Total insurance premiums in 2017 reached nearly $1.2 trillion dollars. Suffice it to say, Americans like to reduce risk when it comes to their financial investments. Homes, cars, and even lives can be insured. But as a landlord, other than your lease and an effective screening policy, there isn’t much to ensure your tenant will treat your property with respect and pay their rent on time. How can you shield yourself from unexpected vacancies and misbehaving tenants? A Lease Guarantor enables you to add an additional watch-dog to oversee your contract and to feel confident that the lease will be followed as expected.
What Is a Lease Guarantor?
A Lease Guarantor is an individual who agrees to fulfill the financial responsibility of a lease if the renter is not able to do it themselves.
A guarantor, also referred to as a sponsor or co-signer, vouches for the tenant in the event that they default. A guarantor could be any person who is willing to accept these financial obligations – a family member, a friend or even a business associate. A company securing housing for its employee can also act as a guarantor. For tenants who find it difficult to convince someone to be their sponsor, there are third-party companies available today that offer these services for a fee. Most commonly, you’ll see parents and guardians act as guarantors in situations in which the risk associated with a young renter is high (as in student housing).
Why Do You Need One?
There are a number of reasons you may choose to require a lease guarantor before renting to a specific tenant. Perhaps their income does not meet your required threshold, or they recently started a new job. Maybe they are a student with a limited credit history. Whatever the context, a guarantor should co-sign when you as a landlord do not have absolute confidence that your tenant will be able to pay their rent.
A guarantor acts as a safety net, providing a sense of security to both tenant and landlord moving forward. In this way, the mere presence of a guarantor on a lease can help foster trust between tenant and landlord and improve the relationship as a whole.
Other common reasons you may choose to require a guarantor include a low credit score, a limited rental history, a history of unemployment, or the renter may be a foreign resident that has come to the US for work or study. Your desire for a guarantor may also depend on your location. In some large cities, like New York for example, it’s common for landlords to require that renters make forty times their monthly rent amount, annually. With already high rents, that can quickly turn into a pretty restrictive number. In this type of market, a guarantor is often a necessity.
Adding a Guarantor Agreement
To officially add a guarantor to your rental contract, you’ll want a Guarantor Agreement. A Guarantor Agreement is a document that clearly states the responsibilities and obligations of the guarantor as they relate to the tenant and their lease. We recommend including contact information and a mailing address to which you as a landlord can send invoices for money owed, or any other necessary correspondence.
Typically, a Guarantor Agreement is appended to the end of a lease agreement as an addendum. If, for whatever reason, you need to add a guarantor to a lease that has already been signed, be sure to have all tenants sign the agreement as well as the guarantor. This will remove any ambiguity regarding the intent of the agreement.
Obligations of a Guarantor
The main obligation of a guarantor is to make rental payments if the tenant defaults. They might also be required to pay for any damages to the rental unit that exceed the amount covered by the security deposit. Damages are not always included in the Guarantor Agreement, so the extent of the obligation can vary from landlord to landlord.
Of course, in an ideal world, you will not ever have to call upon your tenant’s sponsor to fulfill their obligations. If non-payment of rent does occur, you as a landlord can send the bill to the guarantor directly. If you’re finding the guarantor difficult to work with, you can also rely on a collection agency. If the guarantor passes away before completing their obligation, the debts owed are bound to their estate.
Qualifying a Guarantor
As stated, the purpose of adding a guarantor to a lease is to offer additional assurance that a tenant will be able to fulfill their financial obligations. So of course, it’s critical that you ensure the guarantor is capable of fulfilling those obligations if called upon to do so. Just as you do with you tenants, you as a landlord should require a background check, credit check, and application from any guarantors. Set your rules and parameters for a guarantor just as you would for a potential renter.
Of note, some landlords require that the guarantor be located in the same state or city as the rental property. Today, it’s become easier to contact people across the country and transfer money, so it’s not as much a concern, but it is something to consider.
The Drawbacks of a Guarantor
You might think that there are no real drawbacks to requiring a guarantor for your renters, but there are a few:
- Extra Hassle and Expenses – Adding a guarantor means you have at least one additional person whose questions and inquiries you need to answer. You will also have to draw up more paperwork, perform additional credit checks, track more information, etc. All of this adds up to more time and typically more money.
- Uncertainty Still Exists – Nothing is certain in property management, and that goes for guarantors as well. Just as a good tenant can miss payments and turn into a nightmare, a guarantor can prove unable to fulfill their obligations.
- Limiting Your Tenant Pool – Your tenants may not always be able to find guarantors. If that’s the case, you’ll have to choose whether to risk it, or find another tenant.
Parental Sponsors for Students
Student housing in particular is a great fit for guarantor requirements and merits some extra attention. Students can be risky tenants. They have limited credit history if any at all. Few have a reliable source of income, and rarely can they meet typical income-to-rent requirements in their market. What’s more, they are not known for treating their housing with a great deal of respect. Guarantors can help ease the stress that comes with the uncertainty of collecting rent from student tenants.
If you do decide to require guarantors for your student renters, consider requiring it for all of them. Sure, one sponsor will conceivably get the job done, but it can cause confusion. Let’s say, for example, that John and Robert live together but only John’s dad signs on as a sponsor. If Robert drops out of school and moves out of town, you can of course require that John’s dad cover his rental obligation. But he might put up a fight, claiming that he was only guaranteeing his own son’s portion. He’d be wrong, but you’re better off avoiding the dispute by requiring that all parties find a guarantor.
If you feel that requiring a guarantor is not the best fit for you and your properties, there are a few ways you can still secure your rental lease agreement. Increasing the property’s security deposit is an easy yet effective way to create a safety net. Most states have limitations on security deposits, so be sure to check your state laws before making that change. Of course, if you’re concerned that the tenant will be unable to pay their rent, they likely aren’t able to pay a particularly large security deposit.
Instead, you could consider increasing the tenant’s rental amount. In a best-case scenario, the tenant won’t run into any issues and you will benefit by collecting additional funds. If you decide to go this route, be sure to draw up an official policy and keep it on file. In it, stipulate how and why you apply this rental increase. Otherwise, you’ll open yourself up to a potential housing discrimination lawsuit.
Finally, if you’re signing a lease with multiple renters, be sure to use the Joint and Several Liability Clause in your lease. This useful clause states that every tenant is responsible for the entirety of the lease, so if one renter fails in their obligation, you as a landlord can go after any of the others for the unpaid amount. In a way, this is like making each of your renters a guarantor for one another.
Deciding for Yourself
Ultimately, a guarantor is an incredibly useful tool for ensuring that your renters will be able to fulfill their obligations. But like all tools, it’s not a perfect fit for every situation. Be sure to weigh the pros and cons of requiring a guarantor on your leases. And if you decide to use it, make sure you’re doing so properly.
For more interesting articles on managing your properties, be sure to subscribe to our blog and Like us on Facebook. And don’t forget to share your thoughts in the comments!