Engineer 路 Montclair, NJ 路 Member since 2015 路 103 posts 路 57 votes
I'm under contract for a 3 unit, the owner wants to stay on as a tenant and is willing to sign a lease (initially the property was advertised as owner would like to stay but not required). I'm ok with this as I figured we could do a 1 year lease and would act as a good transition for both me and the property. The owner has come back and wants a 3 year lease slightly under market value. I've countered and agreed to his low number for a 1 year lease and he still insists on a 2 year lease with option to renew. Am I being unreasonable by not wanting the owner to stay for a longer period? I will be owner occupying another unit and I'm afraid of the old owner trying to take advantage of me being the new owner becoming a headache down the road. I would also like to note the existing owner is using his 2 bedroom unit as a 3 bedroom and using almost all of the common basement storage for himself.
@Jonathan S.. There are several factors that would determine whether or not I would do this. I wouldn't do this if this is your first purchase. You need to be an experienced landlord and know that the seller will not be able to run over you, or think they are in charge. Also, how good of a deal is this? They want to stay for 2-3 years, at below market rent? Ok, then they need to accept a lower offer that makes up for that cost to you. $100 a month below market rent, for 3 years, is $3,600. They need to lower their asking price by probably $4k or more. And no, they do not get the option of extending the lease. You are always going to control that option. Oh, and he needs to get his junk out of the basement, or he needs to pay an extra fee for use of that storage area. And, at the end of the day, if he's going to be a pain, you simply do not agree to this deal.
IF you are fine with slightly under market value for rent, do a 1 year lease and lower the amount of your offer-then you get the rent back through the purchase price. I would also get a security deposit. As for the using the 2 bedroom as a 3 bedroom-who cares. Using the entire basement for his own storage-tell him that needs to be cleared up prior to closing unless he wants to rent that part of the basement separately.
If it were me I would call his bluff. You have all the leverage in this situation. You said you are under contract with agreement to lease back with no specified term. Did you specify rent? If not I would counter a one year lease at market rent. Make sure he signs a standard lease agreement with damage deposit. Treat him just like you would any other tenant. If he gives you trouble evict him.
If he decides to back out of the deal he is going to have to re-list the property. With Covid-19 the market is very soft, there is no telling when he is going to find another buyer. Prices are falling in many areas. He risks getting a lower price if he goes back on the market.
Again you are in a very strong position don鈥檛 let him push you around.
@Jonathan S. I've looked at deals like this before too, as I've targeted some owner-occupied multifamilies in my area with older / long-time owners. I've shied away from pursuing these deals because I do think it could lead to issues with a long-time owner converting to a renter. I'm sure there's some success stories and I'm also sure there's some horror stories. You've got him on the hook, which is great. I would stick to your guns and don't give him the optionality to stay beyond 1 year without your approval. Not that I necessarily encourage you to incur unneccessary costs, but is there an avenue where you offer to pay for a leasing broker to help him find a new place to live in lieu of him staying? Or some way to make the move for him as frictionless as possible.
@Jonathan S. lots of people are making assumptions that he will be trouble down the road, which is possible but not guaranteed. It is more likely he just doesn't have a place to move to and is looking for a stable living situation to buy time to find a new place. I would avoid a lease longer than 1 year. That is just my recommendation for any tenant when you are first leasing to them. I do renew people at two year increments after they have shown to be a good tenant.
One option may be offering a 1 year lease, but writing into the lease maximum rent increase clauses. For example, you say 1 year lease that renews at month to month interval with 0% rent increase for year 2 and maximum of 3% per year after that. One of three things will happen:
1. He finds a new place and decides to move sometime after the first year.
2. You decide he is too much trouble and you non-renew the month-to-month. You can then rerent to someone else at a higher rate.
3. You decide he is great, he is happy and you keep him month-to-month at a lower than market rate. If he is a great tenant, this isn't a big deal.
You need to convince him this is a good deal. Let him know it gives him price protection, but also flexibility to leave. Make it clear that you would love for him to stay as long as he wants (that is true unless he is a pain, but you don't need to say that, it is obvious). Many tenants break long term leases anyways. He is a landlord, so knows people break leases. Tell him your attorney doesn't want any term over 1 year. I think the key is reassuring him you are not trying to get him out, you just can't sign long term leases. You don't know what your personal situation will be in one or two years, so making long term agreements of any kind is risky.
Thank you everyone for your responses.This forum is awesome in getting feedback from both sides of the spectrum.
