Buying a property with tenants

12 Replies

Hey guys,

so I am buying a property that has tenants in it.

What do you do when you buys a property that has tenants in it?

Do you make them sign your lease? Do you make them sign (epostile/epostilary) forgot the name of the document. But basically, that document is saying that the tenants are aware that you are the new owner (or may be I am confusing something)...

I bought a property with tenants before and it did not go super well. So I am trying to prevent problems and want to make sure paperwork wise I am covering every angle...

Anyway, will you please share your experience?

Thank you!

@Mary Jay When you purchase a property with tenants, then the leases typically transfer to the new buyer at closing. You will have to honor that lease, including the rent and terms, until either the lease expires or the tenant is willing to sign a new lease with you.

The estoppel agreement can be completed by a tenant to verify what they are currently paying in rent along with the terms of the agreement. 

Best of luck! 

Originally posted by @AJ H. :

@Mary Jay When you purchase a property with tenants, then the leases typically transfer to the new buyer at closing. You will have to honor that lease, including the rent and terms, until either the lease expires or the tenant is willing to sign a new lease with you.

The estoppel agreement can be completed by a tenant to verify what they are currently paying in rent along with the terms of the agreement. 

Best of luck! 

Thank you! Do you ask for anything else? Or just proof of payments and an estoppel agreement?

 

@Mary Jay You should ask for rent rolls, T12, and bank statements (if possible) to verify the rents collected match what is being reported.

Best of luck!

Hi Mary,

Great questions! Adding to what AJ recommended, if you are still in escrow it's good to know if the property has to follow any rent control ordinance. This can greatly impact your cash flow up front, and in the foreseeable future. Last, I'd ask a real estate lawyer to review any documents the seller has so you can have piece of mind.

Hope this helps! 

Originally posted by @AJ H. :

@Mary Jay You should ask for rent rolls, T12, and bank statements (if possible) to verify the rents collected match what is being reported.

Best of luck!

 Thank you sir!
1) So, rent rolls are statements from the property management company?

2) What is T12?

3) The seller refusing to provide bank statements.. Unfortunately...

Originally posted by @Mary Jay :
Originally posted by @AJ H.:

@Mary Jay You should ask for rent rolls, T12, and bank statements (if possible) to verify the rents collected match what is being reported.

Best of luck!

 Thank you sir!
1) So, rent rolls are statements from the property management company?

2) What is T12?

3) The seller refusing to provide bank statements.. Unfortunately...

Rent rolls should be available from the property management company to show the number of units, unit mix, tenant, current rate, and lease dates.

T12 is the trailing 12 months of financials. This means the financials for the property in the last 12 months. You want the most recent T12 as possible.

Not getting the bank statements is not a deal breaker, but just make sure the financials are available and do thorough inspections.

Best of luck!

 

Purchase Agreement Clauses for Buying Tenant-Occupied Rental

If you’re considering buying a tenant occupied rental property, there are some documents you want to acquire for review prior to the closing. Once the closing takes place, the seller has zero incentive to cooperate with supplying them.

Not only do you want to obtain these documents, you also want time to review them well before the closing because unfortunately, there’s always the potential that one, or several, of the documents may be fraudulent.

So, let’s go over each document and why it’s important:

  1. Lease: this one should be obvious. A lease is a contract between the landlord and tenant. It spells out the monthly rent, when it’s due, the length of the lease (or term), should contain clauses required by the federal and state governments, and much more. Without the lease a buyer has no legal means to collect rent from a tenant or evict them for nonpayment.
  2. Rent Ledger: this is a record of all tenant charges and payments. It proves if the tenant is current on their rent and their history of whether they’ve paid on time or not. It should also show any security deposit collected, pet fees, cleaning fees etc.
  3. Tenant Contact Information: current phone number and email address are needed to be able to communicate with tenants.
  4. Tenant(s) Government Issued ID: typically, this will be a driver’s license to prove the identity of the tenant(s). Without, you have no way of confirming the occupants of the property are those named on the lease. Proper identification of tenants is also needed if you want any chance of having local code enforcement write tickets against the tenant and not the owner.
  5. Any Legal Action Documents: you’ll definitely want to know if the current landlord is evicting or suing the current tenant(s).
  6. Tenant(s) Social Security Number: this should have been obtained by the current landlord to do a background check during the application process. A new owner will need it if they want to pursue collection and garnishment for unpaid rent and/or property damages.
  7. Tenant(s) Employment & Bank Information: additional information useful for garnishment actions to collect unpaid rent and/or property damages. Usually collected as part of the application process.

