Afford Anything - How to Talk To Your Tenants About Financial Difficulties

Episode Date: July 31, 2020

Welcome back to PSA Thursday, a mostly-weekly segment (sometimes on Thursdays) in which we talk about how to handle money, work, and life in the middle of a pandemic. This week, we continue the conversation on what landlords can do to create and maintain open lines of communication with tenants. Doing so can help you avoid a situation in which your tenants ghost you. If you find these tips helpful, head to https://affordanything.com/psalandlord to download word-for-word scripts you can use with your tenants. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to PSA Thursday, a sort of weekly-ish, but not always weekly, segment of the Afford Anything podcast that airs kind of on Thursday-ish, but sometimes on Friday. This is a bonus segment of the podcast that we rolled out in 2020 in order to specifically cover topics related to money, work, and life in the middle of a pandemic. These PSA Thursday episodes are stripped down bare-bones versions of the podcast. There's no intro music, no outro music. We keep it intentionally ad-free. The episodes are quite a bit shorter.

And the purpose of these episodes is to do what radio was originally intended to do, which is communicate with people in times of crisis. So these episodes are short to the point and meant to offer helpful, actionable information that relates to the special events of the pandemic. On the most recent PSA Thursday episode, we had an interview with Alisa Durana, a writer from Princeton University's eviction lab, which is a lab that is assembling, arguably the most robust, rigorous, trove of academic research about evictions anywhere in the United States. Now, in today's episode, we will follow up on that interview with specific actionable advice for landlords,

including word-for-word scripts that you can use when you are talking to your tenants, about potential financial difficulties that they may be facing. And we're going to break this down into three phases. What you can say to your tenants early on and in a proactive manner before any trouble begins, what you can say to your tenants during a time in which they're facing financial difficulties, and then how you can communicate with your tenants and what you can say to your tenants in an ongoing way. We also have a free giveaway with all of these word-for-word scripts that you can use,

You can print it out. You can keep it on your iPad. Refer back to it whenever you're talking to your tenants. You can download all of these scripts for free at afford anything.com slash PSA landlord. That's afford anything.com slash PSA landlord. Now, before we start with today's scripts, I want to address some of the commentary that we received from the last PSA Thursday episode. It seemed to be quite a polarizing episode. I met some people, including a woman who I met face to face,

who told me that she absolutely loved it. She thought it was a great, highly relevant discussion that came from an informed source. But we also heard from many people who took Umbrage with many of the guests' remarks. They say, and I certainly understand, that first, as landlords, we are not operating a charity. If a tenant can't pay,

then they need to replace that tenant with someone who can, just as if you couldn't pay your bill at a hotel. The hotel would not allow you to. to stay there. Providing free housing is the work of charities and not the work of landlords. They also say that many landlords have had pretty terrible experiences with some of their tenants. Sometimes they have a tenant who will ghost them, stop paying the rent and also stop communicating. If they get through to that tenant, the tenant might be aggressive or dismissive or profane and unwilling to work with the landlord or talk to the landlord in a professional capacity.

there are certainly many landlords who have gotten burned by their tenants, myself included. And my response to that is that that is why it is all the more important for landlords to learn how to try to proactively circumvent issues before they arise. Once the situation becomes bad, it's difficult to salvage. So what is it that we as landlords can do to the best of our ability, keep it from going bad to begin with because the shared interest that both landlords and tenants have in common is that neither of us wants to be in a position where eviction is even on the table. That's unpleasant for everybody, and unpleasant is a very understated term.

No landlord wants to have to evict their tenant. No tenant, of course, wants to get evicted. So what is it that we can do up front to try to prevent such issues from happening? That's the question that these PSA Thursdays, the most recent episode that we aired on July 16, 2020, as well as this episode that you're listening to right now, that's the question that these two episodes aim to answer. And so, to be able to answer that, I wanted to bring on the voice of someone who is grounded in research. I'm not going to bring on some Yahoo who has a bunch of unsubstantiated, unsupported opinions. I'm going to look at the Ivy League universities and ask myself,

which academic institution has the most robust research on the topic of evictions? And Princeton University, with its eviction lab, has rigorously studied the topic of evictions. Naturally, then, for the sake of getting research-based evidence-backed knowledge from the most preeminent eviction lab in the nation, that's going to offer insight that can help all of us as we form a more comprehensive, contextual, multifaceted view of this topic. And not everything that they say, not everything that our guest says will necessarily fuel your confirmation bias,

but that is all the more reason to hear it. There was one particular word that she used that triggered many people. She said that landlords often used the eviction process to extort money from tenants. Many people found that offensive because extortion indicates theft. It indicates obtaining something by force or through unfair means. When in fact many landlords are trying to get what's rightfully owed to them. A landlord and a tenant have an agreement. The landlord provides housing and upkeep and maintenance of that housing, and the tenant provides regular rent checks.

