Real Estate Update: Tenants Breaking a Lease – Lawyer Says We’re Screwed

by Darwin on March 14, 2012

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?

{ 37 comments… read them below or add one }

ParatrooperJJ March 14, 2012 at 8:19 pm

Did you get the parents as cosigners?


Darwin March 14, 2012 at 10:16 pm

No, that’s not common w these college kids; never heard of other landlords requiring it – might deter them since nobody else requires it.


JT March 14, 2012 at 8:23 pm

Whoa – $25,000 isn’t chump change, especially when this is year one. I have no legal background, nor any experience with real estate, but I do know that your lawyer’s claim about credit ratings might not be the whole story. A few of my clients in B2C industries have had no issue reporting to one or all of the credit agencies. Here’s a link to the Experian contact form about reporting bad debts: TransUnion apparently requires a minimum of 100 credit accounts. I’m not sure about Equifax, but here’s a link to their data reporting page:

From what I understand, you have to do a certain amount of volume each month to report to the bureaus. Most small businesses don’t bother, and truthfully it might not be worth it all the time, but it’s not like you’ll have to enter 10,000 different people for $20 a pop – this will be thousands per person. So, I would say you definitely have a shot to report to your issues with payments to one or maybe all of the bureaus. Heck, just getting into one could do a world of hurt. All for the cost of one phone call? Definitely worth it!


Darwin March 14, 2012 at 10:16 pm

Thanks for all the info – I’ll have to look into that further!


krantcents March 14, 2012 at 9:11 pm

I never had a tenant break a lease. I had to evict a number of tenants over the years. They are nearly impossible to collect and I did turn them over for collections after I got a judgment. The evicted tenant keeps a black mark, if the landlord checks for evictions. Their credit is hurt because of the judgment and turning it over for collections. I never collected one penny!

I think you are finding out about some of shortcomings of rental property. In the long run, you will do well, but you encountered a hiccup or two.


Darwin March 14, 2012 at 10:20 pm

Oh well, I guess that deterrent may be enough to convince them to use their heads. We’ll pursue regardless; can’t set a precedent for being easily scammed landlords.


Joe @ Retire By 40 March 16, 2012 at 1:32 am

Thanks for sharing KC. I need to hear this too.


Maggie@SquarePennies March 14, 2012 at 9:18 pm

I’d get their “permanent addresses” (parents’ addresses) from the lease & send the parents a registered letter. I’d tell them that if they don’t find tenants to take their place by such and such a date that the parents must pay you X amount. It’s worth a try. In the meantime I’d be advertising for new tenants. Good luck!


Darwin March 14, 2012 at 10:19 pm

Yeah, we’re on that. To add fuel to the fire, we’re sending registered letters this week for overdue rents first. We gave them an ultimatum to re-sign for next year with a new kid (long story) and we’d give them a slightly reduced rate. If they don’t bite, then we go to parents next.


cashflowmantra March 14, 2012 at 10:08 pm

I also have never collected anything. In Indiana, you have to make a valiant effort to re-rent the house after a tenant breaks the lease and the tenant is only liable for the time the house was empty anyway. Not worth it here. I just get it rented ASAP and not bother.


Darwin March 14, 2012 at 10:17 pm

We’re trying to lease it to another party but we’re doubtful we’ll fill a 5 BR house this late in the season. These dopes signed a lease last summer, said nothing all year and then told us in March they want out. Seriously??


Money Beagle March 15, 2012 at 9:05 am

I’m a little confused. You’re saying that in the summer of 2011 they signed a lease that was to begin an entire year after that and end a full two years after the signing? Wow, there must be a lot of demand for housing if that’s the norm.

That being said, college kids are college kids. Most of them don’t know what they’re going to do for dinner tonight let alone being able to predict where they want to live and where their education will take them a full 12-24 months ahead of time. I’m not siding with the kids here, I’m just saying that this shouldn’t really be a surprise if I’m reading the situation correctly. It’s going to happen and I don’t think they’re deliberately saying “haha, let’s screw over this landlord.’

Now that you know this is a possiblity, I think you have to look into the idea of marketing the properties regardless of what you think is happening, if only to create a potential waiting list.

Also, did you open a dialogue and keep in contact with the various renters where you could have maybe deeloped a rapport with them to where you could have gotten direct or indirect information that they might be wavering? If you’re just a check they send in the mail they’re less likely to care about or bother with keeping you ‘in the loop’ until they absolutely have to.

