,” she said. We both fell on the floor laughing hysterically. We had never heard of such a thing in all of our years of real estate. A big snake loose in a house. Understandably, it was not so funny to the tenant.
We had no idea where to start. We had dealt with leaking roofs, flooded basements, broken furnaces, frozen pipes, anything else, but BIG snakes? We don’t have those in Michigan!
I got back on the phone with Arnold and said, “Well, there’s a chance there could be a snake in the house. Let me call the previous owner and see if he knows anything about the snake. I’ll call you back.”
Do you know how hard it is to find a snake expert in Michigan? I called animal experts, the zoo, pet shops, animal control, exterminators, and I couldn’t get help on the situation. I had my handymen go into the house, crawl through everything including the attic in an attempt to find the snake. They could not find a snake.
In the mean time the tenant called and said they had found someone that went into the home and saw the snake’s tail go up into the wall from the crawl space in the basement. They also told us they were moving out. I then received a call from their attorney asking for their option fee back. I discussed it with their attorney and several of my friends and the consensus from my friends was they would not live with a snake either. I told the attorney when I found the snake I would gladly return the option fee.
After many more weeks of searching, we finally found a guy whom I nicknamed “Mr. Outback” because he was willing to handle any type of critter situation.
Mr. Outback said, “Look, I’ve got this glue that’s $100 per gallon, and I’m going to put it onto a plywood board and put the board in the basement. When the snake crawls across it, he’ll get stuck and we’ll have him!”
I let him put the board in, but, doubting the success of this method. I also called the attorney back and said, “I’ll tell you what: if you can get sworn affidavits from the people who examined the stool samples and from the people who saw the tail go up into the wall, I’ll refund the option fee.”
I never heard from the attorney or Arnold again.
In the meantime my partner said, “Sell that house.”
The house went back on the market, but I forgot that glue board was in the basement. A Realtor® named Susan was showing the house. She went into the basement and I had forgotten about the glue board. My cell phone rang as she had stepped onto the glue board. “Wendy? What is my foot stuck to in the basement?”
I said, “Oh, that’s just the glue board to catch the big snake in the house!”
Susan screamed, and I couldn’t stop laughing. I said, “I’ll pay for your shoes!” The house did sell not long afterwards, and I wrote on the seller’s disclosure where it asks “history of infestation” I answered “None – Confirmed”.
I think what may have happened in this case is that Arnold and his wife didn’t like the smaller home. When the neighbors told them about the previous owner’s snakes, they began to imagine noises in the walls. Regardless, with no snake there was no refund. I could have gone after the rest of the rental agreement also, but we sold the home, so I did not press charges for the rest of the rental agreement. It is amazing what people will do to get out of an agreement.
Option Fees are NOT REFUNDABLE – even though some people will try to get them back. They might make up stories to get their option fees back.
Commitments to the Tenants
If you have tenants in your home, you have certain responsibilities to them. Take care of the house, make sure it’s livable, keep open lines of communication. You have to view it as if your sellers and your tenants are your customers. I’m tougher on the tenants because they screw up deals more often, and that’s not really an issue with the sellers, but I still always keep my end of the bargain.
Make sure that you’re keeping your Realtors®, lenders and others informed at all times, and that they know where to reach you if they have questions. Communication is key!
Protecting Your Privacy with Tenants
In general, you do not want your tenants to know where you live, so either have their rent come to an office or to a post office box. In case a deal goes sour and you have to evict the tenant, you don’t want a disgruntled, grudge-bearing tenant showing up on your doorstep. You have to protect yourself and your family. I don’t give my tenants my home phone, and that number is unlisted. I would only give them my office or my cell phone.
Who is Responsible for Repairs?
One of the benefits of the lease option is maintenance – the tenant does it all! My lease option with the tenant says that the tenant is responsible for all maintenance major and minor. However, if I end up having to do anything for repairs, I’m going to add that to the purchase price at closing. Let them think through their own possibilities first, but if they still don’t know what to do, then you send your own maintenance people and add the cost to the purchase price.