Fraud: let's not pretend it doesn't happen. Desperate sellers do desperate things. We've seen fake leases and rent ledgers, even fake tenants - who were placed by the seller to backup the fake lease and ledger. So. it's not uncommon to request proof of rent deposits via bank statements and corporate/LLC tax returns. Of course, it can be almost impossible to validate any rents the seller claims they collected in cash. So, sellers can also be asked to sign notarized affidavits personally guaranteeing the validity of leases and ledgers.

So now, let’s get to the clause to include on your purchase agreement to make sure you get all this information in enough time to review it.

Seller(s) agrees to provide the following to the buyer within X days of buyer’s satisfactory inspection, but in any case at least X days before closing: All rental leases, rent ledgers, tenant(s) valid phone numbers and email addresses, rental applications & supporting tenant identification, income and asset information, any documents corresponding to any ongoing legal actions pertaining to the property, leases, service contracts, etc., at least three (3) months of the most recent bank statements for any account(s) rental funds were paid into and any company or corporate tax returns for proof of income and expenses. Seller(s) also agree to sign an affidavit at closing personally guaranteeing the validity of all leases and rent ledgers.

Now that may seem like a lot for a seller to agree to, but if they have nothing to hide, why would they not agree?

As always, none of this should be construed as legal advice and we recommend you consult a real estate attorney.

@Mary Jay In my state the bank is responsible for creating an Assignment of Leases which is then given to the buyer and it says the leases have been transferred to the new owner.

I am in the process of buying a new building, scheduled to close on Monday. Monday we discovered the bank at my previous closing did not provide me with the Assignment of Leases. My loan officer has been trying to find the documents from the February 2021 closing, no one has them. Today I had to contact all of the tenants in that building to have them sign a new lease. One lease was up for renewal, one tenant was happy to help, one man was suspicious and is “thinking it over” and the fourth tenant I have not heard from yet.

I’ve had to ask the Seller for an extension of the closing.

Make sure you get whatever your state requires for the Assignment of Leases. If it’s bank provided like mine, or something else. I’m paying the price of a newbies mistake.

Originally posted by @AJ H. :
Originally posted by @Mary Jay:
Originally posted by @AJ H.:

@Mary Jay You should ask for rent rolls, T12, and bank statements (if possible) to verify the rents collected match what is being reported.

Best of luck!

 Thank you sir!
1) So, rent rolls are statements from the property management company?

2) What is T12?

3) The seller refusing to provide bank statements.. Unfortunately...

Rent rolls should be available from the property management company to show the number of units, unit mix, tenant, current rate, and lease dates.

T12 is the trailing 12 months of financials. This means the financials for the property in the last 12 months. You want the most recent T12 as possible.

Not getting the bank statements is not a deal breaker, but just make sure the financials are available and do thorough inspections.

Best of luck!

 

Thank you!

 

 

Originally posted by @Charles Renn :

Hi Mary,

Great questions! Adding to what AJ recommended, if you are still in escrow it's good to know if the property has to follow any rent control ordinance. This can greatly impact your cash flow up front, and in the foreseeable future. Last, I'd ask a real estate lawyer to review any documents the seller has so you can have piece of mind.

Hope this helps! 

Thank you!

