Nervous about buying a house with tenants

Buying & Selling Real Estate
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Nervous about buying a house with tenants

Alba Alamillo
Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes

Hi everybody, 

I have been looking to buy a fixer-upper to remodel and flip.

My realtor has a listing from a lady whose husband died in February, she wants to get rid of their 3 properties and told the firm to please handle the sales for her.

They offered me a house that's not on the MLS, it has tenants and a month to month leasing agreement and the house is in excellent shape for having ben on rent for 30 years. (these tenants have only been there 2 years)

They are offering me the house 100K less than the comps. But with tenants included. I spoke w the tenants yesterday, they seem nice, they have the house in good shape, and they told me that they are in the process of getting approved to get a loan to purchase a property. I asked them why wouldn't they want to purchase the property they are currently leasing and the guy told me that they want to buy a one story house, the stairs are taking a toll on his knees.

2 questions:

1.- How do I protect myself from the worst case scenario? 

2.- This house is across the street from an elementary school. The comps that they showed me aren't in front of an elementary school. Do you know how much the price goes down if the house is in front of a school?

Thank you so much in advance. 

Alba

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Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y

@Alba Alamillo

Buy it. Raise rents ASAP to market rate. Tenants can stay or leave, their choice. It’s a business. And it’s your money.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    7y

    This is easy peasy, and it sounds like you may have a great deal on the line.

    1) I'd get the deal under contract first, with a 10 day inspection period.  That way you have it locked up.

    2) Get an inspection and walk the property with the inspector while he is there

    3) Pay a realtor you trust to give you a BPO (Broker Price Opinion) of the value of the house

    Doing that will tell you what the house should be worth in good condition and give you an idea of what it will take to get it there.

    3Reply
  • Brad Baker
    Flipper/Rehabber · Charleston SC · Member since 2019 · 78 posts · 43 votes
    7y

    @Alba Alamillo

    Put a contract and do your due diligence and if everything checks out you got a great deal. Also you might find a family with elementary school kids who absolutely love the idea of being able to walk their kids directly across the street to school. I'm not sure that affects price much at all.

    1Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Thank you Brad and Greg. I already checked the property and I’m waiting for my contractor to give me a quote on how much it is to make it move in ready. My fear is that I give the tenants their 2 month notice and then the tenant-landlord nightmare starts. I dont know how much are eviction costs and what to do if they vandalize the property. 

    Doing some research I realized that farmers insurance has a policy that covers landlord nightmares. So I’m waiting to hear from the broker with a quote and read everyhing including the fine print . 

    I really appreciate your comments. by my 10th flip I will be more confident  Since this is my first I’m very nervous ☺️

    1Reply
  • Account Closed
    Madison, WI · Member since 2016 · 88 posts · 34 votes
    7y

    @Alba Alamillo ,

    If the tenants in there are good tenants and meet your screening criteria, why would you get rid of them? I can see a reason, but the question was asked of me when I was doing the same thing and want to make sure you've thought through that.

    You say the house is in excellent shape, so unless there is some foundation issue, which should be discovered during the inspection, you should have a great deal on your hands. I wouldn't be extremely concerned with any sort of rehab budget.

    If you want them out, serve them a notice to end the lease agreement (not sure about your location, but in mine it's 30 days). You can give them 60 out of generosity. Then carry on with your business plan. 

    For what it's worth, in my town, I bought a duplex across from the high school, and had no issue with the appraisal coming back lower as a result. If you're considering selling at some point, some folks like that and view it as a free field or an extra large yard to play in but not have to take care of.

    I would definitely get it locked up under contract, and do an inspection. Good luck!

    1Reply
  • Justin Sloan
    Specialist · Farmington, CT · Member since 2019 · 30 posts · 4 votes
    7y

    Alba I wish you luck with your first investment. Being in insurance myself I saw you write a comment that said “Doing some research I realized that farmers insurance has a policy that covers landlord nightmares”.....never heard of this before. Can you elaborate? Thanks 

    0Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Hi Justin, 

    I love Farmers youtube hall of fame videos. So when I saw my friend who works at Farmers I asked him that "he probably knows a thing or two because he has seen a thing or two"... I explained to him that I'm in the process of thinking of buying a house with tenants and I was wondering if there was some sort of insurance that covered attorney fees if they had to be evicted and also property damage if they vandalized the property. He said yes and he asked me a few questions about the property, age of roof, type of pipes, etc. He's in the process of sending me a quote. That's all I know. When he gets back to me with a policy and a quote I will be more prepared to answer that question. 

