Some folks I know are still on the fence about the usefulness of the ETF (Early Termination Fee) for tenants who move out early/break the lease. The common theme I hear is, "They just leave anyway and never pay it."

Okay, granted...but consider this.

If you write your ETF into your lease, be sure to include language that if the land lord successfully evicts the tenant for a breach of lease (unpaid rent, other violation) or the tenant abandons the property the ETF is due just as if they'd have tried to do it the right way and buy out of the lease early. Makes sense: they have opted to terminate the lease early, but they just didn't do it the right way by paying.

How does that help?

You bill the deposit for the ETF first, before all other charges like unpaid rent, late fees, and damages. Always do this, whether they skip out at midnight, or whether you win a judgment for rent and damages. Then you can still COLLECT the judgment amount you won for that unpaid rent and damages, or if you have no judgment you can submit the full charges due to the collection agency without having to lower the amount because the deposit paid some of the unpaid rent, damages, and fees.

The ETF is a backstop to help limit your losses. As many of us know, collection often doesn't succeed, but when it does if you use a collector you may end up paying 50% or more of the amount collected. But, if you applied deposit to the ETF charge, that will leave you MORE to collect.

Doesn't hurt to have the ETF, and it only helps you when in a situation like these. I get paid more ETFs by willing tenants than I get midnight moveouts or evictions: that one little paragraph in my lease has been worth more than $10,000 to me over the past few years. Screening for quality tenants of course is the best ticket for success for tenancies that run their full course or with an ETFs paid, but the ETF truly can only help you. Give it a try!

Sid,

I gave up on ETF a long time ago. I do not have time to be chasing worthless deadbeats in court after they skip in the middle of the night.

Roy, you shouldn’t have leased to that hard to find, hard to collect individual.

Richard and Roy.... I heard what you're saying, but I think you missed what I said. Let's look at an example.

Tenant pays a deposit of $600. A few months into the lease, he pulls a midnight move-out, leaving $800 unpaid rent, $150 late fees, and $500 damages. Total owed: $1450.

Scenario A (no ETF): LL applies the deposit to the total owed and can collect $850.

Scenario B (EFT = $1000): Total owed becomes $2450 (add in the ETF). LL applies the deposit to the total owed and can collect $1850.

Why not have ETF in your lease? It costs 1 penny for the extra toner if you still do paper leases or it's 100% free if you use e-signature leases like I do. Even if you turn it over to collectors and few ever pay, that's still extra money in your pocket. It can't hurt: it can only help!

Sid is correct on this.

I have used an uncollectable ETF as leverage to get some unauthorized residents out without taking them to court. Consider this real life example:

Dear unauthorized scum bag, the person who was on the lease has moved out and in with her new BF. You were never on the lease but since you feel obligated to live here unauthorized - you have be assuming her lease and here balance owed. If you leave in the next 48 hours, I am willing to waive her ETF. If you elect not to leave, you will be discussing this matter with the judge with your check book in your hand. So you can leave with in the next 48 hours using your terms or will get booted out on my terms. The choice is strictly yours.

Sid,

Another thing, I have quit writing 1 Year Leases and I am doing mainly Month to Month now. 1 year leases tie my hands too much and with MTM I can boot out a PITA tenant with only a 30 day notice. Besides, an ETF is only as good as YOUR ABILITY to collect it and my time is more valuable to me than to be chasing deadbeats and trying to figure where they have moved too.

Roy , ask yourself, would I sign a one year lease with this applicant? If the answer is NO, you shouldn't rent to them AT ALL, even with M2M. Because whether its refusing to leave after 30 day notice or refusing to pay rent or whatever, you still have to goto court!

Roy, I want to challenge you to rethink your reasoning on using M2M. If you're still happy with it afterward, the by all means go forth.

You said you like the flexibility in case you have a PITA tenant. Okay, even with good screening, occasionally a cooperative tenant can become a PITA or a PITA can show up as an uninvited Guest. But what of it? I simply non-renew the lease. Now I have a end-date that I know Mr/Mrs PITA Tenant will be Ex-Mr/Mrs PITA Tenant.