I guess what I’m trying to say is not to just look at this particular situation and what to do about it, but maybe look in the future about what can be done to prevent or minimize the chances of it happening again


Darwin March 15, 2012 at 8:29 pm

So, yeah, at this school, the kids sign lease for the NEXT year in the fall before they leave for Christmas break. That was one of the selling points for these properties – the seller was able to provide fully leased properties for the 2012-13 year so we could come up to speed with all the other issues and not stress about filling the properties right after purchase.

we are heavily marketing the properties, but no takers as of yet.


Mike March 15, 2012 at 9:15 am

If I were in your shoes, I’d do two things:

1) Have your attorney send a letter explaining that they are breaking a contract and the legal ramifications- minimum notifications are often required in civil suits. Include the option to settle upon some reasonable terms like helping you find tenants or a flat out dollar amount – would allow you to defray some of your losses.

2) Leave the utilities in their names, which legally your covered since they signed a lease. The utility companies will then file with the credit agencies for nonpayment. Not paying your water or electricity bill looks really bad because people usually pay their minimum living expenses when deciding which obligations to fulfill – not just to other landlords but also to prospective employers, student loan lenders, etc.

In college, my fraternity had trouble filling a house we had signed onto as someone transferred mid-year and we were still small trying to grow. We had to fill 5 bedrooms and 4 people. The $2000/ month cost would have jumped to $500/person/month, but the landlord agreed to offer us $400/person/month if we had 4 people and $450/person/month if we had 3 people. In both cases, we had more responsibilities for maintenance on the house. We ended up with 4 guys in the house and actually did such a good job maintaining the house and even filled another one of his properties that the landlord gave us a discount the next year.

He did make 1 or 2 verbal threats about lawsuits, but when we told him we signed a lease and wanted to do the right thing he backed down. Besides, he wanted a fraternity to rent as that means several years of leases – we were in that house for 3 years before we grew enough for the national office to buy our own place.


Darwin March 15, 2012 at 8:32 pm

I talked to my attorney and he actually said it’s best if he didn’t get involved now (rare for an attorney!). Why? Because once he represents us and sends a letter, they are then protected by some “fair collections act” or something to that effect which inures special protections and benefits to them. Gotta love this system; everything is stacked to favor the squatter, scammers, etc.

On #2 the utilities were already in our name since some of them are shared with the unit attached; so we bill them quarterly to replenish utility account. Kind of annoying, but you can’t have utilities in one kid’s name when another house is sharing them.

We’re getting creative with recruiting; offering finder’s fees and signup bonuses and what-not. We just need some demand!


Financial Samurai March 15, 2012 at 11:10 am

Crap, that sucks. Landlords generally get screwed more than tenants. Tenants can squat etc.

I would call all their parents directly and really put the HEAT on. Come to a happy agreement or else….

I’m sure you can fill some of the house. Just gotta hit the ads immediately.


Darwin March 15, 2012 at 8:33 pm

Yeah, we’re sending registered letters this week to actually collect LATE Rents (these kids are something); then calling the parents in a week or two after the checks roll in (or don’t) to cover both payments and the lease issue; by then we should also have a better feel as to whether we have new prospective tenants.


Rob March 15, 2012 at 5:00 pm

I used to work in property management. This happens all the time, not just with college students.

Your lawyer is absolutely right. It will cost you far more to pursue the claim than you can ever hope to recover for exactly the reasons he stated. You are basically stuck with the money you already should have in hand (security deposits and last months rent.) You’re in the business of property management, not pursuing vendettas.

Here’s how you handle this situation. This is the standard operating procedure for professional property management. Send them a registered letter informing them you will let them out of the lease in exchange for their security deposit, last months rent and all back rents due (if applicable) plus damages assessed after they vacate the premises. That will free the property up immediately rather than having to go through the eviction process, which is just as much a pain in the ass as collecting back rents. This is the best outcome you can hope for in this situation.

You will get exactly nowhere by demanding they pay the full amount of the lease before it’s even taken effect. Nobody in their right mind will agree to it (the students or parents) and no judge will let you get away with it. Even if you could manage to ding their credit, chances are their credit is already trashed and you’re just another grain of sand in the bucket. This is the inherent risk of being in the property management business.

As far as filling up the space again. Never underestimate the college student’s ability to not plan ahead. A friend of mine rents an apartment over his shop and found himself in a similar situation less than a month before classes started. He filled the apartment the week before classes started with a pair of desperate grad students.

