Higher Than Normal Rent Scam

by Mr. Cheap

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With scams the best defense is often to discuss them and let people who haven’t run into them know how they work. Unfortunately, talking about scams can seem like a “how to” for scam artists, which IS NOT my intention here. I always love reading about scams and cons, in part to protect myself, and in part out of amazement at how devious people can be when they’re trying to part us from our cash. Depending on the level of interest, I may occasionally post more scams I’ve encountered, what the person was trying to pull and what might have happened if someone fell for it.

Some people starting with real estate investing, buy into the guru hype and will run around trying to buy stuff as quickly as possible. One scam that preys on this group is what I call the “Higher Than Normal Rent Scam”.

How it works is you find a piece of property that’s already tenanted, and it seems to be a great price for the rent it commands (say it costs $200K and is earning a rent of $2500 / month). You plug the numbers into your “get-rich-quick fast-calculations (patent pending) calculator” and decide this is exactly what the guru ordered. Talking to the seller, he encourages you, saying he’s selling to buy bigger investments himself and that this one will make you tons of cash. There’s only 1 month left on the tenant’s lease, but “he’s going to stay forever” you’re assured.

Soon after closing, the tenant contacts you and reluctantly informs you that he’s been moved elsewhere and won’t be renewing his lease. You wish him the best of luck (plotting not to return his security deposit depending on which guru low life you’ve been listening to) and decide to raise the rent and make it even more cash-flow positive (“this is how the rich think” you say to yourself, patting your own back).

The next month no one is interested in renting your place for $2700 / month (even though it would help you be cash flow positive, the nerve of these tenants!). You reluctantly drop it down to $2500. Still no takers. Time goes on, and finally you manage to rent it out to a shifty looking guy who has “lost his ID” and promises to get you a first-and-last month deposit “real soon” if you let him move in now.

Depending on who you are you may be thinking:

1) Can’t wait until the new tenant pays me! I’m on the fast track!!! Someone who says this doesn’t know it yet, but they’ve got a long, hard life ahead of them.

2) I guess I’m not a entrepreneur yet, I better hire a mentor for $200 / hour. Maybe I can hire that nice man who sold me the place to show me how he was able to get so much rent!

3) I guess the market has changed, I’m so unlucky. I’d best tell everyone how the world is against me and nothing is my fault.

4) Real estate is for suckers, I’ll never rent a property again and will sell this one as cheap as possible as soon as possible.

5) I’ll look into what comparable units are renting for. Then when I’ve found out they’re renting for $1200 / month, I’ll set my rent according to the market rate and screen tenants carefully. Looking into comparable properties, it seems like I paid 50% more for the property than I should have. Since it seems very suspicious that someone would have happily been paying more than double the going rate (sadly there aren’t a whole lot of dumb, rich people running around), I may begin to wonder if the lease was set up to justify an expensive property value and sucker me into over paying. Perhaps the seller and the former tenants weren’t the perfect strangers they pretended to be.

It’s easy to read a scam over and say “how could anyone be so dumb as to fall for that”. Clearly scams exists because people DO fall for them. I came across this one here in lovely Toronto. New real estate buyers may skip the step of determining FOR THEMSELVES what market rates are for a property they’re considering buying, and trust that nice seller who was so friendly and split a beer with them.

If you’re reading this thinking “good idea, I should try that next time I’m selling!” you’re scum. Sadly, there are bad people in this world and you’re one of them.

What scams have you encountered or, if it’s not too painful to discuss, fallen for?

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{ 19 comments… read them below or add one }

1 FourPillars

I came across this one here in lovely Toronto.

Was that the one you bought?? :)

2 Mike-TWA

As an experienced real estate investor, I would never fall for that scam. I always insist on the seller buying me an entire beer. :)

3 telly

From my experience, buying a rental property with a current tenant is bad news. It’s always best to find (and screen) your own tenant.

4 Mr. Cheap

Mike: not the one I bought, this was another one I saw advertised (I saw what they guy was trying to pull pretty much immediately).

Mike-TWA:

telly: I’m always on the fence about that. When a building is advertised as “empty, you can screen your own tenants” I get nervous that there’s some problem why all the units are vacant. You’re right though, that when you buy a building with tenants, you accept the previous owner’s screening. Have you had many problems with existing tenants in the buildings you’ve bought?

5 telly

If you’re purchasing a multi-unit building then you’re absolutely right. It’d be unreasonable (and dangerous!) to think that you could rent them all out in short order, regardless of the vacancy rates.

When my husband bought his 2nd rental house, he was actually planning to live in it for 6-8 months while he did some renovations. He wasn’t planning to move into it for a few months though. His realtor happened to be co-workers (another realtor) of the previous owner and advised my husband to keep the tenant as it would be easier to evict him since my husband would be moving into the property. Big mistake (and a conflict of interest)!