    Thank you so much for reading my post and wishing me good luck. 

    Alba

    0Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y
    Originally posted by @Account Closed:

    @Alba Alamillo ,

    If the tenants in there are good tenants and meet your screening criteria, why would you get rid of them? I can see a reason, but the question was asked of me when I was doing the same thing and want to make sure you've thought through that.

    You say the house is in excellent shape, so unless there is some foundation issue, which should be discovered during the inspection, you should have a great deal on your hands. I wouldn't be extremely concerned with any sort of rehab budget.

    If you want them out, serve them a notice to end the lease agreement (not sure about your location, but in mine it's 30 days). You can give them 60 out of generosity. Then carry on with your business plan. 

    For what it's worth, in my town, I bought a duplex across from the high school, and had no issue with the appraisal coming back lower as a result. If you're considering selling at some point, some folks like that and view it as a free field or an extra large yard to play in but not have to take care of.

    I would definitely get it locked up under contract, and do an inspection. Good luck!

    0Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Hi Tyler. The rent they pay is very low. Rents in that area go for 2500. they are paying 1250. I'm really not in a rush to remodel and sell. I can let them stay until they find the house they are looking for. 

    Thank you for reading my post and giving me your opinion. 

    Alba

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Alba Alamillo

    Buy it. Raise rents ASAP to market rate. Tenants can stay or leave, their choice. It’s a business. And it’s your money.

    4Reply
  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @Anthony Wick, not that easy if the tenants have a multi-year agreement at a shamefully low price.  

    Usually I have seen this done where the tenants were friends (or relatives) of the seller.  The seller is gonna get hit, but doesn't want his/her friends to suffer.  So they lock in a 3 year rent deal at a less than market rent while selling the property for market.  The sale price looks ok, but the 'baggage' makes it a no go.  

    That's the only possible 'minus' I could see.  Otherwise, all ahead!  ;-)

    1Reply
  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y
    Your new tenants will be there until the legal end of their lease.  If the numbers you state are true, you can take my 'vision' to the bank.  I hope it's not a 3 or 4 year deal.  ;-)

    Originally posted by @Alba Alamillo:

    Hi Tyler. The rent they pay is very low. Rents in that area go for 2500. they are paying 1250. I'm really not in a rush to remodel and sell. I can let them stay until they find the house they are looking for. 

    Thank you for reading my post and giving me your opinion. 

    Alba

    0Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Month to month contract. Thank you for reading my post and replying to it. I really appreciate it. 

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Alba Alamillo. Buying with tenants doesn’t have to be a big deal. Just assume you have to evict post closing and if not then be happy.

    Tenants have more to lose due to eviction then a landlord does (in most cases), so it’s unlikely you would file for eviction and it would go all the way through, at least in this situation

    0Reply
  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    7y

    It sounds like your fear is a moral/ethical one. You don't like the idea of asking the tenants to leave. I have two points if that's the case:

    1) You'll have to get over this. This is a business, and there are plenty of other places for the tenants to stay. It is perfectly legal to end the lease, give them appropriate notice, and remodel/re-rent the unit. 

    2) You can be nice about it. You are getting a great deal. In the past, when I've needed to remove tenants (either because they were terrible, or because I need to remodel the unit), I will offer them their full security deposit back (doesn't matter if my plan is to remodel anyways, plus $1,000 cash at move out, assuming they leave the place with all of their personal property removed and in reasonable shape. 

    That goes a long way towards eliminating any bad will between you and your tenants, helps them have cushion and time to find the next place, and typically results in a happy outcome, in my experience. If you are getting a $100,000 better deal than the next guy, applying 1% of that towards goodwill might be a great investment and leave you feeling great about your purchase and your ethics. Note, if you choose not to do this, you are NOT behaving unethically or illegally. This would be an above and beyond generous gesture that would be totally optional. It can also be good business if you believe that there might be costly delays or other problems in getting them to leave without this carrot.

    The technical term here on BP for this, I believe, is called "cash for keys"

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    BiggerPockets
    2Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Thank you so much guys. I Really appreciate your help and time. 

    Alba

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    Define your worst case scenario and then figure out how you would handle it.  

