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Importance of an Exclusive Leasing Agreement

Greetings Real Estate Investors!

Most people know the importance of getting a signed listing agreement when they are selling a property but many may not understand the importance of a leasing agreement.  If you have several investment properties you have probably used the same broker to lease out your properties and may even have a handshake agreement with regard to commission.  This is generally ok if you are a seasoned investor and completely understand the leasing process, but even in those cases there can be exceptions that can ruin a relationship if terms are not put in writing.  If you are new to owning an investment property it is even more important so that you understand all of your rights and the services you should be receiving from your broker.  So lets go through a few of the key aspects of the leasing contract.

#1 The Money!

Of course you are not doing this for fun, you want to make income from your property.  So the terms of the lease that you would like to receive are clearly stated including the total money up front which typically includes first month, last month and a security deposit which should equal one month’s rent.  But there is also the importance of stating how much you will pay the leasing broker and any cooperating broker.  Standard is one month’s rent, split 50/50 between the listing and tenant’s brokers and typically if the listing broker finds the tenant they will take the full month’s rent.  What you may not know is that you should also require a pet deposit if you are going to allow pets in the property.  You should also require a tenant screening that is paid for by the tenant.  We will go into details below on both of these.

#2 Time Frame and Cancellation at Any Time

Most properties should rent out within 1-3 months if priced correctly.  Whereas many listing contracts allow for 6 months to a year to sell a property, your contract should only allow 3 months prior to termination.  More importantly than that you should be able to cancel your contract with the broker at any time with no penalty.  Unless you are renting a million dollar property there should really be no need for additional advertisement of your property beyond placing it on the MLS and putting a sign in the yard.  These activities require no major monetary investment for your broker and are considered part of the cost of doing business so there is no reason that your broker should require any payment if they are unable to rent your property. 

#3 Pets?

We have writing in the past about the value of allowing pets in your property, but this is also subject to specific characteristics of the property.  If your property has pristine wood floors you may now want to allow large dogs because they will scratch up the floors.  For whatever reason most contracts have a stipulation for pets under 20 lbs. which may be a good consideration for you if you have a delicate property.  Either way make sure you get a pet deposit if you do plan to allow pets.  That way if any damage does occur you will have additional funds to cover it.

#4 Tenant Screening

Being a property management company we have seen all manner of disasters caused by tenants who were allowed to lease a property without a proper background screening.  Make no mistake about it this is the real world and there are thieves, drug dealers and even murderers out there that are looking for a place to live.  Don’t let them live in your property and cause you countless headaches.  Even if a prospective tenant does not have a criminal record they may have major issues in their credit report that you should be aware of before you rent your property to them.  Any listing agreement that doesn’t include a requirement for a credit check in addition to a criminal background check is selling you short.

#5 Every Occupant Should be Screened Even Children

Ok so we’re kidding about the kids, but any adult occupant must be screened.  Many brokers will only tell you to screen the main occupant which is a big mistake because most of the time the ones with the biggest problems are the ones that don’t want to be on the lease.  This has the additional incredibly important benefit of ensuring exactly how many people will occupy the property.

So as you can see there are several important considerations to take into account that an exclusive contract does for you.  If you want to run your residential investments like a business it is essential that you get an exclusive contract to list.  If you want additional information about this or any other questions you have about property management or residential investment please contact us at 305-517-3900.

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