They call too often? All calls go to voicemail. Maintenance requests must be in writing.

They tear up the house? Evict, like any other. M2M is no magic here.

Uninvited guest shows up? Unauthorized occupant is grounds for eviction. M2M again is no magic here.

Another thing. The few local LLs that I know who chase deadbeats after an eviction are M&P LLs who want to get some personal REVENGE on the tenant that just trashed their house. With garnishment or whatever, they want to make that ex-tenant's life as miserable as they possibly can,...even if they know they will never collect a penny. (This is a total waste of time). This is a situation where the LL has allowed himself to get 'too personally involved' with their tenants lives and when something bad happens, they only want to extract some revenge out that tenant and make his life as miserable as legally possible (sometimes illegally too).

My last attempt, Mr. Roy! They say money talks, so I'm going to let the money talk.

I just ran a report on my Quicken software to show me the money I got in collections since January 2021.

Year 2021:

Collections: $1861

ETF: $2275

YTD 2022:

Collections: $3811

ETF: $2000

"Collections" refers to unpaid rent, late fees, damages, and ETFs that were collected on my behalf by my Collection Agency. Zero effort on my part once I sent them the tenant's info and the balance owed.

"EFT" is only when the tenant deposited the money into my account.

$9,947 extra income in the past 18 months. I would not have that without ETFs, year leases, and using a collection agency. No desire for revenge here. I don't want to make people's lives miserable. I want to be paid what I'm owed. My collection agency is the most ethical I could find: they strictly follow the limitations set up by the Federal Fair Debt Collection Practices Act.

Would $10,000 additional income make you smile if you could do it with almost no added effort? It sure does me! Now I can afford to buy you a couple Coors next time we get together. *grins

Back in 1980, I rented a 4 bedroom home to a group of friends, all college graduates with jobs. In the 7th month they wanted out of the lease because they all got better jobs and could not afford living on their own.

They agreed to forfeit their deposit and forget about the reaming pro-rated rent already paid, around 10 days worth of rent.

I pulled out my note pad and memorized this agreement in writing, with a carbon copy. All of the tenants signed the agreement.

Also in the lease it had previsions for early termination. Like both parties have to mitigate damages and try to re-rent the home ASAP.

The x-tenants did not help me trying to find replacement tenants. They said that's why the let me have the balance of the rent money and keep the deposit to clean up the place.

Three months later I found myself in Small Claims Court. The tenants had not gotten their deposit and wanted it paid back in full.

I listened to their reasoning. "We moved out and never got our deposit back"! The judge did not want to listen to me. College graduates against a "Kid" 20 year old landlord.

I had to stop the judge in his tracks ready to rule against me. He said "who the H do I think I am"? I said I am the defendant and Owner of the property. So he listened.

The tenants did not just move away, they BROKE the lease. And in consideration for not helping me mitigate damages and re-rent the property, that allowed me to KEEP the deposit and prorated rent of 10 days. The tenants argued and did not agree with my summation.

So I presented the Fixed terms lease of 1 year with the singed agreement allowing me to keep the deposit because they were breaking the lease... I won the case.

Sid,

The differences between MTM and the 1 year lease is probably more psychological (for the tenant and the LL too) than anything else.

Without going deep into psychology issues here, my MTM tenants know their LL has them on a 'short leash' (no pun intended) and can boot them with a 30 day notice if they become a PITA. And this 30 notice works both ways too,...if the tenant realizes her new LL is a PITA/A-hole also, the tenant can terminate the agreement with the same 30 day notice. I explain this to all of my new tenants prior to signing my MTM.

The flip side of this coin is the 1 year lease where both LL and the tenant have it 'in their minds' they are legally bound to each other for 12 months, no matter what happens. Yes, LL can still evict for non-payment of rent but for everything else, the LL thinks he or she has to tolerate bad tenant behavior (not mowing the lawn) for at least 12 months. You realize you made a mistake in renting to this tenant and you feel like you are stuck with this lazy tenant for the duration of the lease which could be 11 more months!