    0Reply
  • Shane Moynihan
    Realtor · Keene, NH · Member since 2018 · 38 posts · 14 votes
    7y

    @Alba Alamillo

    Just wanted to add, that I bought my first house hack a couple months ago. I came across the same worry of inheriting tenants, so I needed one unit open to live in. The way I did it was just let everyone in the process know my plan, since I was getting an FHA loan I had to be in within 60 days of purchase. That was luckily right when one lease ran out. So before I even bought it the prior owners let the tenants know that they would not be getting a new lease from the new landlord. So when I bought they already knew the plan, and last month the lease ended, the were out no problem at all.

    Good luck

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Alan Grobmeier  Absolutely. I don't make an offer until I see the terms of the leases. If somebody had a 3 year lease I simply would walk away. And, I put into my purchase offer; "Seller will not change the terms of the current leases after this purchase agreement is signed". I'm about to buy another multi family. Purchase agreement signed. 1 of the leases was due up for renewal and another tenant wasn't paying his rent on time. Purchase agreement stated first lease will roll over to MTM and the other unit will be delivered empty at close. Another option is the first tenants can simply move out if they do not want a MTM. They know they're under market rents and they know I will raise the rents asap. I don't mind them knowing either. It is their choice to stay or go. 

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    I find if you have ample reserves it's not that much of a stress scenario. If they decide to leave and the unit is empty for a month, no problem. If their rents are under market value for a couple months, no problem. But the goal is to raise rents to market value asap, and of course be a good landlord so people will stay long term while paying market rents. Plus, I always want to get tenants under my lease asap. I see a lot of 1-2 page substandard leases out there. 

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Alba Alamillo owning rental properties is far better than flipping. Most flippers come to this conclusion over time. Tenants are not a nightmare. In fact only a tiny percentage of people would not leave a property when given proper notice. You can raise rent and just let them stay. Raising rent may motivate them to move sooner if that is what you want.

    0Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Thank you guys, I'm going to bite the bullet and make an offer. I will keep you posted. In the meantime, I wish you all well with your endeavors and businesses. 

    Have a wonderful day!

    0Reply
  • Hal Fitzgerald
    Chicago, IL · Member since 2019 · 91 posts · 21 votes
    7y

    @Alba Alamillo How about the tenants? Do you know them? If they are nice and meet your criteria, why you will get rid of them? Why don't you keep them? 

    0Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Hi Hal. I was looking for a property to flip. I love remodeling houses. So that was the idea. Still I can keep the tenants. They seem nice. Thank you so much for your response to my post. 

    Alba

    0Reply
  • Deanna O.
    Rental Property Investor · San Diego, CA · Member since 2010 · 366 posts · 314 votes
    7y

    Good luck! 

    What about  4-6 months  at the current rate, then pre-scheduled, transparent increases? example; 4-6 months at current rate, $1,400 for months 4-12, $1,800 afterward? Motivation for them to buy, but closer to market rent for you if they don't,  Also maybe allow less than 30 day notice as long as they keep you updated. A sale can go sideways at the last minute, or have unexpected delays. 

    BTW, people looking to purchase tend to be awfully good tenants, just saying. They have $ in the bank, and can't afford the credit hit of not paying their bills. They also don't DARE trash the place on the way out -- you can sue for damages, and *poof* there goes their new house!

    0Reply
  • Alba Alamillo
    OP
    Flipper/Rehabber · Member since 2019 · 11 posts · 2 votes
    7y

    Hi guys, so I made an offer in the house and it got accepted. I want you to know that I'm very grateful for your input and help. I've been so nervous about all this thing that I think I have lost 5 lbs. I should buy houses more often. :)

    It's funny that I'm so new with this website that when I want to see the thread of these posts. I have to go to my email and find the link because if I do it from biggerpockets.com I cannot find it. Still learning. 

    I'm getting the house with tenants who have been taking good care of it and with a very crappy one-page rental agreement that states that the rent is MONTH TO MONTH. Just as you told me. Do buyers push for a new fancy leasing agreement with lots of pages like the ones I used to sign when I rented or that will do? 

    I wonder how people who buy apartment complexes do with all the tenants that come with it. Is it customary to do a thorough background check of the tenants? I've been looking online, there are tenants background checks websites. 

    Have a very nice day everybody and thank you so much again. 

    Alba

    0Reply
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