For example, if the tenant’s heat goes out in the middle of a Michigan winter, it’s crucial to get that fixed. Heat is necessary. On the other hand, if the air conditioning goes out in the summer, it’s unpleasant but livable. Do not make your tenant unduly fix too much, because if you treat the tenant like an owner then the court may treat you like a seller – in which case the tenant can say that they’ve put so many dollars into the property, etc. Then the court may make you go through a forfeiture or a foreclosure versus an eviction, which in most states is more expensive and much more difficult.
In a buyer’s market you can put more of the responsibility of maintenance on the seller (Chapter 5 on negotiations). In a seller’s market, I don’t want them to do anything but to be free and clear of that issue. However, I have to approve in writing of any improvements my tenants do.
Keep a copy of any letter or maintenance regarding the tenant’s house. When a tenant calls, we record what was said and what our response was, and it goes in their folder. The same goes for maintenance. We track everything. If the roof leaks and someone slips and falls, accurate files will suddenly become very important!
Transition Between Seller Moving Out and Tenant Moving In
Always assume that the tenant won’t buy. Otherwise it’s like the proverbial “counting your chickens before they hatch.”
Therefore, always have complete documentation of everything regarding a tenant moving in. Probably your most important thing will be to have a video-taped walk-through check-in and check-out with the tenant. It is important that you show them on tape verbally acknowledging the condition of everything, whether good or bad (and hopefully not too much bad – but maybe they’ll point out something that you somehow overlooked. If so, fix it immediately!). This is in order to protect yourself with documentation of the condition of the house – documentation that they have signed. The tenant always thinks they’re going to buy, but things happen, and a checklist protects you and them. If the window wasn’t broken at the time of move-in but is when they move out, you will have video evidence if you need to take them to court and sue for any damages.
After the seller has moved out, make sure it’s ready for the tenant. This includes the following steps:
- Carpets are cleaned if needed (perhaps the seller will do this, but if they don’t, you need to make sure it happens).
- New paint
- Dings fixed
- Kitchen and bathrooms cleaned, re-grouted as necessary.
- Kitchen cupboards cleaned out
- All appliances left behind are clean and in good working order
- Check in/checkout sheet that you need to go through with tenant – have them check the condition of everything and sign. Take pictures at the same time or even video tape the walk through for future reference, if needed.
- Keep track of the title during transition especially if you’re not making the mortgage payment, and especially if it’s a long-term contract. You want to make sure the title stays clean and clear. Run the title work occasionally if you feel like there could be something going on with the seller or with the company they work for… it’s just good to keep the title work current.
Maintenance On the Properties
Although my option agreements state that the tenant is responsible for all maintenance, it is still important to keep the place habitable and treat them like a tenant. If you treat them like an owner, a judge might also treat them like an owner which will nullify the option.
- Always change the locks from the previous tenant – if you don’t change them and someone still has a key, you could open yourself to serious liability.
- Clean the carpets.
- Repair any paint problems.
- Make it habitable.
A Good Buyer Turned Bad
Unfortunately, this business is not all perfect. There are times when you will have a tenant that you think is great. You are sure they will exercise their option. They have paid on time, taken care of improvements/repairs, and been nice in all dealings. Then it happens: You either don’t hear from them (no rent) or they start to make things difficult with repairs, etc. In any case, they were a good tenant and now are bad. I recommend trying to work things out on the phone first. If this does not resolve the situation, then put things into writing. If you have a problem with a tenant that can’t be resolved over the phone or in writing, then you must go to the next step: eviction and the revoking of their option.
