4 unit fully occupied with no leases

4 Replies

I am looking at a 4 unit multi family property with no leases in the lehigh valley pa.  I am told the current owner operated on handshake agreements.  They are working on getting estoppel agreements filled out for all the tenants.  I will then want to see proof (bank statements) that the tenants have actually been paying rent.  What would you do in this situation?  I don't want the owner to sign all the tenants up for 1 year leases right before I buy the property as I did not vet the tenants myself.  The bank I am working with prefers to lend on an occupied building with leases.  I would prefer to buy an empty building vs a fully occupied building with 4 units who I may have to evict immediately if they aren't paying rent.  What should I do?  Have the current owner get everyone on month to month leases or have them evict everyone before closing, fix up the place and rent out to vetted tenants at market rates?  What would you do?

Originally posted by @Cory Carrigan :

I am looking at a 4 unit multi family property with no leases in the lehigh valley pa.  I am told the current owner operated on handshake agreements.  They are working on getting estoppel agreements filled out for all the tenants.  I will then want to see proof (bank statements) that the tenants have actually been paying rent.  What would you do in this situation?  I don't want the owner to sign all the tenants up for 1 year leases right before I buy the property as I did not vet the tenants myself.  The bank I am working with prefers to lend on an occupied building with leases.  I would prefer to buy an empty building vs a fully occupied building with 4 units who I may have to evict immediately if they aren't paying rent.  What should I do?  Have the current owner get everyone on month to month leases or have them evict everyone before closing, fix up the place and rent out to vetted tenants at market rates?  What would you do?

If you need to "count" the rental income to make mortgage math work, FNMA is going to want written leases, or it needs to be vacant.

With verbal leases, a tenant could claim they are on a rent-to-own arrangement, or that their "handshake" included a "no overnight guests from racial group x" fair housing violation. And now that you're the landlord, you inherit those agreements, along with any liability that might come with them. A written lease should contain a "both parties agree that any/all other or previous or outside agreements are void" clause, that you could then show to a judge if the tenant pulls out an audio recording of a rent to own agreement with the previous owner (gotta be a bit paranoid when it's a $500k asset on the line). (Verbal agreements don't carry a lot of weight with real estate, so you'd likely prevail either way, but do you want the tenant's free "tenant's rights lawyer" to drag you through the mud for months, or weeks?)

If you prefer a vacant building, that's actually even easier from a lending perspective. If your lender requires that it be occupied, that's an overlay

As long as your lender allows it, I would be OK with this. While there is some risk as identified above, the estoppels are key for mitigating that. The purpose of those documents is that they establish the terms of the tenancy, that rent is paid, that there are no outstanding claims vs. the prior landlord, etc. Once they're signed, you can rely on them and the tenants would have a challenging path to raise any undisclosed claims. 

Also, on the plus side: one month after closing you can change the terms of their month-to-month tenancy (at least in my state). That could mean you either 1) serve them with notices to quit; 2) raise the rent to market or above; or 3) require a term lease (one year, six months, whatever you like) using your form and with T's and C's you're comfortable with. 

Disclaimer: Am a lawyer; but this isn't legal advice.

I don't believe the lender needs to count the rental income to make the math work it just sounded like that was their requirement.  I will have to confirm.  I know they do keep the loans in house.