The landlord upheld their part of the agreement, and the tenant did not. And so I'm certainly sympathetic to that, and I certainly understand why specifically the word extort, which the previous guest used, was quite offensive to many people. my interpretation of what she meant, and of course I might be wrong, perhaps it's an overly generous interpretation, but contextually, my interpretation of what she meant when she said that was that she was referring to landlords who jump to litigation, landlords who do not try to communicate with the tenant, who do not try to work out an agreement, and who immediately jump directly, to the eviction process as an intimidation tactic. Similar to how in the business world, if you're a freelancer or a consultant, you may have

encountered clients, or maybe you have friends or colleagues who have encountered clients who the moment that there is any type of a dispute, the client immediately starts threatening litigation. And just as that is poor form in the world of business, it is similarly poor. form in the world of real estate. So that was my interpretation of what she meant by using that word, but if that interpretation is correct, which it may or may not be, then certainly it is still the case that she could have expressed that same idea with alternate vocabulary. Ultimately, the message that she kept coming back to, which is the same as the message that I keep emphasizing,

is build and maintain strong, good communication with your tenants. The better your relationship up front and the more that tenants know that they can come to you if something happens, if they lose their jobs, if they get a pay cut, if they're in financial distress, the more that tenants understand that they can come to you and you will be willing to work with them, the more comfortable they'll be. and the higher the likelihood that major downstream problems may be averted. So those are some remarks about our most recent PSA Thursday episode. Again, those remarks are in reference to the episode that aired on July 16th, 2020.

And as I mentioned at the beginning of today's episode, today, since we talk so much about communication, let's go over some of the scripts that you can use, the words that you can say, when you are communicating with your tenants to let them know that you understand we're in the middle of a pandemic, you understand that there is record high unemployment, you understand that everything, especially in the year 2020, is a giant catastrophe. What are the scripts you can use? What are the words that you can say in order to communicate with your tenant in order to reduce the probability that they might end up ghosting you?

Because that is by far the situation that you want to avoid. So here are some suggested scripts. As I said earlier, this is going to be broken down into three phases. One is early and proactive. The second is during and the third is ongoing or after. So let's start with early proactive communication. Things that you can say to your tenants right now, today, before any trouble begins. And so for this early communication, you can send them a text or an email that says,

hey, I know this is a tough time for everyone. I know that there's a pandemic going on and the economy is tanking, and I want you to feel secure in this home. So if anything happens, or if you stumble across any financial troubles, please reach out. I'm open to talking about any financial and life challenges and working together with you to find the solution. So again, just to reiterate, feel for.

free to reach out at any time. I want to make sure our lines of communication are open. So that is an example of the type of text or the type of email that you can send to your tenants. And by the way, just FYI, I'm not quoting this verbat. Like I said, we have a free download available at afford anything.com slash PSA landlord. I am not quoting this verbatim from the handout. I'm simply reviewing in my own words and in broad strokes what that early text or that early email will say. So the example that I just outlined is slightly more formal. If the wording that I just used feels too formal and you want to communicate with your tenants in a more casual, informal sort of way, a text or an email that you can send them right now

could simply say, hey, I just want to let you know the last thing in the world that I would ever want is for you to dry for Uber with a cough for the sake of paying rent. So if you hit any financial troubles, please reach out to me and we will figure something out together. Please don't risk your health and don't risk public health. And that is almost verbatim exactly the text that I sent to my tenants. I sent that text back in March when the pandemic began. And the inspiration for that text, quite honestly, was a news article that I read in which someone was actually driving for Uber with a cough.

And when interviewed about it, he told the reporter, well, I got to pay rent. And when I read that, I was horrified and immediately sent that text to my tenants saying, hey, please, please, do not drive for Uber with a cough. I used that example specifically. And then broadened it out to say, look, if you get into any financial troubles, please reach out to me. Let me know we will figure this out. But please don't risk your health. Don't risk public health.