Am I making any sense here? It makes perfect sense to me why a MTM is better for the LL than a 1 year lease.

Roy, it seems to me you ought to let the tenant keep the mindset about a lease, and you and your attorney take full advantage of it to your benefit.

My lease says they are in violation if:

1) 3 late payments , even if late fees paid

2) failure to follow city ordinance (means they get city ordinance tickets)

3) unauthorized guests

4) and so on!

My lease is similar to David's: I have a fairly extensive but reasonable list of violations that should nip every "PITA tenant behaviors." Define a PITA behavior, and I can show you how I manage it without a M2M lease.

Sid,

BTW, what percentage does your collection agency take for collecting whatever they can collect? Is it a 50/50 or 60/40 split? Just wondering.

50/50. So if I had done all the legwork myself, I supposed my totals would be higher. But how MUCH higher vs all the time I would've had to put in, and who can say if I would've had the same levels of success?

Sid,

Arguing with you makes me thirsty for my favorite beverage and if I continue with this banter I will probably be intoxicated before the day is over with. I do have a few more questions for you though.

1. What happens when a tenant does not pay your ETF? Do you sue them in small claims court? eg. Tenant is moving out after 6 months and just says 'you got my deposit and that is enough',..so have a great life.

2. A 50/50 split. I know you would never pay a property manager 50% to collect your monthly rents for you,...so why would you be willing to pay a collection agency 50% to collect your past-due rents for you??? Why not DIY and take all of the loot yourself? More money does seem to motivate you.

3. As you know, most 1 year leases automatically convert to MTM after the first year. Why not just skip the 1st year lease and just start everyone with a MTM agreement?,...DUH

That is enough for the time being.

My state allows an ETF of up to 2 months rent. That’s what most landlords build into their leases.

I don’t do that because someone with a month or two left will just leave but not return possession since they have to pay for the two months anyway.

So my ETF is equal to 1/2 a month’s rent and must be paid along with the final month they are staying for. I have never lost more than 1/2 month’s rent anyway so this helps cover my true cost.

Lisa,

The ETF is amazing!

I had one tenant exercise it in October 2021 because he decided my U was not for him. he paid and moved out.

I rented the home to a travel nurse for regular rent plus typical utilities ($950/month rather than the $1400 I usually charge) but it was rented as a vacant apartment with a HARD move out date.

I rented that same apartment via a virtual showing to a new guy who moved in mid-January. In Mid-March, he let me know the U was not for him, and that he had accepted a new job in a different place and was moving out at the end of the semester in May. His lease was until December 2022. He paid the ETF and moved out on May 31.

I now have a new tenant in there. She didn't want it until July 1, and because I had received the ETF I wasn't worried about June because it was an easy to rent. Rented it to someone on an internship at a local mental health clinic, who has a guaranteed position through May 2023.

If someone's remainder of the lease is less than the ETF , then it makes sense to make the ETF equal to the remainder of the lease

From my vantage point...there is NO downside to an ETF. Only up.

Have I collected a bunch? No, but a few.

Have I used waiving all or a potion of it as incentive to get the action I want?

Roy,

Because if someone is going to move, they are going to move. My goal is to be made whole, not to be punitive. Every tenant I’ve ever had who had to break a lease has bent over backwards to accommodate showings, kept the home spotless and do whatever it took to help me mitigate any potential loss.

I have never suffered in any way by someone breaking a lease and I get a small ETF as well. It typically works in my favor because it’s another opportunity to increase the rent sooner than expected.

I don’t typically do annual leases anymore now anyway, only month to month so there is no early termination involved there at all.

My state does not require me to mitigate damages but that would mean I also have to leave the place empty and try to collect from a tenant who has moved out of state or is experiencing a hardship. That would be dumb. So I simply rent to a new tenant and collect the ETF to help cover my efforts.

We have not had any trouble collecting ETFs. I believe it's a matter of posture.

Roy, people do post about tenants not abiding by the terms of their lease. Others reply so as to help them improve their screening. ETF collection is automatic with some tenants and impossible with other tenants.

