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Real Estate Investment Software Blog

The idea that you can shake a tenant’s hand and mutually agree that “My word is my bond” has a romantic flare to it. But what works well in fiction can become a disaster in real life real estate investing, and there are a few things you should know about oral agreements before entering one.

Oral agreements are legal for month-to-month tenancies and, in most states, for leases up to a year.

For example, you just posted a For Rent sign in front of your six-unit rental property and to your surprise attracted a call from your brother stating that his daughter would like to rent the unit. Rather than mutually agreeing to the terms and conditions in a written rental agreement with your niece, however, you simply agree to a month-to-month tenancy for $600 per month over a cup of coffee.

Guess what? You just legally bound yourself to an agreement that allows your niece to move in and occupy one of your apartment units on a month-to-month basis for $600 per month.

The problem is that by creating an oral rental contract you also created an agreement that can sometimes lead to disputes. Regardless of our best intentions, memories have been known to fade as time passes. Haven’t we all forgotten the details of a shopping list just hours after it was recited to us. Of course!

Tenants have been known to forget the terms of a lease even when the terms are written down. How can you expect them to remember an oral agreement?

Moreover, if you wind up in court over monies owed such as rent or security deposits, there will be nothing to refer back to except an exchange of words and the proverbial “he said, she said” defensive argument. This is not a good way to manage your real estate investment.

If you are prone to oral agreements, however, there are certain things you should know:

1. When you give a tenant an oral lease exceeding one year, it will become an oral month-to-month agreement at the end of the first year.
2. With oral agreements, the amount of notice you give tenants regarding rental increases or terminations typically depends on the period of time between rent payments. For example, if you get paid monthly, you must give 30 days’ notice in most states.

It is best to check your state and local statutes regarding oral agreements. Not all states and local governments have laws about oral agreements, but it’s better to know before an agreement is made than after the fact.

On the other hand, written rental agreements and lease contracts are available at local stationery stores for purchase, or you can draw one up for yourself. Written agreements are not difficult to obtain, nor are they expensive. So why would you not use them?

It is far better for you to always put rental agreements in writing. Remain a prudent real estate investor and leave oral agreements to the novelists romanticizing characters in a book.