Update as of this morning. My attorney sent over a letter yesterday evening detailing the fact that the seller has been a bit misleading through the process and we are willing to compromise to an extent but we are standing our ground. I pushed the max lease to 18 mos. with my option to renew only. Price is a number I'm comfortable with. so ball is in their court now. I've heard through the grapevine he won't move off 2 years but nothing official yet.
This has been a great learning process so far though. I must say we both mis-communicated at first and I should've been more clear that i have no intention of throwing anyone out but that I don't know them and need to protect myself first. If they're awesome tenants there's no issue in renewing but if not, then I don't need to be locked in for several years.
While I appreciate what agents and attorneys do, sometimes I feel like you have to go outside them to get the non-filtered information you need. I feel like I can size someone up pretty quickly and find out what they're about. Perhaps a phone conversation just to understand his end. If he's super pushy on the phone, dismissive, a know-it-all, etc., its a good sign of what's to come.
I like to create choke points with tenants to get a feel how they react if I don't have enough information. Informal lease reviews are fantastic, for example, because it gives them a chance to respond or speak up if they have concerns. I have a tenant who asked a question and raised an issue with every. single. line. of our lease. It was a 2 hour conversation. I knew exactly what I was getting, and it has come to fruition -- but a bird in hand is worth two in the bush.
I can also agree that a owner-turned-tenant could be a nightmare. "Ozark" also comes to mind with Buddy living in the basement. I'd want to know if I'm getting first half Buddy or second half Buddy, if you've seen the show. :)
There are ways you can craft this deal to work for both of you -- I think the biggest thing is adjustment to the purchase price to accommodate the rent difference or "good deal" you're giving him. But I wouldn't do that until you've sized up him and his situation.
That is a red flag for me. What is the real reason he wants to stay three more years instead of continue to own? Is there deferred maintenance or something like that hiding or is this his first property and he has just decided he doesn鈥檛 want to be a landlord?
As far as options go, can you buy two of the three units and have an option to buy his in three years?
Either way something should be put in writing about the common area.
Find the real reason he wants to sell and be a tenant for the next three years. There is a reason.
I am currently doing this same thing. Previous owners stayed as tenants. And for the same reasons. Older couple. The husband is in poor health and they don't want to make a move due to the stress of it all. The only difference is the fact they didn't ask for a lengthy lease. I was skeptical at 1st but my experience has been positive so far. Would I do it again? Yes. Would I sign a 3 year lease with them? Yes. I've read the responses to your forum so far and there is a lot of good advice here. 1st figure up how much you'd be loosing with below market rent figuring in the inability to raise each year and negotiate the asking price down to that. Figuring in if you did have a vacancy for a few months over a 3 year period will allow you to actually not have to negotiate the full amount. Example while negotiating, "I figured allowing you to stay for the next 3 years $100 under market and not being able to raise the rent $20 each year will cost me $4320 over the next 3 years so if we do sign this 3year lease then the sell price will have to be reduced for me to justify this as an investment." Then see where that goes. $4320 off would be great but if you only get $3600 off and you were already ok with the previous sell price then you're in that much more better position. 2nd if the basement issue is really an issue for you then make that part of the negotiations. Ask for more rent per month, state that it must be cleared out or just use it for a negotiation recession tactic. Maybe build it up to make it seem like a really big deal like you need it for storage for your business or something. Offer for him to continue to use it if he gives up xyz. 3rd have an ironclad lease. That is the key to this whole deal. It doesn't matter if he plans to do anything to get over on you or do something shady once he becomes your 3 year tenant. If you have a good lease it'll cover most of the contingencies. He may have a 3 year lease but if he's breaking the rules then there's grounds for eviction no matter the length. So all in all if a good lease is in place stating landlord and tenants roles then a 3 year "for sure" tenant is a blessing! Lastly if this is a BRRR purchase then it may be a bad idea if you have to wait 3 or 4 years to pull your equity out.
This may turn out to be a "give an inch take a mile" scenario. I would figure out what works with the value of the purchase you are making, figure out what can work within your guidelines and then don't budge from that. I have heard that it can also be harder to evict a former owner if they do not pay. I don't know if that is true, but would be cautious. Possibly require that the former owner be required to handle all of his units maintenance for the reduction in market rent during his stay.
The seller has decided to terminate the contract after our last correspondence. I appreciate the help from everyone here and hope this thread helps another investor make an informed decision. I feel this has been a great learning experience as I continue to forge my path and build a portfolio.