Just come to me. We'll work it out. All right. So those two examples that I just cited, the more formal version and the more informal version, those are examples of what you can say to your tenants right now, proactively, before any financial difficulties begin, if they do so. Now, essentially, if your tenant takes you up on the offer, what happens if your tenant comes to you and says, hey, I am having financial trouble?

What can you say? Well, we have a precise script for this, precise wording, in our, free giveaway at afford anything.com slash PSA landlord. Broadly speaking, what that script says is the following. Hey, first and foremost, thank you for telling me because the most important thing is that we are communicating. So I'm very, very happy that you reached out. Thank you for reaching out. And after that, you list some possible solutions. So if the tenant's issue is that the tenant is waiting for unemployment, and the tenant will be fine once they receive their unemployment checks, but they're still waiting for those unemployment checks to arrive. Well, then one potential

solution for that is that you defer all rent payments until it arrives. And just tell the tenant, hey, I totally get it. Unemployment can be slow, so don't worry about paying rent until it arrives, I will waive any late fees, and once your unemployment checks arrive, your rent payments are deferred until they get here. If your tenant's issue is not that they are waiting for unemployment, but rather that they're continuing to work but their hours have been reduced or their income has been reduced, then there are a couple of different options at your disposal. One potential solution is that you could offer to reduce the rental rate. So for example, you may charge only 80% of the previous rental rate. Or you could reduce the rental rate by waiving one month of rent.

If you do choose to reduce the rental rate, there are a couple of different approaches. You can either reduce it for the remainder of the lease, or you can give your tenant a more dramatic reduction of the rental rate for a limited number of months. Or you could even, if you have a high degree of trust in your tenant, tell them that you will reduce their rental rate until their hours come back or until their income comes back to what it previously was and signal your trust in them by telling them, hey, you're on the honor code for this, and I'd like you to text me an update once a week. The other potential thing, a potential option at your disposal, if your tenant comes to you and says, hey, my hours have been reduced or my

income has been reduced, and I typically never, ever recommend this, but there's a pandemic going on. So for this year, I will make an exception. You could offer essentially what would amount to an exchange, such as they paint the inside of their unit, and you compensate them for that work. I normally never, ever, ever, ever, ever, ever, ever recommend that because it is so easy for that to lead into its own set of problems. But again, there's a pandemic going on, The situation that we're in is unprecedented. And in any year other than 2020, I would not advise that, but this is a special situation. Now, if you were to offer some type of, quote, unquote, exchange like that, don't actually

make it a trade. Make it a straight-up 1099 payment. So you essentially would employ them as a contractor. You would pay them as a 1099 contractor, independent contractor, and then they would turn around and send you that money right back as the rent. So if your tenant comes to you and says, hey, my hours have been reduced, my income has been reduced, those are three options at your disposal.

You could reduce the rental rate, you could waive the rent for a month, or you could essentially hire them as a 1099 contractor to work on their own property. Now, what do you do if a tenant comes to you and says, hey, my hours or my income has been drastically reduced and I don't qualify for unemployment, Or I lost my business, or I'm too sick to work, or I'm caretaking for a family member and it's

cutting into my income. If a tenant comes to you with an issue like that where their life situation has dramatically changed, the first question to ask them back is, hey, is this a temporary situation or a permanent situation? If it's a temporary situation, one potential avenue that you could explore is that you could offer to waive the rent for two to three months if they renew their lease for another year. And that would form a win-win insofar as you know it's a temporary situation. You get the benefit of them renewing their lease for another year, which means you don't have

to deal with a turnover. You don't have to deal with the potential vacancy that arises as a result of a turnover. You get that lease extension. And in exchange, they get a break from rent for two or three months. So that's one possible avenue to explore if the situation that they're in is drastic yet temporary. Another potential avenue that you could explore is that you could reduce the rent drastically for a short period of time, such as four to six months, and then you could add back in a reduced portion of that rent for the remainder of the lease term. So for example, let's say that the rent is $1,000 a month and that there are 10 months left on the lease term. So in theory, you're owed a total of $10,000 for the remainder of the lease term.

