Today’s REI Classroom Lesson

Steve Rozenberg emphasizes why it’s important to stick to your leasing agreement as an owner, including the risks you’re taking if you let tenants pay late and don’t charge late fees per your contract.

REI Classroom Summary

Some owners think they’re being nice by giving a few extra days for tenants to pay rent and not charge the stated late fees but Steve Rozenberg reminds us that by not following your rules and procedures, you’re going against the contract that is binding between you as the owner and the tenant.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Steve: Hi. This is Steve Rozenberg. I’m the Co-Founder of Empire Industries Property Management and Realty Services located in Houston Texas. Today, I’m your host of the REI classroom and what we’re going to talk about is why it’s so important to stick to the lease agreement as an owner.
Mike: This show was sponsored by
Steve: I have many owners that come to us when they have a lot of problems and they’ve made some very vital mistakes as owners and they realize they’re in a lot of trouble, and they have issues with their tenants. And normally, when you get down to the bottom line as to what their challenge was and what they did wrong, they probably did not have policies and procedures, number one, and number two, they didn’t stick with them.
A lot of times, it starts with the screening of the tenant. And maybe they didn’t do the proper screening of the tenant or they went with their gut feeling and now they realized that there was a reason that no one else would rent to them and their gut feeling was way off because the facts showed them clearly why they should not rent to them. But they did not have any policies and procedures, and more importantly, they didn’t stick to them.
A lot of people will get into a big situation and I know this because I was one of them at one time. But they think they’re doing the right thing when they have a tenant that wants you to let them slide on the rent. So the common thing is the rent is due on the first, possibly, and then it’s late on the third and eviction and late fees may start on the fourth.
And what a lot of owners that are new into this industry don’t realize is that when a tenant comes to them and maybe they want to pay late and the owner lets them slide a little bit, maybe they don’t charge them late fees on the rent, and it maybe happens over a course of a couple of months and things happen over time, and what you don’t realize is when you sign a lease agreement with the tenant, you are actually in a bilateral contract. Meaning, you have to perform and the tenant has to perform. If the tenant does not perform, you’re up next and you have to perform.
So what happens is, let’s say, for example, the tenant doesn’t pay on the first, it’s late on the third, and they call you and say that they ran their dog over and they needed some money so now they’re going to pay you on Friday for sure. So you say, “Okay, you pay by Friday, I’m going to let you slide. Just pay me on Friday.” But what you don’t realize is, you actually had to perform. Per your lease agreement, you had to charge them late fees and if you did not perform and you didn’t charge them late fees, you actually were the first one that violated the contract. And you, very possibly, could have set a precedent that you are allowing them not to pay on time and since you didn’t charge them one time, per the agreement, you basically could have been viewed to have voided the contract at least in that sense.
Now, again, you sign the contract, they sign the contract. When you sign a contract for something, you understand that you are obligated just like the mortgage on your house. I was in court one time and I saw this play out where a tenant was late paying for about eight months and the landlord finally got fed up and tired of it. And when they were standing in front of the judge, the judge asked them what the situation was. And the owner told them, and the judge said, “Have you ever let them slide on the rent?” And he said yes, and he said, “Did you charge them late fees every single time?” And the owner said no. He said, “Well, you set a precedent. I am not going to enforce this, and I’m going to dismiss the case.”
And what we’re finding now is, number one, tenants are getting a little smarter, obviously, with online ability to look things up. And number two, a lot of judges are elected officials and they are realizing that the people that actually vote for them are the people that live in their precincts. Well, the tenants are the ones who live in their precincts, not the owners of the properties. So they’re realizing, they have to be a little bit more friendly to the people that live in their precinct to be re-elected.
So you have to think about these things that when you think you’re doing a favor and you think that you’re going off of your gut and you’re not sticking with your policies, and you’re trying to be nice, you actually could be putting yourself in a vulnerable position. And you could be, basically, putting your properties and your property business in a bad situation.
So my advice to you is whenever you have a situation, whatever your policy is, whatever the lease agreement says, that’s what you want to stick to. Because when you’re standing in court, that is what the judge is going to go off of. They’re not going to go off of your interpretation of how you feel, and you should or shouldn’t enforce the lease. They’re going to go off of, did you follow the contract that you both signed?
So again, this is Steve Rozenberg, I hope this helped you. This is REI Classroom. Thank you for listening.
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