Recently we experienced an unusual request from a new tenant. A young couple had been given funds from a Grandparent that was to be used for rent. The Grandparent had requested that the funds pay for a year of rent. The reasons for making the request were entirely personal so I did not dig to deep into the reasoning.
After performing our normal background checks on the applicants and determining they would be approved, I had to discuss with the owner this arrangement that was going to be a part of the lease. I anticipated correctly that the owner was going to request all of those lease funds, less our management fee. I was not sure that was a good idea and wanted to have a position on what we were going to do, prior to even executing the lease. So, I turned to my decision making system that includes a T on a piece of notebook paper and pro/con columns. After emptying my brain, I also consulted a few people in our industry that confirmed my conclusions.
I understand that an owner wants the full year of rent in their bank account. If they were managing the property themselves they would have those funds. Yet, even if they had those funds, they would still be faced with the same issues facing us as the manager. The basic issue is that these funds are pre-paying for a service not yet provided. Yes, I understand we have a similar arrangement monthly for a much shorter time when we receive rent. It still creates a contract that the service will be provided. One year is a much longer period of time to guarantee the service for a property. Our real estate license, not to mention our Code of Ethics, creates a fiduciary responsibility to guard funds given to us in trust. This is why security deposits must be held in a separate fund (and not utilized) and rents are handled from an account separate from our company operating funds.
Basic business principals also played into my decision making. These prepaid funds are a liability until each month arrives where they can then be applied to Rent Due. In this respect, no management fees should be taken until they are applied as rent. Then monthly the distribution to the owner should occur of that months balance. Even if a large repair is needed to the property, these funds need to be segregated and only applied as rent. I also remembered the number of owners we have worked with in the last few years who entered foreclosure, lost their home, and did not share this information with their manager. The new owner of the home is likely not going to respect that a tenant prepaid the rent to a former owner-who now is nowhere to be found.
Similarly, if the tenancy ends for reasons related to the tenant, (such as death, lease violations or evictions) I felt convinced that a court would order the full prepaid amount returned to the tenant. These funds had to stay untouched until the month they were applied to rent.
The more I thought about it the less difficult the process seemed. Convincing the owner was my only concern. I concluded if the owner insisted on taking control of the funds I was going to have to terminate our contract and inform the applicants they would be working directly with the owner. I also updated our company policy to state we do not prepay funds to owners. Payment will come when it is due.
The outcome with our owner? When the reasosn were clearly explained to her, she actually agreed and wanted to be certain the tenants and the Grandparents knew we were going to segregate the prepaid funds until the month due. They would not be touched by the owner or manager. It sure is great to work with owners who have this level of ethics!
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Tags: Indianapolis, Indianapolis Property Management, Indianapolis Property Manager, Property Manager, tenant issues, Wilmoth