 

Originally posted by @Drew Sygit :

Purchase Agreement Clauses for Buying Tenant-Occupied Rental

If you’re considering buying a tenant occupied rental property, there are some documents you want to acquire for review prior to the closing. Once the closing takes place, the seller has zero incentive to cooperate with supplying them.

Not only do you want to obtain these documents, you also want time to review them well before the closing because unfortunately, there’s always the potential that one, or several, of the documents may be fraudulent.

So, let’s go over each document and why it’s important:

  1. Lease: this one should be obvious. A lease is a contract between the landlord and tenant. It spells out the monthly rent, when it’s due, the length of the lease (or term), should contain clauses required by the federal and state governments, and much more. Without the lease a buyer has no legal means to collect rent from a tenant or evict them for nonpayment.
  2. Rent Ledger: this is a record of all tenant charges and payments. It proves if the tenant is current on their rent and their history of whether they’ve paid on time or not. It should also show any security deposit collected, pet fees, cleaning fees etc.
  3. Tenant Contact Information: current phone number and email address are needed to be able to communicate with tenants.
  4. Tenant(s) Government Issued ID: typically, this will be a driver’s license to prove the identity of the tenant(s). Without, you have no way of confirming the occupants of the property are those named on the lease. Proper identification of tenants is also needed if you want any chance of having local code enforcement write tickets against the tenant and not the owner.
  5. Any Legal Action Documents: you’ll definitely want to know if the current landlord is evicting or suing the current tenant(s).
  6. Tenant(s) Social Security Number: this should have been obtained by the current landlord to do a background check during the application process. A new owner will need it if they want to pursue collection and garnishment for unpaid rent and/or property damages.
  7. Tenant(s) Employment & Bank Information: additional information useful for garnishment actions to collect unpaid rent and/or property damages. Usually collected as part of the application process.

Fraud: let's not pretend it doesn't happen. Desperate sellers do desperate things. We've seen fake leases and rent ledgers, even fake tenants - who were placed by the seller to backup the fake lease and ledger. So. it's not uncommon to request proof of rent deposits via bank statements and corporate/LLC tax returns. Of course, it can be almost impossible to validate any rents the seller claims they collected in cash. So, sellers can also be asked to sign notarized affidavits personally guaranteeing the validity of leases and ledgers.

So now, let’s get to the clause to include on your purchase agreement to make sure you get all this information in enough time to review it.

Seller(s) agrees to provide the following to the buyer within X days of buyer’s satisfactory inspection, but in any case at least X days before closing: All rental leases, rent ledgers, tenant(s) valid phone numbers and email addresses, rental applications & supporting tenant identification, income and asset information, any documents corresponding to any ongoing legal actions pertaining to the property, leases, service contracts, etc., at least three (3) months of the most recent bank statements for any account(s) rental funds were paid into and any company or corporate tax returns for proof of income and expenses. Seller(s) also agree to sign an affidavit at closing personally guaranteeing the validity of all leases and rent ledgers.

Now that may seem like a lot for a seller to agree to, but if they have nothing to hide, why would they not agree?

As always, none of this should be construed as legal advice and we recommend you consult a real estate attorney.

 

Wow! Thank you so much for a great reply!

Originally posted by @Alecia Loveless :

@Mary Jay In my state the bank is responsible for creating an Assignment of Leases which is then given to the buyer and it says the leases have been transferred to the new owner.

I am in the process of buying a new building, scheduled to close on Monday. Monday we discovered the bank at my previous closing did not provide me with the Assignment of Leases. My loan officer has been trying to find the documents from the February 2021 closing, no one has them. Today I had to contact all of the tenants in that building to have them sign a new lease. One lease was up for renewal, one tenant was happy to help, one man was suspicious and is “thinking it over” and the fourth tenant I have not heard from yet.

I’ve had to ask the Seller for an extension of the closing.

Make sure you get whatever your state requires for the Assignment of Leases. If it’s bank provided like mine, or something else. I’m paying the price of a newbies mistake.

 Wow! Great point! Thank you so much!!!