Covered and protected with his terms of lease agreement for that amount of time may bring to many possibilities and characteristics that may arise from his end such as sense self ownership, disputes, a sense of pride, the bigger brother, and so many flaws from his end as human that you are not aware of yet and aren鈥檛 willing to tolerate later. Think of it as a 2 year romance in a bad scenario. The Rise, peak, and downfall. First year, the rise of his flaws, but protected to stay. 2nd year, the peak where you had enough and are willing to confront him about it where disputes happens, again but protected to stay. And the 3rd year, the downfall where you the relationship can have a happy ending of a terrible get out we are done break up. It will last 3 years to find out!
That is if he is the perfect human in earth, and shows at least some sign of humbleness and submissions. Reading from what you wrote that he isn鈥檛 willing to budge on your terms, I鈥檓 thinking mabey he isn鈥檛 willing to submit and won鈥檛 submit to any of your terms later. If you submit to his 3 year terms, he is protected.
I would sit with him him have some coffee or have a phone conversation, and find out what his deal is with this 3 year term. If he is just scared or fears it鈥檚 hard to find decent place, then give him the assurance and stipulation that you are willing to it will remain a 1 year lease with extensions of the lease every year under good character, given that on the 3rd year he must give up the other 1/3 of the place Or move out.
I would require the owner to complete an application and qualify just like any other tenant. I would also be clear that you only do 12 month lease terms. The best way to explain it to the owner is that due to fair housing laws, all tenants or potential tenants must be treated equally and therefore go through the same process. It all comes down to following the process in order to be fair to everyone. And the process, in the end protects you. I do not think you are being unreasonable at all.
Get a big security deposit. I was in the same situation on a 4-plex and got $5K Security deposit as he would have more leverage to create problems than any other tenant.
My former owner was the nicest guy- who this fellow doesn't sound like. This guy was so lonely that he took in a person off the street and then family members that I had to evict as they weren't on the lease. Then he moved out suddenly to get a place with his ex-wife who came around again to use him yet again to do things around their new rental house and take care of here disabled sister. Hope I don't end up that way at age 75 with my ex-wife! The owner carry loan was pretty cool though.
Swing a big hammer with a big deposit, if doing it -he will have the cash. Mine was held at the title company, but I had the right to determine what to do with it, if problems.
@Jonathan S. I am in a similar situation. We are about to close on an off market deal. Owner needs to sell to stabilize her financial situation but does not want to leave because she鈥檚 lived in the house for a while and wants to remain.
She wanted a 2 year lease but we were able to guarantee a 1 year lease with her rent being about $200 under market value.
Being in New York with tough tenant favored laws, we are writing the lease with rent at market rate but we will offer her a monthly discount to our agreed upon one year rent. If she wants to continue then she continues at market rate on signed lease.
This a first one for us as well.
We agreed to this rental deal and price because we are purchasing the property at almost half its current price market value.
It was a back and forth negotiation. They were quite adamant at their price but after Covid-19 lockdown we stuck to our lower offer considering the unknown future and risk, and that were we鈥檙e paying cash.
They accepted our lower offer which gives us a pretty fat buffer. It is a duplex that we were going to do a light rehab and rent so having a tenant to begin with ain鈥檛 too bad. We figured at $2400 rent loss for one year, is nothing compared to the price we are getting it at.
Ok, deal is off. This is probably the best thing. I think this would have put you in a situation that you regretted later. If the deal resurfaces, I would recommend you move forward only if the previous owner is out of the property. It is sometimes nice to get a property with rent paying tenants already in it but this one was giving me a bad vibe. Be grateful you dodged the bullet.
First, congrats on getting your first deal! You made the smart move by reaching out to a bunch of seasoned investors who have input for you. Every transaction has its set of challenges. I go back to how good of a deal is it? In this market, if it isn't great, then hold your ground and be willing to walk. I like the feedback to ask for a discount on the purchase for the reduction in rent. The guy is showing you that he wants it his way, and there is an old saying that holds true with tenants."You don't let the inmates run the asylum".
There is always another deal, but this guy could potentially make you miserable.
Sorry it didn't work out, but I'm glad you stuck to what you were comfortable with. You can always tell him that the offer is on the table for 30 days if he changes his mind. When I bought one of my places, the owner rented for a few months as she had financial problems and needed time to find a place based on the sale of her house. She found a place quickly and wasn't a problem.