Inheriting tenants

Buying & Selling Real Estate
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Inheriting tenants

Andy Perez
Bronx, NY · Member since 2015 · 33 posts · 6 votes
I am about to close on a 4 plex (multi family) is that has paying tenants, however I feel that there is a lot of secrecy and things I am not being told about the tenants in the home. According to the listing agent and the owner, the tenets are up to date and paying each month. However, none of the occupants know that the house is being sold. In addition, I asked about security deposits and the owner tells me that most of the tenants used it up when they fell behind on rent, but told me that they have always paid on time. Didn't make sense. This is a great deal, so I still want to buy it regardless of the red flags with the tenants. So, the question is... How hard will it be to get rid of the occupants once I get possession of the property? I live in New York, this will be my first home using FHA 3.5% down and the property is a short sale. Any advice will be helpful.
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y

Security Deposits.  Before escrow closes, you want to make absolutely sure of the amounts of the security deposits that the current tenants has on deposit with the seller. And after you’re sure of what they are, you want to make sure that everybody else—the seller, the escrow company, and the tenants—all agree with you on what these amounts are. You don’t want to think that Tenant Tom’s security deposit with the seller was $600, while Seller Sally thinks it’s $400, while Tenant Tom himself thinks it’s $1,000!

I actually ran into this problem on my FHA owner-occupied fourplex, and I didn't catch the error until after escrow had closed. I had only been credited for $1,000 in security deposits through escrow, while upon review of the lease agreements and discussion with the tenants, the security deposit amounts were actually $3,000! Thankfully, I was able to work with the seller and her agent to collect the additional monies shortly after escrow had closed.

Getting the Tenants Out.  With respect to getting the tenants out, let's start with this: do you know if they're currently month-to-month or in the middle of year-long leases?  If the latter, when do their leases end?  I ask because, in general, you inherit the existing leases.  Also, are you buying a property that's under rent control?

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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    Security Deposits.  Before escrow closes, you want to make absolutely sure of the amounts of the security deposits that the current tenants has on deposit with the seller. And after you’re sure of what they are, you want to make sure that everybody else—the seller, the escrow company, and the tenants—all agree with you on what these amounts are. You don’t want to think that Tenant Tom’s security deposit with the seller was $600, while Seller Sally thinks it’s $400, while Tenant Tom himself thinks it’s $1,000!

    I actually ran into this problem on my FHA owner-occupied fourplex, and I didn't catch the error until after escrow had closed. I had only been credited for $1,000 in security deposits through escrow, while upon review of the lease agreements and discussion with the tenants, the security deposit amounts were actually $3,000! Thankfully, I was able to work with the seller and her agent to collect the additional monies shortly after escrow had closed.

    Getting the Tenants Out.  With respect to getting the tenants out, let's start with this: do you know if they're currently month-to-month or in the middle of year-long leases?  If the latter, when do their leases end?  I ask because, in general, you inherit the existing leases.  Also, are you buying a property that's under rent control?

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  • Scott Weaner
    Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes
    10y

    I would want proof that there is no security deposit, or less than there is supposed to be. If that is the case, I guess the tenants would have to pay another deposit. Could be tricky.

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  • Newton Hinds
    Real Estate Broker · New York, NY · Member since 2015 · 11 posts · 2 votes
    10y

    Leases - Due Diligence 

    Hi Andy,

    First of all, congratulations on your deal. I am also a New York area investor, with experience in multi-family asset management and buyouts. 

    If you haven't already, be sure to visually confirm that the existing leases are in no way stabilized. If they are, the only means by which you would be able to have your tenants move is if they would willingly agree to, typically through some buyout.  

    If you are only told that leases aren't stabilized, and even if current lease copies appear as being open market leases, still confirm the status with DHCR. Renewal leases can actually appear to be different than the way that original stabilized leases appear, and still be protected. 

    There are also several other factors to consider with respects to multifamily due diligence where one has legacy tenants. If you would like assistance with this portion of the due diligence process or with a comprehensive title search, feel free to reach out to me. 

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  • Andy Perez
    OP
    Bronx, NY · Member since 2015 · 33 posts · 6 votes
    10y
    Logan I appreciate your comments and advise. The property is not rent controlled and the contract I sided with my attorney states that none of the tenants have security deposits so I will not be receiving any securities. When I asked my attorney about this, he said that because the contract states no security deposits I should not worry. However, I still feel that these may be problem tenants and I rather screen my own. In addition, according to the owner they are all on a month to month. None have leases.
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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    Sounds good.  If you feel these are problem tenants, then by all means do what you need to do.  My advice, though, would be patience.  Don't rush into kicking out all the tenants at once.  What if you can't fill any units?  You're stuck with a monthly payment on a small apartment with no tenants.  It may be a better idea to advertise the units early on, getting a feel for the market and how easy it is to fill vacancies, before being dead set on any single course of action regarding getting the tenants out.  Let us know how it goes.

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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    10y

    Be careful. The worst experiences I have had in owning rentals was with inherited tenants. In one case I saw red flags and thought worse case I have to evict. Wrong. I didnt actually have to evict, but she left $5K in damages to the place. So be very careful. If something smells bad with the tenants investigate fully. Get rent rolls. Ask to see proof of deposited checks for the last year. 