You could say, hey, I get that you are in a drastically different situation, so I'll tell you what. For the next four months, I will only charge you $200 per month. And for the remaining six months, your rent will be $1,200 per month. And so at the end of that 10-month period, you will have collected a total of $8,000, which means you will have literally 80-20ed it. You're collecting 80% of the total amount that you are owed over the duration of the remaining lease term. But instead of styling it as a 20% rent reduction across the next 10 months, it's instead an 80% reduction up front coupled with a 20% increase at the back end. That type of scenario would be fitting for a situation in which a tenant has a drastic

but temporary situation. And so as I'm going through these potential examples, you can see how depending on the source of the tenant's financial distress, the potential solutions are different. If the tenant is simply waiting for their unemployment check to arrive and it's purely a cash flow matter. And once their unemployment check arrives, then their budget will be exactly what it was before, then great. That's perhaps one of the easiest situations to deal with, because then you can just defer rent payments until their unemployment check arrives. But if the tenant is dealing with a situation in which their income has been reduced, well, then the question becomes, by how much and for how long, and the potential solutions will stem from those answers.

That's why communication with your tenant is so important, because there are a lot of different ways to address and negotiate and work with a tenant who is having financial distress. But the fitting solution is going to have to be a custom fit to the problem. And you're never going to know what that problem is if the tenant doesn't tell you. That's why proactively it's so important to reach out to your tenants and say, hey, if you have any problems, please come to me, please let me know. We will figure it out. Based on what your situation is, we will work out a custom solution that is tailored to that. We've talked about a number of potential solutions. Let's talk about the permanence situation where your tenant's income has been drastically reduced and there is no

reasonable hope that it's going to get back on board. You could always offer to let them out of the lease without penalty and say, hey, you know what? I know our lease stipulates that if you break this lease early, there's an early termination fee and there are mandatory moving. out fees and cleaning fees, but I'll tell you what. I get that you're in a tough situation. If you want to terminate the lease by Friday or by next Friday, then I will let you out of the lease with no penalty. I will waive the early termination fee. I'll even waive the move out fee and the cleaning fee as long as you move out by Friday and you leave the place in spotless, excellent condition. If you do that, then we're good. So that is another potential solution.

if your tenant has a circumstance that makes them permanently unable to continue paying rent in your dwelling. Now, we've gone through examples of the type of communication that you can share with a tenant early on, and we've gone through the examples of the type of communication that you can share with a tenant after they come to you to report financial distress. So now let's talk about what to do after the financial distress. conversation, what ongoing communication should you have? Well, no matter what custom solution you work out with your tenant, make it clear that that solution is conditional on the two of you having frequent communication. So let them know that you are willing to be very flexible and you are willing

to work with them. But the condition of all of that is that they keep in frequent communication. So, For example, maybe they have to text you every Monday with an update on their situation and update on their unemployment checks and update on their furlough and update on their situation once a week. You know, that might be the condition that you ask of them so that you can feel more comfortable with the negotiated terms. And then once you work out, A, the expectation that communication is frequent, and B, a specific schedule, a specific set of expectations for how often you expect to hear from them, i.e., I expect you to text me every Monday. It doesn't have to be an elaborate text, but just please send me a text every Monday. Once you specify how often you want to hear from them and what you want to be updated on, then that becomes the ongoing conversation that you have. That is an outline of the

type of communication that you can have with your tenant proactively before any troubles arise during the midst of those troubles and then ongoing as those troubles and as the negotiated agreement is managed in an ongoing way. Again, during this recording, I used my own words to describe the type of communication that you could have with your tenant. But if you would like specific word-for-word scripts that you can copy and paste if you would like to, you can access that for free at afford anything.com slash PSA landlord. That is our episode for today. Thank you so much for tuning in. If you have thoughts on this episode, please share it with other people in the Afford- Anything community. We have a very vibrant community that you can find at affordanithing.com

slash community, where you can talk not only about real estate rental properties tenants, but about any topic, ranging from debt payoff to early retirement to index fund investing. We have a book club that recently started there. We have many people in our community who get on Zoom calls to connect with one another. So there's a thriving community that you can tap into for free at afford anything.com slash community. Thanks so much for tuning in. This is the Afford Anything podcast.

you're listening to PSA Thursday, which, as a reminder, comes out meh, Thursday-ish, but sometimes Friday, and also comes out not weekly, but every kind of weekly-ish. Thank you for tuning in. Thank you for being part of this community, and I will catch you in the next episode.