Don’t get obsessed with the idea of renting the house out to five friends under a single lease. There’s no rule that says you can’t rent the individual bedrooms out (unless your local government made rules against it.) College towns are absolutely filthy with grad students who just need a place to sleep.

When you’re in property management, your primary job is to keep your spaces occupied. Your job is not to spend money pursuing claims you have little chance of winning. It is in the best interests of your business to allow people who cannot meet their obligations to exit the relationship gracefully.


Rob March 15, 2012 at 5:43 pm

Another thing I should point out. Check your local renters laws. You may not be able to enforce a lease that hasn’t gone into effect yet, especially if they gave reasonable notice of their intention to back out. If that’s the case, you really need to let it go and concentrate on getting the spaces filled.


Darwin March 15, 2012 at 8:35 pm

I’ll have to check into local renters laws; no clue on that. I’d feel much better if I had security deposits to keep from them – that’s motivation. The thing is, these kids are currently in the house; this was to be a renewal for next year and the security would have carried over… but of course – they’ve pretty much burnt through the deposits in damages. At the moment, we have no real leverage other than threatening them and hoping they come around (or finding new tenants of course). Thanks for all the advice within though; definitely looking at this very conservatively, as though chances of collecting anything are low.


Joe @ Retire By 40 March 16, 2012 at 1:37 am

Sounds like a tough situation. Hope you can get them out and fill the place up ASAP. I guess that’s the bad thing about college rentals.


Para root March 15, 2012 at 10:11 pm

rob has the best advice.
Check your state statutes for tenant landlord act, it will direct you to your legal remedy, follow it to the letter, it wond give you business advice as Rob has but it will help you understand your obligations, and make your discussions with your lawyer more fruitful and cheaper.
Tenants feel they pay rent to do as they please a d leave you to clean up, a pro active style of management includes open dialog, per.iodic inspections, SS numbers for credit checks, and parent co signers(SS numbers also). I am in a Big 12 collage town of 30m students and co signers are very common. Who in there right mind would allow 19 year old men in large groups lease anything without a cosigner, they couldn’t rent a car, but a landlord gives them the keys to a quarter million dollar asset with no recourse?
just sayin you may want to study the law and write your leases differently. it aint all easy money.


Economically Humble March 15, 2012 at 11:44 pm

Make sure they officially and legally “stop” the lease, via email or letter, meaning the have moved out and break the lease, then notify them and leap keep the deposit. Don’t bother attempting to get anything from the lease and certainly don’t contact or attempt to contact the parents or legal guardians (these are not dependent children, they are adults). Having parents as co-signers is well, insulting… of course I’m accustomed to a smarty pants school where students discuss research and the finer aspects of beer (brewing, chemical composition and drinking), not simply beer and more beer. 😉

I recommend renting to graduate students. They are easy on the place and will likely stay for years if it is a nice property. Send a flyer to department secretaries on campus, especially around the end of the year/summer and ask them to distribute on campus email lists.


Darwin March 16, 2012 at 7:22 pm

We bought on a primarily undergrad campus; there was a long history of rentals, income and fully leased units for the following year. Unfortunately, one set of students felt like being irresponsible. We’re hitting the advertising on all fronts – craigslist, papers, fliers, web site, social networking, etc


Aaron March 16, 2012 at 7:28 am

I left a comment on a previous landlord article of yours explaining that you should NEVER let the tenants apply their deposit to expenses DURING their tenancy. It is for the move-out inspection ONLY. Otherwise you are left with tenants who have no “skin in the game” because you have let them use their deposit for expenses along the way. This is especially true for college students spending their parents’ money.
My recommendation now: Find new tenants ASAP on your own. Bill the old tenants (and their parents) for any difference in rent collected if there is a gap in occupancy once you find new tenants, but don’t expect them to pay.


Darwin March 16, 2012 at 7:24 pm

The tenants aren’t “applying” their deposit; we just know that based on their tally, they gave us $2500 across the 5 of them and they’re in about $2500 deep. So, for all intents and purposes, they’ve burnt through their deposit. They don’t know specially how far in the hole they are but we do. We are actively seeking new tenants; just not confident we’ll get a fiver.


Aaron March 16, 2012 at 8:10 pm

To clarify: I have found it best to fix everything as they break it/ruin it and bill them as the expense occurs, immediately. This way the house should stay in good repair at all times because it sets a standard of expectations for your tenants, allows you to maintain your business asset in peak condition, and you prevent being labeled as any kind of slumlord. I.e. buy good condition homes and keep them that way, even for high wear and tear first time tenants that are spending their parents’ money.


