Tenant Paid Years' Rent, what if BK? (California bankruptcy)

This is a discussion on Tenant Paid Years' Rent, what if BK? (California bankruptcy) within the Landlord vs Tenant Issues forum, part of the REAL ESTATE & PROPERTY LAW category; Please help with some advice***. A new tenant for my home has poor credit, 550-599 credit score, and wants to ...

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Old Apr 19th, 2008, 05:07 AM   #1
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Lightbulb Tenant Paid Years' Rent, what if BK? (California bankruptcy)

Please help with some advice***. A new tenant for my home has poor credit, 550-599 credit score, and wants to pay me a whole years' rent in advance. At $3000 per month, that is $36,000. I am supposed to approve her as a tenant tomorrow. She is in a difficult place, said she is a Real Estate Agent, and wants the home for a year and possibly 2-3 years. I will do a one year lease to start, and have $3000 deposit. She has two homes in Notice of Default, going to short sale. Her parents are going to help her out, so I thought I should have them sign on as guarantors on the lease, just for additional security. ***My Question: If she pays a year in advance, of course I know I received the rent. However, what if she files bankruptcy? I understand in California Bankruptcy Court, the Court looks at any payments made 90 days or earlier to see if considered preferential. Can they ask for the rent back? If I am given in a lump sum, and she owes other creditors from before, it would be preferential. She obviously owes two lenders as she said she has not been paying her mortgage payments, and is letting her homes go to short sale, and that they might go to foreclosure.

1) Any other risks you can think of? I ran a credit, eviction, and criminal check with a service, (with her signed approval on a tenant application) and the worst it showed was the poor credit. With the full years' rent in advance, she will live there with her husband and 2 kids. I thought it would be okay, as I saw photos of her home for sale online and it is attractive, offered at $1.3 million. I just wanted to be sure I was not missing something. 2) If they are problem tenants (loud, damage, etc.), can I refund rents and evict just like normal tenants, even though paid in advance?

3) Any other issues to be worried about? Please let me know asap. Sincerely yours.
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Old Apr 19th, 2008, 09:46 AM   #2
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Default re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

I would not do this for several reasons. 1) Yes, if a BK court looked at her advance paymetns of rent, they could say that she owed the money to prior creditors. I don't know if they could force you to return it though. 2) If you accept prior rent, you cannot evict her from the rental for anything other than significant lease violation (material breaches). You could not refund and evict. 3) CA is very tenant friendly and I wouldn't want to be stuck with a PITA for at least a year. The court probably wouldn't allow you to evict no matter what since the rent was pre-paid. 4) CA allows you to collect only 3 months of rent as a deposit. Prepaying for this length of time may be considered equivalent to a deposit and may be illegal. You are, in essence, holding that money for months as assurance of future rent being paid (thus monetary damages) so a tenant friendly court may equate it to a deposit. 5) There is a reason this woman is losing 2 houses to short sale (or foreclosure if she can't sell them.) For one, she's a realtor and her income is not stable. If she can't sell a house, she doesn't make any money. And she obviously can't manage the money she does make. (I assume other bills are listed as late or unpaid on that credit report too.) So she probably won't be able to pay the utility bills either. Did you get her to submit the last 3 years of tax returns to see what her yearly income has been (verify income)? Do they show that she makes 3 x the rent in income?

In short, I would not write this woman a lease or accept prior rent payments from her. Personally, I don't think I'd rent to her at all. But if you must, do a month to month agreement so you can get her out if she doesn't pay or is a PITA. Take the maximum deposit allowed by law (3 months worth) And keep a close eye on the utilities because they may end up being shut off. Put in the agreement that a failure to keep the utilities current will terminate the agreement and is grounds for eviction. If she files for BK, you can ask the BK judge to lift the stay so you will able to evict if needed.
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Old Apr 19th, 2008, 12:15 PM   #3
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Wink re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

Dear OH,

Thank you so much for answering so promptly.

[The rest of the post deleted by request of original poster.]