Choose the right tenants.

Avoid the wrong tenants.

Hey S i d, in regard to our friend Roy, my special desk for banging my head is not being used this week, if you would like to use it for a few minutes. :)

Sisco,

Roy, I don't think its necessary get 100% of what one is owed. Let's say over 5 years, tenants pay 90% of ETF fees owed, before any collections. You are well ahead since usually ETF fees will well exceed the actual rent losses had the tenant not moved out.

Jeffrey,

Jeffrey, you almost made me spit my coffee out laughing at that offer to use your head-banging desk! Thanks for the offer (and the chuckles!).

Roy, in answer to your questions.

1. I already covered what I do when a tenant doesn't pay in my original post and in the example I gave (Scenario A and B) in my second post on this thread. You apply the deposit toward it after they move out, leaving you the balance of the ETF if the deposit wasn't enough to cover it, plus you can still go after ALL of the unpaid rent, fees, damages, etc. It may sound like I'm not gaining anything, but I abosolyly am. Look at the two Scenarios (A and B) above again and you'll see I come out $1000 ahead on the amount I can collect, which softens the blow for the 50% the collection agency takes. If I'd have no ETF, and they collect, I'd only get half of $850 ($425), but with the $1000 ETF, that's an EXTRA $500 after the 50% split... so I get $925 instead of $425.

2. Regarding the 50/50 split. This is basically the same discussion as why don't I do my own maintenance or mow my own yards. Collection is different from property management. I am skilled at property management and investing. I am not skilled at collecting. If I know where they are (work, bank, etc) I absolutely will collect on my own because I can quickly and easily file the garnishment or levy thru my attorney's office for about $50 and then I get the full amount due to me. They handle all the paperwork. Often, though, I need a skip trace service, which costs money to find them. Then they might not have a job or income, so I'm stuck. However, the collector reports them to the credit bureaus, which motivates them to pay years down the road when they do get a job or an inheritance or whatever. I cannot directly report to the credit bureau; you have to use a service such as a collector. Bottom line: I'm a real estate investor, not a collection agent. You know me: I hire out most jobs vs. DIY and that extra focus helps me work on growing my business rather than trying to do everything myself. Working on getting more stuff hired out even now!

3. Regarding year lease converting to M2M. I used to do that, but then realized that left me vulnerable. One of the biggest expenses LLs have are vacancies. Not that we should fear them, but we need to manage them to our best advantage. If a tenant decides they want to move at the end of October, it can be a much more difficult task to find a good tenant quickly that time of year. The reason is that most folks like stability around the holidays, plus who wants to move when its cold outside? More of an issue in my state than yours perhaps. Anyway, when you find good, cooperative tenants who have a stake in doing right by the LL, you want to keep them around with a year lease that renews annually and automatically, along with an automatic cost of living adjustment that can be revised any time I feel I want more or just left in place so I don't forget to renew and increase rents. And if said good and cooperative tenant wants to leave, they are more likely to pay the ETF since they have a vested interest in getting a good reference and avoiding a collection on their credit report.

Now, are you still thirsty? It's early here, but you know... I've never been one to judge a person who wants to crack open something refreshing, even at this early hour!

Roy, listen carefully. You do not have to be the only one who is right. Other landlords can do things their way and not your way and that does not make them wrong and you are still the only one who is right.

There are many ways to landlord and different laws in different states and different cultures in different cities.

I appreciate having you tell us how you do it and maybe someone will pick up some information from you that they can use, but no one has to agree that your way is the only way to do things.

Oregon,

I think you may have misunderstood me. I don't mind telling other LL's how I do things and I do try to give justifications for my ways of doing things, which is just based on my past experiences with ETF's. If you can collect them without breaking a sweat, by all means go for it. I always had problems trying to collect them.

My goal here is to share useful information with other LL's based my personal experiences with my Class C and D tenants and I DO NOT try to be or even attempt to be right all of the time. I apologize if that is the way you interpreted it.

If anyone is absolutely opposed an ETF, why not make it it optional for the tenant.