Financial Independence March 16, 2012 at 10:46 am

I am lost 5 houses or 5 kids? Are they houses or rooms?

Now it is March time, what you are saying, that 6 months till September is not long enough to find new tenants?

I think that the kids should be left alone. Normally they are overpaying and left in the sub-standard houses anyway. If all 5 are going to depart abruptly,, perhaps you should consider what is wrong with the house/price.


Darwin March 16, 2012 at 7:30 pm

We do have 5 units. One of the units has 5 kids. all 5 kids decided to walk at the same time. So that one unit is now unrented. The leases start in June, so we’re only 3 months out. As odd as it seems, the housing gets leased for the next Jun season prior to Christmas. So, if you start looking for tenants in March, there are no (or very few) students left.

Your last paragraph is silly and what is wrong with Americans in general. These kids entered into a legal agreement to lease our house and waited until the last minute to break it. They are in the wrong, not us. They were living in the house already when they signed on for another year. It was acceptable then, and now they decided they want to live somewhere else. So, who gets screwed here? US.

That’s like me signing a lease for a car, driving it for a month and then thinking I can return it and stop paying the lease (I changed my mind)?

You’re probably a renter.


Aaron March 16, 2012 at 8:02 pm

Haha. So because these ADULTS are only 18, 19, 20, etc. they should be given a free pass and not be held accountable? Thanks for your thoughts but what exactly are the standards you would hold them to?

You probably are a renter and I’d be very surprised if you have any business experience. If you can’t count on income based on a contract with your customer, how can you expect to stay in business? Just because a small business owner doesn’t have the resources to track down every defaulting customer or the money to affect someone’s credit score doesn’t mean that customers should be able to do anything they please and not be held accoutable. Maybe all rental property should be managed by Bank of America or ENRON with their big bankrolls because that would work out WAY better for the tenants (sarcasm).
How about people today (young ADULTS included) stick to their word and honor the agreements and contracts they have made.


Andrew @ 101 Centavos March 16, 2012 at 9:57 pm

That’s tough nuts, Darwin. I wouldn’t let the kids or the parents off the hook. Registered letters in gradually worsening tone should be the minimum recommended action. Hope it works out to the best possible.


Darwin March 17, 2012 at 9:20 pm

Yeah, stinks. Registered letters going out; gonna try phone calls to parents as well – I bet the parents don’t even know what the heck their kids are doing.


Steadfast Finances March 18, 2012 at 12:27 pm

In my state (not sure it is like this in all states), landlords can only collect on the months that they were unable to fill the vacancy (which resulted in the tenant breaking the lease). And I believe landlords have to show that they actively pursued finding a new tenant. So, if I told my landlord that I was moving out 6 months before our lease ended and they were able to find a tenant the next month, I wouldn’t be forced to pay anything.

Maybe you could motivate them to help you find someone for you. Scare them into thinking you will hunt them down and ruin their credit if they don’t help you find new tenants.


Economically Humble March 18, 2012 at 1:13 pm

Well you certainly don’t want to “scare” them into anything… harassment will not look good should this go to a judge (which it won’t). Be professional and remember you are dealing with adults, at least in the eyes of the law.

I just chatted at a friend of mine that manages an apartment complex near our University and she said follow the law to the letter, don’t bother with the parents unless they are co-signers, and with luck the unit will rent when the summer starts because students will be moving out of the dorms.

This stinks… I wonder, what can be done in the future to avoid this situation, because I’m sure it can happen to anyone with a rental property.


so May 4, 2012 at 9:10 am

Rob has it right. Your claims are worthless — no use crying on how immoral / irresponsible the students are, it comes with the demographic. You’re dead on this one, but now you know better. Next time, get co-signers. We refuse to rent to students (except grad students) without them.

Also, it doesn’t hurt to throw a periodic e-mail in to the renters just to see how things are going. Sometimes you can get notice that things are breaking bad before they break their lease, and you can line up replacement tenants.


Chuck July 10, 2012 at 9:55 pm

Welcome to being a landlord. Just put the sign in the yard and start advertising. Get it rented out, don’t bother chasing them down. If the unit is a good product, it will rent out even if school has already started.

BTW, this post is a few months old…how did it turn out?


Darwin July 11, 2012 at 11:20 pm

Funny you mention, we just had to send late rent letters to these goofballs. They haven’t moved back in, but we have to go through official notification and eventually collect damages if we can’t fill (which we’re still trying to do)


Leave a Comment

Previous post:

Next post: