A few months ago, I highlighted the college real estate deal I did with a partner whereby I borrowed from my 401(k) to finance a decent-sized deal on 5 houses on a college campus. At the time we bought, we had assurances (and signed leases) that the houses were all booked for the upcoming 2012-13 school year. This was a big selling point, in that we wouldn’t have to jump right in and try to fill the houses for the next year, that the work was largely done for us already.
Fast-forward to March 2012. For most of the houses, the same students that are in the house this year were signed on for next year as well. A few weeks back, a few tenants started highlighting various financial and scholastic issues to the property manager. We then got a formal notification from the house that they want “out”. They said they can’t fill the house next year and don’t intend on renting it next year. Regardless of their reasons and personal situation, we DIDN’T promote the house all year and this late in the year, it’s going to be tough to fill 5 kids in a house.
What the Lawyer Says
I called our lawyer, who has advised us previously and relayed the whole situation. I highlighted the situation and asked how we should play it with these kids (i.e. play hardball and say they’re on the hook no matter what [and not try to fill the house], vs trying to fill the house immediately). Surprisingly, he said he wouldn’t even bother trying to collect from these kids and move on. I said, “That’s like $25,000! If we don’t fill the house, we should just eat that?”. He said in his experience, landlords rarely end up collecting at the end of the day.
He said first off, you have to wait until the entire year has elapsed and then try to calculate your damages (i.e. the amount they owed us per the lease). Then, you have to figure out where they live (or their parents) and file in the local court. After that if we’re even successful (he said judges are often very sympathetic to tenants and treat all landlords as if they’re slumlords), he said, if they’re smart, they’ll appeal it. Then apparently it gets kicked out of the lower court into a higher court. Then you have to chase them around as they move to a different county or whatever and try to get the courts to decide in your favor. And each of these comes with fees and court appearances.
I then said, “Well what about their credit, won’t this hurt their credit?”. I’m so naive. I just figured I’d call a collection agency or something and somehow this eventually impacts their credit if they don’t pay. He said that we’re not affiliate with a credit agency, that only large companies usually are which carries a high expense to be affiliate with a real credit rating agency, etc. So, he said we don’t have a means to actually impact their credit. Really? News to me.
It sounds like landlords get screwed under this system! He said at the end of the day, it’s probably just not worth it.
In talking to my partner, who’s been doing real estate for 5-6 years to date, he said they’ve actually had parents just pay when a kid failed out of college and left the house. He said he’s not sure what the motivation is, if it’s just doing the right thing, or avoiding a kid starting out adulthood with court liens or whatever. But he said he’s never had trouble collecting. His opinion is if these kids don’t come around and pay (OR find replacement tenants by next year), that we should go through all the motions and collect what we can. That’s where I’m at too, regardless of the guidance to date.
So, that’s where I figure I’d like a broader consensus. What are your thoughts?
Oh, and if you’re thinking that their security deposit should act as incentive for them to come back next year, well, we didn’t get new security deposits for next year and by now they’ve burnt through this year’s (see why here). So, if they walk, they don’t really have anything to lose, except us chasing them through the court system 2 years down the road.
Is it really that difficult collecting from a tenant that previously signed a lease?