Last edited by top_admin; Apr 20th, 2008 at 07:36 AM.
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Old Apr 19th, 2008, 04:40 PM   #4
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Default re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

My opinion is that I still wouldn't do this. But I can understand needing to rent the unit. But as I said, if you must rent to this woman and her husband, do a month to month. Once you set up a lease, any and all court decisions practically go the tenant's way since your state courts are so tenant friendly. I still think you will have problems with accepting future rents. Let me detail.

1) 2) & 3) are very good ideas. Get the parents' signatures on guarantor agreements and check out their credit reports also.

4) This doesn't matter. She can simply refuse to do so. You will have to file to have the stay lifted as the creditor.

5) The state will not care what account you place it in or how you detail it in the lease or receipt. I feel that the CA courts will find that this much money received in advance will be considered a deposit regardless of these things. It is over the limit that you are allowed to receive and will put you at risk. You may legally accept current rent and security (3 month's worth of rent). Even accepting the last month's rent is considered a security deposit in some states. As I said previously, I would accept 4 months worth (current and the very large deposit based on their risk level) and set them up on a month to month agreement so you can terminate easily if she fails to meet obligations. If she is that worried that she will spend it during this time, she can buy short term CDs with it that she can cash in every few months.

6) Finally you have your own complication. While accepting current rent from a tenant is seen as a fund to pay the mortgage on, this may be considered income to accept this much in advance. (You would be drawing interest on those funds while you were awaiting their use.) I'm not sure how the BK court would rule on this but (in CA again) they may also want to pull those funds since it didn't come in monthly as rent, but is sitting in a bank accruing interest as an asset. Additionally, if you use those funds whenever you wish, that may also emphasize that they were not for rent, but were for your personal use. Having a large deposit would carry you over for a period if she were to default, and hopefully give you enough time to get her out and a new tenant in.
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Old Nov 24th, 2008, 10:49 AM   #5
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Default re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

don't take the risk. i'm going through similiar situation. it's not only the one year but even if she has one year lease that can be extended with no payments... with the courts blessing. tenants have more rights than landlords.
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Old Nov 25th, 2008, 08:57 PM   #6
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Smile re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

Easy one have the money come from the parrents not her.

Problem solved.
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Old Dec 2nd, 2008, 02:35 AM   #7
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Default re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

Hi friend,
I certainly agree with you. Thank you very much for sharing your information.
It was really very helpful for me.
Thanks!!!!!

Last edited by nathan16; Dec 2nd, 2008 at 02:36 AM.
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Old Mar 9th, 2010, 04:02 PM   #8
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Thumbs Up Re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

I know this is an Old Post but. You are crazy if you dont take this deal. I am sure if you did take it, you have no regrets. You could always return prepaid amount and the courts will never ever make a creditor (you as the land Lord or any other creditor for that matter) return any funds. As the matter of fact, you dont even get mentioned in her BK. you are a paid creditor Why would you even think of being mentioned or hurt by her B.K
ALWAYS REMEMBER, CASH IS KING KEEP IT IN THE BANK. she is giving you all the control, why would you waist it???
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Old Mar 9th, 2010, 07:26 PM   #9
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Default Re: Tenant Paid Years' Rent, what if BK? (California bankruptcy)

You cannot always return unused portions of rent. Once you have accepted rent that was tendered, you have accepted the tenant for that period. You would be unable to evict should you have problems with the tenant. CA court have made it difficult to evict for reasons other than failure to pay. Yes, you would have your money. But if the tenant got a pit bull, had loud parties, disturbances and fights, you'd be stuck with the tenant. Normally, you would want to evict the tenant, but having already accepted the rent for the period, you accepted the conditions. It is quite likely that a court would not allow you to evict. Money is not always the only consideration. What good is that money if you are getting nuisance citations from the city that eat up all those profits? What good is paid rent if they are trashing the property?

If you did terminate tenancy, a court COULD easily order you to return future rent payments to the tenant. Just because you are the LL doesn't allow you to keep unearned money (rent). You would have to return unused portions to the tenant.

And since this post is a year old, if the poster did accept it, the lease would be about the end now.
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