When evaluating a property with existing tenants, what are the questions you need to ask?
I've been told by the listing agent these tenants are there month-to-month. Not sure how long, cumulatively, they've been at the property.
They are paying far below market rents - if this offer was to be accepted I would raise rents immediately.
I've read about the estoppel agreement, is that something you look to get signed prior to close, or is your offer subject to tenants signing the estoppel agreement?
I don't want to make a mistake in making an offer and not having the full picture with regards to current tenants.
@Courtney M. I have purchased all of my apartment buildings with existing tenants in place, and I have had a mostly good experience. My first four unit in Lyons, IL had 4 tenants paying under market rent. I have gradually raised them to market over the last three years, and they are all excellent paying tenants who have never missed a rental payment! I was a novice when I bought the property so I did nothing in the way of screening (estoppel, etc). I have since purchased a nine unit and a 20 unit apartment building. I have had evictions at both properties of existing tenants, but have also inherited a lot of tenants who are paying. I retain the good and move on from the bad.
In your position, the first thing I would do is try to meet the tenants. You can gain a good sense for how they will be to work with if you knock on the door and talk to them. Is their unit clean? Do you smell smoke? Are they friendly?
I would also do estoppel certificates if you can, although a lot of residential agents will have no idea what you are talking about. There are very few of us agents who are in apartment space as well, so estoppel certificates are a bit of an anomaly. At minimum, you should have leases that detail security deposits and rents so that there are no misunderstands.
Request current leases. You should be able to obtain a copy so you can review to see exactly what options tenants have and what you may or may not be able to do.
I purchased a 4-plex. Two of four tenants were not paying rent. One was slow and behind. One was paying.
I still have the paying tenant. I evicted two the first business day after close. The one that was behind caught up, and move about a year after.
@John Warren , this is a property I'm looking at buying out of state, so no option to meet the tenants, unfortunately.
@Shawn M., are you requesting leases after an offer has been accepted?
@Eric D. , I assume you had consulted with a lawyer prior to starting the eviction process, or were you already familiar with it in your market?
Get the lease, make sure they’re currrnt, ask the owner how they’ve been so far. Make sure you get the pro rated rent and deposit at closing, not after
@Courtney M. You mentioned you can’t meet the tenants because the property is out of state. Are you not planning to visit the area/property in-person before you purchase it? If so you can meet the tenants at that time. If not then you should have your property management company that will be overseeing the property meet the tenants on your behalf since they are experienced in dealing with and vetting tenants.
Hey @Brian Garrett - good tip. I'm probably not putting in an offer on this particular property - it's a new market for me and the realtor didn't have a PM rec. But I'd want to get that in place beforehand for sure.
Yes @Courtney M. but it may depend on your states real estate practices. I would think lease would be full disclosed during attorney review process, thats how it is in NJ.
Originally posted by @Courtney M. :
@Eric D., I assume you had consulted with a lawyer prior to starting the eviction process, or were you already familiar with it in your market?
Yes, I did not have too many rentals at that time, but I did the eviction myself. They are really not too difficult. Make sure the tenant is given time to correct, and served properly. In MN, we do not even have to give a cure or quit ultimatum.
I have another question with regards to information disclosed prior to making an offer. A few of you had mentioned leases, etc. Is this the information you're gathering after an offer has been accepted? I'm just trying to get a feel of what information you gather before the offer phase, and what you're getting in the option phase.
@Courtney M. as soon as you put the property under contract ask for the leases. There is typically some sort of due diligence period in contracts. In Illinois, we have an "attorney review" period where the attorneys can request and get all of these due diligence times. I typically ask for leases, 12 months of bills for water, sewer, trash, electric, gas, and insurance, and in some cases I have even asked for bank statements (not likely to get these on small multi). Keep in mind that the smaller the operator, the less info they are likely to have on hand. If you are buying a duplex you won't receive a P & L statement.
In 2000 we bought a 9 plex that was rented below market. Asking was $167,000. Our offer was also below market. We paid $106,000 and the seller did a 20% carry back. No Money down and walked out with $6.000 cash at closing.
Existing rents ranged from $260 to $285. Raised the rents to $300 across the board and lost 2 of 9. rehabbed those units and offered them at $900 to move in which included first, last and deposit. Could not give them away.
Lowered the move in to $750 but raised the rent to $400.00 a month. Applicants lined up and threw money at us because the move in was less than 2 months rent. Figure out your market.
What are you wanting an estoppel agreement for? As a claims adjuster we got them to cover liability. Since you not yet the owner the tenants would not sign anything. Once you own it you are subject to the existing terms and rental conditions in place until you have a proper demand sent to your tenants. Again the tenants would have no need or desire to sign your estoppel agreement. However, if you clarify WHY you want one we may be able to give you a better answer.
Thanks @John Warren !