You know give them a choice of being on the hook for the rent up to the time the place fills back up, the market and advertising cost for that period. Around here, we get lots of Lake effect snow in the winter. It can be a bit more challenging to find someone who is qualified and wants to move in four feet of snow. If you told the person to just pay two months rent and they don't have to worry about unlimited risk.........investors might be surprised about the folks WANTING a ETF over the alternative.

Ray N PA,

Yesterday I rented out my last vacancy and based on the merits of Sid's post here, I decided to give my new tenants a choice between a 1-year lease (with an ETF clause) and a MTM agreement which has no ETF clause. They chose the 1 year lease option with the ETF clause and that is what I gave them. Now, have I turned over a new leaf here? Not at all. The true test here will happen if this couple decides to move out (or skip out) before the 1 year term expires.

Roy, tell me more about your tenants. How well did they screen? Are they cooperative? Do they have stable, garnisheable income? How'd the credit report look? Positive LL references?

Sid,

Since I accept Apps from Zillow, these folks did pay the $29.00 Zillow App fee and completed their app which was e-mailed to me. Their credit was average (nothing really bad but nothing really great either - this is Par). Husband has a stable decent paying job working as a welder but he has only had this job for 1 month now. Yes, he is garnishable. They were very cooperative, mainly because they were living in a motel at $60.00/day and were desperate to get out. Yes, this is a another red flag but all of my applicants have some red flags. I did talk with their previous LL who had nothing bad to say about them.

This couple though was not my first choice. The couple that I did the home inspection on,..they bailed on me! Better now than skipping out later on.

Ken,

Roy,

I feel for you if that’s the quality of tenants you attract. I wouldn’t rent to them just due to their lack of common sense. I mean it was so bad a hotel was a better option, and what next when they couldn’t find anything quickly?

If I had any inkling of considering these people I’d need more info, what did their landlord prior to the short term landlord have to say? Where were they before they moved to the area they didn’t like?

Are they from another state? I mean I can see making that mistake if you’re not familiar with the area so what is their excuse for making the bad decision to move to an area where they don’t feel comfortable in the first place?

Lisa,

Roy,

That makes sense.

S i d [MO] I have been considering an ETF in my leases, even though my leases convert to MTM of the first year.

Every year I make a lot of $$$ from ELT fees. I only rent to people with good credit who care about their credit and they are relieved to have an option in their lease that allows them to keep their good credit.

I market the ELT option by telling residents your 1-yr lease is flexible. You can move to Hawaii any time of the year by paying an Early Lease Termination Fee equal to 2 months rent. Then you're free to move whenever you choose and you keep a positive rental reference with no impact to your credit.

I have requirements to be approved for the ELT:

1) All rents are paid and balance due is $0

2) Proof of ELT funds provided prior to approval

3) Only then is an ELT Agreement provided for e-signing

4) ELT Fee must be paid 10 days prior to vacate date (to make sure funds clear)

5) Deposit is still refundable. I tell them if you do an amazing job cleaning your unit, you could cut the impact of that ELT fee in half by getting a full deposit refund.

Interesting topic guys!

I began using Early Lease Termination clauses in my leases a few years ago, and I’ve had two occasions now where tenants ended up utilizing the ELT. First time was during pandemic, both tenants lost their jobs and moved home to mommy/daddy. In their case they exited in December (lease ended in March), so I was short four months. They were good people and agreed to split the four months in half. Their deposit covered one month and they paid for all of December. I was out two months rent but I used the entire four months to work on fixing up the place and we had it sold my March. The ELT language sort of seemed to help in this scenario as the tenants realized they should at least cover two months rent (that’s the amount of the ELT).

The other time I had an ELT was when a long time good resident’s g/f got a job offer in Chicago. Their lease ended in July 31st this year, but I think it was March when they moved out. They agreed to cover April/May rent and the ELT covered June/July. We found a new tenant that wanted a July move in and we signed a 13 mo lease with her. During the vacancy we had the hard wood floors sanded. Previous tenant got most all his security deposit returned and things worked out very well all the way around.