In order for you to do this they must violate a part of the rental agreement. It is for this reason I use option contracts that are subject to the rental agreement being followed. I also include in my option contract this statement: “If any rental or option payment is made 10 days or more late, then this option can be declared null and void by Optionor”. It is usually advised to revoke an option in writing before you evict a tenant. This is only a matter of one or two days added to the process. Once you revoke their option, you can start the eviction, as there is no option agreement in place at that time. In most parts of the country revoking an option agreement is not necessary to evict someone, however, it is the safest way.
To revoke an option you can send the tenant a letter via first class mail and certified mail – both containing the information that the option has been revoked. The certified notice is the one you want them to receive and sign for, but if they don’t you had sent it first class also. I use this for extra precaution. When you send the revocation letter, you should indicate why you are revoking their option. You might want to attach a copy of their option agreement and highlight the area you are utilizing to revoke their option contract. The letter can be something as simple as this:
|Dear Joe, Date|
Attached is a copy of the option agreement you signed. Your rent is now 15 days overdue and is a violation of the option agreement. You have been late many other times. We are now voiding your option agreement. Please be advised that you no longer have the right to buy this home.
Wendy Patton – member
Wendy Patton’s LLC
Also, if you want to allow them to reinstate their option you can state that in this letter. For example: add this to the end of the above letter:
If you want to reinstate your option, you will need to remit the amount of $$$$ currently due, by MM/DD/YY.
I would recommend this statement if you really do want to work it out with the tenants. Remember to try other softer ways to work it out first; this letter should be a last resort. If this is used too soon in the negotiations, then the buyer can be ticked off to the point of no return.
Wendy’s Advice on Accepting Sob Stories
If the tenant doesn’t pay their rent – you are paying it for them.
The best advice I can give on late payers is to start eviction as soon as possible. My office starts to evict when rent is five days late. From over twenty years in this business, I can tell you that tenants lie! You will want to believe them and want to work with them. It will be harder for some of you than others. It was always hard for me, because I have a soft heart. I want to believe people and I do until they prove me wrong. Unfortunately, I have been burned many times from deceit and promises that could not be kept. There is one thing to remember and I hope this helps you be firm on this policy:
If you are ok with that, then you can listen to all the sob stories you want, however, most of us can’t afford to carry another family. If you don’t like playing the “heavy,” you can also have your partner/spouse sign the contracts and you and be “the manager.” The tenant doesn’t know you are the owner also. They only think you manage the home. This way when they don’t pay and give you a sob story you can be the good guy. Example: Tenant hasn’t paid rent due to husband being laid off, wife is pregnant, it is December and very cold outside, and it is almost Christmas. You can say, “Boy I really feel for you. I understand this must be a hard time for you. I would let you stay, but I have to start to evict you, or I could lose my job. The owner is very strict on this and really is tight on cash, too. He/She really needs you to pay soon. Do you think you can do it?” This is what you might call good cop/bad cop.
A special note about receiving payments that are post-marked with a Pitney Bowes-type office postage machine: the dates can be changed manually. A tenant can tell you, “I sent you the check,” and you’ll get it maybe several days late with a Pitney Bowes metered stamp that precedes the due date. I tell my tenants that their payment has to be stamped by the post office and not a Pitney Bowes machine because of the potential for deceit. When I was first starting out, I didn’t realize that the dates could be changed and I got burned a few times until I got smart.
Of course, you don’t want to have late payments from your tenants, and you want to lay out the ground rules up-front about late fees. However, tenants can feel intimidated to call their landlord with even a legitimate excuse about why the rent is late. It is important, therefore, to keep a rapport with the tenant as to facilitate a comfort zone and open communication. Be friendly but not friends – at least not until the option is exercised. It’s similar to a parent-child relationship. The parent is not the child’s best friend. The parent is the parent, and the landlord is the landlord, and being a landlord is a business. If the tenant doesn’t pay the rent and you don’t do anything about it, you will have to pay their rent – and that’s not a way to run a business.