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  • Andy Perez
    OP
    Bronx, NY · Member since 2015 · 33 posts · 6 votes
    10y
    Thank you guys for the advise, but let me ask... Is it easier for a landlord who owns the building to evict tenants or a new owner. Is it just has hard for both. I would assume it's easier for me as a new owner to get rid of them if I don't collect rent from them from the start.
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  • Douglas Snook
    Attorney · Attleboro, MA · Member since 2015 · 412 posts · 165 votes
    10y

    Andy, since you are about to close, I think it is too late to get the soon to be former owner to evict. 

    The day you close be sure to send them all notice you are the new owner and where to send their rent (you may want to mention the amount you were told they are paying) who to contact for emergencies etc.

    Since you are being told there are no leases, find out how to terminate an at will tenancy and do that while offering them a new tenancy AFTER they complete an application and sign a lease, pay a deposit etc. (if thats they way you want to go) You may want to wait a month or two to see if they voluntarily start paying

    And be sure to get it in writing, sign by the Seller that there are no deposits or leases and let him know that if one of the tenants claims otherwise, you will sue him

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    10y

    @Andy Perez

    The current owners problem tenant might not be that much of a problem when you close escrow. 

    I took over a duplex that was a problem for the previous owner.  Ran the owner into the ground.  When I closed escrow and took over I built rapport with the tenants and everything turned out fine.  Some owners/manager are not good with relationships.


    Frank

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Require an Certificate of Estoppel from every tenant before COE and as a condition.

    The Estoppel is a means to verify that the seller & tenants are on the same page as to:

    • written or oral promises
    • ownership of the contents of each unit
    • the deposits paid

    If the deposits were consumed by the seller in-lieu of rents, that's total mismanagement - - but water over the dam now.  Does the tenant and seller agree on that accounting?

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  • Graham MinkPro Member
    Rental Property Investor · Stowe, VT · Member since 2013 · 102 posts · 27 votes
    10y
    Andy Perez This smells like a bad deal. The only thing worse than no tenant is a bad tenant. An estoppel certificate is an absolute must if you are buying a property and carrying over a tenant. However, if I were in your situation I would ask the current owner to remove all of the current tenants and delay closing until they did. Where I come from evictions are costly and time consuming. Having to evict multiple tenants at once would be a nightmare. Also, one thing that always goes unmentioned with evictions is the enormous amount of negative energy that you are bombarded with. YOU are the bad guy(gal), YOU are cold, YOU are a greedy jerk, etc etc. Although this couldn't be further from the truth you still need to deal with that pit in your stomach for months until the evictions are final. It sucks. Do you have an extra $20k to carry the property, pay for attorney's fees and repair the units if you need to evict after closing? Have you taken these expenses into account in your calculations? Is the property still a good deal when you do? This smells like trouble to me, I would be careful.
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  • Christopher Lombardi
    Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes
    10y

    I would get an Estopple Letter from each tenant.  The estopple letter would allow you to find out from the tenant where his deposit is and for how much.  You don't want to close on the property and find out later that not only did the seller take the security money, but your tenants aren't paying rent and you have to actually return money to them that is long gone.  

    How difficult it will be to evict the tenants depends on the jurisdiction, but I understand NY is a very tenant friendly jurisdiction. 

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    I agree with the last post. Either I get sign-off from each tenant that security deposits have already been forfeited or I assume that I will have to make up security deposit from every tenant as per original lease figures, and factor my purchase offer accordingly. 

    Just another reason why I want a clean building/house with no tenants. 

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  • Andy Perez
    OP
    Bronx, NY · Member since 2015 · 33 posts · 6 votes
    10y

    it Looks like I will be asking for the estoppel. I am guessing is something I can ask the attorney for. 

    By the way the deal is a good one which is why I would be willing to take on this challenge. I was able to meet 3 of The tenants and they seem to be very nice but because I have Hurd horrible stories about inherited tenenets I am probably over thing this. I know for a fact one of the tenants is a problem because they gave us a really hard time during the appraisal.

    I figured that once I have the property I can ask for the apartment for me to live in. If they don't leave I guess a judge would be willing to side with me because I would have just bought a house that I want to live in. 

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  • Account Closed
    Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    This might sound like a stupid question but have you inspected the property?  You mentioned that none of the tenants know the property is being sold.  You also mentioned all of the deposits have been used up, and none of the tenants have been late.

    If you have not inspected EVERY unit I would expect more damage than the deposits would cover.

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  • Curtis BidwellPro Member
    Rental Property Investor · Olympia, WA · Member since 2014 · 777 posts · 744 votes
    10y

    @Andy Perez.  Congrats! I just signed on a 10 unit myself Wednesday.  9 units occupied and they are all excited to get a landlord who cares!  I will not be asking anyone to leave, (though some may choose to when they get their new contracts in January).  I will hold off making any changes for December, but will require new contracts with new rent rates for the new year. The new contract makes them "my" tenant as I always go over the contract in detail with each tenant. They either agree or give notice to leave, and I graciously give them that option! 

     I will be making upgrades for safety and comfort, and they will begin to see changes starting right away.  That will give me leverage to start bring rents up to market.

    Good luck! 

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  • Andy Perez
    OP
    Bronx, NY · Member since 2015 · 33 posts · 6 votes
    10y
    Originally posted by @Account Closed:

    This might sound like a stupid question but have you inspected the property?  You mentioned that none of the tenants know the property is being sold.  You also mentioned all of the deposits have been used up, and none of the tenants have been late.

    If you have not inspected EVERY unit I would expect more damage than the deposits would cover.

     I had a chance to inspect the units during the apraisiel. They seem to be in fair shape. According the my contract with the attorney, they have not security deposits. 

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