The tenant was late with the few months rent he did pay, skipped out on the last months rent, decided he owned the fence and deck HE had put up and tore them down and somehow left more junk in the house than was there when he lived there! :( It was the absolute worst clean up you could imagine!

We were a little naive in the process but we learned a lot from the experience. If you purchase a property that is rented, be sure to get a copy of the lease (and re-write the lease at closing) with as much detail as possible so you’re not in for any big surprises when the tenant leaves.

6 FourPillars

Telly – when you buy a property can you evict the tenant even if you are not going to move in yourself?

Can you do a check on an existing tenant (ie screen them)?

7 telly

Mike, I don’t believe you can (either you or a family member has to be moving in as far as I know). In that case, it would be best to make the eviction of the tenant upon closing a condition of sale. I don’t know the legality of this but I believe it to be legal.

As for your 2nd question, I don’t really know but I would think you could (again, as a condition). Maybe someone else has had some experience with this?

8 Aaron Stroud

If youíre reading this thinking ďgood idea, I should try that next time Iím selling!Ē youíre scum. Sadly, there are bad people in this world and youíre one of them.

Great ending. While I’m sure it’s quite an unpleasant experience to go through, that story does a great job of pointing out the dangers of a victim mentality and viewing the rich as dishonest, greedy people. Basically, if you’re gullible enough to hold those views, you’ll probably fall for a lot of scams as well.

9 Mr. Cheap

Mike-TWA: I just realized I never filled out my response to you above. A whole bottle of beer to yourself! It left me speechless! ;-)

telly & Mike: Re: evictions. My understanding from my more knowledgeable friend is that its a lot easier to evict people than is commonly thought. I think if the tenant doesn’t have a lease (or are on a month-to-month lease) you can tell them to leave for any reason you want (as long as you give them proper notice).

Aaron: I’m with you. Its not a popular idea these day, but I think people should take responsibility for their actions (I’m a radical, I know :-) ).

10 Gates VP

From what I understand, this is par for the course in business rental units. Renters get a “cash advance” for their unit renovations and then pay “full price” for the actual rental to inflate income.

This one seems like another classic (with about 5 different red flags for “something’s not right here”).

11 Mike-TWA

On the eviction front, you purchase the property subject to existing leases. So, you can kick ‘em for the same reasons as the prior landlord–i.e. breach or expiration. If the tenant is month to month, you have to give 30 days notice, but any or no reason will do it.

The usual disclaimers for differences in laws of exotic Canadian places versus standard ole middle American, of course.

12 Aaron Stroud

“Aaron: Iím with you. Its not a popular idea these day, but I think people should take responsibility for their actions (Iím a radical, I know ).”

Whoa, Mr. Cheap could you please stand a little further away when you make statements like that! I don’t want to get hit with any flying stones!

Seriously though. The world would be a better place if (1) we took responsibility for our own actions and (2) if more people had the integrity to let others be responsible for their own actions.

13 fathersez

The primary ingredient that people who fall for scams seems to be greed. That they have found something that others have missed.

Like you said, the scam artists will keep on thinking of more and more ways to snag people. I don’t think we shall ever see the end of these guys.

We just have to keep educating ourselves and learn (more often than not the hard way) that opportunities too good to be true usually are.

(Incidentally, your particular example of the scam is new to me. Thanks for pointing it out.)

14 FourPillars

I guess the moral of the story is don’t be to eager to accept a great story with respect to financials.

Mike-TWA – Toronto is extremely exotic – almost tropical in fact – you should visit sometime.

Mike

15 Mr. Cheap

Mike & Mike: I was just thinking the other day that Toronto is getting TOO exotic!

For those who don’t visit, we have what the media calls “hula girls” that hang out on Yonge street in grass skirts and coconuts bras. They’re always forcing local fruits on passerbys. I’m getting fat from all the mangos, papayas and bananas I’ve been eating (and I just can’t say no to a woman in a coconut bra)…

Some of them even came out a couple years ago for the birthday of Ed Mirvish (a local businessman / celebrity who sadly passed away recently): http://www.citynews.ca/news/news_2143.aspx

Every time I hear the saying “It’s as Canadian as a hula girl” I think this isn’t the country *I* grew up in!

16 telly

Ha! We have such girls in Windsor, however they are generally 19 year old Americans shivering in their mini skirts and tank tops waiting in line at one of the bars downtown.

Sorry, no mangos or coconut bras that I’ve seen here. ;)

17 Four Pillars

19 year old Americans shivering in their mini skirts and tank tops

Mr. Cheap just got on the train to Windsor. :)

18 Mr. Cheap

I’m there! :-)

19 Mrs. Micah

New scam to me too! Not that I’m planing to do rental properties anyway…I don’t think I’m meant for real-estate stuff. But I shall remember to refer any friends in the biz to this piece. :)

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