If you have an arrangement with your tenants that their rent is always due on the first day of the month and you don’t get it, call them immediately or send a notice: “Is your Rent going to be late? Call in with one of these numbers, so we will know why.” When your tenant first moves in, you can give them a list of the most famous excuses you’ve had for rent being late. It’s a little humor but at the same time lets them know you’re heard it all before and that you’ll be watching. It also shows there is a serious side to paying rent on time. You can add to your own list as you learn through the years. You won’t believe the excuses you will hear.
At the very least, tenant issues provide a great wealth of learning experience, and many times a good laugh! Learn to smile at the stories, it helps relieve the stress.
Each state has different collection procedures and abilities. In Michigan I can garnish bank accounts, wages, tax refunds, etc., even “Execution Against Properties” which is going after personal property to resell and claim the money. Use a collection service, but be aware that the collection company will take 40-60%.
Tips to Increase Profits
- Sometimes it pays off to find the tenants before you find the house!!! Line up a bunch of potential tenants, then go find the homes that will fit them in their price range and in their area. – especially good in a buyer’s market.
- Charge for late rent. My rental agreements say that I will charge $5 to $25 per day, and I do enforce that.
- Charge court costs, state fees, legal fees, whatever your state will allow you to charge.
- Define “on time” to your tenants
- I always pay the water bills myself, then bill the clients for them. The reason I pay them is to make sure they are paid on time. Otherwise my city can put a lien on the property if it were left up to the tenant and the tenant didn’t pay. Check your state out to see if this applies. In many states it is not a lien on the home.
- Money orders and certified funds are not always good because a tenant can do a stop payment on them so know that they can bounce! (Go ahead and ask I how know J. If you lose it, they’ll reissue it because you’ve put a stop payment on it.
- Enforce your maintenance co-pays.
- One technique is to call the bank when you get a check and see if that check is good. They won’t tell you how much is in the account but they will tell you if it’s good or not.
If it’s not good, call back a few hours later and have a lower number and ask if a check for that amount is good. Say, if the first was $1,000 and not good, maybe the second call is for $800. If that’s good, then you know that the account has between $800 to $1,000 in it. So then go and deposit $200 into their account, and then cash the $1,000 check. Of course you will bill back the $200, and the tenant might be very angry, but that’s tough. Yes it is sneaky, but heck they owe you the money. You MUST call and make sure the check is good before you try to cash it because the bank will only submit the check twice.
With me you get the chance to use personal checks UNTIL one bounces. Thereafter they all must be certified funds or a cashier’s check.
Moving a Tenant Out When They Decide Not to Exercise
If the tenant decides not to buy the property, then you want to go through the property with them and check them out.
If you had a security deposit with the tenant, keep in mind that in most states a security deposit cannot be used to cover normal wear and tear on the property. Normally with an option I don’t have a security deposit because I want their money tied up in option (non-refundable) as opposed to a security deposit (refundable), but there is good argument to have money tied up in security deposit because then it looks more like a rental agreement. Of course, if they have animals you might also want to charge a security deposit for that. In any rental agreement, if the security deposit isn’t enough to cover damages, you would have to sue the tenant to get any additional amount.
Nikon Drive Property
I lease optioned this property to a real estate attorney’s daughter. She wanted her dad to review the contracts. I don’t mind at all if an attorney reviews my contracts because I’m not going to change them much. The dad called me after he reviewed the contracts and said, “I’m not changing one thing.”
I said something like, “Oh no, the contracts must not be very good?”
He said, “No, you don’t understand. My daughter made her bed and she can lie in it. She got the bad credit herself; she can fix it. Your contracts are tough, but they’re fair. If she doesn’t do her part, she can lose her money. I’m not bailing her out anymore.” Thankfully the daughter made her payments and ended up buying the house. I made $35,000 on the deal. I saw the daughter three years after she closed on the home. She ran up to me and hugged me and thanked me for her home. She had recently sold it and made over $40,000 herself. She had two children and needed a larger home. This is a true win/win/win!